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U.S. sales remain stable for BAT; Heated cigarette sales slow in Japan

U.S. sales remain stable for BAT; Heated cigarette sales slow in Japan

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The U.S. tobacco market is providing a stable revenue source for British American Tobacco as the company nears completing its first year of fully owning Reynolds American Inc.

However, BAT offered a cautionary tone in Tuesday’s first-half fiscal 2018 update when it comes to the critical heated traditional cigarette market in Japan.

BAT releases just mid-year and full-year financial reports, rather than quarterly reports. Its first half ends on June 26.

BAT is the world’s largest publicly traded tobacco manufacturer, having completed on July 25, 2017, its $54.5 billion purchase of the 57.8 percent of Reynolds it did not already own.

Reynolds operates as a wholly owned subsidiary. Legacy Reynolds shareholders own 19 percent of BAT.

BAT said it is experiencing, as expected, lower U.S. industry volume, particularly during the first quarter, which “is expected to impact revenue in the first half.”

“Share in the first half is expected to be stable following strong growth at the end of last year.”

Even though the former Reynolds brands of Newport and Camel continue to chip away at Marlboro’s dominant U.S. market share, sales have plateaued in recent months.

Wells Fargo Securities analyst Bonnie Herzog said May 30 that Newport’s brief sales decline in May “echoes signs of price confusion and tepid consumer/retailer response to Newport Platinum.”

Newport holds a 13 percent market share and Camel 8.9 percent, compared with Marlboro at 46.9 percent.

BAT said that while its glo heat-not-burn traditional cigarette holds a 4.3 percent market share in Japan, growth in the overall category “has slowed.”

BAT has said part of its growth slump was related to production limits set by the Japanese government.

“With device supply constraints now lifted, we are on track for further Japanese and international roll-outs in the second half,” BAT said.

Japan remains “possibly the most fascinating tobacco market in the world,” said David Sweanor, an adjunct law professor at the University of Ottawa and author of several e-cig and other tobacco and health studies.

“With the introduction of heated tobacco products, traditional cigarette sales plummeted by 27 percent in the two years to the end of 2017,” Sweanor said. “Heated products took 21 percent of the market, and there was a more rapid decline in the overall use of tobacco products.

“This was the opposite of what is predicted about the introduction of reduced-risk products by abstinence-only advocates, but consistent with what people who smoke have long said about wanting to quit smoking.”

As a result, Sweanor said, “there is now truly healthy competition in Japan as the major tobacco companies pursue strategies to replace cigarettes.”

Philip Morris International announced Tuesday plans to raise prices on Marlboro in Japan by Oct. 1 to gain more revenue.

PiperJaffray analyst Michael Lavery said one ripple effect could be “giving greater consumer incentives to switch to iQOS, which could be almost 10 percent cheaper for the consumer, but a 10 percent to 15 percent higher net realized price.”

“We have had concerns that Japan Tobacco may be reluctant to raise prices on cigarettes and risk steering consumers to PM’s lower-priced iQOS HeatSticks, so we believe PM signaling bold pricing ambitions on cigarettes is a solid strategic move.”

rcraver@wsjournal.com 336-727-7376 @rcraverWSJ

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