Japan Tobacco cuts cigarette outlook as smokers shift to "heat-not-burn" alternatives

TOKYO, Aug 2 (Reuters) - Japan Tobacco Inc on Wednesday lowered its domestic cigarette sales forecast for this year as it sees more smokers defecting to “heat-not-burn” (HNB) tobacco products dominated by global rival Philip Morris International Inc.

The former state-monopoly said it is ramping up production of its Ploom Tech battery-powered smokeless tobacco product as it tries to catch with up Philip Morris’ IQOS and British American Tobacco PLC’s (BAT) recently released glo.

“It’s a pity we fell behind when IQOS and glo appeared,” said Executive Vice President Hideki Miyazaki at an earnings briefing.

Japan Tobacco, which commands 60 percent of the domestic cigarette market, is tackling the quick-growing popularity of IQOS and glo at a time when the number of smokers is shrinking in an era of increasing health awareness.

It said it now expects to sell 93 billion cigarettes in Japan this year, down 12.4 percent from last year and 3 billion fewer than projected at the beginning of the business year that started in January.

Miyazaki attributed two-thirds of the downward revision to the defection to Philip Morris’ and BAT’s HNB offerings, and one-third to a decline in cigarette demand.

Japan has become a fertile market for HNB because its pharmaceutical regulations prohibit the use liquid laced with nicotine - the basis of e-cigarettes, the consumption of which is popularly known as vaping. In Japan, e-cigarettes use flavoured liquid.

Japan accounted for about 96 percent of the $2.1 billion global sales of HNB products in 2016, showed data from Euromonitor International. The researcher forecasts global sales of such products to grow to $15.4 billion in 2021.

In Japan, HNB made up just 3 percent of the total tobacco market in terms of shipment volume last year, but Mizuho Securities forecasts the products to reach 47 percent in 2021.

Philip Morris started selling IQOS in Japan in 2014 and expanded nationwide in April last year. BAT gave its glo a limited release in the country in December, and plans to expand nationwide by the end of 2017.

Japan Tobacco started selling its Ploom Tech in central Tokyo last month after production delays, and aims to expand nationwide in the first half of next year.

Though Japan Tobacco expects a steeper decline in its domestic cigarette business than previously estimated, it raised its full-year operating profit forecast by 1 percent to 565 billion yen ($5.10 billion) as it sees favourable foreign exchange movement boosting profit from overseas business.

The forecast compared with the 576.8 billion yen average of 20 analyst estimates in a Thomson Reuters poll. ($1 = 110.6800 yen) (Reporting by Taiga Uranaka; Editing by Christopher Cushing)