Japan Tobacco Operating Profit Slumps on Domestic Sales

Japan Tobacco Inc., the world’s third-largest publicly traded cigarette maker, said first- quarter operating profit plunged 24 percent as domestic sales dropped and the yen gained.

Operating profit fell to 84.3 billion yen ($887 million) for the three months ended June from 110.5 billion yen a year earlier, the Tokyo-based company said in a statement today. Sales slipped 15 percent to 1.46 trillion yen from 1.72 trillion yen.

The maker of Camel and Mild Seven cigarettes is losing sales in Japan as the smoking rate falls and tighter tobacco controls are introduced. The yen’s rise against the dollar and other currencies eroded gains from overseas cigarette sales helped by the 2007 takeover of U.K.-based Gallaher Group Plc.

“Japan Tobacco was among victims by the global recession,” said Mitsuo Shimizu, an analyst at Tokyo-based Cosmo Securities Co. “It needs to seek growth outside Japan, which makes it more vulnerable to currency swings.”

Japan Tobacco fell 0.6 percent to 270,200 yen in Tokyo trading today, before the earnings were announced. The decline extended its year-to-date loss to 8.4 percent, compared with a 15 percent gain for the benchmark Nikkei 225 Stock Average.

Overseas tobacco revenue fell 24 percent to 568.3 billion yen because a stronger yen reduced the value of Japan Tobacco’s overseas sales. The yen averaged 95.50 against the dollar in the first half of this year, compared with 105.02 yen per dollar a year earlier.

One-Time Gain

The ruble and other currencies weakened against the dollar in the period, which reduced Japan Tobacco’s overseas sales. The cigarette maker uses the dollar to compile revenue from countries including Russia and the U.K.

The company posted a one-time gain of 9.11 billion yen from selling its corporate housing last quarter. That boosted net income to 42.9 billion yen from 16.9 billion yen.

Japan Tobacco reiterated its forecast today. Net income may fall 19 percent to 100 billion yen for the year ending March. Sales may fall 12 percent to 6 trillion yen.

Domestic tobacco sales fell 7.5 percent to 779.7 billion yen, including tax, in the quarter. The percentage of Japanese men who smoke has fallen by half over the past 40 years to about 40 percent.

The number of cigarettes Japan Tobacco sold abroad fell 1.4 percent. The company temporarily stopped shipments to the Middle East and switched its license contract in the Philippines, eroding higher Winston sales in countries including Turkey and Russia.

Japan Tobacco will buy overseas leaf suppliers and set up JTI Leaf Services LLC with Hail & Cotton Inc. and J.E.B. International Co. to secure supplies.

The company agreed to take over Tribac Leaf Ltd. of the U.K. last month and also said earlier this month that it plans to acquire Kannenberg & Cia. Ltda., a Brazilian leaf supplier, and its Kannenberg, Barker, Hail & Cotton Tobacos unit in October. The expansion will cost about $230 million, Japan Tobacco said July 22.

Japan Tobacco, which is 50 percent government owned, is the biggest traded cigarette maker after Altria Group Inc. and British American Tobacco Plc.

© Copyright: Bloomberg

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