26th Sep 2019 09:06
(Alliance News) - Imperial Brands PLC on Thursday cut its revenue guidance due to a challenging vaping and e-cigarette market in the US and changes to its Africa, Asia & Australasia forecast.
Shares in Imperial Brands were down 9.3% at 1,873.56 pence in London in early morning trade.
The tobacco firm now predicts net revenue growth for its financial year ending Monday next week will be 2%, slashing its previous 2.5% growth forecast, as several US local governments enact e-cigarette bans over serious health concerns and the US federal government threatens the same.
Imperial's Next Generation Products business, which includes e-cigarette and vaping devices, and has suffered in the US in the wake of a vape-related outbreak of severe pulmonary disease that has killed 11 people and caused at least 530 lung injuries.
"The USA NGP environment has deteriorated considerably over the last quarter with increased regulatory uncertainty, including individual US state actions. This has prompted a marked slowdown in the growth of the vapour category in recent weeks, with an increasing number of wholesalers and retailers not ordering or not allowing promotion of vaping products," said Imperial Brands.
New York and Michigan banned flavoured e-cigarettes this month and San Fancisco banned them in 2018. Going a step further on Wednesday, Massachsets temporarily banned the sale of all forms of e-cigarettes - the first state to enact an outright ban.
The US Food & Drug Administration also put a ban on market leader Juul Labs Inc's advertising itself as a less harmful alternative to smoking, forcing the firm to pull all of its US ads. Juul axed its former boss and has hired a new CEO, Kevin Crosthwaite, poached from Altria Group Inc. Altria holds a 35% stake in Juul.
Reflecting the increased pressure on tobacco firm, Philip Morris International Inc and Altria Group Inc ended merger talks on Wednesday, partly over the increasingly fraught US vape market.
Imperial Bands has "stepped up" its retail engagement programmes in the US over the second half of the year, and has generated improved customer off-take, but it was "less than expected" due to the "slowdown in the US vapour category combined with increased competitor discounting".
This has hurt Imperial Brands' overall revenue and profitability, although the overall NGP business it set to grow revenue by approximately 50% in financial 2019, even if this is below previous expectations.
Growth in Europe and Japan has been strong year-on-year but, due to "a successful build-out" earlier in its year, Imperial Brands' second half sales in Europe are forecast to hold steady from the first half.
In terms of its Tobacco business, Imperial Brands said it has produced "low single-digit revenue growth and higher tobacco operating profit", with Europe and the Americas proving the best performing regions while Africa, Asia & Australasia declined.
"We are delivering good performances in Europe and the Americas, which will more than offset tougher trading conditions in the AAA division. In particular, we increased investment behind share in Australia in a highly competitive environment, utilising a benefit from duty paid inventory around the September excise increase. However, the realisation of this benefit has been re-phased into the next financial year, resulting in a stronger AAA divisional performance expected in 2020,2 said the company.
Overall, Imperial Brands predicts it will benefit from around GBP30 million of other gains in its financial year, versus GBP80 million the year before. The firm expects an approximately 2% gain on foreign exchange translation at the current rate.
The firm is also undertaking a cost optimisation programme, expected to produce GBP300 million of annual savings by September 2020.
Imperial Brands is also "evaluating the effectiveness" of its Next Generation Products supply chain, and could incur contract termination costs not included in these revised expectations.
Underlying cash conversion is set to be in line with prior guidance. At constant currency, earnings per share is set to be broadly flat. Imperial Brands had previously guided for growth in adjusted EPS.
The company is currently divesting its premium cigar business, which it says is "progressing well and has generated strong interest from a number of potential buyers". Imperial Brands is hoping to realise proceeds of as much as GBP2 billion from its disposal programme by May 2020.
"Whilst this is disappointing for the current year, we believe that NGP provides a significant opportunity to deliver additive growth to complement our Tobacco business. We continue to refine our investment behind building a strong and profitable NGP business in a rapidly evolving market," said Imperial Brands.
By Anna Farley; [email protected]
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