British American Tobacco earnings squashed by sterling, underlying profit up

30th Jul 2014 07:47

- Revenue down 10%, or up 3% at constant rates - Strong sterling means EPS 12% lower- Cigarette volume decline slows to 0.4%Currency headwinds blew earnings per share 12% lower at British American Tobacco in the first half of the year, although underlying profits improved if exchange rates were held steady and management is confident of high single-digit earnings growth for the full year.Due to the adverse exchange rate movements, group revenue was down by 10% to £6.80bn at the reported level, or up 3% at constant rates of exchange to £7.78bn as the decline in cigarette volume slowed to 0.4%. Volume declines were worst in Western Europe, down 8.8%, though were up slightly in the much larger Asia and Eastern Europe, the Middle East and Africa.Adjusted profit from operations increased by 4% at constant rates of exchange to £3.07bn, thanks to improving margins, and decreased by 9% at current rates, meaning basic earnings per share were down 12% to 93.3p.Chairman Richard Burrows said: "British American Tobacco performed well during the first half of the year but, as expected, results were affected by the strength of sterling."He said the company's Global Drive Brands - Dunhill, Kent, Lucky Strike and Pall Mall - had helped it continue to increase market share and pointed to tight control of costs that resulted in underlying operating margin growing by 30 basis points to 39.2%.To cope with volume declines in traditional tobacco, the company pointed to a strong pipeline of next-generation tobacco and nicotine products, including electronic cigarettes and tobacco heating devices. One year after launching Vype, its first electronic cigarette in the UK, retail distribution and the product offer was increasing. All in all, Burrows was positive about progress: "We remain confident of high single-digit earnings growth at constant rates of exchange, which we have said we will recognise with an increase in the dividend."Some 19m shares were bought back during the period at a cost of £632m, but the FTSE 100 group reiterated that its planned $4.7bn investment to maintain the 42% shareholding in Reynolds American, as part of its proposed acquisition of Lorillard in the US, would mean the share buy-back programme would now be suspended. Reynolds' contribution during the period decreased by 7% to £203m, or up 1% at constant rates.OH