Comment: New Imperial Boss Rolls Out Her Vision

Source from:  SHARECAST 11/12/2009

Alison Cooper, who has been appointed as the new chief executive of the cigarette manufacturer Imperial Tobacco, said she wants the firm to be known for 'sales growth' as well as 'cost control'. But a quick scan through the firm's full year results suggests that its focus on cost control has served it well and such a strategy could be the best approach in years ahead. Unlike its only quoted rival in the UK, British American, whose acquisitions have been focused on growth markets such as Indonesia and Turkey, Imperial's main focus has been the integration of Franco-Spanish rival Altadis, concentrating on synergies rather than growth. In the year to September 30, pre-tax profit jumped to £945m from £621m in 2008 on revenue up 29% to £26.52bn, reported the firm, best known in the UK for its Lambert & Butler cigarettes. Net debt fell from £14bn in March to £10.8bn and Imperial has lifted its dividend by 16% to 73p, which makes for a yield of 4%. The improvement in profitability largely reflects the acquisition of Altadis, the maker of the famous French brand Gauloises, in 2008, which helped lift sales in Germany to £826m from £664m and in Spain to £610m from £411m. The UK remains the company's biggest single country market, having seen sales rise to £893m from £869m. More important than profit growth, Imperial has made impressive progress integrating Altadis, delivering ?47m synergies in the current financial year, taking the total to ?90m, some ?0m ahead of target. These synergies have been enacted, to give just one example, by merging the sales divisions of Imperial Tobacco, Altadis cigarettes and Altadis cigars in Spain into one unified team. The company has a target of ?00m in savings by the end of 2012, so the short term outlook for profit growth remains strong. Synergies are necessary in markets such as the European Union due to the strong regulatory obstacles that are placed in front of the cigarette market as smoking becomes more and more socially unacceptable. In its results today, Imperial said it "will continue to challenge disproportionate and unnecessary regulation that undermines the principles of adult choice and the freedom of competition." In the UK, the latest step towards outlawing smoking to have raised Imperial's ire is a vote by MPs to ban the display of tobacco products. In the face of this onslaught, it might be tempting for Ms Cooper to just hoist up the white flag and concentrate on markets that offer the prospect of exciting growth rather than managing decline. However, in its core markets, Imperial has weathered the storm well so far. "Our powerful portfolio spans all tobacco product categories and price points and enables us to quickly align with local market consumer preferences," the company said today. In the UK, Imperial's ownership of the low-priced Lambert & Butler brand leaves it well placed to adapt to the growth in economy cigarettes' share of the market to 15% from 11% the previous year, something that has been brought about by increasing taxation and intensified by the economic crisis. It has also seen higher sales of loose tobacco in both value and volume terms, as smokers choose to make their own roll-ups rather than buying pre-made cigarettes. Admittedly, Imperial has seen impressive growth in its "Rest of the World" area, which includes markets such as Russia, North Africa and Cambodia. Sales climbed to £2.14bn from £1.5bn and will continue rising in this region, though rising affluence may not be the inexorable process some imagine. Shares in Imperial trade at about 10 times forward earnings, so are cheaper than those of British American, which has a price/earnings ratio of about 12 times, perhaps reflecting its more exciting emerging market growth prospects. It would be foolish to ignore the growth offered by the developing world, but Imperial has shown itself adept at lifting profitability in stagnant if not declining markets and Cooper, an accountant by training after all, is unlikely to forget this. Enditem