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Chief Executive's review of the preliminary results for the year ended 31 December 2014

A word from Nicandro Durante

Our strategy is delivering

I am delighted with the excellent progress we have made in the four years since I became Chief Executive, during which we have enhanced our strategy with a sharpened focus on the consumer. We have increased our share of the global cigarette market in this period by 70 basis points and grown our Global Drive Brands (GDBs) and share of key segments at an even faster rate, improving the underlying quality of our portfolio. We are meeting consumer needs with differentiated products, including innovations which now make up nearly 50% of our GDB volume.

Our focus on resource allocation is driving major investments in high growth markets, particularly in EEMEA and Asia-Pacific regions, resulting in share growth in these markets. By supporting pricing with strong brands and innovations, substantially reducing costs and improving productivity, we have increased our operating margin by more than 520 basis points over four years. We are also making excellent progress towards our goal to lead across the various next-generation product categories.

This performance shows that we have the right strategy for our business – it has served us well in a changing and challenging market environment and it continued to deliver for our shareholders in 2014.

Another strong performance in 2014

Although currency movements significantly impacted our reported results for last year, at constant rates we continued to grow revenue (+2.8%), adjusted profit from operations (+4.4%) and adjusted diluted earnings per share (+7.9%). Excluding the transactional effect of foreign exchange, adjusted profit from operations would have increased by an estimated further £90 million, or 1.5%.

Exchange rates continue to be volatile and in the current year, if rates were to stay where they are today, we would face a substantially larger transactional exchange headwind. This would impact our constant currency performance and would be in addition to any translational impact on reported numbers.

In 2014, we again increased our market share in our key markets driven by our GDBs’ excellent performance. As a result, our cigarette volume decline of 1.4% was less than the overall industry decline, estimated at 2.5%.

We maintained good pricing, despite an increase in competitive pricing activity in some key markets. We also achieved another good improvement in operating margin (over 50 basis points) – an excellent result given that we absorbed significant transactional costs caused by currency movements.

The Group continued to invest in growth opportunities in key markets and in building a pipeline of next-generation products. We developed our e-cigarette brand, Vype, in the UK with new product launches and made significant progress towards launching Voke, a medicinal nicotine product, which was granted a UK medicines licence last year. We plan to begin consumer trials of a tobacco heating product by the end of 2015 and have our first product in a test market in 2016.

We continue to deliver value to shareholders

Despite tough market conditions, the strengths of our business and our people ensured we achieved another competitive set of results and again delivered high single-figure earnings growth at constant exchange rates. We therefore propose to increase the final dividend for 2014 to 100.6p, bringing the total dividend for the year to 148.1p, 4.0% up on 2013.

The Group recently announced that it is evaluating a possible public tender offer to acquire the remaining 24.7% of Souza Cruz shares that it does not currently own. This investment would further strengthen our presence in Brazil, a key strategic market where we are already market leader. It would also provide opportunities to leverage Souza Cruz’s capabilities in areas such as leaf and closer cooperation in research and development, while further integrating the business into our Americas region.

We expect the trading environment to remain difficult in 2015, and that foreign exchange headwinds will continue to have a significant impact on both a transactional and translational level.  However, I am confident that with our proven strategy, strong global presence, powerful brands, talented people and continued focus on efficiency we will deliver value to our shareholders in the short and long term.

Nicandro Durante
25 February 2015

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