NEWS RELEASE
Trading Update
The following statement provides an update on Gallaher Group Plc's current
trading. It will be discussed with analysts and investors before the close
period leading up to the announcement of the Group's preliminary results for
the year ended 31 December 2004.
Gallaher confirms that trading in 2004 is in-line with expectations, and the
Group's business is in a strong position going forward.
Gallaher's total Group volumes increased 3.9% to 139.3 billion cigarettes in
the first 10 months of 2004. This growth has been driven by Gallaher's
continued success in the CIS and Central and Eastern Europe. Excluding Polish
volumes, Gallaher's group volumes grew 2.3% to 136.0 billion cigarettes.
* United Kingdom
Estimated total duty-paid cigarette market volumes decreased by about 2.5% in
the first 10 months of 2004, with July to October volumes declining at a higher
rate than first half volumes. Moderate downtrading from premium and mid-priced
brands into value cigarettes continued.
Gallaher performed well in the UK cigarette market and maintained its focus on
cost control. The Group's volumes reduced 2.0% to 16.8 billion cigarettes in
the first 10 months and it achieved an average market share of 38.6%.
The UK cigar market continued to decline. Notwithstanding this, Gallaher's
performance was robust with the Group maintaining its average market share at
46.3%.
Handrolling tobacco market volumes showed modest growth. Gallaher's share of
the handrolling tobacco market was 29.8%.
In November, the Government published a White Paper which proposed a total ban
on smoking in all workplaces and restaurants, and the majority of pubs, by
2008. Gallaher believes that this goes beyond what the public says it wants.
The right balance should be struck between sensible regulation and voluntary
measures that accommodate smokers and non-smokers alike.
The Group expects that the ban may have an incremental impact on total
duty-paid market volumes up to, and after, 2008. However, it plans to mitigate
any impact on UK profitability through its focus on cost control and pricing.
* Continental Europe
Trading conditions in Continental Europe have been difficult in 2004 due to
large duty increases in several markets and increased cross border trade from
markets with lower duty regimes. Foreign exchange movements have also been
adverse.
In spite of these factors, Gallaher delivered a robust performance. The Group
increased total divisional volumes 4.8% to 41.3 billion cigarettes during the
first 10 months.
This growth has been underpinned by market share gains in Central and Eastern
Europe, and the continued success of RGI, Gallaher's joint venture with
Reynolds American.
Gallaher's market share in Poland reached 5.0% in October 2004, up from 1.7% in
July 2003, when the Group purchased its Polish factory.
Total duty-paid market volumes in Austria, Gallaher's most significant
Continental European market, declined 7.2% in the first 10 months of 2004. The
decline in the duty-paid market has slowed in the second half, assisted by
improved border controls - although the Government is planning to increase its
tax yield from January.
In Germany, this December's duty and price rise hascreated parity in optical
pricing between the cigarette vending and retail markets for premium brands.
Gallaher believes that it is likely that this development may provide a degree
of stability for its German vending sales.
Gallaher commenced on-shore production in Romania in October, following the
leasing of a factory in Bucharest.
* Commonwealth of Independent States
Gallaher continued to make strong progress in the CIS during the first 10
months of 2004.
Total divisional volumes grew 6.5% to 73.6 billion cigarettes. The Group
achieved market share gains in Russia, Kazakhstan and Ukraine, and a further
improvement in its mix of sales. Gallaher's average market share was 16.2% in
Russia, 34.7% in Kazakhstan and 14.2% in Ukraine.
A combination of Gallaher's investment in brands and continued focus on costs,
together with favourable macro-economic conditions, is resulting in a slightly
better than previously expected performance from the Group in the CIS - in
spite of the continued weakening of the US dollar.
- Rest of World
Total Rest of World volumes decreased 9.6% to 7.6 billion cigarettes in the
first 10 months, with reduced volume sales in the Republic of Ireland and lower
volumes manufactured under contract.
In the Republic of Ireland, market volumes declined 10.7% in the first 10
months of 2004. This reduction has been influenced by successive above
inflation duty increases.
The ban on workplace smoking, including in all pubs and clubs, effective from
the end of March, has also affected market volumes. However, monthly volumes
have continued to fluctuate considerably since the introduction of the ban and
it is still too early to assess the longer-term impact of the ban.
The Group is continuing to build its presence in Asia Pacific. Gallaher is
making good progress in China, where it has received permission to import LD
into the market. The Group has also launched Memphis in the mid-priced sector
in Singapore.
- Interest
The early refinancing, in June, of a €900m bond that matures in January 2005
will adversely impact Gallaher's 2004 Group interest charge.
14 December 2004
For further information, contact:
Claire Jenkins, Director, Investor Relations Tel: 01932 859 777
Anthony Cardew, Cardew Group Tel: 020 7930 0777
Cautionary Statement
This announcement includes `forward-looking statements' within the meaning of
the US securities laws. All statements other than statements of historical fact
included in this announcement, including, without limitation, statements
regarding Gallaher's future financial position, strategy, impact of market
trends and price increases, dividend policy, exchange rates, anticipated
investments, projected sales, costs and results (including growth prospects in
particular regions), plans, projects to enhance efficiency, impact of
governmental regulations or actions, litigation outcomes and timetables, the
successful integration of acquisitions and joint ventures into our Group,
objectives of management for future operations and effects of restructuring
activities, may be deemed to be forward-looking statements. Although Gallaher
believes that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to have
been correct. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. Important factors could cause actual results to differ
materially from Gallaher's expectations including, without limitation, changes
in general economic, political or commercial conditions, foreign exchange rate
fluctuation, interest rate fluctuations (including those from any potential
credit rating decline), competitive product and pricing pressures, the impact
of excise tax increases, regulatory developments, the uncertainties of
litigation, difficulties in integrating acquisitions and joint ventures,
production or distribution disruptions, difficulty in managing growth,
declining demand for tobacco products, increasing dependence on sales in the
CIS and other emerging markets, changes in the supply of tobacco and
non-payment of receivables by our distributors as well as other uncertainties
detailed from time to time in Gallaher's public filings and announcements. The
risks included here are not exhaustive. Moreover, we operate in a very
competitive and rapidly changing environment. New risk factors emerge from time
to time and it is not possible for us to predict all such risk factors on our
business or the extent to which any factor, or combination of factors, may
cause actual results to differ materially from those contained in any
forward-looking statements. Given these risks and uncertainties, investors
should not place undue reliance on forward-looking statements as a prediction
of actual results.
