KT&G set to become global No. 4 tobacco maker
Seen above are solar panels installed at KT&G's plant in Daejeon. Courtesy of KT&G
By Nam Hyun-woo
KT&G CEO Baek Bok-in
KT&G is cruising toward its goal of becoming the world's No. 4 tobacco maker by 2025, achieving excellent results in its earnings as well as environment, social and corporate governance (ESG) values.
According to the cigarette maker, it posted 1.46 trillion won ($1.31 billion) in consolidated sales for the third quarter of this year, up 10.7 percent from 1.32 trillion won last year. During the same period, operating profit grew 13.6 percent to 434.6 billion won, allowing the company to score double-digit growth in both sales and operating profit.
Of notice was the growth of overseas sales, which grew 28.2 percent year-on-year to 262.9 billion won. The company said it sold 12.7 billion cigarettes overseas from July to September, up 30.9 percent from a year earlier, and this is largely attributable to growth in the Middle East and the expansion of the sales networks of its U.S. and Russian subsidiaries.
KT&G's rally came three years after CEO Baek Bok-in announced the company's medium- and long-term strategies and set a goal of becoming the No. 4 player in the global cigarette market by 2025. KT&G was No. 5 in terms of sales volume according to a 2018 research by Euromonitor International.
According to company data, it exported products to approximately 50 countries in the third quarter of 2017, but this grew to 90 in the third quarter of this year. Revenue from exports grew by 28.2 billion won, outpacing the 22.2 billion won growth in domestic sales during the same period.
The company attributed its growth to increased investments for product improvements.
According to the company, its tobacco R&D expenditure in 2016 stood at 12.2 billion won, and the amount grew to 16.1 billion won in 2017, 17.9 billion won in 2018 and 23 billion won last year. Following the investments, the company applied for 431 patents last year, up from 238 in 2018 and 95 in 2017.
Tobacco heating products are also a driver of KT&G's growth. The company signed an agreement in January with its rival Philip Morris International so that the latter would distribute KT&G's tobacco heating products in overseas markets. Following the agreement, KT&G's lil tobacco heating devices and their exclusive cigarette products began exports to Russia in August, Ukraine in September and Japan in October.
The company said it will increase the number of export markets to 100 by the end of this year and double the number by 2025.
Along with improvements in its earnings, the company's commitment to ESG values is gaining favorable responses from overseas investors, who increasingly pay greater attention to investable companies' ESG compliance.
Last month, KT&G obtained a Grade A in an ESG evaluation by investment information provider Morgan Stanley Capital International (MSCI), a notch up from BBB it won last year. The company said it scored a higher grade than the global top three cigarette makers.
KT&G ranked first among all 11 tobacco companies for product safety and quality due to its responsible marketing and outstanding quality management. It also earned a high score for supply chain labor standards, in recognition of efforts such as strengthening its code of conduct to improve the labor practices of its partners.
As part of its commitment to the environment, the company established a 2 megawatt-hour solar power generation facility at its Sintanjin plant in Daejeon to cut its carbon emission. Also, it introduced new type of materials for cigarette packets and packaging to save 1,900 tons of pulp and 850 tons of aluminum annually.
For transparent governance, the company mandated outside directors to occupy the majority of seats on its board and audit board, as well as separating the board chairmanship and CEO positions.
The efforts came as a growing number of global investors put greater weight on ESG values in evaluating a company. In January, BlackRock CEO Larry Fink drew attention by saying that his firm would make investment decisions with environmental sustainability as a core goal.
“KT&G has been reporting plans on pursuing ESG values to the board, as part of its efforts to strengthen its commitment to those values,” a KT&G official said. “Based on a global top-level governance, we will do our utmost to maximize our corporate value and fulfill our social responsibility.”