Russia - Tobacco Reporter

BAT in Talks to Transfer Russian Business

BAT is in advanced talks to transfer its Russian business to Russia’s SNS Group of Companies after Moscow suggested it could nationalize assets of foreign firms that left the country, reports Reuters.

BAT controls just under 25 percent of the Russian tobacco market.

“The process of transferring the management of BAT business in Russia to SNS GC is well underway at remarkable speed,” said an SNS spokesperson.

BAT declined to comment but said last week that it was looking for parties interested in the transfer of the Russian business. Kingsley Wheaton, BAT’s chief marketing officer, stated that BAT’s distributor could be interested in a transfer, adding that exiting the business or stopping sales or manufacturing would be seen as a criminal bankruptcy by Russia and BAT would face legal consequences.

The level of production and the supply and distribution chain will be maintained with a transfer, according to the SNS spokesperson. Whether BAT will pull out completely or continue to supply SNS with raw materials or manufacturing support is unclear.

March 21, 2022

Morningstar: Stocks Hit Too Hard By Ukraine War

Tobacco companies’ retreat from Russia will materially impact their cash flows, at least in the short term, according to Morningstar. Nonetheless, the financial services company believes investors have overstated the valuation impact as the tobacco companies will be able to recoup some their losses after hostilities end.

Following Russia’s invasion of Ukraine and the imposition of sanctions by Western countries, the leading multinational tobacco companies have all reevaluated their operations in Russia.

Philip Morris International ceased investment in Russia and plans to scale down its business there. BAT will exit Russia and transfer its Russian assets to a third party. Imperial Brands has begun negotiations with a local third party about a transfer of its Russian assets and operations. Japan Tobacco has ceased planned investment in Russia.

Russia is the world’s fourth-largest cigarette market, with market volume of almost 206 billion sticks in 2020, according to Euromonitor. Japan Tobacco is the most exposed with a volume share of 38 percent, representing almost 16 percent of group tobacco volume in 2021. Philip Morris International and BAT are the next largest with shares of 26 percent and 25 percent, respectively, representing 9 percent and 8 percent of group volume. Although Imperial Brands is smaller, with only 8 percent share, Russia represents 7 percent of group volume, according to Morningstar.

The Russian cigarette 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, according to Euromonitor. However, it has been a promising market for tobacco-heating products. Morningstar estimates that heated-tobacco units accounted for 11 percent of the total market in 2021, making Russia one of the largest markets for heated-tobacco outside Asia.

Exiting Russia would be especially painful for PMI because it would jeopardize its medium-term targets for IQOS HeatStick sales, according to Morningstar

Meanwhile, the collapse in the ruble will create translational foreign exchange pressure for all manufacturers and is likely to make an already low-margin market even lower. Regional margins are also likely to contract materially in the near term. Some manufacturers have pledged to continue paying the salaries of employees in Russia and Ukraine even as revenue will probably be decimated.

March 21, 2022

Imperial Negotiates Transfer Russian Assets

Imperial Brands has begun negotiations with a local third party about a transfer of its Russian assets and 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,” the company wrote in a press release. “We employ 1,000 people in Russia in our sales and marketing operations and in our factory in Volgograd—and their safety and well-being is our key priority in this process. We will also continue to pay their salaries until any transfer is concluded.

“Meanwhile, we are also supporting our Ukrainian colleagues and their families, including with transport and accommodation to enable them to escape the areas most severely hit by conflict as well as [with] resettlement assistance for those who have left Ukraine.

“We have evaluated the financial impact of an exit from Russia and the previously announced suspension of operations in Ukraine on our full-year guidance for FY22. We now expect full-year constant currency net revenue growth of around 0 [percent] to 1 percent. While there will be some ongoing costs related to the suspension in Ukraine, we expect a relatively small impact on our constant currency adjusted operating profit, reflecting the limited profit contribution of the two markets. In FY21, Russia and Ukraine represented in total around 2 percent of net revenues and 0.5 percent of adjusted operating profit. Any transaction relating to our Russian business is subject to agreement being reached.”

March 15, 2022

BAT Withdraws from Russia

BAT is withdrawing from Russia, the company announced on its website.

“Building on our announcement of 9th March 2022, we have now completed the review of our presence in Russia. The context is highly complex, exceptionally fast-moving and volatile,” the company said in a statement, referring to the Russian military invasion of Ukraine.

“We have concluded that BAT’s ownership of the business in Russia is no longer sustainable in the current environment,” the company wrote.

“Today, we have initiated the process to rapidly transfer our Russian business in full compliance with international and local laws. Beyond continuing to pay our 2,500 employees, we will do our utmost to safeguard their future employment.

“Upon completion, BAT will no longer have a presence in Russia.

“Following our decision today, and in light of the continuing uncertainty related to Ukraine and Russia and the possible indirect impact on the rest of the group, we consider it prudent to revise our guidance for full-year 2022. We now expect constant currency group revenue growth of 2 percent to 4 percent and mid-single figure constant currency adjusted diluted EPS [earnings per share] growth. In 2021, Ukraine and Russia accounted for 3 percent of group revenue and a slightly lower proportion of adjusted profit from operations.”

BAT faced heavy criticism for an earlier decision to continue operating in Russia. “If you are a member of the board of British American Tobacco, courting popularity was probably never a top personal priority. Even so, the people overseeing a large and widely held FTSE-100 company might still feel obliged to explain why, amid the broad boycott of Russia by multinationals, they think its fine to carry on business in the country roughly as normal,” wrote Nils Pratley in The Guardian.

Earlier, Philip Morris International, Japan Tobacco International and Imperial Brands announced the suspension of their operations in Russia.

March 11, 2022

J.P. Morgan: War Could Thwart PMI’s Smoke-Free Ambitions

The war in Ukraine could seriously impact sales of Philip Morris International, reports MarketWatch. Earlier this week, J.P. Morgan downgraded the multinational’s shares to “neutral” from “overweight,” citing the company’s exposure to Russia and Ukraine.

PMI derives about 8 percent of group sales from Russia and Ukraine combined, according to the investment bank. The two countries account for about 23 percent of PMI’s heated-tobacco unit (HTU) volume. Heated-tobacco products are key to PMI’s next-generation growth strategy as they are reportedly less harmful than cigarettes.

PMI entered the Ukrainian market in 1994. In 2021, Ukraine accounted for around 2 percent of PMI’s total cigarette and HTU shipment volume and under 2 percent of PMI’s total net revenues. The company has one factory and approximately 1,300 employees in the country.

Russia accounted for almost 10 percent of PMI’s total cigarette and HTU shipment volume and around 6 percent of PMI’s total net revenues in 2021. PMI opened its first representative office in Russia in 1992 and has more than 3,200 employees in the country.

PMI’s cigarette shipments to Russia in 2021 fell to 52.5 billion units from 55.6 billion units in 2021, and the percentage of total cigarette shipments fell to 8.4 percent from 8.8 percent, according to a company filing with the U.S. Securities and Exchange Commission.

For HTUs, Russian shipments rose to 16.3 billion units from 13.6 billion units while the percentage of total HTU shipments slipped to 17.2 percent from 17.9 percent.

Meanwhile, PMI’s HTU market share in Russia improved to 7.4 percent from 6.3 percent while the company’s overall HTU market share increased to 3.5 percent from 3 percent.

On March 9, PMI announced the suspension of its planned investments in Russia, including all new product launches and commercial, innovation and manufacturing investments. PMI has also activated plans to scale down its manufacturing operations in Russia amid ongoing supply chain disruptions and the evolving regulatory environment.

March 10, 2022

Firms Scale Back in Russia and Ukraine

The leading tobacco companies are adjusting their strategies in Russia and Ukraine following the war between those countries.

Philip Morris International announced the suspension of its planned investments in the Russian Federation, including all new product launches and commercial, innovation and manufacturing investment. PMI has also activated plans to scale down its manufacturing operations amid ongoing supply chain disruptions and the evolving regulatory environment.

“We have watched with shock the war in Ukraine and condemn the violence in the strongest possible terms. We stand in solidarity with the innocent men, women and children who are suffering,” said PMI CEO Jacek Olczak in a statement. “We join the many voices calling for an immediate end to the war and the restoration of peace.”

Olczak said PMI had helped evacuate more than 800 people from the most impacted areas; provided critical aid to employees who remain in Ukraine; and provided those who have left the country with logistical, medical, financial and other practical support in neighboring countries. PMI is continuing to pay salaries to all its Ukrainian employees during this period, the company said.

Ukraine accounted for around 2 percent of PMI’s total cigarette and heated-tobacco unit shipment volume and under 2 percent of PMI’s total net revenues in 2021. The company has one factory and approximately 1,300 employees in the country.

In 2021, Russia accounted for almost 10 percent of PMI’s total cigarette and heated-tobacco unit shipment volume and around 6 percent of PMI’s total net revenues. The company employs more than 3,200 people in the country.

BAT, which employs more than 1,000 people in Ukraine and around 2,500 people in Russia, said it had suspended all business and manufacturing operations in Ukraine and suspended all planned capital investment into Russia.

“In Ukraine, we have suspended all business and manufacturing operations and are providing all the support and assistance we can to our colleagues, including relocation and temporary accommodation. Our businesses bordering Ukraine are providing assistance to the humanitarian relief effort,” the company wrote on its website.

“In Russia, we have a full establishment of our people right across the country, including substantial local manufacturing. Our business in Russia continues to operate. As a key principle, we have a duty of care to all our employees at this extremely complicated and uncertain time for them and their families.”

Japan Tobacco International, which has four factories and nearly 4,000 employees in Russia, announced the suspension of all new investments and marketing activities as well as the planned launch of its Ploom X heated-tobacco product in Russia, citing the unprecedented challenges of operating in Russia at this time. “Unless the operating environment and geopolitical situation improve significantly, JTI cannot exclude the possibility of a suspension of its manufacturing operations in the country,” the company wrote in a press statement.

Imperial Brands also suspended all operations in Russia, halting production at its factory in Volgograd and ceasing all sales and marketing activity.

“We have already suspended our operations in Ukraine in order to prioritize the safety and well-being of our 600 employees in that country,” the company wrote in a statement.

Russia and Ukraine are relatively small markets for Imperial Brands, representing around 2 percent of net revenues and 0.5 percent of adjusted operating profit in 2021.

March 10, 2022

Multinationals Continue to Monitor Situation in Ukraine

Multinational tobacco manufacturers have not stopped their operations in Russia but have done so in Ukraine.

In the wake of Russia’s invasion of Ukraine and the stance taken by companies such as Apple and Stora Enso in halting sales in Russia, Tobacco Reporter asked the multinationals whether they had stopped sales of their products in Russia or when, if ever, they intended to do so. They were further asked why they had not stopped sales, given that this was the case.

“Our priority is our employees, and we are taking the necessary measures to ensure their safety,” said a spokesperson for Japan Tobacco International. “Our operations in Russia are fully functional and we have contingency plans in place to ensure business continuity if the situation were to change. As a responsible international company, we are fully committed to complying with all applicable national and international sanctions.

“We are closely monitoring the situation and cannot comment any further.”

Meanwhile, a spokesperson for Imperial Brands said: “We are monitoring the situation in both Ukraine and Russia very closely. Our prime concern remains for the welfare of our people in Ukraine, where we have suspended our operations for safety reasons. We will continue to update our plans as necessary.”

And a spokesperson for British American Tobacco said: “We are deeply concerned about the conflict in Ukraine. The safety and wellbeing of our people in Ukraine and across the region is our first priority.

“We have suspended all business and manufacturing operations in Ukraine and are providing all the assistance we can to our colleagues, including relocation and temporary accommodation.

“In Russia, our wholly owned subsidiary has been in operation for more than 30 years. BAT always complies with relevant regulation and legislation wherever we operate, and we are aligned with all international sanctions.’

“We continue to closely monitor the situation as it evolves.”

Philip Morris International had not responded by the deadline.

March 4, 2022

Stora Enso Suspends Operations in Russia

Stora Enso will stop all production and sales in Russia until further notice due to the ongoing invasion in Ukraine. Stora Enso has three corrugated packaging plants and two wood products sawmills in Russia, employing around 1,100 people. The company will also stop all export and import to and from Russia. A mitigation plan has been activated to secure availability of input materials from other sources.

“The war in Ukraine is unacceptable, and we are fully behind all sanctions. We will now focus all our attention on supporting our customers and the well-being of our employees,” said Annica Bresky, president and CEO of Stora Enso, in a statement.

Stora Enso’s sales in Russia are approximately 3 percent of total group revenues. The impact on Stora Enso’s sales and earnings before interest and taxes is not material.

March 2, 2022

Tag: Russia