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Indonesia: Cigarette makers blame costs for lower profits

| April 25, 2013

Cigarette manufacturers in Indonesia blamed higher production costs and currency fluctuations for the slow-down in their business throughout 2012.

Revenues at PT Gudang Garam increased by 17.1 percent to reach IDR49.03 trillion ($5 billion). However, their spending also increased, jumping 25.6 percent to IDR39.84 trillion. The higher spending and losses from currency fluctuations ultimately saw the company book IDR4.01 trillion in net profits in 2012, an 18 percent decline from the previous year, according to a story in the The
Jakarta Post.

Another cigarette maker, PT Bentoel Internasional Investama announced that its revenues fell slightly by 2.2 percent to IDR9.85 trillion. Along with Gudang Garam, it also posted higher costs of goods sold (COGS) last year, which were up 5.5 percent to IDR8.18 trillion.

Bentoel said that it suffered IDR323.35 billion in net losses, compared to IDR306 billion in net profits in 2011. In a statement submitted to the Indonesia Stock Exchange, it attributed the net losses to the significant increase in the clove price. At the same time, it added, sales dropped as a result of higher excise duties.

Meanwhile, PT HM Sampoerna reported a 26 percent rise in revenues to IDR66.63 trillion in 2012, as a result of higher sales. Last year, it managed to sell up to 107.7 billion cigarettes, a rise of 17.4 percent from 2011.

Sampoerna’s COGS were up by almost 28 percent to IDR48.12 trillion and its net profits surged 23.3 percent to IDR9.94 trillion in 2012. The increased COGS pushed the company’s net profits-to-revenue margin down to 14.9 percent from the previous 15.3 percent in 2011.

Separately, PT Wismilak Inti Makmur reported that its revenues climbed 20.9 percent to IDR1.12 trillion from 2011, thanks to higher sales, which grew 11 percent to 2 billion cigarettes. With higher sales, the company also reported a surge in its COGS, which increased 22.6 percent to IDR814.42 billion.

However, despite recording positive growth in revenue, Wismilak suffered from lower net profits in 2012, which slumped 40.3 percent to IDR77.2 billion.

This year the government plans to increase excise duty by 8.5 percent.

According to Trust Securities analyst Reza Priyambada, overall, the cigarette makers faced similar problems throughout 2012 with increasing raw material prices and higher excise. “It was like they were ‘attacked’ from the top and from the bottom,” he said.

Reynolds American profits jump 88 pct in Q1, volume down

| April 24, 2013

Consumers squeezed by higher gas prices and an increase to the payroll tax led Reynolds American Inc. to report a sharp drop in cigarette volumes in the first quarter.

“Overall, the external environment remained challenging,” President and CEO Daniel Delen said. “Industry cigarette volumes were negatively impacted by higher energy prices, the expiration of the payroll-tax holiday and fewer shipping days,” according to a story posted on 4-traders.com.

Profit, meanwhile, jumped 88 percent in the quarter due to lower costs and a $202 million credit tied to a landmark tobacco settlement. Adjusted profit was higher than Wall Street expected, aided by higher cigarette prices and strong demand for smokeless products, though the decline to net sales was worse than anticipated.

Reynolds American and rival tobacco companies face a difficult operating environment as cigarette volumes have been declining for years. A weak economy and high unemployment have continued to pressure consumers’ disposable income. But an estimated 6.2 percent drop to cigarette volumes in the first quarter was more bruising than historical trends, with declines generally averaging 3 percent to 4 percent in recent years. Domestic cigarette shipment volume at the R.J. Reynolds unit fell 8.7 percent in the first quarter, though when adjusting for the two fewer shipping days, the company estimates its cigarette volume dropped about 5.6 percent.

The company’s total cigarette retail market share dropped to 26.1 percent from 26.7 percent, the eighth consecutive year-over-year decline.

Camel and Pall Mall, the company’s core brands, performed better than the overall cigarette unit. Volumes slid 5.5 percent for Camel and 2 percent for Pall Mall, and both posted higher market share. Together, they represent more than two-thirds of the company’s total market share.

Supreme Court declines to hear cigarette label case

| April 22, 2013

The legality of placing graphic warnings on cigarette packages appears to have been settled when the U.S. Supreme Court declined today to hear an appeal on the labels from a group of tobacco manufacturers, according to a story in the Winston-Salem Journal.

However, it remains unclear what the warning labels will look like or when they will debut.

A federal appeals court in Cincinnati ruled in March 2012 to uphold parts of the 2009 Family Smoking Prevention and Tobacco Control Act, which restricts how tobacco products may be marketed. The FDA’s labels would cover the top half of cigarette packs.

The manufacturers, including R.J. Reynolds Tobacco Co. and Lorillard Inc., petitioned the U.S. Supreme Court in October to review that case. Reynolds did not have immediate comment today on the decision.

The nine labels – which include images of dead bodies, diseased lungs and gums, and cigarette smoke drifting around an infant — were chosen by the FDA in June 2011. The labels had been slated to debut last September.