France: LTR Industries Continues to Enjoy Favorable Industry Dynamics

Source from:  Tobacco Reporter  10/14/2013

LTR Industries of France marks its 50th anniversary this year. Starting with a single production line in the 1960s, the company, a subsidiary of SWM, is now the world's leading supplier of reconstituted tobacco leaf, accounting for more than 50 percent of global production. Despite the mounting　pressures on the tobacco industry, the firm's man-agement is optimistic about the future. New regulations and shifting consumer preferences all but guarantee continued demand for LTR Industries' services.

A golden anniversary is a big deal—especially when serving an industry as beleaguered as tobacco—and LTR Industries is celebrating accordingly. Throughout the year, the company has been and will be hosting customers to commemorate the milestone. In May, it held an open-door weekend, inviting employees' families and friends to its factory in Le Mans. And this month, the company will hold festivities for current and past personnel.

While enjoying food and entertainment, the revelers will have much to reflect on. The reconstituted tobacco manu-facturing process was invented by William P. Schweitzer—an American paper manufacturer whose name was featured prominently in that of LTR Industries' parent company until Schweitzer-Mauduit rebranded, becoming SWM Intl. several years ago.

Like all industrial processes, tobacco manufacturing gener-ates waste. Leaf-threshing plants and cigarette manufacturers are left with byproducts such as stem and dust, which can represent significant value. Without a method to reuse these products, however, producers are unable to realize that value, and the byproducts must be thrown away.

Schweitzer applied his experience in papermaking to help solve the problem. If paper manufacturers can turn wood pulp into paper, he reasoned, they could use the same technology to create a sheet of tobacco. Instead of wood pulp, however, the raw material would be tobacco byproducts. This approach not only reduces the waste generated in cigarette manufacturing but also turns the byproducts into a form—a sheet cut into strips—that can be easily reincorporated into the production process.

Schweitzer's process mixes water with tobacco byproducts to create a pulp. The fibers are then separated from the solubles and used to create a paper-like web. Later in the process, the separated solubles are concentrated and reincorporated into the web. The result is usually a 100 percent tobacco-materials-based product with several attractive attributes for cigarette makers.

In addition to the obvious cost savings and sustainability aspects associated with waste reduction, reconstituted tobacco leaf presents another important benefit—it helps homogenize the tobacco blend of smoking articles. The characteristics of recon are more stable than those of natural leaf tobacco, which is a big asset for tobacco blenders and product developers. Whereas the properties of natural leaf tobacco, including chem-istry (sugars and nicotine), physical attributes (filling power and degradability) or smoking deliveries, differ from harvest to harvest, recon is consistent from batch to batch. What's more, the tobacco sheet created by the papermaking process is porous, which has two advantages: It burns well, reducing tar deliveries, and it readily absorbs the casings that give their signatures to cigarette blends.

Unsurprisingly, reconstituted tobacco leaf caught on quickly in the United States and elsewhere. Eager to serve overseas demand, Schweitzer built a recon factory in France, together with the French tobacco monopoly, Seita, which has since privatized and is now part of the Imperial Tobacco Group. (SWM is now sole owner of LTR). Construction started in 1962 and the first product batch rolled off the line in 1965. LTR Industries installed a second production line in the 1970s and a third started operations in 2003.

The company's sales figures followed a similar trajectory. In its first year of operation, LTR Industries reported a turnover of $25,000; by 2002, it had sold more than $100 million. Last year, the firm posted its best turnover yet—$200 million. The com-pany currently employs about 400 people and produces 80,000 metric tons of reconstituted tobacco leaf per year.

Michel Fievez, executive vice president of SWM's reconstituted tobacco business, attri-butes the firm's success to the remarkable characteristics of recon, and to the fact that SWM is easy to work with. "In most cases, we take our customers' byproducts, convert them and then ship them back," he says. "It's a bit unusual for customers to deliver the raw materials. So, it's important to have [a] properly designed sup-ply chain, with good management and communication."

LTR Industries is constantly working to further improve the characteristics of its product. For example, it is currently able to work with a broader range of raw materials than it was in the past. "Basically, cigarette manufacturers have available to them two types of raw materials—those from the tobacco crop and those from the factories," says Fievez. "We have been able to work with a combination of both, but today, the inclusion rate of each can vary from nearly 0 to 100 percent, giving custom-ers unprecedented flexibility in terms of product composition." Many of the company's efforts are directed also at enhancing the processability of recon, allowing it to be mixed directly with natural tobacco in the customer's primary department, for example.

Changing conditions

LTR Industries' anniversary also provides a good opportunity to look ahead. Can SWM's recon business continue to do well, even as its customers face stagnating cigarette sales and unprec-edented regulatory and competitive pressures? Fievez believes the answer is a qualified yes. The cost competitiveness of recon against natural tobacco, he says, will likely increase. "While the price of natural tobacco fluctuates from year to year, the long-term trend is toward more expensive natural tobacco," he says. The outlook for reconstituted tobacco, in terms of cost, is more stable. "If customers want greater predictability in their projections, we can easily offer that through long-term supply agreements," says Fievez. "We can give clear indications of cost and price—and the trend for recon is not upward like the one we see long term for natural tobacco."

Fievez believes demand for recon depends largely on a customer's motivations for using the product. Reconstituted tobacco leaf is widely used in cigarettes—but not by everyone. Customers who use recon as a blending tool are likely to keep using it. Demand from such customers, says Fievez, tends to be stable. When recon is strictly used as a cost reducer, however, there can be a bit more fluctuation, depending on the price of natural tobacco, among other variables.

The increasing demand for "light" cigarettes, driven by both consumer preferences and government regulations, sug-gests continued demand for recon, which is an effective tool to reduce tar deliveries. While the tar deliveries of cigarettes sold in the Western world have come down significantly during the past decades, in other countries the conversion has barely started. China, the world's largest cigarette market, for example, has instructed its tobacco industry to reduce the tar deliveries of its cigarettes to 10 mg by 2016. Such efforts will effectively double the recon market in China, according to SWM. In other markets, such as Indonesia, the demand for lighter products comes from smokers rather than regulators. And while the definition of "light" in such markets differs from that used in the West, the result is the same—cigarette manufacturers will need tools to achieve the desired delivery reductions.

Alert to opportunity, SWM, in July 2011, signed an agree-ment with the China National Tobacco Corp. (CNTC) to establish a joint venture, China Tobacco Schweitzer (CTS), in Yunnan Province. CTS will be working closely with Yuxi Hongta, Kunming Hongyun-Honghe and other leading Chinese manufacturers, manufacturing recon for premium cigarettes. The facility is scheduled to start production in the first half of 2014 and will have a production capacity of 30,000 metric tons.

While China has several homegrown suppliers, CNTC clearly felt it needed a foreign partner to cater to the country's rapidly growing premium segment. "The Chinese selected SWM because they expect we will bring something none of the domestic producers are currently offering," says Fievez. "Even as the Chinese recon suppliers have been making much progress, it's difficult to catch up with 50 years of experience in a short time."

Depending on future demand, SWM is even considering reopening a factory in the Philippines that it had mothballed in the wake of pessimistic short-term predictions concern-ing regional demand. Thus far, according to Fievez, those predictions have not materialized—at least not to the extent forecasted. "Once the project in China is up and running, we hope to be in a position to restart the Philippine project," he says.

Fievez has a nuanced view on the impact of regulations on the future use of recon. He says it's　important to differ-entiate between regulations in emerging countries that are encouraging the use of recon, and regulations in markets such as the U.S. and Europe, which are neither favorable nor unfavorable to reconstituted tobacco but are going against the interests of the tobacco industry at large by reducing cigarette sales, for example.

"If regulations affect our customers, they affect us, as well," he says. 

And in rare cases, proposed regulation  could pose a direct challenge to the reconstituted tobacco business. Whereas most countries that have tackled tobacco flavorings have limited restrictions to so-called characterizing flavors—those flavors that impart a distinct taste, such as vanilla, on the product—Brazil and Canada have also banned noncharacterizing flavors— flavors that are used to "fix" imbalances in natural leaf tobacco and are an integral part of the popular American-blend ciga-rettes. Reconstituted tobacco has traditionally been the tool of choice for applying　noncharacterizing flavorings.

Like many suppliers to the traditional tobacco industry, Fievez and his colleagues have been following the development of the new e-cigarette category, which has been growing rapidly, albeit from a low base. Some commentators have suggested that e-cigarettes could outsell traditional cigarettes in the not-so-distant future—a prospect that, if true, would have considerable implications for suppliers of cigarette paper and other tradi-tional cigarette components. While aware of the developments, Fievez urges caution in extrapolating trends. "The fact that your child has grown rapidly in recent years doesn't mean he will be 5 meters tall upon reaching adulthood," he says.

Despite the challenges facing tobacco, Fievez believes that, even after 50 years, the traditional cigarette industry continues to provide plenty of opportunities for LTR Industries. The com-pany is constantly investing to improve the characteristics of its products and add value for its customers. For example, LTR Industries is devoting considerable resources to developing grades of recon that allow for greater differentiation in terms of composition, taste and smoking characteristics.

While reluctant to discuss specifics, Fievez is clearly buoyed by the potential of the products in the pipeline. "I would not be surprised if, thanks to changes we are working on at the moment, the future value of recon will be even greater than it is today." Enditem