2-22-18 8:16 AM EST | Email Article

By Saabira Chaudhuri


LONDON--British American Tobacco PLC (BTI) disappointed investors by reporting weaker-than-hoped progress in its cigarette-alternatives business, sending shares down and underscoring the importance the shift away from combustible tobacco holds for investors of tobacco companies globally.

BAT's shares fell 4% in afternoon trading in London after the owner of the Newport and Camel brands said full-year next-generation-products revenue was about GBP500 million including annual revenue from Reynolds American, which BAT acquired last year. That figure was below the GBP550 million research company Jefferies said it was expecting, which had baked in the likelihood of stronger growth in the last few months of the year.

For 2018, the London-based tobacco company said it expects heated tobacco and vapor products to contribute GBP1 billion in revenue, which Jefferies said it viewed as a downgrade from a previous estimate in October where BAT had said it expected revenue of "over GBP1 billion."

"The big negative is the lack of details to build conviction in heated tobacco" and reduced risk product growth said Jefferies analyst Owen Bennett, who complained that BAT's failure to break out volume growth of heated tobacco products from that of cigarettes made it hard to track growth of the new products going forward.

The investor response to BAT's otherwise strong results highlights the heightened expectations around so-called next-generation products, which investors see as the future for an industry whose volumes continued to decline.

BAT's full-year earnings report comes a day after arch rival Philip Morris International Inc. (PM) offered up more details on its own strategy for next-generation products at a New York conference. Philip Morris, which is currently waiting on approval from the U.S. Food and Drug Administration to sell its heat-not-burn iQos device and market it as safer than regular cigarettes, is leading Big Tobacco's shift to alternative products.

On Wednesday, Philip Morris said it is striving for volumes from reduced-risk products of 30% and net revenue of 40% by 2025, up from 4% of volumes and 13% of revenues last year. Morgan Stanley analyst Matthew Grainger cheered that announcement saying he "viewed the presentation as reinforcing our confidence in Philip Morris's ability to manage this controversial but ultimately necessary transition for the tobacco industry."

Philip Morris has pushed most of its money towards developing iQos, betting heat-not-burn products will woo existing smokers in way that vaping devices--which don't contain tobacco but typically heat a nicotine-laced liquid--haven't been able to.

By contrast, BAT has spread it bets across a variety of formats, selling a vapor product called Vype, a heat-not-burn one called Glo and a hybrid product called iFuse. BAT is also still very focused on its traditional cigarettes business, which bring in the vast majority of its revenue.

"Combustible cigarette products remain at the core of our business," said BAT Chief Executive Nicandro Durante.

Mr. Durante in an interview said he was baffled by the extent of Thursday's share drop but attributed this in part to greater-than-expected currency fluctuations, noting that BAT's forecast for currency headwinds was above what analysts were expecting. Separately, RBC analyst Mirco Badocci noted that BAT's adjusted operating profit was 2.5% below analyst estimates, which could also partly explain the share decline.

The producer of Lucky Strike and Dunhill cigarettes said that its volume of cigarettes and tobacco-heating products sold over the year--excluding the impact of the acquisition of Reynolds American--declined by 2.6%. The falling volumes were better than the market overall, which declined by an estimated 3.5%, according to BAT.

BAT reported a net profit of GBP37.53 billion for the year ended Dec. 31, up from GBP4.65 billion the year before. Stripping out the impact of Reynolds and currency moves, BAT's profit grew 3.7% to £5.68 billion.

Adjusted, organic revenue grew 6.5% or 2.9% at constant rates of exchange, as BAT raised prices.


-- Carlo Martuscelli contributed to this article


Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com


(END) Dow Jones Newswires

February 22, 2018 08:16 ET (13:16 GMT)

Copyright (c) 2018 Dow Jones & Company, Inc.
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