Strong won, drop in Middle East demand slash KT&G's profitability

By Kim Hyun-bin

The strengthening Korean currency and declining demand in the Middle East have drastically weakened the profitability of KT&G, the country's leading cigarette manufacturer despite a slight increase in overall sales.

Overseas sales dropped 14.4 percent year-on-year to 11.9 billion cigarettes ― or 12.3 percent to 251.1 billion won ― in the second quarter due to weaker demand in the region.

“The Middle East market overall saw an increase in taxes and strengthened tobacco regulations as well as the COVID-19 pandemic, which led to total demand dropping over 20 percent since 2018. It will be difficult to recover from this in the short term,” Cho Jae-young, chief of KT&G's global business division said in a conference call after the release of the company's second quarter regulatory filing, Thursday.

“However, our brand recognition in the region is very good, so we expect to expand our brand portfolios to achieve a turnaround. We are not sure how long the COVID situation will last, but we plan to release diverse new products to secure future growth,” Cho added.

In a regulatory filing, Thursday, KT&G said consolidated net income came to 246.4 billion won ($215.3 million) during the April-June period, down 15.9 percent year-on-year. Operating profit also fell 16.2 percent over the same period to 330.1 billion won despite sales increasing 2.1 percent to 1.34 trillion won.

“The decrease in net profit is mainly due to the strengthened won and the poor performance of the Korea Ginseng Corporation (KGC), a non-tobacco subsidiary,” a KT&G official said. “But the second half looks to be positive with steady sales of heat-not-burn devices and electric cigarettes.”

The company sold 10.34 billion cigarettes in the domestic market during the three-month period, down 170 million, but accounting for 64.1 percent of the market, up 0.7 percentage point from a year earlier. In the e-cigarette sector new releases and slim products such as Lil and a further expansion in the heating tobacco stick portfolio increased KT&G's share of that market to 39 percent.

KGC saw sales decrease 6.6 percent year-on-year to 259.3 billion won for the three months ending June, while its operating income plunged 67.5 percent to 6.5 billion.