Sat | Jul 21, 2018

Carreras keeps ahead of the pack - Innovation, lower costs key to profits and shareholder value

Published:Friday | January 12, 2018 | 12:00 AM
KenyonHemans/Photographer Marcus Steele, managing irector of Carreras Limited.
KenyonHemans/Photographer Marcus Steele, managing irector of Carreras Limited, show holds a package of cigarettes distributed by the company.
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Carreras keeps

ahead of the pack

Innovation, lower costs key to profits and shareholder value

For Marcus Steele, it's a simple equation: maximising revenues and minimising costs to increase shareholder value - earnings per share growth, a healthy return on equity and growing gains on total capital.

In this mix, consistently high profits don't hurt, either.

Steele is determined that under his leadership, the listed cigarette trader must continue to earn deserved accolades from shareholders and the equities market.

However, the Carreras managing director admits that keeping the cigarette marketing and distribution company profitable, and as the darling of shareholders, is a challenging feat that requires focus and constant innovation.

Innovation to keep Carreras ahead of the pack over the past year involved revamping its route-to-market strategy: investing over two years - 2015 to 2017 - some $200 million in a new fleet of vehicles, including 30 motorbikes, to be faster and more nimble in servicing small-volume retailers in the nooks and crannies across Jamaica.

The fleet move was meant to meet head-on the challenge from illicit traders in counterfeit cigarettes and sellers of products which apparently evade Customs.

These cheap goods, which Steele estimates to control some 30 per cent of the tobacco market and growing, have been pervasive in the small-volumes market segment and geographic locations where it is uneconomical to dispatch vans or larger transport types.

In an interview with the Financial Gleaner, Steele, who has been leading the big cigarette company for the past four years, identified dealing with this challenge as the company's number one priority.

The Carreras MD went to town on the illicit and "uncustomed" cigarettes issue, picking up where he had left off in several media encounters over the past month and even years.

And, the company appears to be steeling itself for another round of battle with the Government over, for it, the vexed issue of high levels of taxation, which it points to as being the fuel feeding the illicit trade.

Carreras, majority owned since 1999 by London-based British American Tobacco Plc, has a commercial response to the attempt to undersell its products. It has been fighting on this front for some seven years now with what it has dubbed its low-price brand - Pall Mall.

Last year, the company also introduced its ultra-low-priced raw tobacco product Fire Grabba on an experimental basis targeting young adults, who like to roll their own smoke. Other brands include its premium Dunhill, Rothmans, Newport and mid-end smokes Craven A - Carreras' number one selling cigarette - and Matterhorn, its next bestselling stick.

The cigarette trader continues to post healthy profits and consistently pays good dividends to the shareholders. It grossed $13.5 billion in revenues last year with net profits of $3.8 billion. Shareholder return on equity climbed to 179 per cent with earning per share at $7.84. The stock is now trading above $11.

Carreras has been shelling out big bucks for investment in packaging, experimenting with a range of blend and flavours catering to various market segments, building brand image, doing promotions and market research.

Steele pointed to this investment in promotion and various activities to build brand equity as being part of the Carreras "magic", although he concedes that the portfolio of products is quite simple.

"We find that the stronger the equity of the brand, the more resilient it is, but there is a point where price is an issue because at the end of the day, if a smoker only has $100, a smoker only has $100 and that's where the challenge is," he observed.

Steele is focused on delivering the growth that Carreras and its parent have set for themselves. "British American Tobacco and its subsidiary companies, including Carreras, focus on key strategic segments of the market that offer the best prospects for long-term growth, including our premium segments," the company's 2017 annual report declared.

The cigar business is not being viewed as a feasible, lucrative and desirable market segment, according to Steele.

"Cigars are a niche product. We don't run down every segment," he said.

An accountant with ACCA accreditation and a management graduate of Harvard University's executive management programme, Steele joined Carreras as a management accountant in 1998 and was promoted up the ranks after being targeted for leadership.

The former Carreras director of finance at one time headed up BAT's Caribbean and Latin America division, headquartered in Trinidad & Tobago.

He was politically correct in responding to whether in the event of the legalisation of marijuana, Carreras would enter that business.

"We are in the combustible business and because we are in the combustible business, any business opportunity that presents itself we will participate as long as it is legal. It would be another product in the combustible side of the business and that is as much as I can say because that side is not yet commercial legally, so it would be inappropriate to have a conversation around something that is not legal," he said.

As Steele forges ahead in what is intended to be another profitable year for the once-diversified Carreras, the company is keeping its eyes on a sizeable carrying amount of trade receivables, which was identified in its 2017 financials by independent auditors KPMG as a "key audit matter.

"The group has a significant concentration of credit risk with large credit customers with material balances both individually and in aggregate, which account for 82 per cent of trade receivable at the reporting date," the auditors said.

Carreras listed its $4.1-billion total group assets as including accounts receivable of more than $600 million, up from $448 million in 2016.

The return of cigarette manufacturing to Jamaica is nowhere on the horizon, by Steele's reckoning, but he acknowledged that such a move would be a big fillip to local economic activities.

According to the Carreras MD, however, the Jamaican market is not yet demanding the volumes to substantiate a return of manufacturing and the Trinidad-based factory, run by sister company West Indian Tobacco, still has spare capacity.

huntley.medley@gleanerjm.com