Supply Chain Changes Causing Imperial Tobacco Earnings Decline

Imperial Tobacco is the second largest tobacco company in Europe and it reported that its cigarette earnings during the first half of the year has declined because of its program implementation for improving the supply chain and its investments on brands.

Supply Chain Changes Causing Imperial Tobacco Earnings DeclineDuring the six months period that ended on March 31st, its adjusted tobacco operating profit decreased by 5% to $2.2 billion or 1.3 billion pounds. Imperial Tobacco is the tobacco company based in England and produces the Davidoff and Gauloises Blondes. This is in comparison to the average estimate of 1.33 billion pounds by 9 analysts that Bloomberg surveyed.

Alison Cooper, the chief executive of the company stated that their stock optimization program has unavoidably impacted some of their figures. Yet, Cooper remarked that she is pleased with the company’s underlying performance. She added that active management of their cost base means releasing of funds to invest on brands.

Its supply chain program, Imperial said, remains on track to deliver the incremental 60 million savings for the entire year. This is albeit the reduction in growth market inventories especially in Iraq and Russia. Imperial repeated that its complete year outlook and also its boosted 10% dividend matches the estimates if the analysts. It will begin its quarterly dividend payments in year 2015.

Credit Suisse analysts stated that the results were aligned in magnitude and shape without any changes in guidance. Shares traded at 2,531 pence in London, which is up by 0.6%.

The underlying volumes increased by 4% in the period among the growth brands of Imperial Tobacco such as JPS and Davidoff. This performance reflects the growth quality that the company targets. It further noted that it is achieving success although there is a backdrop of 4% market decline.

Regulatory Changes Affecting Growth

Imperial Tobacco also stated that its share in the growth regions has declined due to the changes in regulation in Russia where the difficult market conditions are. Russia aside, the market share of the company has improved in other countries.

The underlying volumes, however, increased while the market share is negative and the volume/share disclosure is limited. Exane BNP Paribas analyst James Bushnell said that investors need to be more confident.

BAT Is Taking Ahead

Shares of Imperial have increased 7.7% last year, which is due to the improved economic outlook in the southern region in Europe. Also, the company has introduced its first ecigarette back in February so it could catch up with its competitors like BAT or British American Tobacco that released its Vype ecigarette last year. Nonetheless, profit in the UK that comprises about one fifth of the total earnings of the company remains threatened because the UK government has plans to implement plain packaging similar to that of Australia starting next year.

Cooper mentioned that Imperial is set to release a new ecigarette this 2014. It began selling its Puritane ecigarettes in the UK during late part of February through Boots chain drugstore. With this, Imperial has been seen as a slowcoach on the alternative nicotine products because BAT was very much ahead when it launched its Vype in 2013. BAT essentially has the first mover advantage over Imperial and other competitors.

Nevertheless, Imperial seems to have a rather different approach in tackling its electronic cigarette venture. While BAT was busy improving and developing and promoting its product, Imperial chose to slowly creep into the budding market by taking on its side the inventor of electronic cigarettes, Hon Lik.

Lik has founded a company, Dragonite; and Imperial bought its electronic cigarette kits unit. Through the acquisition, Imperial was essentially given the right to oversee Dragonite’s ecig patents.

Thus, Imperial went to sue various electronic cigarette makers in the US whom it thought are infringing its acquired patents from Dragonite.

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