Smoking ban hits cigs manufacturer Gallagher

Silk Cut owner Gallaher today posted a 4.4% rise in profits, despite what the company said was the negative impact on sales of the smoking ban in Ireland and higher taxes on cigarettes in Germany.

Silk Cut owner Gallaher today posted a 4.4% rise in profits, despite what the company said was the negative impact on sales of the smoking ban in Ireland and higher taxes on cigarettes in Germany.

Higher UK cigarette sales offset worsening conditions in the company's other key European markets.

Gallaher, which also owns the Benson & Hedges brand, said UK consumers smoked 3.3% more of its cigarettes in the first half of 2004 despite packet prices continuing to go up.

But pre-tax profits of £250m (€368m) were restrained by higher taxes slapped on cigarettes in Germany, where the cigarette market declined 13.5%, and the workplace smoking ban in Ireland, which cut demand for cigarettes sold via vending machines in pubs and clubs.

"There's no doubt but that the ban has had an effect on sales in Ireland," said a spokesman for the company. "It's too early yet, though, to judge the long-term effects."

The company does not release figures specifically for the Irish market, but had predicted the ban would lead to a 5% drop in sales in the Republic.

Turnover grew 8% to £4.67bn (€6.9bn) in the period after the group captured market share in emerging markets such as Russia, Kazakhstan, Ukraine and Poland. Total volumes of cigarettes also increased by 8% to £79.3bn (€116.8bn).

Chief executive Nigel Northridge said: “We continue to grow our volumes and profits year-on-year in the face of difficult trading conditions in a number of European markets, coupled with the negative effect of foreign exchange.”

Gallaher employs just under 10,000 people worldwide, of whom about 2,500 work at its Surrey head office and at two factories in Cardiff and Northern Ireland.

Bottom-line profits of £200m (€294.5m) included an exceptional charge of £9m (€13.2m) from the restructuring of its operations in Europe.

This overhaul has seen 530 staff lose their jobs since the start of 2003 as Gallaher ended manufacturing in the Republic of Ireland and cut its headcount in the UK and Austria.

The total cost of the restructuring is expected to be in the region of £65m (€95.7m) by the end of next year, reflecting redundancy payments and write-downs on machinery.

This overhaul lifted operating performance in the UK, with productivity at its cigarette factory at Lisnafillan in Co Antrim increasing by 28%.

Benson & Hedges boosted its share of the UK cigarette market to 9.5% from a mark of 9.1% a year ago, while the Mayfair brand also gained ground.

But these improvements were moderated by small declines from Dorchester, Berkeley and Silk Cut, with smokers switching to cheaper brands.

Analysts said the results were slightly above expectations, although tough trading conditions in Ireland, Germany and other European countries meant shares moved 1% lower today.

A note by Barclays Stockbrokers said: “It is likely that the UK will also restrict smoking areas in the near future, whilst further tax increases are likely amongst EU countries.

“Gallaher’s earnings growth is expected to slow to around 5% per annum over the next three years and dividend growth may also come down to the same level.”

Gallaher unveiled a 5.8% hike in the interim dividend to 10p.

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