Philip Morris International, during the early part of 2013 is rather uncertain regarding its stance on the electronic market, unlike other Big Tobacco players like Altria, Reynolds American and Lorillard that have all started to embark in the growing category. However, as 2013 came to an end, it also announced that this year of 2014 will be the beginning of its ecigarette undertaking.
Sales of traditional cigarettes are declining and every tobacco company will admit this. Each of them also knows that the ecigarette market is promising lots of opportunities. According to Philip Morris International, ecigarette sales have grown by 25% in its six major markets in the previous 2 years.
Thus, it has decided to finally make an entry, although quit late, in the category using its vaping technology that offers delivery of better taste on the late part of 2014.
Awakened Philip Morris International
The third quarter results of PMI might have caused it to awaken and bolt. Its volume of cigarette shipment fell at 5.7% to about 223.1 billion units because of the sluggish movement of the tobacco industry.
Although its revenue increased, this boost is only a minuscule 0.1% or $7.9 billion. Despite this, its adjusted earnings also managed to swell by 4.3% to $1.44/share against the previous year period.
It was quite opposed to ecigs earlier in 2013, but it seemed to have a change of mind about the smoking alternatives. It now looks at picking up space in launching reduced-risk products.
It has plans of developing a product with controlled heating operation to warm the tobacco in cigarettes instead of burning it. This said product is planned to be introduced in 2015, ahead of the original plan in 2016-2017.
This year of 2014 will be its investment year. Volumes are not seen by PMI to increase or recover until 2015. In fact, it sees volumes to decline by 2-3%.
PMI has purchased 20% interest on Grupo Carso, its Mexican tobacco business for $703 million last September. St the same time, it also signed the agreement of taking 49% stake from United Arab Emirates company, the Arab Investors-TA.
This Cross-Licensing Agreement happened between PMI and Altria. Altria was the last among the three tobacco giants in the US to have ventured on electronic cigarettes.
Under the agreement, Altria is said to provide exclusive license to PMI in internationally commercializing its electronic cigarette products.
PMI, alternatively, will provide Altria with exclusive right to also commercialize two reduced risk products in the USA.
Both companies have agreed on working with each other on a regulatory agreement involving the heated tobacco products together with the FDA and involving electronic vapor products with the international regulation authorities.
Altria, apparently, will not have any material gain from this deal until the FDA has allowed the commercialization of reduced risk products. Nevertheless, Altria is provided with the opportunity to additionally diversify its already affluent product portfolio that includes smokeless tobacco products as well as wine. Its earnings growth potential from the falling consumption of conventional cigarettes will be better insulated.
Alternatively, PMI will have a developed electronic cigarette that it can already sell in the international markets. Such will aid in offsetting the decline of its traditional cigarettes sales due to the increasing number of smokers transitioning to the healthier electronic alternatives.
Chief Executive Officer of PMI Andre Calantzopoulos remarked that this will also provide PMI with the platform in accelerating entry in the international market of electronic cigarettes all the while continuing its development of the product’s future versions.
This agreement is, therefore, a win for both companies involved. Both companies are provided by this deal with improved prospects on long term growths. Both can also benefits from the sharing of future improvements on the existing generation of electronic cigarette products.