BAT Disappoints With Weak Progress on Cigarette-Alternatives Business
February 22 2018 - 8:31AM
Dow Jones News
By Saabira Chaudhuri
LONDON--British American Tobacco PLC (BTI) disappointed
investors by reporting weaker-than-hoped progress in its
cigarette-alternatives business, sending shares down and
underscoring the importance the shift away from combustible tobacco
holds for investors of tobacco companies globally.
BAT's shares fell 4% in afternoon trading in London after the
owner of the Newport and Camel brands said full-year
next-generation-products revenue was about GBP500 million including
annual revenue from Reynolds American, which BAT acquired last
year. That figure was below the GBP550 million research company
Jefferies said it was expecting, which had baked in the likelihood
of stronger growth in the last few months of the year.
For 2018, the London-based tobacco company said it expects
heated tobacco and vapor products to contribute GBP1 billion in
revenue, which Jefferies said it viewed as a downgrade from a
previous estimate in October where BAT had said it expected revenue
of "over GBP1 billion."
"The big negative is the lack of details to build conviction in
heated tobacco" and reduced risk product growth said Jefferies
analyst Owen Bennett, who complained that BAT's failure to break
out volume growth of heated tobacco products from that of
cigarettes made it hard to track growth of the new products going
forward.
The investor response to BAT's otherwise strong results
highlights the heightened expectations around so-called
next-generation products, which investors see as the future for an
industry whose volumes continued to decline.
BAT's full-year earnings report comes a day after arch rival
Philip Morris International Inc. (PM) offered up more details on
its own strategy for next-generation products at a New York
conference. Philip Morris, which is currently waiting on approval
from the U.S. Food and Drug Administration to sell its
heat-not-burn iQos device and market it as safer than regular
cigarettes, is leading Big Tobacco's shift to alternative
products.
On Wednesday, Philip Morris said it is striving for volumes from
reduced-risk products of 30% and net revenue of 40% by 2025, up
from 4% of volumes and 13% of revenues last year. Morgan Stanley
analyst Matthew Grainger cheered that announcement saying he
"viewed the presentation as reinforcing our confidence in Philip
Morris's ability to manage this controversial but ultimately
necessary transition for the tobacco industry."
Philip Morris has pushed most of its money towards developing
iQos, betting heat-not-burn products will woo existing smokers in
way that vaping devices--which don't contain tobacco but typically
heat a nicotine-laced liquid--haven't been able to.
By contrast, BAT has spread it bets across a variety of formats,
selling a vapor product called Vype, a heat-not-burn one called Glo
and a hybrid product called iFuse. BAT is also still very focused
on its traditional cigarettes business, which bring in the vast
majority of its revenue.
"Combustible cigarette products remain at the core of our
business," said BAT Chief Executive Nicandro Durante.
Mr. Durante in an interview said he was baffled by the extent of
Thursday's share drop but attributed this in part to
greater-than-expected currency fluctuations, noting that BAT's
forecast for currency headwinds was above what analysts were
expecting. Separately, RBC analyst Mirco Badocci noted that BAT's
adjusted operating profit was 2.5% below analyst estimates, which
could also partly explain the share decline.
The producer of Lucky Strike and Dunhill cigarettes said that
its volume of cigarettes and tobacco-heating products sold over the
year--excluding the impact of the acquisition of Reynolds
American--declined by 2.6%. The falling volumes were better than
the market overall, which declined by an estimated 3.5%, according
to BAT.
BAT reported a net profit of GBP37.53 billion for the year ended
Dec. 31, up from GBP4.65 billion the year before. Stripping out the
impact of Reynolds and currency moves, BAT's profit grew 3.7% to
£5.68 billion.
Adjusted, organic revenue grew 6.5% or 2.9% at constant rates of
exchange, as BAT raised prices.
-- Carlo Martuscelli contributed to this article
Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com
(END) Dow Jones Newswires
February 22, 2018 08:16 ET (13:16 GMT)
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