Reynolds American RAI (copy)

British American Tobacco is the parent company of Reynolds American, which employs 2,500 to 3,000 people in Forsyth County.

British American Tobacco PLC is projecting a strong finish to fiscal 2019, bolstered again by Reynolds American Inc. revenue, in a second-half guidance update released Wednesday.

However, BAT cautioned Wednesday that the “recent slowdown in the U.S. vapor market” means revenue growth from its new-category sector will be in the lower range of its 30% to 50% projections.

New categories includes electronic cigarettes, heat-not-burn traditional cigarettes, snus and other oral tobacco products. Those sales helped offset continuing declines in traditional cigarette sales volume during the first half.

On Thursday, BAT said it has chosen two Reynolds products — e-cigarette Vuse and “modern oral” Velo — among the three next-generation tobacco offerings it will emphasize globally in 2020, along with BAT’s glo, a heat-not-burn traditional cigarette.

BAT is Reynolds’ parent company, which has between 2,500 and 3,000 employees in Forsyth County, primarily at its 2 million-square-foot manufacturing plant in Tobaccoville.

BAT projected full-year adjusted revenue growth in the upper half of its 3% to 5% range, and adjusted operating profit growth in the upper half of its 5% to 7% range.

It also projects high single-figure adjusted diluted earnings growth.

In August, BAT reported that its profit in the first half of the fiscal year was $5.3 billion, a 1.3% decline from the first half of fiscal 2018. First-half revenue was $14.7 billion, up 4.6%. Diluted earnings were $1.49 a share, also up 4.6%. When excluding one-time charges, BAT reported adjusted profit of $6.3 billion, up 8.1%, and adjusted earnings of $1.81, up 8.8%.

Unlike U.S. publicly traded companies that issue quarterly earnings reports, U.K. corporations, which BAT is, are required to produce first-half and full-year reports.

“We expect to deliver a strong performance in 2019, building on the good progress we made in the first half,” Jack Bowles, BAT’s chief executive, said in Wednesday’s guidance statement.

“Our focus on our global strategic brands is delivering share gains and strong price mix in combustibles, both globally and in the U.S.,” Bowles said in the statement. “Increased investment and new product launches are delivering good new category revenue growth in the second half despite the recent slowdown in the US vapor market.”

Vuse, Velo going global

Vuse, the No. 2-selling U.S. electronic cigarette made by R.J. Reynolds Vapor Co., had a 17.1% market share as of October, up from 14% in August.

The first global branding of Vuse will be on a McLaren F1 race car at the Abu Dhabi Grand Prix this weekend. BAT said it plans to debut Vuse in the United Arab Emirates early next year.

Velo is Reynolds’ latest spit-free tobacco product that contains no tobacco leaf or other tobacco-plant matter apart from the nicotine extracted from the tobacco plant.

Velo, which was introduced in the U.S. in July, has expanded to 75,000 retail outlets. It holds a 9.2% market share in what it called the “modern oral category.”

Reynolds already sells Camel Snus, the top-selling snus product in the U.S.

Vapour products will be branded VUSE; modern oral products will be branded VELO; and tobacco-heating products will continue to be branded glo

The other product is BAT’s glo heat-not-burn traditional cigarette.

“BAT will now focus its marketing resources and investment on developing three strong, trusted international brands that will compete on the global stage,” said Kingsley Wheaton, BAT’s chief marketing officer.

“We want to lead the industry across all our new-category products and believe the time is now right to simplify our brand portfolio,” Wheaton said.

Electronic-cigarette fluctuations

A high-profile example of the decline in electronic-cigarette sales volumes was disclosed Nov. 1 by Altria Group Inc.

In December 2018, Altria made a $12.8 billion investment in Juul Labs Inc., the maker of the top-selling U.S. e-cigarette, which gave a 35% ownership stake in Juul.

On Nov. 1, Altria reported taking a noncash, pretax impairment charge of $4.5 billion related to its Juul ownership stake. That puts the fair value of the investment at $8.3 billion, down 35%.

Altria said in its third-quarter regulatory filing that the charge was due “primarily to lower e-vapor volume assumptions in the U.S. and international markets, and a delay in achieving margin performance, as compared (with) the assumptions at the time of the Juul transaction.”

Meanwhile, anti-tobacco advocates in the U.S. are questioning the Trump administration’s tobacco-control policies, particularly as it appears to be backing away from President Donald Trump’s pledge in September to support banning most flavored-tobacco products.

Bowles said in his written statement that BAT “believes that the issues around vaping in the US should lead to a better and stronger regulatory environment in which we are well placed to succeed.”

Traditional-cigarette sales expected to fall

BAT updated its projections for traditional cigarette volumes, estimating a 5.5% decrease for fiscal 2019 and an additional 4% to 6% decrease in fiscal 2020.

BAT and Altria previously estimated the fiscal 2019 decline could be between 4% and 5%, while Imperial Brands PLC has said it could be between 4.5% and 5%.

Wells Fargo Securities analyst Bonnie Herzog has said cigarette volumes could be down as much as 6% this year.

Stephen Pope, managing principal for Spotlight Ideas in London, said BAT’s growth is sustainable “as it is concentrated in the new products and the geographical distribution is broadly based.”

“If there is a weakness, it is in the more granular analysis,” Pope said. “There appears to be an emphasis on one new product line in one geographical region ... not a homogeneous distribution off all new products across all sales territories.

“Still, I ought not to be churlish,” he said, “as this group is doing well in finding new cash streams to overcome the decline of traditional tobacco.”

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