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October, 2009

First Half Global Review:
Terrible year!

By Jonathan Bell

TI European Director Jonathan Bell looks at how the first half-year of the global economic turndown is affecting tobacco.

The ‘Great Recession’ has posed challenges to many industries, tobacco included. The first half 2009 picture of sales and profits, however, are generally quite strong for tobacco. This is good news. Bad news is the FET tax increase in the USA, an historic tax burdening on the industry that could spread to other nations.

It would seem that while the USA tobacco market convulsed violently at the harrowing price increase for almost all products, it is surviving. It is even already showing an unexpected resilience.

Following are accounts of the major tobacco companies in the first half of 2009, along with news from other companies and of general developments.

During the first half of this highly unusual year, worldwide, the ugly specter of a ban on duty free sales haunts almost all participants in the tobacco product community. Comments on this important community issue are included.

China: CNTC Market
The China National Tobacco Company, a constituent of the government-run China State Tobacco Monopoly Administration is the world’s largest cigarette producer and marketer for the planet’s largest cigarette market. Sales, which have been a growth sector in China, are reported to provide 8% of government tax revenues. They expanded further in the first half of what is termed a global Great Recession year. China? What recession?

Chinese cigarette factory-made product disappearance reached 1.2 tn units, a gain 0f 3.06%, year-period on year-period (YOY). Although such expansion is impressive, this rate of YOY growth shows indications of slowing down: the increase Jan-June 2009 softened by 0.5%. A comparison of sales from these past six-months sales against the same in 2007 show a growth rate slowing by 2.8%.

But growth is growth, even if signs of maturing are on the horizon.

First half 2009, China exported 54,700 tons of leaf tobacco. Same period China exported 6.4 bn cigarette sticks, a YOY gain of 35.9%. China-foreign cooperatively produced cigarettes plus sales of imported cigarettes achieved sales of 8.7 bn units. Although still relatively insignificant in terms of overall consumption, this sector saw great expansion during the period, up 40,4%. Sales value for this sector, the nation’s premium cigarette sector, during the period, were up 55.9% YOY.

Growth in market is based on rising popularity of the Sector One products, or the top ‘30 most important brands’ as they are known. Expansion is also based on sales increases in central and western regions, the nation’s less developed areas.

The still nascent China cigar market saw sales of 370 mn units in 2008. The market remains dominated by Chinese made cigars but is in flux as foreign cigars gain in sales. Low-end cigar segment accounting for 200 mn units last year is heavily dominated by Chinese products. The remaining 170 mn cigars consumed last year were in the mid-to-high product range, seen to represent some 95% of sales value, shows increasingly strong presence by foreign made product.

The China cigar market is characterized as 25% top-end cigars, 30% in mid-priced cigars, and 45% in lower priced cigars (the latter being traditional cigars that are different from those sold in American and European nations).

The middle-to-high end price product segment is now dominated by foreign made cigars. It is reported that the majority of these cigars arrive clandestinely. Indications are that in some major markets such as Shenzhen, Guangzhou and Zhuhai these cigars account for 90% of local sector sales.

Leading Chinese brands on the national market include the cigar brands Great Wall, Lion, Maoda, and Three Gorges.

British American Tobacco
In context of a recessional global economy British American Tobacco’s first half 2009 sales volume results are relatively unscathed. The company reports total Group sales of 443 bn cigarettes, off 1% from the YOY period (445 units in firsts half 2008).

Conversely, sales by BAT subsidiaries gained 349 bn units, versus 334 YOY. BAT associated companies, manly Reynolds in the States and ITC in India, deceptively decreased during the six-month period by 15%, YOY, to 94 bn units.

BAT Group revenue rose by 24%, YOY, to 6.8 bn pounds. The 2009 six-months results do not include production volumes or revenues from the Group’s acquisition this year of Bentoel and Terkel.

Interestingly enough, the Group’s mid year report condemns black market (especially counterfeit) activities as its number one concern.

For 12 months of 2008, Group revenues came to 33.9 bn pounds. Global Cigarette unit sales reached 715 bn units.

Philip Morris International
First half 2009 saw a extremely slight softening of cigarette sales for PMI. The company reported a sales volume for the six-month period of 426.5 bn sticks, versus 426.6 bn for the half year earlier period. This is purely a marginal downturn of virtually no statistical importance.

Increased sales of PMI brands in its Asia and Latin America/Canada regions were offset by reduced sales in its Eastern Europe/Middle East/Africa and European Union regions.

Gains in sales in Indonesia, Korea, and Pakistan were offset for example by slower sales in Italy, Poland, Spain, Romania, Ukraine, and Duty Free. In all the company reports market share growth for its brands in 23 national markets during the first six-months of this year.

Shipments of Marlboro came to 149.4 bn units, off 1.7%. This the company attributes to reduction in business travel and softening of the premium market in Russia and Ukraine - Productora Tabacalera de reflecting the state of the global economy.

PMI reports its shipments of cigarillos increased by more than 30% in the report period despite the decline in cigarillo shipments to the German market. Cigarillos sales for the period although important represented less then 5% of total PMI product shipment.

Operating income came to $4.7 bn for the first half of 2009 down less than $400 from YOY 2008. A stronger 2009 second quarter, against lower results for the first quarter, helped PMI achieve strong overall performance.

In recent news, PMI has announced acquisitions this summer of Swedish Match’s South African operation and of Colombia’s Productora Tabacalera de Colombia for $452 mn.

Altria Group: Philip Morris USA and UST
Shipments of PM USA cigarettes are reported at 75 bn units for the first six-months of 2009, a decline of 10.4% in volume from YOY 2008, The company’s market leader Marlboro had sales of 63.7 bn units in the first half, versus 69.9 bnu in same period of 2008. A decline of 8.9%. Other PMUSA brands saw larger losses: Parliament, Virginia Slims, Basis, and ‘others.’

The company’s shipment volume when adjusted for changes in trade inventories and calendar differences is estimated to have actually decreased by 9% from 2008 first half. The total USA cigarette market, with same adjustments, is seen as diminishing 7% following the draconian tax increase (known as FET) on tobacco products levied in April of this year.

Despite the very heavy product price increase, cigarette revenues for Altria increased first half 2009 by 8.4% to $9.9 bn.

Altria’s UST subsidiary reports sales of 317.6 mn tins of moist smokeless tobacco product during the first six-months. This volume is a reduction of 4.3% against the YOY figure. With adjustments the company reports it in actuality as a reduction of only 2%. UST brands include Copenhagen, Skoal, Premium MST, and Red Seal.

UST first half net revenues came to $671 mn (prior year not given as acquisition of UST occurred in January of 2009).

Middleton cigar sales for Altria came to 615 mn units, off 7% from the YOY period. Almost all of these cigar sales are for the popular Black & Mild brand family. Overall, Middleton products held a 31% share of USA cigar retail sales. Net revenue for Altria’s cigar business expanded by 21.4% to $233 mn during the first half of 2009.

In major news for Altria. The vast Cabarrus County Philip Morris production factory has at last been closed, with all production centralized in the companies lone cigarette factory, in Richmond, Virginia.

Of special interest regarding the leading global cigarette trademark, Marlboro, for the first time in two years Philip Morris will be launching a new brand extension.

As well, Altria is probing the USA RYO market in test areas for an L&M RYO product. This would be the companies first RYO product, if it is realized as many observers assume will happen.

Although heavily impacted by the enormous rise in Federal taxes in April - the USA RYO market plunging 17% in sales as an immediate result - it can be predicted from similar RYO scenarios on other national markets, that sales will recover as consumers adjust. In fact it remains considerably more economical to produce 20 RYO cigarettes (MYO, or whatever) than to buy a pack of cigarettes. Altria seems cognizant of this act.

Japan Tobacco International
JTI’s international cigarette sales in first half 2009 came to 216.1 bn units, off 0.9% from the same period of 2008. Despite recession and continuing stress on public smoking the results are strong.

Sales of JTI’s eight global brands, including Winston and Camel, rose 1.8% in the first half, to 121.3 bn units.

Nevertheless, net revenues fell by 10.7% during the first half to $4.55 bn, this due to the company’s vulnerability to recent fluctuations in foreign exchange rates. With constant rate of exchange from YOY 2008 the company reports it would have reported a 9% increase in net revenues for this reporting period.

Results from the Russian market have been encouraging for JTI. The company holds a 36.3% market share there with its LD and Glamour brands.

These JTI results do not include its RYO, cigar, and snus products, nor its contract packaging activities.

Japan Tobacco Inc. will announce its own official first half 2009 domestic market results in late October. In advance it is reported that its Japanese sales came to 39 bn sticks, a loss of an adjusted 4.2% in volume. Despite this the company retained a 65.1% sales dominance of the Japanese cigarette market.

Imperial Group
And the first half winner in cigarettes is... Imperial. Primed by the first results of the combined Imperial and Altadis operations, Imperial Group saw its cigarette sales in the first half increase by 25% to 152 bn sticks. The gain reflected sales increases as well as the combination of Imperial and Altadis production.

Part of the strong showing came from sales of Altadis brands that benefited from the larger Imperial tobacco products global distribution. These included entries for the historic brands Gauloises and Gitanes, as well as newer marks such as Fine. Gitanes Blondes and Fine saw sales grow by 21% respectively.

Bucking the economic situation, Imperial shows growth in the first half for its value cigarettes brands, accounting for almost half of its portfolio. This applied especially to JPS which gained 5% in sales during the period, boosted by gains in Germany.

Premium cigarette brands make up 14% of Imperial Group offer. Davidoff sales increased by 9% during the period, with stellar results in the Middle East. The brand did well also in Greece.

During the first part of 2009 Altadis USA closed its famed HavaTampa plant in the Tampa area. Production is being relocated to an Altadis factory in Puerto Rico. Also in the period, Altadis USA announced the retirement of renowned cigar man Theo Folz as CEO. Folz is followed by Gary Ellis.

Imperial Group also reports satisfactory growth in its leading role in the global RYO and MYO market.

Swedish Match
The company reports an historic first half, bolstered by a second quarter that gave the company its strongest sales performance and operating profit ever in Swedish Match’s reporting periods. Second quarter sales volume for snuff products zoomed up by 17% and operating profit bounded by 15%. While sales expanded vigorously in Scandinavia, USA sales were a major contributor to the results.

Following the FET increase in April, Swedish Match saw its USA snuff sales rocket by 21% against 2nd quarter 2008.

Regarding cigars where Swedish Match follows Altadis–Imperial as a global cigar marketer, first half results sales in local currencies increase by 10% across the board, while operating profit gained by 52% over the first half results of 2008.

R.J. Reynolds Tobacco
Number two USA cigarette manufacturer R.J. Reynolds reports its second quarter tobacco market activity achieved sales of $2.25 bn, a drop of 3.8% from the previous year, same quarter.

Company profits rebounded from the affects of the FET, based on pricing, productivity and moist snuff volume increases.

For the quarter, operating income increased YOY to $649 mn.

Stronger sales for Camel and Pall Mall contributed to the quarter’s stronger results. The Conwood company generated record volumes and earnings via its moist snuff products, most especially the Grizzly brand.

A big gain is reported by Lorillard in the USA cigarette market during the second quarter of this year. Net sales rose to $1.5 bn in the quarter against YOY of $1.1 bn. Quarterly earnings rose by 32% YOY.

The company announced that while quarterly shipments of Newport fell by 1.2% to hold a market share of 10.38%, shipments of its Maverick brand increased by 68%.

Villiger Group
Celebrating its 120th year, the company has recently reported a quite youthful expansion for 2008. Sales increased by 4.7% last year, to a value of $172.9 mn.

Expansion was predicated on German and Swiss sales.

To honor its 120th anniversary, Villiger has launched Villiger 1888. This hand made long filler premium cigar has been met, according to the company, with strong international acceptance. This has proven particularly true in Southeast Asia where the number 1888 symbolizes great fortune.

Outside of Europe, Villiger reports growth in both the Far East and South East Asian regions.

Storm Watch: Duty Free
This past summer the awaited WHO negotiations on the future of tobacco product sales at Duty Free outlets ended in a draw, no decision could be reached. Another meeting on this impending crisis for the tobacco industry is scheduled for late 2009.

A ban, which had support at the summer meeting, would be a major blow to all segments of tobacco products, most significantly perhaps for cigars. To be blunt, it could in fact be disastrous for some manufacturers. The importance of the controversy is such that it has been called the single most serious threat to the international tobacco industry in decades.

This development follows bleak quarters for Duty Free sales, attendant on the sharp decline in business travel.

In the first quarter of 2009 global duty free and travel retail tobacco sales fell by 19.3%, year to year periods. It is now labeled as the worst quarter ever for tobacco sales in this especially lucrative retail sector.

For the quarter, on-board airline sales sank 26.5% while sales in airport outlets dropped by 24%.

PMI, on increased sales of Marlboro, managed to improve its market shares in the quarter to 35.5%. BAT, however, dropped in share to 26.6%. Including sales by JTI and Imperial, the Big Four tobacco companies held 88.7% of Duty Free sales in the quarter,

All product sectors were affected; cigarette sales fell by 19%. cigars were down by 23% and Cut Tobacco products shot down 19.9%.

The fifth most important company in Duty Free tobacco is Gold Bond Enterprises, the exclusive agent for the Shanghai Tobacco Group’s cigarette brands, the best seller among these being Chung Hwa.

Concerning the threat of a ban on tobacco sales in Duty Free outlets, ETRC secretary General Keith Spinks has said to the industry:

”Despite the fact that we are an honest, legitimate business that has absolutely nothing to do with illicit trade, there was significant support for an outright ban to duty free sales. Our industry needs to regroup and redouble our efforts over the next few months.

“Governments across the world need to be reminded how tightly controlled and how important an industry we are. If duty free cannot mobilize to protect its long term future, I would be worried about the outcome of the next round.”

Tobacco International - October, 2009


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