Global tobacco results highlight next generation product shift: Fitch

The financial results of global tobacco companies highlight the shift towards a next generation products (NGPs), Fitch 
Ratings says. 

This shift will help cushion the industry from weaker organic revenue growth from cigarettes, but will increase risk and uncertainty as cash flow generation becomes 
less predictable. 

British American Tobacco PLC said it expected NGP-generated revenue to double this year to GBP1 billion (almost 5 percent  of 2017 BAT revenues), and to increase to more than GBP5 billion in 2022. 

BAT and Reynolds American, which it acquired in July, have invested approximately US $ 2.5 billion in NGPs since 2012, the company said. 

BAT and, more recently, Imperial Brands PLC have both adjusted their strategies to complement tobacco products with various NGPs. 

BAT is focusing on both e-vapour and heat-not-burn technology. Imperial is planning to launch several new products in 2018, leveraging on its “blu” e-vapour platform and testing heat-not-burn. 

Philip Morris International, Inc. (PMI) benefits from first-mover advantage in heat-not-burn, which may enjoy high consumer acceptance as the NGP that most closely resembles cigarette smoking. 

Its sales of HeatSticks and of IQOS devices grew to US $3.6 billion in 2017, of which Asia accounted for US $ 3.2 billion, up from US $ 0.7 billion in 2016, according to the company’s most recent results. 

NGPs represented almost 13 percent of PMI’s net revenues, excluding excise taxes, in 2017, up from 3 percent in 2016. 

Fitch said the shift towards NGPs increases overall risks and uncertainties for tobacco companies. 

The rating agency noted that the potential for obsolescence and possible shifts in consumer preferences will be hard to control, and NGPs have cannibalised sales of combustible tobacco products. 

It is even possible that the industry will be transformed by NGPs or by regulatory changes. 

Philip Morris International, Inc. (PMI) benefits from first-mover advantage in heat-not-burn, which may enjoy high consumer acceptance as the NGP that most closely resembles cigarette smoking. 

Its sales of HeatSticks and of IQOS devices grew to US $3.6 billion in 2017, of which Asia accounted for US $ 3.2 billion, up from US $ 0.7 billion in 2016, according to the company’s most recent results. 

NGPs represented almost 13 percent of PMI’s net revenues, excluding excise taxes, in 2017, up from 3 percent in 2016. 

Fitch said the shift towards NGPs increases overall risks and uncertainties for tobacco companies. 

The rating agency noted that the potential for obsolescence and possible shifts in consumer preferences will be hard to control, and NGPs have cannibalised sales of combustible tobacco products. 

It is even possible that the industry will be transformed by NGPs or by regulatory changes. 

“While tobacco companies generally exhibit solid credit metrics, against this backdrop, financial flexibility has a value over the long-term. 

The suspension of PMI’s share buyback since 2015, accompanied by slower dividend increases, indicates a willingness to protect the company’s credit metrics and prioritise the allocation of cash flow towards growing the NGP business. 

We expect that this approach will also be taken by the other tobacco players as they focus on NGPs, and we do not expect BAT or Imperial Brands to restart share buybacks this year, or to accelerate dividend growth,” Fitch said.