A Look Back at 2017
Staff Report
Many interesting things happened for the industry in 2017. The US Food and Drug Administration slightly shifted its stance on e-cigarettes, delaying regulating them by five years to gather more data about them. Heat-not-burn products took off and become one of the hottest topics of interest for both consumers and manufacturers. And Philip Morris International announced its plans to shift from traditional cigarettes to new tobacco products. Let’s take a closer look at how 2017 turned out for Philip Morris International, British American Tobacco, Imperial Tobacco, and Japan Tobacco International, as well as what to look forward to in 2018.
Philip Morris International
PMI reported increased full-year net revenues of US$78.1 billion, up by 4.2%. Net revenues excluding excise taxes went up by 7.7% to US$28.7 billion. Excluding unfavorable currency of US$437 million, net revenues, excluding excise taxes, increased by 9.4%, driven by a favorable pricing variance of US$1.4 billion from across all regions, despite low price realization in Russia, and favorable volume/mix of US$1.1 billion, driven by Asia and despite unfavorable volume/mix in EEMA, mainly due to Russia and Saudi Arabia.
Full year operating companies’ income was reported to be US$11.8 billion, up by 6.0%. Excluding unfavorable currency of US$155 million, operating companies income went up by 7.4%. Adjusted operating companies income came in at US$11.8 billion, an increase of 6.0%. Excluding unfavorable currency of US$155 million, adjusted operating companies income was up by 7.4%.
“A strong fourth-quarter performance helped drive robust full-year results, exemplified by currency-neutral, double-digit adjusted earnings per share growth, despite previously disclosed challenges in Russia and Saudi Arabia,” said André Calantzopoulos, c.e.o. of PMI.
“The excellent performance of our flagship smoke-free product iQOS -- not only in Asia, but also in the vast majority of our launch geographies -- underscored its great promise and the commitment of our employees to lead the transformation of our industry towards a smoke-free future. Continued investment behind IQOS in 2018 is expected to further drive its positive momentum.”
“For the first time since 2011, we have entered the year with annual guidance that reflects a positive currency impact. Our combustible product portfolio provides us with a strong foundation. The confirmed potential of our smoke-free alternatives reinforces our strong determination to deploy all necessary resources to accelerate their growth, which will drive our business success and ability to generously reward our shareholders over the long term.”
For 2018, PMI forecasts net revenue growth, excluding excise taxes, of over 8.0%, excluding currency; operating cash flow of over US$9 billion; and capital expenditures of approximately US$1.7 billion.
British American Tobacco
In BAT’s second half pre-close trading update 2017 ahead of closed period commencing January 1, 2018, the company reports that business continued to perform well and trading is in line with expectations.
It also said the company is confident of another year of good earnings growth at constant currency, with continued market share growth, driven by global drive brands (GDBs); H2 organic operating profit growth reflecting the benefit from the phasing of volume shipments, offset by a more difficult pricing environment in some markets; and Reynolds American Inc. (RAI) integration on track, with the businesses performing strongly, driven by good share growth and pricing. BAT also expects full-year earnings per share (EPS) to benefit from a reduced currency translation tailwind of 5%.
Second half organic volume is expected to benefit from the phasing of shipments in a number of key markets, including Pakistan, partly offset by the impact of the significant excise increase in GCC. The company anticipates full year industry volume to be down around 4%. Organic revenue in the second half benefits from growing NGP revenues and good overall pricing in most markets, although organic price mix is expected to moderate in H2 due to downtrading in GCC and a more difficult pricing environment in some markets, notably in Russia. Full year organic price mix is expected to remain within historic ranges.
The national rollout of glo in Japan is complete and glo has continued its excellent performance with national share now at 2.7%. glo has also been successfully launched in Canada, Switzerland, South Korea, and Russia and is now available in a total of five countries. In vapor, BAT’s share in Western Europe continues to grow and the performance of VUSE in the US remains strong.
Imperial Tobacco
Imperial’s growth brand volume increased by 5.5% to GBP159.6 billion while market share increased by 80 points. Tobacco net revenue declined 2.6% on a constant currency basis and increased 8.2% at actual rates to GBP7.8 billion. Sixty-three percent of BAT’s tobacco net revenue is now generated by its growth and specialist brands, up on last year. Growth brands include Winston, Gauloises, and Davidoff.
According to a statement by Alison Cooper, Imperial’s chief executive, in the latest annual report in 2017, the company increased investment in its growth and specialist brands by £310 million, focusing spend in a number of areas including portfolio simplification, advertising and marketing, consistent pricing, sales force, and customer engagement. “This higher level of support, aligned with the roll-out of our market repeatable model, delivered market share gains in many of our priority markets and improved share trajectories in others. Growth brands performed well, outperforming the market with volume growth and a share gain of 80 basis points. We also continued to make good progress in e-vapor, further building our capabilities and consumer insights in preparation for an enhanced program of activity in 2018,” she said.
The market repeatable model comprises six elements, which are meant to deliver market share growth. The elements are: simple market focused portfolio; sustainable brand investments; always on price strategy; core range everywhere, all the time; tailor custom solutions; and honest accurate learning.
Cooper also added that Imperial can be expected to step up its level of activity in next-generation products (NGPs) in 2018, with new product launches in new and existing markets. E-vapor will continue to remain Imperial’s priority.
Japan Tobacco International
For JTI in 2017, core revenue at constant FX declined 0.3% or US$33 million to US$10. 46 billion, despite a positive price/mix contribution of US$90 million. Adjusted operating profit at constant FX increased 4.0% or US$125 million to US$3.22 billion. Profit growth was impacted by US$182 million due to the impact of a non-recurring loss. Excluding this and after investing in emerging markets and reduced-risk products for future sustainable growth, adjusted operating profit at constant FX grew 9.9% or US$306 million to US$3.4 billion, driven by cost optimization and positive price/mix variance.
On a reported basis, core revenue increased 0.1%. Adjusted operating profit grew 1.4%, whereas excluding the impact of a non-recurring loss, the profit increased 7.7%.
JTI’s GFB shipment volume grew 0.8%, led by the strong performance of Winston (up 3.5%) and continued market share gains in both mature and emerging markets. Total shipment volume was stable, down 0.1%, whereas, excluding acquisitions in Indonesia and the Philippines, it declined 2.1%.
Core revenue was resilient, declining 0.3% at constant FX, driven by acquisitions and continued market share gains. Favorable currency movements drove reported core revenue up 0.1%. Year-on-year market share increased in the key markets of France, Spain, Russia, and Taiwan.
Logic and Ploom, JTI’s brands in reduced-risk products, are now present in 11 markets excluding Japan.
Masamichi Terabatake, president and c.e.o. of the JT Group, said, “In my first year as c.e.o., I will focus on ensuring success in the domestic tobacco business, an essential driver for our future growth. We will also continue to actively invest in both traditional tobacco and reduced-risk products with the ambition to hold the no.1 market share position in reduced-risk products in Japan by the end of 2020.”