By Shashwat Awasthi and Muvija M
(Reuters) - British American Tobacco (BAT), the world's No. 2 tobacco company, on Wednesday warned of steeper declines in cigarette sales globally mainly due to waning demand in its main U.S. market, sending its shares lower.
The warning highlighted the challenges dogging the tobacco industry as smokers, particularly in the United States, turn to less harmful alternatives such as e-cigarettes and vaping products.
The maker of Lucky Strike and Dunhill cigarettes said it expects global industry volumes to fall around 3.5% this year, compared with its earlier estimate of a 3% drop.
The stock, which had gained roughly one-fifth in value this year, lost almost 5 percent and sank to the bottom of Britain's blue-chip index, on course for its worst day in seven months.
"There is some profit taking, but the stock is still suffering from the wider changes in the industry," CMC Markets analyst David Madden said.
"The group will need to beef up its vape related sales in order to shake off the wider negative sentiment."
BAT said it would invest further in what it calls its "New Category" business and announced plans to consolidate the portfolio, which makes tobacco heating product glo and Vype e-cigarettes as well as snuff and nicotine pouches.
BAT said revenue growth in the "New Category" portfolio was approaching its annual guidance range, which analysts read as indicating some softness in that side of the business.
BAT expects volumes in the United States, which makes up for more than a third of its sales, to decline 4-5%, above the 3.5-4.5% range it estimated earlier.
Its guidance comes just a day after rival Imperial Brands, another tobacco firm looking to diversify with its blu e-cigarettes, reiterated its guidance of a 4.5%-5% decline in U.S. volumes for 2019.
Even Marlboro maker Philip Morris International Inc, the world's largest tobacco company, has flagged an industry-wide slowdown in cigarette volumes.
Credit Suisse analysts said BAT's forecast of a further decline in cigarette volume "is not a surprise given the year-to-date decline in the U.S. is over 5%, although (it) slightly questions management's 'feel' for the market."
Despite the challenges, BAT reaffirmed full-year targets.
BAT forecast sales of vaping and e-cigarette products to accelerate in the second half of the year.
However, its expectations that full-year revenue from the business would grow between 30% and 50% at constant currency was below Jefferies' estimate of 79% growth.
(Reporting by Shashwat Awasthi and Muvija M in Bengaluru, additional reporting by Helen Reid in London; Editing by Saumyadeb Chakrabarty and Edmund Blair)