Gallaher posted a 4.4 per cent gain in underlying first-half profit today, but the maker of Benson & Hedges and Silk Cut cigarettes warned of worsening trading in continental Europe, especially Germany.
The company, which also makes Mayfair and Berkeley cigarettes in Britain, said it suffered as the German vending machine market shrunk by a third in the second quarter due to tax increases and as smokers switched to cheaper cigarettes.
Chief executive Mr Nigel Northridge said the tough trading in Europe, which also stretched to Austria, France and Ireland, was being offset by a better performance in Britain, helped by a restructuring last year.
The company, which has expanded rapidly outside Britain since it listed in 1997, posted first-half profit before tax and exceptional items of £250 million pounds ($443.9 million), at the top of a range of analyst forecasts of £246-250 million.
Germany accounts for 7.5 per cent of Gallaher's profits. The cigarette market there has shrunk by 13.5 per cent year on year after hefty tax increases, while the vending sector was hit particularly by a shift in favour of make-your-own cigarettes.
The company also said its saw volume down 7.5 per cent in both Ireland and Austria, the first due to tax rises and market disruption after a ban on smoking in pubs and the latter due to cross-border trading after the expansion of the European Union.
Northridge said the ban on smoking in pubs disrupted Ireland's market as 10 per cent of cigarettes were bought in pubs, but he added that it was too early to assess the long-term effect of the ban or its effect if implemented in Britain.
In Britain, where Gallaher makes nearly half of its profits, he said the market decline and the move to cheaper cigarettes had both slowed as its market share rose to 38.7 per cent from 38.3 per cent compared to Imperial's 44.6 per cent .