GAMBLE BACKFIRES: Tobacco company’s $4.5 billion fail
ONE of the world's biggest tobacco companies has taken a massive gamble as part of a move away from traditional smoking - but it doesn't appear to have paid off.
Philip Morris International, the maker of Marlboro and other cigarette brands outside the US, reported that the $4.5 billion it spent on four new 'smoke-free' products, has failed to win over new customers. The company introduced the products in a bid to keep up performance as smoking rates and subsequent cigarette sales decline globally.
But according to the company's most recent earnings report - which posted revenue of $18.43 billion in the period and with an adjusted revenue of $6.9 billion - it missed Street forecasts. Four analysts surveyed by Zacks expected $7.02 billion.
The report revealed cigarette shipment volume declined 5.3 per cent during the first quarter, hit by big drops in Japan, Russia and Saudi Arabia, and sales for its cigarette alternatives started to stall in a key market.
The company's weak quarterly sales showed that it suffered the biggest one-day loss in its history as shares plunged 15.58 per cent, down $15.80, to $85.64.
Shipments of heated tobacco products - devices that release flavours and nicotine without combustion - have dragged since December. And shipments of cigarettes are down 5.3 per cent from a year ago. Combined cigarette and heated tobacco shipments are down year-over-year this quarter, too.
The company's tepid earnings report shaved almost 16 per cent off its share value today, making it Philip Morris International's worst trading day in a decade.
WHAT WENT WRONG?
Big Tobacco has long been under threat from the steady decline of smoking, particularly in the developed world, The Wall Street Journal reported. But in recent years, the industry has been able to push through price increases to make up for falling volumes - boosting profits and stock prices. That has enabled big investments aimed at developing smoking alternatives, like e-cigarette devices and other gadgets that promise to deliver nicotine but not the more harmful effects that come with tobacco combustion.
Philip Morris International has developed four "platforms" that it says are less harmful than cigarettes.
The iQOS, which the company's website extols as its most advanced smoke-free product, heats but doesn't burn tobacco.
Sales growth of the iQOS electronic cigarette, a device that heats a tobacco plug without setting it on fire, has been slowing after initial success in Japan.
The company's chief financial officer Martin King said on an earnings call that "device sales were slower than our ambitious expectations".
Mr King said the iQOS had already reached the easily adaptable youngsters of Japan but that changing the habits of the age 50-plus smoking population - which make up roughly 40 per cent of adult smokers - was a bigger challenge.
"We are now reaching different socio-economic strata with more conservative adult smokers who may have slightly slower patterns of adoption," Mr King said.
The company's second product, TEEPS, is a second heat-not-burn offering that resembles a regular cigarette with a tip that prevents flame, according to Bloomberg. Philip Morris International said it plans to launch a consumer test for the third platform - a nicotine inhaler - this year, and also plans to release a next-generation version of Platform 4, an electronic-vapour offering.
The company is convinced iQOS and its other smoke-free products will make a comeback. Heated tobacco sales went up in Japan and South Korea, while the sales of traditional cigarettes fell in Japan, Russia, and Saudi Arabia. The company says it remains on track to double global sales of heated tobacco products in the near future.