Interim Management Statement for the three months ended 31 March 2016

SHARE AND VOLUME GROWTH DRIVES GOOD START TO YEAR

•  Cigarette volume from subsidiaries increased by 3.6% to 158 billion, or 2.4% on an organic basis1
•  Continued organic market share growth of 20 basis points (bps)2
•  Revenue increased by 7.5% at constant rates of exchange, or 6.1% on an organic, constant rate basis
•  Revenue was up 1.7% at current rates of exchange
•  Global Drive Brands’ cigarette volume grew by 10.5%
•  Continuing growth in our Next Generation Products (NGP) business
   

Nicandro Durante, Chief Executive, commented: “Our momentum has continued with market share in our Key Markets increasing by a further 20 bps. Cigarette volume was up 3.6%, with our GDBs growing by 10.5%. This excellent volume performance reflects the strength of the business combined with the uplift from recent acquisitions and some benefit from inventory movements in the comparator period. Revenue increased by 7.5% at constant rates of exchange, or 6.1% on an organic basis. Our UK NGP business continued to grow, we made good progress with the expansion of Vype to other markets and launched glo iFUSE, our first tobacco heating device, in Romania. While profit growth will be weighted to the second half of the year, partly due to the impact of foreign exchange on our cost base, I remain confident that we will deliver another year of good earnings growth at constant rates of exchange.”

SUMMARY OF PERFORMANCE

Trading update

Cigarette volume from subsidiaries grew by 3.6% to 158 billion with organic volume up 2.4%. Excluding the effect of inventory movements in the comparator period, like for like volume was up by 1.1% demonstrating the strength of the portfolio. Volume increased in a number of markets including Ukraine, Middle East, Bangladesh, Indonesia, Russia, Turkey, Vietnam, Japan, Romania, France, Spain and Mexico. This more than offset lower volume in markets including Pakistan and Malaysia, which were impacted by significant excise led price increases.

GDB volume was up by 10.5%. Dunhill increased by 5.5%, as growth in Indonesia and South Korea more than offset lower volume in Malaysia. Kent was 9.7% higher driven by growth in Chile, Turkey and Japan. Lucky Strike was up by 12.6%, due to higher volume in Colombia, France and Italy. Pall Mall was lower by 5.1% as growth in a number of markets including Venezuela, Poland and Mexico was more than offset by lower volume in Pakistan and following the migration to Rothmans in Italy. Rothmans built on an exceptional 2015 with further volume growth of 49.4% in the quarter, driven by Ukraine, Russia, Italy, Turkey and Algeria.

We continue to grow market share, up by a further 20 bps on a strong performance in 2015, as growth in Ukraine, Indonesia, Turkey, Russia, Bangladesh, Philippines and Japan more than offset lower market share in Brazil, GCC and South Korea.

Revenue was up by 7.5% at constant rates of exchange or 6.1% on an organic basis. Price/mix was nearly 4%, with the impact of exceptional pricing in high inflation markets being offset by increased adverse geographic mix.

At current rates of exchange, revenue was up by 1.7% as movements in the majority of the Group’s key trading currencies relative to the same period last year adversely impacted reported revenue.

We have strengthened our NGP business with the recently completed acquisition of Ten Motives in the UK. Vype continues to perform well, growing market share in the UK and delivering ahead of expectations in Germany, France, Poland and Italy. The integration of CHIC, our e-cigarette business in Poland, is on track, with Vype volume benefitting from the CHIC distribution network. Test market results of glo iFUSE, our first tobacco heating device, in Romania are exceeding expectations with distribution expanded across Bucharest.

The Group is performing well and we are on track for another year of good earnings growth at constant rates of exchange. We expect profit growth to be weighted to the second half of the year, mainly due to the timing of the effect of transactional foreign exchange headwinds and an improving price/mix.

Trading environment

The trading environment remains challenging, notably due to the continued impact of adverse exchange rates at a transactional level which is estimated to be a profit headwind of approximately 7%, with a consequent impact on operating margin. If sterling stays at the current rate for the rest of the year, there would be a positive translational effect of approximately 3% on earnings.

Cigarette volume

The segmental analysis of the volumes of subsidiaries was as follows:

FINANCIAL POSITION

The Group has sufficient financing and facilities available for the foreseeable future.

There have been no material events, transactions or changes in the financial position of the Group since the year end, other than as outlined in this statement. Further, the Board is not aware of any material events, transactions or changes in the financial position of the Group which have occurred up to and including 25 April 2016, being the latest practicable date before the date of the publication of this Interim Management Statement.

On behalf of the Board
Nicola Snook
Secretary
25 April 2016

Interim Management Statement for the three months ended 31 March 2016 (269 kb)