KT&G CEO Baek Bok-in (left) and PMI CEO Jacek Olczak shake hands after a signing ceremony held in Seoul, Monday. (KT&G)
In a bid to expedite its foray into the global market and ramp up its sales, South Korean tobacco company KT&G on Monday clinched its first-ever long-term contract with Philip Morris International to supply the global tobacco giant with its products.
Under the 15-year sales and purchase agreement, KT&G said it will be supplying PMI with its heat-not-burn cigarette brand "lil" products, along with future e-cigarette products that will be developed in the future. Meanwhile, under the contract, PMI will use its distribution system across the world to sell KT&G's products.
"We estimate that we will be experiencing an average annual sales growth rate of 20.6 percent for our next generation products (lil products) over the next 15 years (with this contract)," said Lim Wang-seob, chief of KT&G's NGP business division, during a press conference.
"We also estimate that we will be seeing 24 percent growth in average annual sales growth rate for our cigarette sticks," he added.
In order to guarantee the success of the partnership, KT&G said PMI has agreed to purchase at least 16 billion units of KT&G's lil products from periods 2023 to 2025.
Starting 2026, KT&G said it will be reviewing the two companies' joint performance to flexibly respond to the changing market's needs every three years.
"KT&G is expected to strengthen its financial efficiency and minimize wasting resources by utilizing PMI's marketing abilities and distribution infrastructure," said Lim.
The recent SPA agreement follows KT&G and PMI's first SPA agreement inked in January 2020 to release KT&G's lil products in three countries including Japan, Russia and Ukraine.
The partnership between the two companies has expanded since to have KT&G's e-cig brand "lil" to foray into total of 31 countries in Central America, Europe and Central Asia.
"Over the past three years, the two companies have achieved remarkable results that no other industry has shown through sincere cooperation," said KT&G CEO Baek Bok-in.
"In many countries, both market share and profitability have continued to grow significantly. We are confident that the two companies will be able to go far and lead the rapidly changing global tobacco market," he said.
"The two companies' heat-not-burn tobacco products will complement each other and produce an innovative product portfolio," said PMI CEO Jacek Olczak.
"This contract clearly demonstrates the two companies' efforts to provide better alternatives for about 1 billion smokers around the world," he added.
Meanwhile, KT&G has yet to disclose their specific sales overseas under the contract that has been continuing since 2020, under agreement with PMI.
"It is difficult to tell you our specific sales (overseas) under the existing contract. However, compared to the two years in 2021 and last year, sales of our overseas e-cigarette units doubled and operating profit has increased by 4.6 times," said Lim, regarding the question about its sales overseas.
"We predict that with this contract, we will be able to enter all overseas markets that sell Philip Morris' IQOS, and thus significantly increase our market share abroad," he added.
"We plan to add information on its overseas sales related to e-cigarette in this year's quarterly earnings announcement," an official from KT&G told The Korea Herald.
By Lee Yoon-seo (email@example.com)