BATS British American Tobacco Plc

By Saabira Chaudhuri

LONDON--British American Tobacco PLC reported stronger net profit for 2016, helped by the weak pound, as cigarette volumes fell but the owner of Dunhill and Lucky Strike pushed through price increases.

London-headquartered BAT reported annual net profit of 4.65 billion pounds ($5.8 billion), compared with GBP4.29 billion pounds a year earlier, on revenue that was 13% higher at GBP14 billion. On a constant-currency basis, revenue rose 6.9%.

The company said the volume of cigarettes sold declined 0.8% on an organic basis, compared with a decline of 0.5% a year earlier and against an estimated industry decline of 3%.

In January, BAT agreed to take full control of Reynolds American Inc. in a $49.4 billion deal. Buying Reynolds will give the tobacco giant direct access to the U.S., 13 years after it merged its U.S. business Brown & Williamson with R.J. Reynolds Tobacco Holdings Inc. to form Reynolds American. BAT has maintained a 42% stake in Reynolds ever since, with a 10-year standstill agreement preventing it from increasing this.

The company's move to take direct control comes after Reynolds bought Lorillard Inc. in 2015, in a deal that combined the U.S.'s second- and third-largest cigarette makers.

The U.S. is the world's largest profit pool for tobacco companies outside of China and BAT has pointed to high disposable incomes, relatively low pack prices and strong demand for alternative products like vaping sticks as reasons behind its decision to buy the rest of Reynolds. Litigation risks are also seen to have broadly ebbed in the U.S.

"The litigation environment is more stable," BAT General Counsel Jerry Ableman said. "Clearly the BAT board feels very positive about the U.S. environment."

The company said operating margin for the year declined by 0.9 percentage points to 37.2%. Stripping out currency and acquisition impacts, the margin would have improved by 1.6 percentage points, according to BAT.

RBC analyst Mirco Badocco said the margin improvement highlighted how cost control remained a key competence of the company, describing its overall results as "solid."

BAT has been pushing hard to compete with rival Philip Morris on next-generation products, spending $1 billion over the past five years. The company in December launched a Vype-branded vaping device called Pebble and has also launched a new heat-not-burn product called Glo in Japan.

BAT said on Thursday that its vaping business was now the world's largest outside the U.S., where it currently operates only through its stake in Reynolds.

In the Asia-Pacific region, BAT's adjusted profit at constant currency climbed 1.3%, as a strong performance in Pakistan, Bangladesh and Vietnam was dampened by markets like New Zealand, Malaysia and Japan. In the Americas, profit on this basis rose 2.8%, as weakness in Brazil was overshadowed by a good performance in places like Canada, Peru and Venezuela. In Western Europe profit rose 7.8%, while in Eastern Europe, the Middle East and Africa it was up by 5.3%.

BAT results were helped by its stake in Reynolds and its Indian business ITC Ltd. Income from associates and joint ventures jumped 80% to GBP2.23 billion. Factory closures hurt results, amounting to a charge of GBP603 million, up from GBP367 million a year earlier.

-Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com

(END) Dow Jones Newswires

February 23, 2017 03:57 ET (08:57 GMT)

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