Bloomberg rated tobacco shares to be among the best for the last 10 years. PMI has turned in tremendous figures for 2011, BAT has just announced impressive results for the year past, and Japan Tobacco has exceeded all expectations on its road to recovery from the tsunami. Many suppliers to the tobacco industry have had a record year. What about 2012?
Good financial performance lends credibility - and security - to an industry "under attack" from certain quarters attempting to dissuade investors from investing in tobacco and tobacco-related stocks, to wit, a recent publication by ASH UK trying to encourage pension funds and municipalities not to invest in tobacco stocks for reasons of long-term financial viability and to divest shares for ethical reasons.
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There is an old saying by a wise stock broker: "People will always want to eat, will always become ill, and will always want to have fun, so invest in food companies, pharmaceuticals, tobacco and beverages". And the results of companies in these sectors seem to confirm this philosophy 100 per cent, they are solid investments by and large.
Good financial results don't just happen, they are made by people, who in turn make products that consumers want and are willing to pay for. The laws of supply and demand apply. And in our competitive times, differentiation between products.
We asked around in the tobacco business as to where managers see 2012 heading and have published some of the statements given. The common denominator was a confident if not boisterous attitude, despite some major imponderabilities ahead, plain packaging in Australia, the upcoming revision of the Tobacco Products Directive in the EU and the subject of menthol in the US.
The top key drivers mentioned for 2012 were innovation and teamwork. Innovation has been running at a fast pace in recent years, largely as a response to ever-changing regulations, and innovation cycles and time-to-market have shortened considerably.
But it is teamwork and cooperation among suppliers and customers, and even between suppliers themselves, that has become a growing driver in keeping business buoyant. The entire supply chain seems to be "closing ranks" to produce better products - and faster. By all accounts 2012 could be another dynamic year for the industry.
Hiroshi Kimura, President and Chief Executive Officer, Japan Tobacco:
"We are revising upwards the full-year forecast for the year ending March 2012 given the stronger performance of the Japanese domestic and international tobacco businesses. The domestic tobacco business has been steadily recovering market share toward the 60 per cent target for March this year through initiatives to strengthen our competitiveness after the earthquake.
"The international tobacco business delivered strong financial results despite the challenging ongoing environment. As we approach the end of our "JT-11" mid-term management plan period this March, I am confident we will exceed the 5 per cent compound annual EBITDA growth plan objective."
"We are aiming for the sales volume growth for the year ending March 31, 2013 by increasing market share. Following the impact of the March 2011 earthquake, JT's domestic tobacco market share for the current fiscal year through January 2012 on average has been 54 per cent.
We are aiming for this to increase to 60 per cent or above for the year ending March 2013 by introducing products that will provide greater consumer satisfaction and being more competitive in POS initiatives."
"Our management is confident in achieving another EBITDA growth of 10 per cent this calendar year at constant rates of exchange. We are aiming to achieve the growth through pricing in mature and emerging markets, and the volume increase and product mix improvement in emerging markets."
Peter Nixon, Vice President Communications, Philip Morris International:
"We begin the year with solid business momentum following the excellent results we achieved in 2011. Despite the challenges that may be ahead - such as the continuous economic uncertainty and currency volatility - we remain confident in our ability to continue to provide high quality and innovative tobacco products to adult smokers, meet our financial growth targets and reward our shareholders with superior returns. The strength of our brands, our geographic diversity and the talent and drive of our employees will remain key drivers of our success."
Marcus T. R. Schmidt, - General Manager, Reemtsma Germany & Switzerland:
"We operate in a very competitive market environment. German consumers are very price sensitive when it comes to tobacco products and we expect this trend to continue and grow even further. Reemtsma's portfolio offers a broad range of FMC and OTP products to fit these price sensitive consumer needs. On the regulatory front, we will be watching the draft for the rewritten European Tobacco Product Directive very closely. The draft is expected to be released in the second half of 2012. Reemtsma will robustly defend its public stance regarding provisions such as plain packaging and display bans."
PT Sreekumar, Managing Director, Filtrona Filter Products:
"I see potential for further progress in 2012, even though issues such as regulation, the growing challenge of the illicit trade and plain packaging will remain squarely on the industry agenda. Certainly, segments such as emerging markets and female smokers continue to provide good opportunities for growth.
As retail prices have risen as a result of higher tobacco taxation, so too have consumer expectations. And the drive for more premium, consumer-relevant products to meet these expectations also creates an opportunity for those suppliers which have a flexible global footprint and a strong innovation capability.
Understanding and supporting customers in providing value-added solutions to consumers remain a key requirement for suppliers."
Henry Tuck, Managing Director, SPI:
SPI takes the view that inevitably the current regulatory and volume pressures on the Tobacco industry will increase or at best continue at the same level, leading to more competition between tobacco companies for whatever volume is available.
This competition will drive more product and marketing innovation as each tobacco company tries to gain or maintain market share, whilst pressure to reduce costs will be transmitted to the industry suppliers.
Those suppliers that can provide innovative and cost effective answers to these issues will do well: those who cannot will struggle. SPI believes it has the expertise to suit this outlook and therefore expects to do well in 2012.
Insa Briel, Managing -Director, Heinr. Borgwaldt GmbH:
"I do not expect 2012 to be much different from 2011. However, the whole Borgwaldt group looks with interest to the introduction of the new EU Tobacco Product Guideline, probably in the 3rd quarter 2012. Besides this the industry is in motion as always!"
Tony Edwards, Divisional Managing Director, Payne & Payne Security:
"In what I expect to be another positive year of progress for the industry there will inevitably be continued issues around regulation, with tobacco packaging and display at the forefront of the discussion. Counterfeit tobacco remains a growing challenge, although overt and covert security measures continue to develop to help manufacturers protect their brands and consumers from this illicit trade.
Managing these successfully will need the entire supply chain to be working in harmony and the most successful brands will think imaginatively about new ways to distinguish & protect their offer and tap into brand reputation and consumer loyalty."
Steve Frankham, Managing Director, Cerulean:
"We have seen our tobacco customer's requirements and expectations change quite dramatically over the last 5 years, and we have learnt that if we work hard to adapt our products and services to meet these very specific needs then Cerulean will be successful.
"We see the outlook for 2012 as being a further progression of this trend, possibly an acceleration of it. In the current economic climate capital expenditure will be relatively tight and as a result we will need to work hard to win orders.
"We will continue to develop new products and refine existing ones, customising them in order that they fit seamlessly with our customers processes and help them meet their increasing regulatory and operational requirements. By doing so we are anticipating another successful year in 2012."
Catharina Trierenberg, Head of Sales, Trierenberg Holding:
"2012 will definitely be one of the most crucial years for the whole industry, as regulation is becoming the centre of attention. It will be the year, where Australia, the first country following FCTC recommendations, introduces plain packaging and the EU decides upon the revision of the European Tobacco Directive.
"The effects of these regulations, including a potential increase of illicit trade, will only be seen much later. On the other hand the industry is getting more innovative every day and we are convinced to see a number of innovative products on the market. For us, the year has started very positive and we expect stability throughout the year."
Stuart Jenkinson, Business Manager for Tobacco, H.B. Fuller:
"2012 will bring many challenges for the tobacco industry. Increased restriction in advertising legislation has resulted in a rapid rise in differentiated packaging and cigarette design to improve brand recognition.
"This innovation in the cigarette pack and cigarette design will drive an ongoing need for new technological developments in efficient and high performance adhesives that can bond to more challenging substrates. However, greater co-operation between cigarette manufacturers, the adhesives industry and co-suppliers will keep pace with these trends.
"H. B. Fuller, working with key industry partners, has already developed products to allow for this level of differentiation in both the packaging area and cigarette design. With challenge comes opportunity, and these issues will continue to drive innovation in tobacco."
Guan Xingjiang, General Manager, Mudanjiang Hengfeng paper Co.:
"Looking back at 2011, for the tobacco industry, it was a year full of challenge. Nearly every government raised the tax on cigarettes and promulgated anti-smoking laws, more public areas were exempted from smoking. From a world perspective, cigarette consumption began to drop in CIS and Eastern Europe after rapid growth; America and Western Europe keep falling; as the largest cigarette-consumption market, Asia grows slowly.
"Looking to the future, tobacco harm reduction will be an important development direction; with the raise of cigarette taxes, illegal trade will be increasingly rampant; the government will seek a new balance between smokers' rights and anti-smoking laws. Overall, 2012 will not see big changes, the tobacco industry will develop steadily."
Patrick Riou, Sales & Marketing Director, Rhodia:
"The outlook for the tobacco industry in 2012 is obviously focusing on innovations. This confirms that this industry that was rather considered as conservative until a few years ago has engaged on the very different path recently where innovations are considered a key success factor. It also appears that this differentiation process and value creation process is not confining itself to traditional domains but is extending itself to all components that can help making cigarette companies successful on their markets.
"At Rhodia, we have decided to devote all our efforts to support those efforts from our customers. This is why we have recently announced an extension of our production capacities of Super Slim tow as well as the start up of a Coloured Tow unit. Rhodia Super Slim tow and Rhodia Coloured tow are already highly appreciated in the market for their quality. Both products will give consumers the freedom of design and trendy options.
"Also, Rhodia will be very soon launching the production of Rhodia DE-Tow, exhibiting five to ten times faster degradation, and the production of Rhodia FilterSorb, a novel additive to enhance filtration, both of which are dedicated to improve the image and the performance of our industry and customers in our markets."
Marc Subias Pujadas, Managing Director, PJM Pujadas S.A.:
"With 120 years in adhesives and 50 years in tobacco we have witnessed many cycles in the tobacco industry, good years and years under pressure, especially as tobacco is becoming more and more controversial, so this is the time when we - as suppliers also - need to stand up to our qualities more than ever.
"Innovation, quality, responsibility, environment, safety, integrity are the trade mark of the industry, and all the companies that want to be involved in this industry have to join these high standards by all means. We must all live up to the standards expected from us. The tobacco industry is demanding higher levels of corporate responsibility day by day, and maintaining a good reputation calls for constant attention and a continuous demanding attitude.
"We see 2012 as a year of growth specially in emerging tobacco markets. For Pujadas, 2012 will be a year of expansion into important markets such as Russia as well as setting partnerships with new global customers. 2012 will be an important year for the tobacco industry and we will play our part." Enditem
