2005 interim results presentation
7 September 2005
Nigel Northridge and Mark Rolfe
Slide 1 |
(Gallaher) (Nigel Northridge) Good morning - and thank you for joining us to discuss Gallaher's interim results. Before I begin, could I please ask you to turn off your mobile phones or nowadays, blackberries as well - not just on silent - as they can cause interference with the sound system. |
Slide 2 |
Gallaher has delivered a robust financial performance. Our ongoing and successful drive to improve our efficiency, and expand our geographic base, enables us to report interim figures which show growth in volumes, profits and earnings per share. The last five years have demonstrated the effectiveness of our Group strategy. Following our major acquisitions in 2000 and 2001, Gallaher has achieved significant organic growth, and successfully entered new markets. This is an excellent opportunity to look at where we have got to, and at the platform for growth that we have created and the value for our shareholders. So - as a one-off - we are going to structure our presentation on a different basis to the one you have grown used to. Mark will take you through the results, and then I will take a strategic look at: - our enlarged manufacturing footprint; - the synergies we have created; and, - the way we build shareholder value by exploiting growth opportunities in new markets. So, first of all, over to Mark. (Mark Rolfe) Thank you Nigel, and good morning everyone. |
Slide 3 |
We improved our key financial performance indicators, with EBITA growth of 1.8%. We delivered adjusted earnings per share growth of over 6%. These results bear the costs of investment in new opportunities, but also benefit from returns from investments made in previous years. Excluding benefits from foreign exchange translation, incremental restructuring savings, and sales of acquired brands - but excluding increased sales and marketing expenditure, and new market investment - Group EBITA was ahead by over 4%. |
Slide 4 |
Despite phasing and market issues in the UK and Europe, core tobacco EBITA grew by over 2.5%. Adjusting for the factors I just detailed, we improved tobacco EBITA by over 5%. |
Slide 5 |
We are making good progress with restructuring our European operations. We charged an additional £29mn in the first half, taking total exceptional charges to date to £85mn. We expect costs to total around £95mn and annualised savings of at least £30mn, by the end of 2007. |
Slide 6 |
The reduction in UK turnover was driven by volume decline and continued downtrading, more than offsetting price increases. But, the impact on EBITA has been entirely offset through lower operating costs. |
Slide 7 |
Our UK volume decline, of 8%, is heavily influenced by the timing of past price increases. Our underlying volume trend was broadly in line with the overall decline of around 4% in the duty-paid market. Our total market share remained broadly stable at 38.5%. Downtrading from premium and mid-price brands into the value sector continued in the first half - albeit, at a slightly slower rate than in 2004. |
Slide 8 |
Our key objectives within the UK cigarette market are to maintain our leading position of the premium sector, and to increase our share of the growing low-price sector. Mayfair, Benson & Hedges Silver and Sterling grew share quicker than any other brands in the market - driving an increase in our total sector share to 35.9%. We took value sector share from all our competitors. |
Slide 9 |
The success of our value sector strategy in recent years means that our sales mix now more broadly matches the market mix today. This shift places us in a stronger position to capture future downtrading and - with our continued leadership of premium - underpins the UK's strong cash generation. |
Slide 10 |
The UK cigar market decline has moderated, with half year market volumes down 6.3%. We have stemmed share loss through increasing our share of the growing miniature sector. The handrolling tobacco market grew by 8%. Amber Leaf grew sharply, partially offsetting the ongoing decline of Old Holborn. |
Slide 11 |
Europe is one of the two revised business segments we announced at the year-end. In spite of the continued difficult trading conditions in western Europe, Gallaher delivered some excellent performances, notably in the Republic of Ireland, and central and eastern Europe, limiting the EBITA decline to some 2%. I expect the split of full year European EBITA to be weighted slightly towards the second half - partly because of: - the impact of the trade phasing on the first half, most notably on Austrian tobacco and distribution earnings; and, - the benefit of a full six months contribution from the acquisition of B & H and Silk Cut in Malta and Cyprus, from BAT in April, offsetting tourist volume declines. |
Slide 12 |
Cigarette volumes - including German singles - were broadly flat. The effect of trade demand phasing and total market declines in Austria, Italy and Germany offset strong growth elsewhere. European tobacco EBITA was down around 1% to £97mn - mainly reflecting margin pressure from the change in mix of sales. |
Slide 13 |
The Austrian market declined around 13% in the first half as a result of the phasing of trade sales, and increased illicit cross-border trade. We estimate the underlying rate of decline is currently some 10%. We continued to focus on balancing volumes and price - as a result, maintaining total Austrian tobacco EBITA. In January, we took price increases at the same time as the duty increase - and then we repositioned Memphis Classic, narrowing its price gap to premium. The total cigarette market in Ireland stabilised, even though the first three months of 2005 were compared to a period preceding the smoking ban last year. Benson & Hedges grew its share of the market to 20.2%, underpinning our leadership of this high-margin market. |
Slide 14 |
In Germany, total factory-made cigarette market volumes fell 14.7%, due to substantial increases in taxation and heightened cross-border trade. During the second half of 2004, we launched Ronson singles. They accounted for 3.9% of the singles sector in June. The Italian cigarette market declined by 5.7%, with the underlying rate of decline accelerated by the smoking restrictions introduced in January. There has been sharply increased competition in the value cigarette sector, and sharp growth in the handrolling and pipe tobacco market. We grew Old Holborn's volumes by 47%, increasing its share of the tobacco market to over 11%. |
Slide 15 |
Although outperforming the total market, we have seen a decline in our Greek volumes and a shift in the mix of sales, reflecting a strong downtrading trend in this market. Old Holborn continues to grow strongly. Austin and Benson & Hedges American Blend have grown our share in Spain. The French cigarette market has stabilised, and - again - there is increased competition in the value sector. However, higher-margin Benson & Hedges metal's robust performance mitigated our overall share loss. We increased our share of the French cigar market to 1.9%. |
Slide 16 |
We continue to strengthen our position in central and eastern Europe, growing sales to markets including the Czech Republic, Hungary and Slovakia. We increased our share of the total Czech cigarette market to 7%, driven by an excellent performance from Ronson. We began on-shore manufacture of our brands in Romania at the end of last year. |
Slide 17 |
Our distribution operations were impacted by the total market declines in Austria and Germany. In Austria, our focus on costs, and price increases in the premium sector, partly offset the market effect. However, the current optical pricing parity between vending and retail for premium brands has helped alleviate pressure on our German vending operation. The change in mix of our distribution earnings has impacted margins. EBITA reduced to £30mn. |
Slide 18 |
ATG's results are greatly influenced by external factors - the size of the branded cigarette market, optical pricing between retail and vending, and the resultant margin per pack arising from the number of sticks in a pack at particular price points. Since 2001, the German cigarette market has fallen by 30% - and the total cigarette volume sales by ATG have fallen by a similar amount, but still account for some 6% of the market. However, the changes that we have implemented to this operation since acquiring Austria Tabak in 2001 have improved its efficiency. By rationalising the machine park - and removing underperforming machines - we increased the pack-sales-per machine by 4%. |
Slide 19 |
The CIS division continues to demonstrate our successful development in the region, with good returns from our investments. We grew volumes over 11%, improving sales mix, despite excise duty increases in Russia and Ukraine, and manufacturer price increases across the region. We grew both gross and net turnover by over 20%. EBITA increased to £23mn, with an improved EBITA margin, from: - our price increases; - further cost efficiencies; and, - the continued improvement of sales mix across all our markets. |
Slide 20 |
The Russian consumer carries on moving up the margin ladder - and we continue to outperform the market dynamics, increasing our shares of the intermediate- and higher-priced sectors. |
Slide 21 |
We continue to grow our average-price-per-pack, at the same time as growing total market share. This achievement was driven by a variety of brands - notably St George, Troika, Sovereign and Sobranie - underpinned by LD, which remains the leading brand in the value sector. |
Slide 22 |
In Kazakhstan and Ukraine, we grew our total market shares - and improved our mix of sales. In Kazakhstan, Sovereign and LD are the two leading brands, and Sobranie has become number ten. In Ukraine, our share growth has been solely driven by gains in the intermediate- and higher-priced sectors, with LD firmly established as the fifth largest international brand in the market. I expect the distribution of full year CIS EBITA to broadly reflect this region's seasonal trading pattern, with less than 40% of annual earnings being attributable to the first half. |
Slide 23 |
Rest of world EBITA totalled £15mn. This mainly reflects: - volume growth in Poland, which - together with price increases - has moved the operation into profit in line with expectations; and, - a good performance - assisted by lower operating costs - in Sweden. These factors have broadly offset the impact of start-up investments in Denmark, Lithuania and South Africa, as well as weaker African and Middle Eastern volumes. |
Slide 24 |
The Swedish cigarette market declined by 3%. We defended our leading position - with share broadly stable - driving strong cash flow for reinvestment across the Group. We successfully launched LD in Denmark - achieving a market share of 4.7% in the three months to July. We consolidated our position in Estonia, increasing share to 28.9%, and entered Lithuania. |
Slide 25 |
Our growth continues in Poland, even after price increases at the start of the year. We lifted volumes by 34%, increasing our market share to 6.8%. |
Slide 26 |
Guinea volumes reduced, following our price increases earlier this year, and we terminated a distribution agreement in the Middle East. In South Africa, we commenced on-shore manufacturing of Sobranie and LD, after we began exporting Sobranie earlier in the year. |
Slide 27 |
We increased Asia Pacific volumes by over 12%. Our plans for this region were enhanced by the progress we have made in China, where imported LD was launched into the trade in August. |
Slide 28 |
Net finance costs were down £8mn, including the benefit from a £5mn increase in IAS-related credits. This reduction - despite higher interest rates - was due to a reduction in net debt. The period-end net debt reduction of £111mn reflected positive cash flow, foreign exchange gains and derivatives revaluation. |
Slide 29 |
The tax charge of £65mn represents an effective rate of 28.7%. This rate is distorted by the low effective rate of tax credit applicable to the higher exceptional charges in 2005, and the increased level of non-deductible intangible asset amortisation. This year's lower adjusted effective tax rate of 26.8%, which removes these effects, largely arises from the reduction in the Austrian corporation tax rate from 34% to 25% from 1st January 2005. I expect the full year adjusted rate to be broadly at the first half level. |
Slide 30 |
After minority interests of £2mn, adjusted earnings per share increased by 6.2%. We have declared an interim dividend of 10.6p per share - an increase of 6% over last year. |
Slide 31 |
Cash flows. Excluding JVs and associates - and adjusting for the exceptional charges - EBITDA was £342mn. After working capital fluctuations, the cash conversion rate is 124%. The net working capital reduction this year was mainly the result of higher duty creditors in Ireland - where earlier settlement terms apply in December - and lower UK debtors, partly offset by lower UK duty creditors, impacted by the December 2004 trade demand ahead of price increases in January. A number of these factors are largely seasonal, and are expected to reverse in the second half. However, we continue to see benefits from our ongoing focus on working capital management. The increased taxation payments of £67mn primarily reflect tax assessments in Austria - which are reviewed periodically - and have been brought into line with current levels of profitability. |
Slide 32 |
In the first six months of the year, our £62mn of debt reduction from cash flow was after net capital investment of £116mn. This included the purchase of trademarks in Malta, Cyprus and Lithuania from BAT for £70mn in April. And now I'd like to hand back to Nigel. (Nigel Northridge) Thank you Mark |
Slide 33 |
These results again demonstrate Gallaher's central commitment - maximising cash flow from core markets to fund profitable expansion. I am proud of the platform we have created - our enlarged manufacturing footprint has delivered cost synergies, and allowed us to exploit growth opportunities in new markets, while our enlarged brand portfolio enables us to build profitable volume growth. Our sustainable strategy delivers shareholder value: - maximising the cash flows from our core markets; - exploiting new export markets, given amenable tariff regimes; - investing on-the-ground in markets where we have identified clear opportunities - either by establishing new production facilities, or through acquisitions, measured against a stringent financial criteria; and, finally, - accelerating growth through joint ventures and business alliances. |
Slide 34 |
We drive our core markets by: - defending our strong market shares, maintaining pricing power; - offsetting volume declines through manufacturer price increases; and, - an ongoing focus on operational cost reduction. |
Slide 35 |
The key to successful cash generation from the UK, Austria, Ireland and Sweden is maintaining strong positions to achieve optimal price increases - we have succeeded in all four markets. The vital objective is not affected by decline of tail brands, or a measured reduction in market share following a significant increase in margin. |
Slide 36 |
Despite increased excise duties and negative mix - resulting from downtrading - we have increased the average net take per stick in all four markets since 2002, albeit by different rates at different times in different markets. These price increases have more than offset the volume decline over that period. |
Slide 37 |
As a result - together with improved cost efficiencies - our four core markets have delivered increased profits, despite the significant challenges in western Europe both last year, and so far this year. This improving cash flow is re-invested in further growth opportunities. |
Slide 38 |
The second component of our strategy - to grow profitable export volume - is simple. After identifying an opportunity - provided there are no significant import tariffs - we export the chosen strategic brands from the appropriate production facility. All this in accordance with our international trading policy. Each business plan requires meaningful returns within a specified time frame. The initial investment period can mean operating at a loss, or with very thin margins. But, we regularly monitor progress, and will pull out of a market if we don't meet those very clear internal targets. In the case of developed markets - with higher margins - the most difficult milestone to reach is 1% share. At this point, we make reasonable returns - as does the retail trade. If we achieve that position, we believe we can build share further - normally targeting about 5%. In emerging markets, however, we normally target a share of 5% as quickly as possible. At this point, the volume platform provides us with the scale to leverage the distribution framework - to take price increases on existing products, and to surf-in higher-margin brands. Growing share - and margins - then become realistic. Let me give you some examples. |
Slide 39 |
Kazakhstan abolished tobacco import tariffs in 1993. We seized the opportunity, and within six weeks developed Sovereign Red, and identified its ability to build clear brand equity. Within two years we grew our market share to 4%. In '96 the government announced its intention to re-introduce import tariffs, so we began building a factory. At this stage, although we were profitable, margins were low because of the ongoing investment in the business. In 1998 we doubled margins, but then Kazakhstan suffered the lag of the Russian rouble crisis, you recall. However, we knew the economy would recover. By 2001, the advances of Sovereign, and additional launches of brands like LD, drove margins back to the pre-crisis levels. We keep taking share in the intermediate- and higher-priced sectors, and the favourable change in our mix of sales - plus the overall volume growth - has driven our margins to even higher levels. |
Slide 40 |
Another example, Greece. By 1997 we had built sufficient brand equity in Silk Cut to provide us with a good foundation for earnings growth. We were the fastest-growing international tobacco company in '98 and '99, but the margin remained low as we developed the business. Then we increased marketing investment, launched new brands, and started to increase net pricing. By 2002, we achieved a desirable margin from our extended cigarette portfolio - and our entry into the HRT market. We have broadly maintained margins despite the change in our mix of sales as a result of increased downtrading. |
Slide 41 |
After achieving a pan-Balkans market share of over 5% last year, we have successfully improved profitability. This improvement is after increased investment in our brands and sales capability. |
Slide 42 |
Or even more recently, we targeted the Czech Republic. Before EU accession, our sales to that market were tourist volumes, requiring minimal on-the-ground investment. Although small, these volumes were at a highly attractive margin. In the first half of last year, we identified the opportunity for Ronson, and began P&L investment in a domestic sales force. While our margin fell initially, volumes grew sharply. Since we breached that 5% threshold at the end of last year, the margin has begun to recover. |
Slide 43 |
And then in Slovakia, we began an intense focus on that domestic market last year. Tiny volumes of tourist purchases were at high margins. However, we identified an opportunity to capture share quickly by being fast and flexible. Tax changes last year eliminated the pricing advantage of 70 millimetre cigarettes, and we were the first to introduce an 80 millimetre cigarette brand at an attractive price point. That - and increased P&L investment in our distribution capability - resulted in rapid share growth, to some 5% now. We have already moved out of the investment phase - we broke even in the first half - and we anticipate margins moving ahead from now on. |
Slide 44 |
The third component of our strategy is investing on-the-ground, either through start-ups or by making acquisitions. Liggett-Ducat and Austria Tabak extended our geographic footprint, and greatly enhanced Group scale. And, they gave us the extended brand portfolio that we use across the enlarged Group, plus new skills and experience. Investing on-the-ground is necessary if exports are not possible, perhaps because of tariff barriers or geography. Potential acquisitions must accelerate our growth platform. Although we have focused on smaller scale investments since AT, collectively they have made a meaningful contribution to the total Group. |
Slide 45 |
Four years ago, based on Liggett-Ducat's success in Russia, we identified the opportunity to enter Ukraine - using our emerging-markets-model. Import tariffs were prohibitive for exports and so we purchased a brownfield site, and began on-shore manufacturing in 2002. We quickly established a position in the base filter segment, in order to attain distribution scale - and by the end of that year we had over 9% of the market. In 2003, we used our distribution platform to introduce higher-margin products - and, as planned, moved into profit during that year. We now have 16.1% of the market, with an improving mix of sales - and are concentrating on improved profitability. Based on its financial performance up to the end of August, we currently expect Ukraine to deliver a post-tax cash flow return on investment in excess of 12% this year. The recently established on-shore facilities in Romania and South Africa are still in investment phase as you know - but I expect these facilities to strengthen our position in the domestic markets going forward. |
Slide 46 |
In 2003, we entered Poland through the acquisition of KT Merkury - which had then less than 2% of the market. We leveraged the existing volume sales platform to advance our market share through our base filter and value brand portfolio. Utilising our lowest cost manufacturing skills, we built our market share up to 5% in just 12 months, giving us the platform to launch a full range of products, and to start improving margins. In this half, we grew market share to 6.8%, as Mark said, and results were enhanced by increasing the price of LD and Level. The Gostkow factory also started production for export to developing markets this year, contributing to the overall profitability of the Group. I am clearly pleased with our performance in Poland so far, and - as planned - the operation has moved into profit. Based on its performance up to the end of last month, Poland is currently expected to earn a post-tax cash flow return above Group WACC this year. And, if the operation progresses as planned, this return will improve significantly next year. |
Slide 47 |
And the final component of our strategy is to enhance our growth prospects through joint ventures and business alliances, where others bring something different or new to the party. In July 2002, we entered into a joint venture with Reynolds, to manufacture, market and sell a limited portfolio of American blend cigarettes, initially in four markets. We licensed Benson & Hedges American Blend and Benson & Hedges Red to the JV, and they licensed Reynolds, an American blend brand in a unique slide-box pack. Since then, our partner's brand Austin has been added to the portfolio - and the JV now sells in France, Spain, Italy, the Canaries, Andorra, Belgium and Luxembourg. Total JV volumes have tripled since 2002 - with the full portfolio, and especially B & H American, benefiting from the JV's management focus. In 2003, RGI was in investment phase, but in 2004 it contributed £5mn to Gallaher. And, in spite of the challenging conditions in western Europe this year, RGI contributed £2mn in the first half. |
Slide 48 |
In May 2004 - building on the strong relationship we had developed since the mid-90s - Shanghai Tobacco started manufacturing and distributing Memphis in China, and we began the same for their brand, Golden Deer, in Russia. Our strong relationship is also reflected in the CNTC's approach to our import aspirations. Our share of total imports grew to 6.7% last year - after our reciprocal agreement with Shanghai Tobacco went live. And, we now have permission to import LD in addition to Sobranie - with the launch to the trade only last month. China is an opportunity for the longer-term and our alliance with Shanghai Tobacco positions us well for the future. So - to summarise. Our strategy over the last five years has been to maximise the cash flow from our four core markets, and to expand our footprint through exports, on-the-ground investments - both start-ups and acquisitions - and through JVs and alliances. |
Slide 49 |
Now, the successful application of that strategy can only be possible by ensuring that the organisation possesses four key strengths: - a strategic brand portfolio for all chosen markets; - an optimal supply chain solution, and the best route to market; - low cost manufacturing; and, - the best people. |
Slide 50 |
Exploiting our strategic brand portfolio is absolutely fundamental to the success. We have a proven ability to build equity in our brands, and have established positions across all the price points. Our strategic cigarette brands - which now constitute 47% of total Group volumes - grew 13% in the first half. A critical component of our current success has been our ability to maximise the cross-border benefits from our enlarged brand portfolio - particularly following the acquisitions of Liggett-Ducat and Austria Tabak. |
Slide 51 |
LD's performance, for example, was underpinned by strong growth in the brand's established markets, and a number of launches across the Group's territories. The brand created by Liggett-Ducat for Russia is now sold in 22 markets, and is Gallaher's largest brand. Recent launches in northern, central and eastern Europe have further expanded its reach. |
Slide 52 |
Sovereign Red has grown from strength-to-strength. The brand's largest position is in Kazakhstan, where it now is the leading brand with a share of 17%. We are now extending the house, introducing the higher-margin slims variant in Russia and Ukraine. |
Slide 53 |
In 2001, our brand portfolio was further enhanced by Austria Tabak's products - notably, Memphis and Ronson. At that time, Ronson was sold in 15 countries in continental Europe and Africa. Since identifying the brand as a key value proposition we have rolled Ronson out to new markets - notably in northern, central and eastern Europe - driving compound average annual volume growth of 24% since 2002. That brand is now sold in 27 markets worldwide. |
Slide 54 |
From a low base, premium-priced Sobranie has grown its volumes by over 75% this year. In '97, Sobranie Cocktail and Black Russian held niche positions. We began the process of launching Sobranie in new markets. We developed Pinks and Mints for Japan, later rolling them out to Russia and China, and we introduced the house in Asia Pacific duty-free. And, we developed Sobranie Classic as a more main-stream proposition. Today the Sobranie portfolio is sold in 20 countries, and continues to make gains in Asian travel retail, central and eastern Europe, and right across the CIS. |
Slide 55 |
Right across that brand portfolio, we have a focus on quality and innovation as you would expect. The move to compact-pack across the Group is not only delivering efficiency savings, but also improving pack quality. Benson & Hedges Gold's recent conversion to compact has reinforced the brand's premium cues - and we are further highlighting it on the shelf, with eye-catching over-printed film. We have introduced Silk Cut in a bevel-edge pack at the same time as re-emphasised the purple mortis design and stabilised the brand's share of the UK premium segment. |
Slide 56 |
The second key strength I mentioned - supply chain - encompasses two distinct components. Optimal solutions for in-house processes, and establishing the best route to market. To date, most of our in-house focus has been on optimising the benefits of our manufacturing footprint. Regarding our working capital management - recent initiatives are generating reductions across the Group, and I expect to see further efficiencies from this. And, we have a track record of reducing distribution costs. You will recall, in the mid-1990s, we revolutionised our UK distribution infrastructure - reducing the number of warehouses to one, single, world-class facility in Crewe. As part of the operational restructuring proposals more recently, TOBA's warehousing operations will be centralised in Vienna, reducing the number of stock-picking facilities from seven to one. |
Slide 57 |
Achieving extensive distribution through reliable long-term partnerships is critical to our success. There are essentially three routes to market in the tobacco industry: - the de facto monopoly distribution by one firm, with neutral, transparent and fair logistics; - distribution to large retail stockists, as in the UK and Germany - which potentially means higher listing fees for new brands; and thirdly, - in less developed markets the route is usually via a third-party - ideally exclusive, if your partner has the reach. Our approach in these markets facilitates our growth. Our distributors invest in their own sales forces and trade promotions - above and beyond Gallaher's promotional campaigns - and we share best-practise, leading to mutual benefit from increased sales. For example, the Megapolis contract in Russia demonstrates what I mean. Since our relationship began, Megapolis has more than tripled its sales force, and increased the number of warehouses from 85 to 102, providing us with extensive distribution right across most of Russia. We are also working closely with Megapolis to further optimise our product flow, by making sales direct to retail and the open market. In Kazakhstan, we have a long-term partnership with our exclusive distributor Arline. Their distribution network spans the entire country, achieving maximum penetration for our core brands, Sovereign and LD - and creating a platform for growing sales of our premium brand Sobranie. We are using this approach to great effect in newer markets, such as Denmark and South Africa. |
Slide 58 |
The third key strength, underpinning our strategy, is maintaining our focus on low-cost manufacture, by: - ongoing productivity gains, through capital investment and working practice improvements; - by effective deployment of capital, and utilisation of our manufacturing facilities; and, - maintaining our flexibility to meet changing market demands. We can respond quickly to an identified opportunity. |
Slide 59 |
We increased Group cigarette productivity by 5% in the first half, in spite of lower manufacturing volumes in the UK and western Europe, and the near-term disruption caused by more recent stages of the operational restructuring. This performance was driven by improvements in the CIS and Poland, and comes on top of consistent productivity improvements delivered in preceding years. The restructuring programme is expected to deliver further productivity improvements in 2006. |
Slide 60 |
We reduce the Group's potential capital expenditure requirements by a holistic approach to the management of our assets. For instance, after the closure of our Dublin factory we re-deployed the handrolling tobacco primary to South Africa and, with other surplus equipment, converted it to a cigarette primary. Our investment in new high-speed machinery for our mature facilities in the UK and Austria - to further enhance performance - has enabled us to re-deploy our displaced equipment to meet growth in demand elsewhere in the Group. So - we continue to drive improved efficiency in our mature facilities, while cost-effectively enabling the Group's expansion in growing facilities. Since 2002, actual capital investment in our start-ups has been less than half than it would have been if we had had to invest in new, or even re-conditioned second-hand, machinery. |
Slide 61 |
Operational efficiency is also driven by the effective utilisation of those manufacturing sites. Our mature facilities in Austria and the UK mainly serve European markets - but not exclusively. Production is allocated between Group factories based on a number of factors. This use of our manufacturing base delivers cost and efficiency benefits to our markets, and operationally. Recently, we moved some manufacturing for developing markets to Poland. When we decided to bring specialist filter-making in-house in 2003, we decided that Hainburg was the best factory site for the Group as a whole. |
Slide 62 |
We are rigorous in our evaluation of all investment opportunities. This year, manufacturing will account for around 70% of our total cap-ex. Clearly, there is a certain amount of what is best called maintenance cap-ex - mainly investment required as a result of new regulations. Then, there are the value-added projects: - those that deliver significant cost savings, such as bringing specialist filter making in-house, or our move to king size standardisation right across the entire Group; - those that are needed to meet our growing sales; and, - those that enable our markets to launch new products. Our factories respond quickly to requests from commercial divisions for product to exploit those opportunities - but only if the numbers stack up. Over 80% of this year's projected operational cap-ex can be categorised as value-added. Some of the sums involved are very small in isolation, but together this investment accelerates that growth platform. These examples from 2003 and 2004 are all delivering at or above our initial expectations. |
Slide 63 |
Our focus on efficiency continues to deliver improvements. We reduced Group cigarette unit costs by 3.7% in the first half. Our efficient manufacturing facilities enable us to compete effectively everywhere we operate. Finally, and very obviously. |
Slide 64 |
Our employees are central to our business success. Not just their talents and capabilities, but deploying them to best effect, and motivating them to deliver against tough targets. We invest in the best people - helping them develop new skills and qualifications, and by our Group-wide talent management, succession planning and development. For example, an initiative running throughout the Company - driving business improvement - is enhancing the commercial and financial business skills of our key managers. And, for our sales and marketing teams, we founded the Gallaher trade university to act as a specific best practise forum. In short, we are seeking continuous improvement. Our challenge is to keep making Gallaher better and better. |
Slide 65 |
The successful application of our strategy meant we made good progress in the first half - using cash flow from our four key markets to grow elsewhere, and to enter new markets, either through exports or investing on-shore. This strategy is underpinned by exploiting our strategic brand portfolio, and through maximising the benefit of our efficient manufacturing footprint: - we made market share gains across the CIS and in certain European markets, including Poland, the Czech Republic, Denmark, Estonia, Lithuania, Romania, Slovakia; - we increased our strategic brands' volumes by over 13%; - we reduced Group cigarette unit costs by 3.7%. These results show that we have delivered organic growth in a challenging environment, and increased our earnings, after higher sales and marketing expenditure. Group EBITA grew 1.8%, and tobacco EBITA was up 2.6%, in spite of increased investment. However, as Mark said, we increased underlying Group EBITA by over 4%, and tobacco EBITA by over 5%. There is significant scope to roll-out our growth strategy, both in the near-term - with current trading in line with expectations - and further out, where our current investments will bear fruit. We are in excellent shape to take advantage of future opportunities. |