BAT Anticipates Its Vapor Product Sales to Exceed $6.6B by 2022

LONDON — British American Tobacco plc (BAT) is gearing up for a major push into next generation tobacco products.

BAT's outlined its strategy for next generation (NGP) and reduced/risk products (RRP) during its investor meeting in London on Oct. 25. According to Bonnie Herzog, managing director of tobacco, beverage and convenience store research at Wells Fargo Securities LLC, BAT's CEO Nicandro Durante laid out an ambitious plan to substantially accelerate momentum behind its multi-category next-generation products strategy with the goal of:

• More than doubling NGP revenue to more than $1.3 billion in 2018 and more than $6.5 billion in 2022 — or 15 to 20 percent of total revenues, and
• Achieving breakeven profits on NGPs by end of 2018 followed by "substantial" profits by 2022.

 

"While we came away quite impressed by BAT’s robust innovation pipeline filled with multiple products across the vapor and heated tobacco spectrum, we have some concerns with execution risk given the shear breadth and complexities of its product offerings," Herzog said.

She explained that while the London-based tobacco company believes multi-category NGP approach is the right strategy given the multi-faceted consumer, management noted its strategy is not necessarily easier, but smarter than Philip Morris International's (PMI) strategy — who to-date is putting everything behind one category, iQOS Platform 1.

According to Herzog, PMI's long-term strategy is similar to BAT's since it also includes multiple categories under different iQOS platforms like heat-not-burn and vapor technology, a deep understanding of the consumer, digital capabilities, and customization and personalization offerings.

"However, we tend to believe PMI's strategy of being more focused near term is smart since it allows them to build scale more rapidly which is critical to ultimately driving greater profitability," she said. "Regardless, we think it's far too early in this multi-decade global race to determine who will win and in fact, continue to believe the runway is long enough for multiple winners, importantly one being the consumer."

In all, BAT forecasts the global next gen category will reach more than $39 billion by 2020 and that NGPs will represent 30 percent of the company's revenue by 2030.

In addition to addressing next generation tobacco products, BAT also updated investors on its recent acquisition of Reynolds American Inc. (RAI), based in Winston-Salem, N.C. BAT continues to expect to extract roughly $400 million in cost synergies by year three of the deal, "but this continues to look conservative to us since it likely underestimates the global opportunity the combined entity now has in RRPs as BAT noted that the revenue synergies could be significant," Herzog said.

According to Herzog, key potential positives ahead include:

• BAT's access to the highly attractive/lucrative U.S. market strengthens its ability to accelerate funding of NGP development;
• As the world's largest listed tobacco and NGP company, BAT should be able to exercise significant leverage across its now even stronger, faster growing portfolio of global brands; and
• Potential U.S. corporate tax reform in 2018 would further enhance the cash flows available to BAT in the U.S., supporting a robust dividend program and future RRP investments.

 

Speaking of the U.S. market, BAT said it plans to submit a Substantial Equivalence application to the Food and Drug Administration (FDA) for glo in 2018, but if this isn't successful, it plans to file a Modified Risk Tobacco Products application to the FDA in 2020.

According to a report from Reuters, BAT's forecast comes as a parliamentary committee in Britain launched an inquiry to examine the financial and health implications of the growing market for e-cigarettes, as well as the suitability of current regulations.