In Europe, profit at £842 million was up £61 million or 8 per cent, at both current and comparable rates of exchange, mainly as a result of higher margins in Russia, Romania, Hungary and Spain, which more than offset the impact of reduced volumes in a number of markets. Volumes were down 1 per cent at 245 billion, with reductions in Russia, Ukraine, Germany, Italy and Spain partly offset by increases in Romania.
In Italy, volumes and market share were lower although Lucky Strike, Dunhill and Pall Mall grew share. While margins improved following industry price increases, profit was lower due to the reduced volumes, higher marketing expenses and the disposal of the Toscano cigar business in 2006.
In addition, the Group incurred a penalty of €20 million in the ‘cartel case’ related to cigarette prices in Italy, where the infringement had been committed prior to the Group’s acquisition of Ente Tabacchi Italiani.
The productivity programme was completed through the consolidation of production into one factory and a further reduction in the cost base.
The European Productivity Programme
The programme governs a range of projects to reduce product complexity, drive continuous improvement and deliver synergies above and within markets.
The programme has delivered significant savings, contributing over 40 per cent of the Group’s total productivity gains, ahead of schedule, through:
- the elimination of overcapacity with 11 factories closed or sold whilst maintaining the Group’s corporate reputation;
- reduced packaging material costs;
- 80 per cent fewer cigarette specifications;
- 30 per cent fewer tobacco blends; and
- 800 fewer stock-keeping units.
Although cigarette market share rose in Germany, driven by Pall Mall, volumes declined as industry sales were affected by the continued growth of illicit trade, the end of StiX sales, changes in vending regulations and consumer down-trading to other tobacco products. This, together with the lower margins of other tobacco products, led to lower profit.
Sales volumes in France were lower, mainly as a result of the overall industry decline after public place smoking restrictions and a price increase. Lucky Strike and Pall Mall showed strong growth in market share, with Dunhill and Vogue performing well in the Premium segment. Profit was up as margins improved through the price increase and cost reductions.
The excise increase in Switzerland at the beginning of the year stimulated down-trading and growth in the trade brand sector, resulting in weaker volumes and lower profits. However, Parisienne and Pall Mall grew market share.
Volumes and profit in the Netherlands increased, benefiting from the growth of Lucky Strike, Kent and Pall Mall and the May 2007 price increase, partially offset by consumer down-trading. In Belgium, a significant excise-driven price increase led to lower volumes and market down-trading. Profit was lower as the impact of these more than offset higher margins and overhead savings.
Results in Spain improved, benefiting from price increases at the beginning of 2007 and, although volumes were lower, Lucky Strike showed impressive market share growth.
Sales volumes in Russia were influenced by trade buying at the end of 2006 in anticipation of the new excise system and price increases in December. However, most of the shortfall was recovered with strong performances by Kent, Vogue and Viceroy, leading to an increased market share. Profit grew significantly, benefiting from higher margins, an improved product mix and productivity savings.
In Romania, the excellent performance of Kent, the leading brand in his market, supported by the growth of Dunhill, Vogue and Pall Mall, resulted in a higher market share. Profit increased impressively with volume growth, higher prices and an improved product mix.
Results in Ukraine improved as better pricing, effective cost control and an improved mix, following a good performance by Kent, was partly offset by the impact of reduced local brand volumes. In Hungary, profit grew substantially, benefiting from improved margins and efficiency programmes. Overall volumes were stable with Viceroy and Pall Mall growing strongly and Vogue strengthening its position in the Premium segment. Results in Poland improved significantly as prices increased and volume and market share grew with good performances from Viceroy, Pall Mall and Vogue.