British American Tobacco - Tobacco Reporter

Russia Exit Hits BAT Profits

BAT took a £957 million ($1.15 billion) impairment charge related to the transfer of its Russian business, lowering its half-year earnings by a quarter.

The London-based firm, which controlled almost a fourth of the Russian market, said earlier this year that it was in advanced talks with its distributor in the country to sell the business in the wake of Russia’s invasion of Ukraine.

BAT reported a 25 percent drop in profit from operations on a reported basis to £3.68 billion for the six months to June 30 as a result of the charge. The company expects global tobacco industry volume to be down about 3 percent, partly because of the Russia-Ukraine crisis.

In a press release announcing the half-year results, BAT emphasized the growth of its New Categories products and the performance of its combustible business, which continues to grow value share enabled by robust pricing.

“I am very proud that our continued New Categories growth momentum is driving faster transformation, with revenue growth of 45 percent in the first half of 2022, on top of 51 percent growth in fiscal year 2021,” said BAT CEO Jack Bowles. “I am especially proud that the number of consumers using our noncombustible brands has passed the milestone of 20 million in the first half.”

Noncombustible products now represent 14.6 percent of BAT’s revenue.

While acknowledging the geopolitical and macroeconomic challenges, Bowles was upbeat about the outlook for BAT.

“We are not immune, of course, to the increasing macroeconomic pressures, exacerbated by the conflict in Ukraine,” he said. “However, we are well positioned to navigate the current turbulent environment due to our powerful brands, operational agility and continued strong cash generation.”

July 27, 2022

BAT Launches Glo Hyper X2

BAT unveiled its Glo Hyper X2 tobacco heating device in Tokyo on July 21.

Building on the technology of Glo Hyper+, which launched in 2020, the Hyper X2 incorporates advanced induction heating technology encased in a smaller, lighter weight device. A separate boost function for faster heating, battery status LED indicator, a protective iris-shaped shutter and bold new colors complete the new hyper X2 offer, according to BAT.

Hyper X2 works with existing consumables from the Glo Hyper series.

“The launch of Glo Hyper X2—our newest, state-of-the-art heated tobacco product—marks another key milestone in our transformation as we build the brands of our future,” said Kingsley Wheaton, chief marketing officer at BAT, in a statement. “Since launching our first Glo product in Japan in 2016, we have built Glo into a billion-dollar global brand through our deep consumer insights, science and innovation.

“Our multi-category portfolio offers the industry’s widest choice of scientifically substantiated, less risky and enjoyable products for adult smokers who are looking to switch. This is a further big step in accelerating our transformation into a consumer products business that defines itself by the consumer needs that we meet, rather than the products we sell.”

“In addition, final results from our landmark one-year clinical study of Glo have provided important new data that adds to evidence supporting Glo as a reduced-risk product. In the study, people switching completely to Glo achieved significant and sustained improvements across many exposure and potential harm measures compared to those who continued to smoke, with many indicators similar to quitting.”

Glo hyper X2 will be available in Glo stores across Japan and on the Glo and Velo official online store from July 25, 2022, and in convenience stores in Japan from August 2022.

Glo products are available in 25 countries. The global rollout of Glo Hyper X2 will take place over the coming months.

July 24, 2022

Motley Fool: Juul Exit Would Crown BAT King

The removal of Juul products would hand the U.S. market to British American Tobacco, according to Motley Fool.

Juul, which is partly owned by Altria Group, had been the undisputed e-cigarette leader, with a near-80 percent share of the market at the height of its success. The latest Nielsen data puts Vuse’s share at 35.1 percent compared to 33.1 percent for Juul. Third-place NJOY has a 3.1 percent share.

Last year, the U.S. International Trade Commission ruled that Philip Morris International’s IQOS heated tobacco device infringed on BAT’s patents, and that device was prohibited from being imported and sold in the U.S. Altria had partnered with PMI to market and distribute IQOS in the U.S., but the ITC ruling disrupted those plans.

Because Altria shelved its MarkTen e-cigarette brand in favor of partnering with PMI, the ITC ruling leaves it without a vapor product. The FDA has all but wiped out the rest of its investment in Juul. In 2018, Altria paid $12.8 billion for a 35 percent in the vapor company. As of the end of the first quarter of 2022, Altria had reduced the fair value of its Juul position to just $1.6 billion.

If the FDA is successful in eliminating Juul, BAT will essentially have no roadblocks in its way to market dominance.

Vuse turned profitable in the U.S. for BAT in the second half of last year, and it’s been able to grow its share because it discounted the device and the consumables to attract users. Earlier this month, BAT said it was now ready to raise prices on both. With a major competitor removed from the market, this should provide the company with a big boost in profits.

BAT’s vapor revenue grew 59 percent last year to £927 million ($1.14 billion), while its own heated tobacco products, marketed under the Glo brand, saw a 46 percent rise in sales to £853 million.

June 27, 2022

‘BAT key beneficiary of Juul MDO’

The removal of Juul products from the U.S. market would boost the prospects of British American Tobacco, create opportunities for Philip Morris International but represent a problem for Altria Group, according to Morgan Stanley.

In a letter to investors, the financial institution evaluated the impact of the U.S. Food and Drug Administration’s leaked plans to deny Juul Labs’ premarket tobacco product application (PMTA). While the FDA has not issued a formal statement yet, shares in Altria Group were down more than 9 percent in the immediate wake of the news. Altria owns about a third of Juul Labs.

According to Morgan Stanley, Juul is Altria’s only exposure to the growing vapor category. While a Juul marketing denial order (MDO) would give Altria an opportunity to terminate its noncompete agreement with Philip Morris International, allowing it to step-up its vapor product research and development or acquire vapor technology, the company would not be coming from a position of negotiating leverage, according to the investment bank.

“In addition, there are few larger scale independent e-vapor assets on the market,” wrote Morgan Stanley.

The investment bank believes that removing market leader Juul from U.S. store shelves would create opportunities for other products, such as PMI’s IQOS heat-not-burn device, which has already received PMTA approval.

The key beneficiary of a Juul MDO, however, would be British American Tobacco, according to Morgan Stanley.

Several of the company’s products have already received PMTA authorizations, the investment bank points out. Though its Vuse brands, BAT recently overtook Juul as the leading U.S. e-cigarette player with a market share of more than 33 percent. The company has gained significant momentum in the category over the past 24 months and a Juul MDO could lead to further BAT market share gains, according to Morgan Stanley.

June 23, 2022

Jury Awards PMI $10.7 Million in Patent Case

A U.S. jury awarded Philip Morris International $10.7 million on June 15 after finding that R.J. Reynolds Vapor Co.’s Vuse e-cigarettes violate its patent rights, reports Reuters.

The federal court jury in Alexandria, Virginia, said RJR’s Vuse Solo and Alto devices infringe two PMI patents covering parts of a vaping device for heating substances and preventing leaks. At the same time, the jury cleared Vuse Alto of infringing one of the patents.

A Philip Morris spokesperson told Reuters the company was “grateful” for the verdict, which “rejects an attempt by BAT to free-ride on our hard work and investment.”

A spokesman for RJR indicated it may appeal the June 14 verdict.

The case is part of a multi-front patent dispute between PMI and RJR parent company British American Tobacco.

The recent verdict concerned counterclaims in RJR’s ongoing patent lawsuit over PMI’s IQOS heated-tobacco device. RJR won an order blocking IQOS imports at the U.S. International Trade Commission last November.

PMI succeeded earlier this year in invalidating parts of some patents RJR accused it of infringing at a U.S. Patent Office tribunal.

BAT has also sued PMI over IQOS in the United Kingdom, Germany and elsewhere. A PMI filing with the U.S. Securities and Exchange Commission earlier this year said IQOS patent lawsuits and challenges outside of the U.S. have “repeatedly and universally failed.”

Altria has separately sued RJR for patent infringement in North Carolina over the Vuse line, in another case that is still pending.

June 16, 2022

BAT Reiterates Full Year Guidance

British American Tobacco reiterated its revenue guidance of £5 billion ($6.27 billion) for 2022, anticipating that its diversification into noncombustible products will pay off.

The new business line “is increasingly contributing to group performance, and we are confident in delivering our £5 billion New Category revenue and profitability targets by 2025”, said BAT CEO Jack Bowles in a statement, adding that the company continues to drive value through its combustibles business.

The noncombustible product consumer base reached 19.4 million in the first quarter of the year, according to BAT. In the first half of the fiscal year, the company invested more than £1 billion to build its brands in this product segment. Its portfolio of non-combustible products includes vapor products, nicotine pouches, tobacco heating products and other oral products.

BAT’s Vuse vapor cigarette now holds a value market share of 35.9 percent in the U.S., up 3.4 percentage points in the year to date versus 2021. Vuse debuted in the U.K. in May and the company anticipates further rollouts for the second half of 2022.

BAT said it continues to enjoy volume share leadership in Modern Oral in Europe, with 69.3 percent of the market.

We are confident in delivering on our current financial targets, irrespective of the timing of the transfer of our Russian business.

Jack Bowles, CEO, BAT

Like many multinationals, BAT has been impacted by the war in Ukraine, which has increased global uncertainty and disruption, further exacerbating inflationary pressures on supply chains. In March, BAT announced that its ownership of the business in Russia was no longer sustainable. The company is in the process of transferring its Russian business to a third party.

“While we are not immune to these pressures, we are confident in delivering on our current financial targets, irrespective of the timing of the transfer of our Russian business,” said Bowles. “This is thanks to our well-established multi-category strategy, our strong portfolio of global brands and our resilient, highly cash generative business.”

While considering BAT’s aspiration to reach £5 billion of sales and achieve profitability in its new products stream “achievable,” Ross Hindle, an analyst at Third Bridge, noted the significance of Russia and Ukraine to BAT. “Russia and Ukraine are very important heated tobacco markets, they are even more important for BAT than PMI, with 26 percent of their heated tobacco sales coming from the region historically,” he told Proactive.

June 9, 2022

BAT Conducts Real-World Vuse Study

BAT has conducted a first-of-its-kind study of Vuse designed to assess and provide insights into the real-world health impact of vaping. The study compares biomarker measures from Vuse consumers who have been using the product for over six months with the results from smokers, former smokers and never-smokers. Protocol details explaining the innovative design of the latest study were published in the Journal of Health and Environmental Research.

The cross-sectional study design uses a single set of data readings to measure exposure to certain toxicants and indicators of potential harm related to several smoking-related diseases in people who have been exclusively using Vuse.

BAT hopes that the results, which are currently being analyzed and will be published later this year, will provide further supportive evidence that using Vuse can reduce relative risk for certain diseases among adult consumers compared to smoking. The company expects that once available, the results will add to the growing body of evidence on Vuse’s potential as a reduced-risk product.

“This innovative study demonstrates our commitment to researching the reduced-risk potential of our new category products,” said Sharon Goodall, BAT’s group head of regulatory sciences, in a statement.

“What makes it particularly relevant and exciting is that the results generated will be from people who have been using Vuse as they normally would for more than six months prior to testing. The results will provide important new insights and show us the differences between Vuse users, smokers and former smokers across a range of important biomarkers thought to be predictive of disease development. We look forward to sharing the data once available.”

June 6, 2022

Sailing to Zero

BAT wants to become carbon neutral across its value chain by 2050.

By Stefanie Rossel

For the environment, tobacco production is a damaging business. In 2014, global cigarette manufacturing was responsible for 84 million tons, or 0.2 percent, of the world’s carbon dioxide (CO2) emissions, according to a study by Imperial College. Eager to minimize their impact, tobacco companies have been working hard to reduce their carbon footprint.

BAT, for one, aims for carbon neutral operations by 2030 and a “net-zero” value chain by 2050. The company signed up for the United Nations-backed Race to Zero global campaign, an initiative to halve global emissions by 2030 and achieve net-zero carbon emissions by 2050. As part of this, BAT has committed itself to realigning its existing carbon neutral targets, which were previously based on the 2015 Paris Agreement to limit the global average temperature rise to 2 degrees Celsius, to match the new consensus that the temperature rise should be limited 1.5 degrees Celsius to avoid severe climate change effects on people, wildlife and ecosystems.

In 2020, BAT’s emissions totaled to 6.11 million tons of CO2 equivalent (CO2e), according to the company’s ESG Report 2021. The company’s own operations, however, contributed a mere 9 percent of its total 2020 emissions footprint. The remainder were “Scope 3” emissions—indirect emissions from resources that the organization does not own.

Seventy-six percent of Scope 3 emissions came from the company’s upstream value chain, including 32 percent from tobacco growing (fertilizers, curing barns, farm machinery, etc.) and 22 percent from materials. Another 15 percent emerged from BAT’s downstream value chain, 10 percent of which were produced by the use of sold products and 5 percent by their end-of-life treatment.

BAT is tackling the emissions of both its own operations and its wider value chain. To decarbonize its operations, the company continues to expand its renewable energy sourcing. Across its manufacturing sites, it is identifying opportunities to reduce CO2e emissions through decarbonization assessments and value stream mapping. Internal carbon pricing has been incorporated into the company’s business plans since 2021 to ensure that the impact on environmental performance and targets is formally considered and quantified.

A Cure for Curing

By generating solar power on-site and purchasing green electricity, BAT aims to expand its number of carbon neutral sites. Of BAT’s 75 manufacturing facilities, 32 were sourcing 100 percent renewable electricity by the end of last year while 19 sites were producing renewable energy on the spot. Combined, the company says, these measures have reduced CO2 emissions to 42.7 percent of CO2e from its 2017 baseline. Renewable sources currently account for 28.6 percent of BAT’s total energy consumption. The company aims to achieve 100 percent by 2030.

Reducing emissions in its tobacco supply chain, where about a third of BAT’s Scope 3 carbon emissions are generated, is a tougher nut to crack. Most of these emissions come from tobacco curing. Although more than 80 percent of BAT’s annual leaf volumes are cured using renewable fuels, sustainable wood, biomass or sun curing, the problem of emissions persists.

The company sources approximately 61 percent of its tobacco leaf from its own operations in 18 countries, which contract directly with more than 75,000 farmers. The company’s remaining leaf comes from third-party suppliers in 26 countries that contract with over 264,000 farmers.

In several countries, BAT has introduced fuel-efficient curing technologies, among them new types of curing barns that enable at least a 30 percent reduction in fuel use and a 14 percent reduction in electricity use. For the tobacco volumes it purchases, the company aims to eliminate the use of coal as a curing fuel. Coal-cured leaf presently accounts for 10 percent of the tobacco that BAT sources through third-party suppliers.

To further determine the best combination of curing technologies and fuel types for reducing emissions, the company started trials in six countries in 2021. Its global leaf agronomy center in Brazil is identifying startups to help develop new technologies and practices that support carbon-smart farming.

Planting trees and cover crops and practicing conservation tillage not only keep the soil covered and store carbon but they may also increase water retention capacity, improving drainage and making the soil more fertile, which in turn will lead to increased yields and better quality crops. BAT is currently working with a specialist consultancy to validate its approach and verify the results. The company started testing its carbon-smart farming program with 35 farmers in Brazil last year and intends to expand the pilot to Bangladesh, Mexico and Pakistan in 2022.

Making Products More Sustainable

Product materials account for around 59 percent of BAT’s Scope 3 emissions, 15 percent of which are generated by the company’s 30 largest direct suppliers across more than 100 sites. An assessment showed that most suppliers were only in the early stages of decarbonization. To enable suppliers to align with its net zero target, BAT provides support and technical assistance and continues to track progress.

To include end products in its sustainability ambitions, BAT has implemented a company-wide circular economy. Through life-cycle analysis across its product categories, the company has identified key areas that can contribute to reducing Scope 3 emissions, including the optimization of product design and shipping goods by sea instead of air where possible. Underlining its environmental commitment, BAT in 2021 announced that its Vuse e-cigarette had become the first global carbon neutral vape brand.

Stefanie Rossel is Tobacco Reporter’s editorial contributor. An experienced trade journalist, she combines sharp reporting skills with in-depth knowledge of the tobacco and vapor industries. Prior to joining Tobacco Reporter, Stefanie was editor-in-chief at Tobacco Journal International, where she worked for a decade. Fluent in English, German and French, Stefanie covers tobacco news around the world. She is based in Germany.

May 1, 2022

BAT Ukraine Resumes Pryluky Operation

BAT Ukraine has resumed manufacturing operations at the Pryluky tobacco factory in Ukraine as of April 25, reports InterFax Ukraine.

The company has reportedly decided to resume manufacturing at the factory in phases after making a thorough risk and threat analysis.

The operations at the Pryluky factory comply with all applicable security and safety requirements, curfew and other restrictions proper to martial law, according to BAT.

BAT Ukraine is monitoring the security and safety situation in Pryluky and the Chernihiv region and plans to adapt activities as the situation changes.

April 28, 2022

Heading for the Exit

Following Russia’s invasion of Ukraine, tobacco companies to retreat from one of the world’s top cigarette markets.

By Stefanie Rossel

Amid growing pressure, the four leading international tobacco manufacturers have joined the exodus of U.S. and European companies that has followed Russia’s invasion of Ukraine. In early March, after the United States, the European Union and Great Britain imposed economic sanctions, all major cigarette makers announced that they would suspend operations or pull out of Russia altogether—although some did so less enthusiastically than others.

After initially announcing it would merely suspend its planned capital investments in Russia, BAT quickly made a U-turn, signaling a far greater retreat. On March 11, the company announced that its ownership of the business in Russia was no longer sustainable in the current environment, which it described as “highly complex, exceptionally fast-moving and volatile.” BAT is in advanced talks to transfer its Russian business to the SNS group of companies, its distributor in the country since 1993. According to SNS, the level of production and the supply and distribution chain would be maintained with a transfer. As a result of the withdrawal, BAT reduced its annual revenue growth outlook to between 2 percent and 4 percent from the 3 percent to 5 percent announced in February.

BAT’s move came a day after a Russian government commission approved the first step toward nationalizing the assets of departing foreign companies. On March 10, Russia’s economic development ministry published a draft bill that would give state-owned Vnesheconombank and the state export guarantee agency the right to seize the property of foreign firms that left Russian markets of their own accord. The proposed law would treat a corporate decision to exit the business as a criminal bankruptcy and empower authorities to initiate criminal justice proceedings against local management, BAT Chief Marketing Officer Kingsley Wheaton told Reuters in an interview.

After announcing plans to scale down its operations in Russia on March 9, Philip Morris International in late March specified the concrete steps it would take, saying it was working on options to exit the Russian market “in an orderly manner.” The company stated that it had discontinued some of its cigarette brands offered in the market and suspended its marketing activities. Furthermore, it had canceled all product launches planned for this year in Russia, including the introduction of its new tobacco-heating product (THP), IQOS Iluma, and its plans to manufacture more than 20 billion Terea sticks, the consumables for IQOS Iluma. Production of the latter would have involved an ongoing investment of $150 million, which the company also canceled.

JTI, meanwhile, limited its withdrawal from Russia to a suspension of all new investments and marketing activities along with the launch of its most recent THP, Ploom X.

Imperial Brands, which has a relatively small footprint in Russia, announced on March 15 that it had started negotiations with a local third party about a transfer of its Russian assets of operations. “We believe that, in the current circumstances, an orderly transfer of our business as a going concern would be in the best interests of our Russian colleagues,” Imperial Brands wrote in a statement.

In addition to their actions in Russia, all four cigarette manufacturers temporarily closed their production sites in Ukraine to protect their workforce and have pledged to continue paying the salaries of employees in the affected countries.

Between a Rock and a Hard Place

In deciding their course of action, cigarette manufacturers faced a dilemma of choosing either to leave and protect their reputations or to stay and continue to benefit from the world’s fourth-largest tobacco market.

The decision to leave not only has financial consequences, but it also presents practical challenges, according to Jon Fell, partner at Ash Park Capital. “It’s one thing to say, ‘we’re no longer going to send our luxury handbags or fashionable training shoes to Russia,’ but if, in addition to factories or distribution centers, you have hundreds or thousands of employees in the country—who up until now have been seen as an integral part of your international company—then you have to take difficult and complex decisions, and there’s no obvious easy, right answer,” he says.

“Sorting the mess out takes time, and you can’t just abandon employees,” adds Fell. “I don’t think the approach of the tobacco industry overall is very different to that of other consumer packaged goods companies, quite a few of whom are continuing to operate in Russia right now—and drawing criticism because of that.”

Russian cigarette makers sold 206 billion cigarettes with an estimated value of $717 billion in 2020, according to Euromonitor International. The market has been declining at a 6 percent compound annual rate over the past 10 years and almost 7 percent over the past five years.

At the same time, the country has developed into a promising market for THPs, which, according to Moningstar, accounted for 11 percent of the total tobacco market in 2021, making the country one of the largest markets for these products outside of Asia.

With a volume share of 38 percent in 2021, JTI has the greatest exposure to Russia of the tobacco multinationals, according to Euromonitor. The company, which in 2018 acquired Donskoy Tabak, has four factories and 4,000 employees in the country. It has invested over $4.6 billion in the past 20 years. In 2020, its tax payments accounted for 1.4 percent of Russia’s state budget. Russia represented almost 16 percent of group volume in 2021, according to Morningstar.

It’s one thing to say, ‘we’re no longer going to send our luxury handbags or fashionable training shoes to Russia,’ but if, in addition to factories or distribution centers, you have hundreds or thousands of employees in the country, then there’s no obvious easy, right answer.

Jon Fell, partner at Ash Park Capital

Costly Exits

For PMI, Russia accounted for almost 10 percent of cigarette and THP unit shipment volume and around 6 percent of its total net revenues in 2021. With a market share of 26 percent, the company has three factories, more than 100 sales outlets and approximately 4,100 employees in the country. Ukraine, where PMI runs a factory in Kharkiv with around 1,300 employees, represents about 13 percent of PMI’s regional volume and contributed almost 2 percent to PMI’s total net revenues in 2021.

Morningstar expects PMI’s tobacco volume from Eastern Europe to decline by 45 percent in 2022 with a slow recovery thereafter as the collapse of the ruble is likely to create translational foreign exchange pressure.

Both Russia and Ukraine are important markets for IQOS, accounting for about 23 percent of PMI’s THP sales. PMI’s shipments of THP consumables in Russia increased from 13.6 billion units to 16.3 billion sticks in 2021 while shipments of cigarettes continued to fall. Considering Russia’s worsening economic outlook in the wake of international sanctions, however, a J.P. Morgan analyst doubted that PMI would still be able to achieve its next-generation product growth targets. Morningstar assumes that PMI’s write-down in case of a market exit could be approximately $7 billion, corresponding to 5 percent of the company’s market capitalization.

Ukraine and Russia combined accounted for 3 percent of BAT’s group revenue in 2021 and a slightly lower proportion of adjusted profit, the company said on its website. Morningstar estimates that the bulk of net revenue from these two countries, 2.5 percent, was generated by Russia, where BAT, according to Euromonitor, held 25 percent of the market in 2021. Employing some 2,500 people in Russia, BAT has a factory in St. Petersburg and 75 regional offices. Since the company entered the market in 1991, it has invested more than $1 billion in Russia. Morningstar reckons that the value of BAT’s operations will depreciate by around $2.2 billion, or about 2.4 percent of its market capitalization, as a result of its withdrawal from Russia.

Among the four players, Imperial Brands is a distant fourth, holding 8 percent of the Russian cigarette market. It operates a production site in Volgograd and has a workforce of 1,000. In 2021, the company said, Ukraine and Russia represented in total around 2 percent of net revenues and 0.5 percent of adjusted profits. Due to the limited profit contribution of the two markets, Imperial Brands explained it expected “a relatively small impact” on its constant currency adjusted profit.

Seeking a Backdoor

How the multinationals’ retreat will impact Russia’s illicit cigarette market is anyone’s guess. “It’s very hard to know how demand and supply of tobacco products will evolve in Russia given all that’s going on with sanctions, ownership of the industry and, presumably, local purchasing power,” says Fell. “I would certainly think that an increase in the size of the illicit market is a risk, and that’s also going to depend on how long this situation lasts.” Illegal cigarette sales represented 10.7 percent of the total Russian tobacco market in 2021, up from 4.6 percent in 2017, according to Statista.

Much will depend on how long the conflict continues. Considering the large amounts invested in Russia over the past 20 years, it’s safe to assume that cigarette manufacturers will do their best to minimize their losses. The companies have built strong positions in the Russian market, and there is demand for their products.

“I’d be surprised if any of the companies—not just the tobacco manufacturers—now exiting Russia are doing so in a way that would prevent their going back in the future, assuming that the war stops at some point, relations are normalized and reentry becomes conceivable,” says Fell. “But arranging that in a way which allows you to say you have exited the country for the time being is no doubt very tricky and is likely to be contributing to decisions taking some time to reach and to be implemented.”