British American Tobacco profits up as cigarette alternatives stumble

CAPE TOWN — E-cigarettes and other alternatives to traditional cigarettes, plugged as vital harm-reduction tools by some top health experts, (whom the anti-smoking lobby regard with great suspicion), – are not selling as well as the major tobacco manufacturers feared, it seems. All health considerations aside, British American Tobacco Plc are delivering solid returns for shareholders and seem so confident that they’re no longer too worried about their reduced profits on the alternative tobacco product market. Overall things are looking good and they’re forcing market analysts to eat humble pie. That doesn’t mean that they’re not plotting to innovate in the heated tobacco category however – smaller, sexier versions of the Glo stick in Japan where former-wildfire sales have now slumped – this time with more nicotine – are aimed at boosting growth. It seems the big tobacco companies are strategising around health research that it’s smoke, not nicotine, that causes cancer and associated lung diseases. Not that addicted smokers are taking much notice, much to the BAT shareholders relief… – Chris Bateman

By Sam Chambers

(Bloomberg) – British American Tobacco Plc’s shares broke out of their recent malaise as investors welcomed solid profits and the prospect of the company’s heated-tobacco product being the first on the US market.

BAT’s first-half profit of 4.82 billion pounds ($6.4 billion) was slightly ahead of analysts’ estimates. The London-based company said it received approval from the U.S. Food and Drug Administration to begin selling its Neocore heated-tobacco device, which was formerly known as Eclipse.

The British American Tobacco Plc logo sits on a glass pane at their research and development laboratories in Southampton, U.K. Photographer: Luke MacGregor/Bloomberg

The shares were the best performers on the benchmark FTSE 100 index, rising as much as 5.5 percent to a three-month high.

“There’s plenty of good news in there,” Liberum analyst Nico von Stackelberg said by phone. “Expectations have been so low for so long that a beat on profit is certainly welcome.”

BAT’s profits are a rare bit of cheer for tobacco investors. A slowdown in the growth of heated-tobacco devices in Japan and the rapid growth of US e-cigarette startup Juul Labs Inc. has made big tobacco look increasingly vulnerable to the decline in the conventional cigarette. The London-based tobacco company’s shares have fallen 17 percent this year.

First mover

BAT inherited Neocore from Reynolds when it acquired the business last year. Eclipse had already received FDA approval, which enabled BAT to fast-track its application this time around. Neocore is a carbon-tipped product that is lit with a match yet doesn’t burn the tobacco. The company will carry out consumer tests of the product during the next 12 months, according to Jerry Abelman, BAT’s head of external affairs.

The approval will help build investor conviction in the company’s potential in cigarette alternatives and should mean its heated-tobacco device is on the market before Philip Morris International Inc.’s iQos, Jefferies analyst Owen Bennett said by email.

Philip Morris, which has been selling Marlboro tobacco sticks for iQos devices in more than 30 countries, is also developing a carbon-tipped product called Teeps. However, it hasn’t officially launched it in any markets besides a consumer trial in the Dominican Republic.

Outside of the US, BAT’s progress with cigarette alternatives has faltered. The growth of heated-tobacco devices in Japan has recently slowed, leading the company to concede it may not be able to achieve its forecast of breaking even in its cigarette alternatives business this year.

BAT expects revenue from its cigarette alternatives to exceed 1 billion pounds this year. A month ago it expected revenue “substantially” above that level.

“The growth in Japan has definitely flattened and the heated-tobacco category needs reinvigorating,” BAT’s Abelman said by phone. “Breaking even isn’t the focus right now.”

In a bid to spur faster growth in Japan, BAT will release a smaller version of Glo in the second half. The company is also aiming to convert more smokers by offering heated-tobacco sticks with more nicotine.

The slowdown in Japan has been compounded by the success of Juul, an e-cigarette that has captured the majority of the US market in just three years and launched in the UK this month. BAT plans to start selling the Vuse Alto, a similar device that uses nicotine salts to give vapers a bigger hit, across the US in August, to be followed by another product near the end of the year.

The decline in US cigarette volumes in the first few months of the year led investors to speculate that Juul was the cause. Abelman rejected that hypothesis, saying the decline was driven primarily by rising gas prices and a tax increase in California.

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