Aug 2012 Financial News

Witco profits SMOKING

Aug 02, 2012

West Indian Tobacco (Witco), the main producer of cigarettes in Caricom, more than doubled its net profits between 2007 and 2012 despite challenges in the regional economy, high commodity prices internationally and an increasingly aggressive anti-smoking lobby. Witco managing director Jean Pierre du Coudray says the company’s success is due to planning over the years. “We had to put things in place to protect the core of the business. What you are seeing today is the end result of a strategy we have had in place for many years. The number-one reason why we have been able to deliver these results is our portfolio. It has evolved a lot in the last ten years and every year, it has got stronger,” he said.
He spoke to the Business Guardian last week Wednesday at Hyatt Regency hotel, Port-of-Spain.

Witco delivered a profit after-tax of $168 million for the six months ending June 30, which was an increase of 22 per cent over the same period in 2011. The after-tax profit for the same period in 2007 was $78.8 million, which means that in the six-year period, Witco’s profitability improved by 113 per cent. The company also saw its revenue increase by 14 per cent from $370.5 million in 2011 to $422.5 million for the six-month period this year. The total profit before taxation for the six months was $228.7 million. According to the chairman’s review, this figure represents an increase of 20 per cent over the corresponding period in 2011.

Marketing

One of the strengths that has kept the company on top of its game is their marketing strategy. “Every year, we introduce new brands and formats of products that we make more innovative and relevant to our consumers. We have brands like Dunhill, which is the strongest premium brand. Du Maurier, as we know, is a very strong brand in T&T and it is a very nationalistic brand. It is a powerhouse of a brand. Then at the bottom is Broadway with its own heritage and loyalty. As it stands, our portfolio is the strongest it has ever been.” Du Coudray said one strategy the company uses is that it listens to feedback from its customers. “Going forward, we want to strengthen it and listen to our consumers, taking feedback from them and making the changes we need to make to meet up with their demands. It is a dynamic world, which is changing. People are travelling more, they are being exposed to more,” he said. He gave the example of changing their packages to keep consumers satisfied. “We were getting feedback from Broadway consumers that they did not like the pack. So we changed it and immediately we saw the response. We are always listening to our consumers and customers.” Du Coudray said times have changed and consumers no longer simply accept a product and business persons must now satisfy customers with quality products. “Our premium brand is Dunhill and that is the brand we tend to experiment with in terms of innovation and we get feedback from the trendsetters who travel. It was different from 30 years ago. Back then, you made a product and we said this is what we have made and take it or leave it. But now, it is different and consumers demand what they want. I think we have done a good job of doing that.”

Plant investment

Huge investments in their plant over the last few years have contributed to the success of their business. “We also made huge investments in the factory over the years. BAT (Witco’s parent company, British American Tobacco) had factories in Suriname, Guyana, Barbados, Jamaica and Trinidad. In the last ten to 12 years, they closed all those factories and they transferred all that manufacturing to Trinidad. We now manufacture for the Caribbean. We had to invest in machinery, very high tech and very efficient machinery to cater for distribution and capacity that we were asked to manufacture.

That allowed us much better economies of scale and we were able to produce our products at a better rate. The sum we spent is close to about $30 million during the period 2001 to 2006,” he said.At present, Witco has about 240 permanent employees and another 50 to 60 people on a temporary basis. Witco, which generated revenues of $763 million in 2011, exports 70 per cent of its production to Caricom on a contract manufacturing basis, while the balance is sold on the local market. While 30 per cent of its production is sold in T&T, domestic sales of Witco products accounted for $637 million of its total revenues of $763 million. Witco is a subsidiary of BAT, which is headquartered in London and is the second-largest publicly-traded tobacco company in the world. BAT owns 50.13 per cent of Witco, a publicly-listed company on the T&T Stock Exchange, with the remaining 49.87 per cent of the shares being widely held by individuals and institutions locally. BAT owns 50.4 per cent of the share capital of Carreras, the main cigarette in Jamaica. In the Jamaican press last week, Carreras announced that it would start selling two new brands of cigarettes in Jamaica and du Coudray confirmed that the Pall Mall and Turf brands, to be sold in Jamaica, will be manufactured in Trinidad. He said sales to Jamaica have been “stable” despite challenges in the country’s economy.

Anti-smoking lobby
Speaking about the impact of legislation that has sought to curb smoking, he said Witco anticipated it a long time ago and planned for it. “We knew the legislation was coming. It was only a matter of time that it came to T&T and we were actually lobbying for legislation because we wanted to make sure our product was legislated because it is a controversial product. So when the legislation came, it already formalised what we were doing. What it did was make it harder for our competitors who were not compliant with all the rules and regulations.” He said that Witco has been in T&T for 108 years and will not go very easily. “We are a legal business in T&T. There is no reason to think we will not be here for another 108 years. The only way we can continue this way in the market is not only to meet society’s expectations but to exceed them on how a tobacco company is supposed to operate in T&T,” he said.

Price increases
Witco’s major brands are:
• Du Maurier $20 a pack
• Broadway $18 a pack
• Dunhill $22 a pack
“In 2010 we increased once, in 2011 we increased and in 2012 we increased once more. In 2010, we took an increase that was driven by the excise increase. Despite this, our sales have not increased but have not decreased either. It has not affected our revenue stream in terms of the number of cigarettes we have sold in the market. It is driven by the economy. We may see a plus or minus one per cent, year on year, but over the last five years our volumes have been stable,” he said. He justified price increases by saying that tobacco has been increasing on the international market. “All our price increases are driven by raw material increases. Our biggest raw material is tobacco. It is a commodity crop just like coffee or cheese or milk. It is driven by demand and supply and availability and what we have seen, because of the climate over the last couple years, is that the tobacco crops we use have become a little more scarce and as a result, the prices have gone up. We import mostly from Brazil. But when it is hard to get from Brazil, we import from the USA or Turkey or from Africa. In 2011, there was a 14 per cent increase in tobacco prices, which is why we had to take a price increase,” he said.

Du Coudray also said for the ten years he has been at Witco, there has never been a decrease in the global market price of tobacco. “Given the global situation with demand and supply for top quality tobacco, it is unlikely we will see any reduction in the short to medium term.” Du Coudray said it is difficult to say how much of the final cost of each cigarette comes from tobacco. “Each brand uses different tobacco, different paper, different packaging and carton material but I would estimate 70 per cent of the cost comes from tobacco,” he said. “What results in the difference is the quality of tobacco used for each brand. For example, Dunhill is our premium brand and we use the best quality tobacco for it and less quality tobacco for the Broadway brand, which is cheaper,” he said. It seems that the top cigarette and tobacco companies globally are also making huge profits. In 2011, BAT’s revenue was $28 billion, while RJ Reynolds’ revenue in 2011 was $8.54 billion. Japan Tobacco Inc is a cigarette manufacturing company. It is part of the Nikkei 225 index. In 2009, the company was listed at number 312 on the Fortune 500 list. Japan Tobacco Inc’s revenue was US$47.4 billion in 2011.

Demographics
He described cigarette smokers as normal citizens of T&T. “There is no demographics really. It is whoever smokes. It is a wide spectrum of people and you have old and young, it is across the board. Over the last ten years, we have been working with our customers. In every single outlet, you see our youth presentation campaign about not selling to underage people.
“One of the reasons we have been able to sustain the growth is because of our strategy is to work with all stakeholders including NGOs and the Ministry of Health. “Any of those stakeholders who have an issue with the way things are done, we always want to meet and have a discussion with. If we want to survive for another 108 years, we have to be part of the solution. We are part of BAT which is present in 118 countries, so we have a lot of resource.” When asked if people are smoking more or less in 2012, he replied, “Our sales have remained steady. All the time people are quitting, all the time people are starting, so it sort of balances off.”

Future
Despite the fast-paced business and economic environment the company operates in, du Coudray is confident they will survive. “We are a fast-moving consumer-goods company. It is an evolution and we will always be making changes. We will always be making changes to our portfolio, changes to our factory and distribution, it is an ongoing ever-changing process. “We go out there with a hunger and desire to continue our performance. We do not know what is going to happen in the next ten years but we have to listen to our stakeholder, listen to our customers and consumers, listen to the Government and anyone else who has an impact on our industry. If we do not listen to stakeholders we will have a shock to the system and this impacts business negatively. “I have to be optimistic about the future.”


Source:
Raphael John-Lall
Trinidad Guardian
Thursday August 2, 2012

http://www.guardian.co.tt/business-guardian/2012-07-31/witco-profits-smoking