(Bloomberg) -- Japan Tobacco Inc. forecast profit that missed analyst estimates as sales for the first nine months fell, hurt by a stronger yen that eroded its overseas earnings.
Operating income will probably be 580 billion yen ($5.5 billion) this year, the Tokyo-based company said in a statement Monday. That's lower than the 586 billion yen average of analysts estimates compiled by Bloomberg. Sales declined 4 percent in the first nine months due to the negative impact of foreign exchange rates.
Japan Tobacco has been pursuing an expansion in overseas markets and developing new products such as electronic cigarettes as the shrinking Japanese population and rising concern about the health risks of smoking sap demand. The company on Monday slashed its forecast for total domestic sales volume this year by 1 billion units as the shift to vapor smoking reduces demand for cigarettes.
E-Cigarettes Constraint
Japan Tobacco shares are down 11 percent so far this year compared to the 10 percent slump in the benchmark Topix index. The stock gained 0.1 percent at the close Monday, before earnings were announced.
“When the company falls short of analyst estimates, it's hard to react positively,” said Mitsushige Akino, an executive officer at Ichiyoshi Investment Management Co. in Tokyo.
Demand for the company's Ploom Tech offering, a battery-powered device that uses vapor from heated liquid to deliver the taste of granulated tobacco leaves in a capsule, had outstripped supply since its introduction in March. The company aims to be the market leader in the domestic vapor market in three to five years, said Hideki Miyazaki, the executive deputy president, at a briefing Monday.
The company said in September it plans to boost production capacity of the capsules used in the device by ten times next year. For now, competition from rival Philip Morris' iQOS e-cigarette offering is heating up. Mizuho Securities Co. forecasts Philip Morris's vapor product will “continue to capture cigarette replacement demand,” leaving Japan Tobacco with a 33 percent market share by fiscal 2020.
Smoking Decline
Still, vapor cigarettes may help Japan Tobacco realize operating profit margins of more than 60 percent, higher than for cigarettes, according to Mizuho.
The number of Japanese smokers are on the decline, with only a fifth of the adult population regularly lighting up, according to health ministry data. That's down from 26 percent in 2005.
Operating profit fell 4.8 percent to 149.6 billion yen in the third quarter while sales fell 8.7 percent to 541.7 billion yen, according to the company.
“Our international tobacco business continues to deliver strong results, led by market share gains, volume growth and robust pricing,” said Chief Executive Officer Mitsuomi Koizumi in the statement.
To contact the reporters on this story: Grace Huang in Tokyo at xhuang66@bloomberg.net, Yuko Takeo in Tokyo at ytakeo2@bloomberg.net. To contact the editors responsible for this story: K. Oanh Ha at oha3@bloomberg.net, Dave McCombs
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