British American Tobacco PLC (BATS.LN) Thursday posted a rise in first-quarter sales, but the world's second-biggest tobacco group by revenue said volumes continued to soften and warned of challenging trading as smokers struggle with tough global economic conditions.
Consumers in more mature markets are switching to low-cost brands as spending power is hit by tax hikes and other austerity measures to help governments rein in borrowing.
BAT volumes were hit by declines in Spain, Mexico, Australia and Vietnam. Still, Chief Executive Nicandro Durante said the company grew market share in all these markets and noted that the rate of volume decline overall is slowing. To compensate for volume falls, tobacco companies are paring costs and raising prices in mature markets like Western Europe and the U.S.
London-based BAT, which competes with U.S.-based global market leader Philip Morris International Inc. PM -0.19% and U.K.-based peer Imperial Tobacco Group PLC (IMT.LN), said organic sales rose 5% in the three months to March 31 on a constant currency basis, boosted by pricing gains.
Volumes fell 2.4% to 164 billion cigarettes in the quarter from 168 billion in the same period last year. Stripping out these acquisitions, volumes fell 1.8%. Most regions showed a drop in volumes from last year although Eastern Europe, the Middle East and Africa posted a flat performance.
"This good performance was achieved in trading conditions which remain challenging, with industry volumes markedly lower in a number of market," the company said.
Global brand volumes rose 9%, with Kent up 16%, Dunhill up 6% and Pall Mall 10% higher. Lucky Strike volumes fell 4%, hit by declines in Spain.
BAT also said there were higher-than-expected shipments to Japan, where the environment remains "highly uncertain" following the earthquake last month.
At the end of February, BAT said it was on track to reach an operating margin target of 35% by 2012 after it rose to 33.5% from 31.4% last year, supported by production, supply chain and logistical savings. It also resumed its share buy-back program after suspending the scheme in 2009 during the economic downturn.
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