Tobacco Industry: Spain Altadis Cost-cutting plan

Supreme Court ratifies judgment which absolved Altadis in tobacco lawsuit in Spain

Madrid, July 27, 2006

The Supreme Court has permanently ratified a ruling of June 2002 passed by the 25th Section of the Madrid Provincial Court, thus absolving Altadis in a lawsuit linking tobacco consumption to the so-called “Buerger Syndrome” and in which compensation of €58,000, to be paid jointly by the Company and the State, was being sought. The suit was brought against Tabacalera (now Altadis) and the Spanish Government (Ministry of Finance and the Exchequer) in October 1998, with the first judgement being handed down by the Madrid Court of First Instance n? 70 in April 2000. It was the first ever ruling concerning tobacco addiction in Spain.

The order issued by the Supreme Court rejects the plaintiff’s appeal, thus upholding the ruling of the Provincial Court of Madrid with regards to the non-existence of a causal relationship between the consumption of tobacco and this disease.

Altadis has been absolved in all rulings passed to date, in which two fundamental points have been agreed upon and underlined, firstly the general knowledge that tobacco consumption is a risk to the individual’s health and a voluntary act, and secondly the lack of a direct causal relationship.

Altadis wishes to reiterate that it has always, at all times, complied with European regulations in force on the manufacturing and marketing of its products, using rigorous quality control measures and observing health regulations.

Altadis gears for worst ahead of 2006 public smoking ban
Cost-cutting plan includes firing 1,500 workers, closing factories

2005
CARLOS G?MEZ

The proposed smoking ban in public places, set for January, is predicted to be harmful to the health of French-Spanish tobacco giant Altadis. The company is already in the middle of a cost-cutting plan that will last until 2007 that will reduce its workforce by 1,500 and close several factories in Seville and Cadiz, but Altadis is now expected to announce further measures to reduce costs by up to €40 billion by shutting down its network of offices and factories in France and Spain.

Altadis, led by Chairman Antonio V?zquez, has refused to comment on the likely impact of the new smoking restrictions, but financial director Michel Favre recently said that the company’s net results would probably only grow by about 1.5 percent instead of the expected 3 percent. Altadis has just issued €500 million worth of 10-year bonds to refinance its

€2 billion debt. Sources in the company said that the strategy for 2006 is to consolidate, following two years of expansion including the purchase of Italy’s number-one tobacco distributor Etinera, Russia’s second-largest cigarette maker Balkan Star, as well as the former Moroccan monopoly R?gie Marocaine des Tabacs. Altadis also took over the duty-free chain Aldeasa.

The impact of anti-smoking laws introduced in Italy this year prompted an immediate 15 percent reduction in the sale of tobacco products, but which over the course of the year has averaged at around 5 percent.

Analysts in Spain have noted that there has already been a reduction in tobacco sales as the date of the smoking ban approaches, with many smokers using the new restrictions and price increases as a stimulus to kick the habit.

Caja Madrid and Morgan Stanley have both revised their recommendations upward for the company, with Caja Madrid forecasting annual growth of around 7 percent between now and the end of the decade. That said, Madrid-based analysts ACF said that the growing number of cheap cigarette brands will damage Altadis’ books, with sales falling about 9 percent in 2006. ACF also said that Altadis’ sales have been falling in Germany and France, and that it has depended on Spain to make up the difference.

Cigarette sales in Spain rose in 2005 after several months of decline, reaching 71 million packs in the first nine months of the year, a 1.6 increase over the same period in 2004.

“We launched Ducados Rubio in the first week of July,” said a source at the company, “and although we now control 25 percent of the market, we aren’t happy.”

Altadis said that it isn’t comfortable competing in the low-cost market. The government is considering introducing a minimum price per pack of €3 to counter the impact of cheap cigarettes, which it says is undermining its efforts to reduce smoking.

But cigarette makers said that the increased sales are partly explained by French and British tourists buying in Spain because cigarettes are cheaper.

Altadis’ sales of blonde tobacco have grown by 2.1 percent, while sales of black tobacco products have fallen by 12.5 percent. The firm controls 25.5 percent of the blonde market, down from 26.9 percent in 2004. It has held onto its market share in France, but lost ground in Germany and Italy. Fifty percent of Altadis’ sales come from cigarettes, 25 percent from cigars and 25 percent from logistics.

The company reported net profits of €423 million for the first nine months of the year, a 3.7 percent fall year-on-year, mainly due to increased taxes. Sales grew by 15.7 percent to €3.04 billion.

Altadis said at the time that its situation had improved due to its acquisitions in Russia and Italy. Cigarette earnings increased by 6.4 percent, cigars by 6.4 percent, and logistics by 35.1 percent.