Imperial Invests in Caffeine Products to Counter Smoking Slump -- 2nd Update

By Saabira Chaudhuri Features Dow Jones Newswires

Imperial Brands PLC on Wednesday reported lower half-year operating profit and said it is investing in a caffeine-based, low-calorie product designed to give users a boost of energy as part of an effort to diversify.

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The remarks come as Imperial--the least diversified of major tobacco companies--works to combat the impact of declining cigarette volumes. Imperial on Wednesday reported total tobacco volume fell 5.7% in the period to 126.3 billion sticks, a deterioration from the 3.1% decline in the same period a year earlier. Tobacco net revenue climbed 9.3% but dropped 5.5% at constant currency.

While rivals such as British American Tobacco PLC and Philip Morris International Inc. are aggressively investing in future proofing their portfolio with so-called next-generation products, Imperial only owns one e-cigarette brand, Blu, which it bought in 2015 as part of Reynolds American Inc.'s $25 billion acquisition of Lorillard Inc.

Philip Morris has spent $3 billion developing next-generation products, including a device, called IQOS, that delivers nicotine. It also owns vapor brands Nicocigs and Vivid. BAT, which makes Dunhill and Pall Mall, has spent $1 billion over the past five on this area, including its vapor brand Vype and its own heat-not-burn product Glo.

Overall, Imperial, which makes the JPS and Gauloises brands, said net profit rose to GBP675 million ($871 million) in the six months ended March 31 from GBP290 million a year earlier. Revenue rose to GBP14.3 billion from GBP12.81 billion.

Earnings were boosted by investment income, which rose to GBP730 million from GBP290 million a year earlier. Without this, operating profit fell to GBP902 million from GBP1 billion.

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Imperial, the third-largest cigarette company in the U.S., said its Winston and Kool brands had increased market share over the half while mass market cigars are performing well.

Imperial in 2015 launched a trial version of the energy-boosting product, called Reon, sold in Manchester and online that was designed as a strip intended to melt in one's mouth. Wednesday, Imperial said it continues to invest in this product, which could be delivered through a variety of formats, including powders and liquids, but isn't yet looking to commercialize it.

U.K.-based Imperial's results come as the regulatory environment for traditional cigarettes continues to toughen. The country will later this month implement plain packaging, under which cigarettes will be sold in uniform packs stripped of distinctive logos and colors, and adorned with graphic health warnings. Australia and France also have plain packaging laws in place and other countries, such as Ireland and Hungary, are on a path to similar legislation.

Imperial's Chief Executive Alison Cooper said the company is working to simplify its brand portfolio to better manage the impact of plain packaging but that it had increased sales and profit in Australia despite the industry no longer having the ability to brand cigarette packs there after a law passed in 2011.

Imperial is on track to meet consensus analyst estimates for the full year, said Ms. Cooper. Analysts currently expect adjusted earnings of GBP2.77 a share on tobacco net revenue of GBP7.9 billion.

Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com

(END) Dow Jones Newswires

May 03, 2017 06:44 ET (10:44 GMT)