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BAT (U) Profits Dip 56 Percent But Firm Vows to Turn a New Leaf(East African (Kenya) Via Thomson Dialog NewsEdge) British American Tobacco (Uganda) announced a 56 per cent drop in operating profit in the first half of 2006 compared with the same period last year. In its half-year unaudited results announced in Kampala last week, the company said the fall in profit was largely due to higher costs of doing business in the country. The management however remained optimistic about returning to profitability in the next six months. Managing director Glenn Sheppard told The EastAfrican that the loss should be seen in light of the restructuring the firm has undergone in the past two years. He expresses optimism that the company will turn a new leaf in the second half of the year. "We have now factored in the inputs into the business properly and second half results are usually better than the first," he said. Operating costs in the period under review increased significantly due to the depreciation of the Uganda shilling particularly against the dollar, at a time when the company had increased its foreign currency loans portfolio. This, the company said, resulted in the loss before taxation of Ush1.2 billion ($648,648) in the six months to June 30, compared with a profit before taxation of Ush2.7 billion ($1.45 million) in the same period last year. Like many other companies in Uganda, BAT was affected by the energy crisis facing the country and officials say the escalating costs of electricity have increased production costs by 50 per cent. The firm plans to import a 1,500 KVA generator - enough to power a small town - for its headquarters and green leaf threshing plant in Kampala. BAT (U) is the country's largest tobacco firm controlling about 75 per cent of the market. The company said the results reflected some of the costs carried over from reforms initiated last year when it shut down its factory in Jinja, to concentrate on growing leaf and its export. As part of British American Tobacco's global reforms, Uganda is one of five countries, including Brazil, Zimbabwe, Indonesia and India, selected to produce high-quality tobacco leaf for the group's cigarette making operations, with cigarette manufacturing for the region restricted to BAT Kenya. BAT Uganda has restructured its leaf operations, reducing buying centres to four central purchasing points instead of the original 152. Last year the company incurred $783,729 in restructuring costs and recorded a net loss before taxation of Ush9.3 billion ($503,891). Operating profit for 2005 was similar to the previous year's which stood at about Ush2 billion ($1.08 million) reflecting higher cigarette sales but a reduction in leaf revenue. The company registered a gross turnover of Ush120 billion ($65 million) in 2005 compared with over Ush140 billion ($76 million) in the previous year. Turnover for the first six months of 2006 was Ush75.5 billion ($40.8 million), up from Ush68.4 billion ($36.9 million) from the same period last year, which the company attributed to a four per cent increase in volumes over the said period, mainly in the lower-value cigarette segment, as well as gains from the competition share market and modest success in curbing illicit trade in tobacco and cigarettes. Reforms in leaf growing, processing and export were beginning to pay off in the form of better quality of tobacco processed. With average annual earnings of $40 million from leaf exports, this is a core area to the company's operations in Uganda and officials remain optimistic that the "prospects for the second half of the year look positive," as long as conditions remain favourable. Three of these conditions include, "the continuing efforts to curb the illicit trade in cigarettes and illegal purchase of tobacco leaf, the local exchange rate, and the ability to secure the purchase of the targeted leaf volumes from the company's contracted farmers for eventual export sales." Mr Sheppard said cigarette smuggling into the country and buying of tobacco leaf from the company's outgrowers by competitors, are challenges the company was also addressing. "Smuggling is about the Ugandan economy, not just about BAT Uganda," he said. The Uganda Revenue Authority loses Ush6 billion ($3.2 million) every year in illegal, untaxed cigarette trade, while the company losses $1 million in revenue annually. Illicit cigarettes account for 20 per cent of the local market share. Last year, 53 million illegal cigarette sticks were impounded and destroyed, while in West Nile, competitors operating in Uganda and along the border with Congo, stole between three to four million kilogrammes of the company's tobacco from farmers. The company only managed to buy 12 million kilogrammes out of the projected 16 million kilogrammes in 2005. BAT Uganda hopes to buy 17 million kilogrammes of tobacco this year, and export 98 per cent of it to markets in the European Union, Russia, Asia, Australia, Singapore and South Africa. To fight smuggling, the firm recently signed a memorandum of understanding with the revenue authority, to co-operate in stumping out cigarette smuggling. The company has also trained 430 law security officers to ensure that its enlisted tobacco outgrowers do not sell to unscrupulous competitors. These measures are working," says Jimmy Kiberu, the company's spokesman, pointing at the central purchase point in Arua, in northwest Uganda, where as much as 200,000 kilogrammes of tobacco is bought per day. Said Mr Sheppard, "Our operations are transparent, efficient and with computerisation, farmers are paid on the spot." He said tobacco is the only commodity in the region where farmers are paid cash for their produce. BAT Uganda is one of the biggest taxpayers in Uganda. Its contribution to the treasury in form of cigarette excise tax and value added tax rose by 3 per cent from Ush39.2 billion ($21 million) in 2004 to Ush40.3 billion ($21.7 million) last year. The company says its tax contributions increased by 5 per cent in the first half of the year compared with the same period last year, reflecting increased cigarette volumes. Total cigarette market volumes grew by 2.7 per cent in 2005 from the previous year mainly in the lower value segment, reflecting continued low consumer disposable income. Leaf export volumes fell significantly by 17.5 per cent in 2005 compared with 2004 because of quality issues. Meanwhile the company's shares have been trading at Ush505 (27 US cents) per share on the Uganda Securities Exchange, down from a three-month high of Ush735 (39 US cents). Distributed by AllAfrica Global Media. (allafrica.com) Copyright 2006 East African (Kenya). Distributed by Allafrica Global Media. |