BAT manages 4% increase in revenue

Billions of cigarettes are smoked each year in markets around the world. Image: Cafa Art

The company's ability to pass price increases on to its customers is critical in an environment where anti-smoking sentiment is stubbing out cigarette sales - especially in developed markets.

BAT's results showed cigarette volumes down 2.7% to 676bn pieces. But BAT's chief executive Nicandro Durante said the company's market share continued to increase in key markets.

"Together our Global Drive Brands (GDBs) - Dunhill‚ Kent‚ Lucky Strike and Pall Mall increased share and volume," he said.

Kagiso Asset Management investment analyst Dirk van Vlaanderen believed the 2.7% decline in BAT volumes was below what the market expected in an "average' year".

"It is explained by continued pressure in Western Europe (down 8%) because of weak consumer environment and significant excise tax increases in Russia and Brazil," he said.

He estimated that if Russia and Brazil were excluded‚ BAT's volumes were down only 1.4% with a strong performance from Asia Pacific offsetting the weakness in Western Europe.

Price mix

Durante noted that BAT achieved a strong price-mix of 7% - which more than offset the overall volume decline.

Van Vlaanderen agreed that BAT's price-mix was robust and in line with the 5% to 8% that the company achieved in recent years.

"The important aspect is that pricing was around 9% across all of BAT's operating regions‚ with the exception of Asia‚ where pricing was up only up 1%," Van Vlaanderen said.

BAT says it has managed the price increases well. Image: My Discount Cigarette

He said the continued roll-out of innovations and focus on GDBs in all regions was also key to underpinning a shift to more premium brands, which in turn underpinned a greater ability to price.

Durante said BAT's international brands grew volumes by 2.1%‚ of which the company's GDBs grew by 1.9%. Dunhill volume was up a sprightly 9.7% and Pall Mall grew by 4.4%‚ but Kent was 2.9% lower and Lucky Strike by 6.5%.

The GDBs account for about 35% of BAT's total volume.

Durante noted that from this year BAT had added Rothmans to its GDBs portfolio‚ and had launched the Vype electronic cigarette in the UK (becoming the first tobacco company to look at this new market).

Durante said BAT's strong performance in 2013 was achieved against a backdrop of adverse exchange rate movements‚ lower industry volume and instability in some parts of the world.

While revenue was at constant exchange rates up 4%‚ adjusted profit from operations was up by 7% to £5.8bn. This translated into a 10% hike in earnings to 216p‚ which yielded a full year dividend of 142p (up 6%).

"We adapted to changes in our business environment‚ faced some tough trading conditions and embraced a range of new opportunities‚ in both new product categories and new markets. We invested further in our existing key high growth markets too," he said.

Arguably the most encouraging aspect of the BAT results was the fatter operating margin of 36% (previously 35%). Durante said BAT's adjusted operating margin improved significantly by 100 basis points - the top end of the company's forecast of an increase of 50 to 100 basis points each year.

"This was achieved thanks to efforts right across our global organisation to address our cost base‚ to standardise our systems and deliver productivity savings year on year," Durante added.

Looking ahead to the new financial year‚ Mr Durante said the pricing environment remained good.