British American Tobacco scales back NZ business to distribution

Friday 17th June 2016

British American Tobacco's New Zealand business has lost responsibility for strategic decisions, leaving it principally a distribution point for the cigarette maker in an increasingly hostile market.

Since July last year, the local holding company, British American Tobacco Holdings (New Zealand), has focused on trade marketing and distributing products locally, with all portfolio strategy, brand and pricing decisions made by UK-based related entity British American Tobacco (UK and Export), which is responsible for the manufacture and supply of the group's products such as Pall Mall, Benson & Hedges and Dunhill cigarettes.

The restructure reduced the company's wage bill, with employee costs down 13 percent to $13.1 million, and also terminated BAT NZ's trademark licences, which were sold to the related UK company for a net gain of $229.9 million, statements filed with the Companies Office show. That removes $127 million of goodwill attached to BAT's trademarks and brands.

Saul Derber, BAT NZ's head of legal and external affairs, said the move wasn't to mitigate the risk posed by the government's plans to impose plain packaging on tobacco companies, rather it was the result of a groupwide review to keep the firm operating efficiently and competitively.

"In the past these reviews have resulted in moving manufacturing and product development out of New Zealand," Derber said in an emailed statement. "In the latest review, it was decided that the NZ business should now focus only on distribution and meeting the competitive challenges in its trade environment."

BAT NZ closed its manufacturing line in Napier in 2006 to shifting that work to Australia and ending 60 years of production in Hawke's Bay.

New Zealand tobacco companies face increased policy efforts using annual tax hikes of 10 percent a year to cut smoking consumption. The percentage of the population that smokes has fallen to 15 percent in 2014/15 from 18.3 percent in 2006/07, and the government wants that below 5 percent by 2025, making the nation essentially smokefree.

While those tax hikes feed through to higher revenue for firms like BAT NZ, whose sales were up 6.1 percent to $1.31 billion in calendar 2015, gross margins have been squeezed by the added duty. BAT NZ's gross profit of $202 million was at a gross margin of 15.4 percent, down from 19.2 percent a year earlier.

Net profit of $344.4 million compared to $126.5 million in 2014, and was bolstered by the intercompany sale of trademark licences. When reporting its group results in February, the parent said its New Zealand profit rose as higher prices offset lower volumes, while its Rothmans brand increased market share.

Derber said Rothmans' market share rose 1.7 percentage points to 6.3 percent in 2015, and since then was up to 8.3 percent.

BAT NZ declared and paid dividends of $117.4 million in 2015, up from $115.7 million a year earlier. A further dividend of $41.2 million was declared after the Dec. 31 balance date.

The company dominates New Zealand's tobacco market, with nearest rival Imperial Tobacco New Zealand, whose brands include Horizon, JPS, Peter Stuyvesant, West and Drum loose tobacco, reporting a 50 percent jump in profit of $30.7 million on a 16 percent gain in sales of $553 million in the year ended Sept. 30, 2015. Third-placed Philip Morris (New Zealand), which has the Marlboro brand, more than doubled profit to $2.9 million on a 57 percent gain in revenue to $155.4 million in calendar 2015.

However, Imperial Tobacco, the country's biggest cigarette maker with a manufacturing site in Petone, has the widest gross margin, which it largely maintained in 2015 at 20.7 percent compared to 20.9 percent a year earlier. Philip Morris has the skinniest gross margin at 11.3 percent in 2015, down from 13.5 percent in 2014.

BusinessDesk.co.nz

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