Solid price increases, a stronger product mix, and successful cost-cutting measures will drive steady operating profit growth for European tobacco companies, according to a new report from Moody's Investors Service.
In spite of challenges facing the market, the company says that the overall outlook will remain stable in the next 12-18 months.
"Price hikes combined with stronger product mix and cost cuts will help European tobacco companies grow operating profits at 5-6% over the next 12-18 months, offsetting the expected 2-3% drop in cigarette sales volumes as smoker numbers fall and underpinning the stable outlook on the sector," says Ernesto Bisagno, senior credit officer at Moody's.
Moody's says that the weaker US dollar and more stable emerging market currencies will benefit Phillip Morris International (PMI), while British American Tobacco (BAT) and Imperial Brands will continue to benefit from the weaker pound.
The ratings agency adds that European tobacco companies' leverage ratios will improve marginally on the back of steady earnings growth, the neutral foreign exchange environment, and recent US acquisitions by BAT and Imperial.
In terms of volume, cigarette consumption continues to increase in the Middle East and Africa, but is declining in Russia, Eastern Europe, and South America. However, Moody's notes that price increases should offset lower volumes.
It also adds that alternative products will continue to gain traction, but are 'unlikely to make a significant impact' on operating profits, due to initial high marketing and development costs.
PMI has indicated its growing smokeless business could break even this year. However, Moody's is less clear about when BAT and Imperial's smokeless products will start generating positive earnings.
© 2017 European Supermarket Magazine – your source for the latest retail news. Article by Sarah Harford. Click subscribe to sign up to ESM: The European Supermarket Magazine.