Gadgets designed to be cool and reduce nicotine risk may not be the saviors of the tobacco industry after all.
To counter falling cigarette use and rising taxes on tobacco, Philip Morris International Inc. spent more than $4.5-billion to develop four new products, including the iQos, a device that heats a tobacco plug without setting it on fire. It’s been most successful in Japan, but now the company says sales growth is slowing.
Philip Morris, which sells Marlboros outside the U.S., reported revenue excluding excise taxes of $6.9 billion, less than the $7.03-billion projected by analysts in a Bloomberg survey. Shares fell as much as 17.7 per cent to $83.50, the most since the company split from Altria Inc. in 2008. The stock had fallen 4 per cent this year through Wednesday’s close of trading.
As global smoking rates decline, tobacco companies are trying to keep up performance by boosting prices and introducing new products. Philip Morris has introduced iQos into 38 markets. Chief Executive Officer Andre Calantzopoulos has said he envisions a world where all 1 billion smokers have moved away from cigarettes to less harmful sources of nicotine.
Slower Growth
Optimism around new products was bolstered by iQos’ early success in Japan. While growth rates there were hampered by supply chain issues, demand would rise to meet higher supply once those problems were solved, Philip Morris previously said.
That didn’t happen. IQos sales growth slowed in the first quarter, proving it might not be so easy for smokers to quit cigarettes after all.
Cigarettes -- and not gadgets -- still contribute the majority of the company’s earnings and cash flow, Chief Financial Officer Martin King said on a call with analysts.
King said the deceleration of iQos sales was due to the fact that the company has tapped easily convertible youngsters. Now it has to convince the more conservative 50-plus cohort to trade in cigarettes for new tech.
“We’re now reaching different socio-economic strata with more conservative adult smokers who may have slightly slower patterns of adoption,” he said on the call.
The company knew a plateau was coming, but it came earlier in the year than it had hoped, he said.
Philip Morris has developed four “platforms” it says are less harmful than cigarettes. The first is iQos. Platform 2 was introduced in the Dominican Republic in December. That product, called TEEPS, is a second heat-not-burn offering that resembles a regular cigarette with a tip that prevents flame. The company said it plans to launch a consumer test for the third platform, a nicotine inhaler, this year, and it expects to release a next-generation version of Platform 4, an electronic-vapor offering.
Questions about iQos’ long-term potential also hit Philip Morris’ sister, Altria Group Inc. The two companies, which used to be one tobacco giant, have a research agreement to work together on reduced-risk products. If iQos is approved by the U.S. Food and Drug Administration, the product will be sold in the U.S. by Altria through a licensing agreement.
Philip Morris raised its earnings guidance for 2018 by 5 cents to between $5.25 and $5.40, primarily due to a lower tax rate. That new forecast takes into account lower-than-expected growth in Japanese device sales.
While investors are pessimistic, Wells Fargo & Co. analyst Bonnie Herzog said there’s still upside. She said she isn’t overly concerned about the falling stock price because the quarter’s results reflect “iQOS entering a more mature phase of growth” that “doesn’t detract from its strong growth prospects globally.”