Marlboro Maker Bets $100m More On Alternative Cigarettes

Source from:  Financial Times 07/19/2019

Philip Morris International, the company behind Marlboro, is to spend another $100m this year developing its alternative to traditional cigarettes as a global marketing drive intensifies to convert smokers to a new generation of products.

Martin King, chief financial officer, said on Thursday that extra funds would be deployed to accelerate innovation of the company’s IQOS product — a cigarette-like device that heats, rather than burns, tobacco.

The plans, which come ahead of an imminent launch of IQOS in the US, are the latest sign of big tobacco ramping up investment to safeguard the industry’s future.

Rival manufacturers are fighting over a share of the market for alternatives as health-conscious consumers reject traditional cigarettes at an accelerating rate. They include vaping company Juul, in which US tobacco group Altria struck a deal to take a 35 per cent stake last December for $13bn.

Quarterly results on Thursday from PMI, which makes Marlboro outside the US, underlined how the company is becoming increasingly reliant on IQOS.

Shares were up more than 7 per cent by late morning in New York, giving it a market capitalisation of $135bn, as better than anticipated volumes prompted executives to raise their full-year financial guidance.

The company shipped 184bn cigarettes to retailers globally in the second quarter, a decline of 3.6 per cent from a year ago. There were falls in all regions apart from south and south-east Asia.

In contrast to the falling demand for traditional cigarettes, PMI shipped 15bn heat sticks globally for its “heat-not-burn” devices, a year-on-year rise of 37 per cent.

The $100m additional investment in IQOS is an increase of one-third from PMI’s previous plans. “We’ve got to continue with our innovation pipeline,” Mr King said, adding that competition for reduced risk products was “intensifying”.

The company will use some of the funds to accelerate the rollout of IQOS in new markets, particularly in more cities in Russia and the EU where the product has only a limited presence.

Regulators are concerned that some of the new products — particularly flavoured e-cigarettes that appeal to teenagers — could get a new generation hooked on nicotine, although they also recognise they have the potential to reduce health risks substantially for existing smokers.

This year regulators gave PMI the go-ahead to sell its heated tobacco devices in the US. They will be marketed and distributed in the US by Altria, from which PMI was spun out more than a decade ago, and be rolled out initially in Atlanta, Georgia.

PMI said that as a result of the stronger than expected second quarter it now expected adjusted earnings per share to rise at least 9 per cent this year, an increase of 1 percentage point.

Quarterly revenues across the group were little changed from a year ago at $7.7bn, but rose 9 per cent on a like-for-like basis, a metric that assumes currencies were constant. Net earnings increased 5.5 per cent to $2.3bn, equivalent to $1.49 per share.  Enditem