directors report and accounts 2006 - Europe


In Europe, profit at £781 million was slightly lower mainly as a result of very competitive trading conditions in a number of markets and the inclusion in the comparative period of a one-off benefit in Italy, resulting from the change in terms of trade following the sale of Etinera. Excluding this benefit, profit increased by £9 million, with strong growth from Russia, Hungary, Italy and France, largely offset by declines in Spain, Poland, Germany, the Netherlands and Ukraine. Regional volumes on a like-for-like basis were 2 per cent higher at 248 billion, with growth in Russia, France, Spain and Hungary partly offset by declines in Ukraine, Italy and Germany.

In Italy, profit grew strongly driven by improved margins after industry price increases and a successful productivity programme which has considerably reduced the overall cost base. The growth in Global Drive Brands’ market share was more than offset by the decline in domestic brands.

Profit in Germany was slightly down due to excise driven volume declines in the overall market and down-trading to lower price and margin products after the end of Stix production. These factors were partly offset by cost reductions and the good cigarette market share growth of Pall Mall and Lucky Strike, which led to a higher overall cigarette market share.

Profit in France grew strongly, benefiting from higher volumes, an improved product mix and lower costs. In Switzerland, profit was higher due to the inclusion of the vending machine business acquired last year and despite price competition. The continued growth of Parisienne volume and share was offset by the decline in other brands, resulting in overall volumes the same as last year and a lower market share.

In the Netherlands, profit was lower due to higher excise levels and an adverse product mix, partly offset by cost savings, while cigarette market share increased. Profit in Belgium was affected by intense price competition in the other tobacco segments, although overall cigarette market share increased as Pall Mall and Winfield performed well. In Spain, despite strong growth in volumes and a much higher share, the results were adversely affected by the significantly reduced market profitability resulting from intense price competition.

The impressive performance in Russia continued through strong volume and profit increases, with an improved product mix and lower production costs. A higher overall market share resulted from significantly increased volumes of Kent and Vogue, supported by good Pall Mall growth. In Romania, the Group continued to grow volumes and profit, consolidating its leadership position in a reduced market, affected by substantial excise increases. Volume performance was driven by its premium brands, particularly by Kent, which is now the largest selling brand, as well as Dunhill and Vogue.

In Ukraine, profitability was adversely affected by the considerable decline in volumes. However, Kent, Lucky Strike and Pall Mall grew market share. Profit grew significantly in Hungary, benefiting from the recovery of the legal market after improved border controls, efficiency programmes and the strong volume growth from Viceroy and Pall Mall. In Poland, industry profitability was severely affected by increased excise rates and aggressive price competition. Volumes were down, although Pall Mall and Vogue grew both share and volume.

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