BAT profits plunge as tobacco giant takes £957m hit from Russia exit

British American Tobacco profits plunge 25% after Lucky Strike owner takes £957m hit from exiting Russia

  • Half-year profits from operations at the Dunhill cigarette maker fell to £3.68bn
  • Earnings were also impacted by the firm’s restructuring programme Quantum 
  • BAT’s revenues from its non-combustible brands jumped by 45.4% to £1.28bn

British American Tobacco’s profits have plunged by a quarter following its decision to exit the Russian market.

The Lucky Strike-owner fell to £3.68billion operating profit in the first six months of the year, even though total revenue jumped by 45 per cent thanks to strong demand for non-combustible products.

The decline in earnings was mainly driven by impairment charges of £957million from the intended transfer of BAT’s business in Russia, where it had controlled about 25 per cent of the local tobacco market.

Decline: Profits from operations at the Lucky Strike cigarette maker fell to £3.68billion in the first six months of the year, even though total revenue jumped by 45 per cent

Another £450million charge was incurred in relation to investigations by the US Department of Justice and US Treasury’s Office of Foreign Assets Control into the alleged breach of sanctions.

Earnings were further impacted by BAT’s restructuring programme Quantum, which has included quitting the Egyptian market and the planned closure of a factory in Singapore.

However, the FTSE 100 company said Quantum had delivered annualised savings of £1.5billion six months earlier than planned, with further savings set to be attained by the end of 2022.

BAT also continues to expect full-year revenue growth of 2 to 4 per cent and is confident of reaching its target to turn a profit and generate £5billion from its ‘new category’ portfolio by 2025.

Chief executive Jack Bowles said: ‘We are not immune, of course, to the increasing macro-economic pressures, exacerbated by the conflict in Ukraine.

‘However, we are well positioned to navigate the current turbulent environment due to our powerful brands, operational agility and continued strong cash generation.’

Demand: Over 20 million people now use at least one of British American Tobacco's non-combustible brands, which now provides 14.6 per cent of its overall revenues

Demand: Over 20 million people now use at least one of British American Tobacco’s non-combustible brands, which now provides 14.6 per cent of its overall revenues

In the first half of this year, the group saw revenues from its three non-combustible brands – Velo, Vuse and Glo – jump by 45.4 per cent to £1.28billion.

Vuse saw the largest increase in sales, surging by 55.2 per cent to £617million as massive demand for its Alto e-cigarette helped the brand become the market leader in 34 US states.

Alongside this, BAT achieved revenue growth of 38.6 per cent from tobacco heating products on the back of much higher sales and volume share in Europe, and the rising popularity of Glo Hyper devices.

Over 20 million people now use at least one of the firm’s non-combustible brands, which now provides 14.6 per cent of its overall revenues, though BAT said it was still making £222million in losses from the segment.

During the second half of 2022, the company is expanding the range with the launch of Glo Hyper X2 and extending its Vuse Go platform into more markets following a trial in the UK.

However, while BAT is trying to bolster its share of trade from new categories, Bowles said the firm was seeing ‘no acceleration of downtrading’ of its combustibles products.

Sales of traditional cigarette brands, which include Dunhill, Rothmans and Pall Mall, grew by around £250million due to higher pricing, offsetting a drop in volumes caused by the sale of its Iranian business, the escalation of the Russo-Ukrainian War and weaker output in the US and Turkey.

Steve Clayton, a fund manager at Hargreaves Lansdown, said: ‘Tobacco will always be a controversial industry, but BAT is making tangible progress toward a future where its products are less harmful. 

‘In the meantime, the group’s ability to churn out reliable cash flows and dividends remains unimpeded, and with debts falling away, the financial appeal of the group is improving.’ 

British American Tobacco shares were up 0.4 per cent to 3,485.5p during the late morning on Wednesday, meaning their value has grown by over 25 per cent in the past year.