July 23, 2010 - PMI, the world's largest non-state owned tobacco company, shipped 240.96 billion cigarettes in the quarter, up 8 percent from a year earlier. Part of the increase was fueled by customers stocking up in Japan ahead of a tax increase that takes effect October 1, 2010.
The one exception is in Western Europe, where Philip Morris saw a 6.2 percent drop in cigarette shipments due to a weak economy in Spain, a declining market in Germany and tax increases in Greece. Places like Spain have very high unemployment and that killed demand.
Still, Philip Morris is in many emerging markets where cigarette sales continue to grow and, unlike Altria and Reynolds, it is not exposed to the U.S. market, where smoking has declined steadily for years.
Cigarette volume in the quarter was 241 billion units, up by 8% on a reported basis and by 0.3% excluding the additional 17.2 billion units generated by our business combination with Fortune Tobacco Corporation in the Philippines.
Shipments in the quarter were also boosted by the buildup of stocks at our distributor in Japan. At the end of June, the inventories at our distributor in Japan were approximately 3.4 billion units higher than at the same time last year.
We expect these stock levels to be sufficient to meet the forecasted higher demand from retailers and consumers ahead of the October tax and price increases. The depletion of these stocks will result in a significant reduction in shipments to Japan in the second half of this year. Finally, we expect the revaluation of inventory sales by our distributor to benefit our income during the fourth quarter of 2010.
Volume performance in the quarter was achieved thanks to our superior and broad brand portfolio. The volume of our top ten international brands increased by 3.6% helped, of course, by Japan. Not surprisingly, in the current economic environment, our low-priced brands have performed particularly well. In addition, our key premium and mid-priced brands are also performing solidly. Parliament achieved a volume growth of 2.3% in the quarter, with Japan, Korea and Russia more than offsetting the impact of tax-driven consumer down trading in Turkey. Marlboro volume declined by just 0.5%, as higher volumes in North Africa, the Middle East, Japan, Korea and the Philippines largely offset a decline in the EU region, attributable to a continued challenging environment for premium brands.
Chesterfield's vibrancy is confirmed by a 6.2% volume growth in the quarter, despite continued down trading in Spain, one of its key markets. Finally, L&M achieved a favorable volume overall, thanks to growth in Nigeria, Egypt, Germany, Greece, the Netherlands, Slovakia and Thailand, which compensated for volume declines in Eastern Europe and Turkey.
Our competitiveness is confirmed by our continued favorable share trends in both OECD and non-OECD markets.
Highlight the strong performance in Russia. Our market share grew by a further 0.2 share point to 25.5% in the second quarter, thanks mainly to the growth of mid-priced Chesterfield and low-priced Bond Street, as well as the resilient performance from above-premium priced Parliament, the volume of which was up in the quarter. It should be noted that Bond Street is now mostly gaining shares from competitive brands in the same pricing. Overall, in the second quarter, our volume increased by 4.9%, indicating that the total market is stabilizing. Consumer down trading continues to moderate in Russia, as evidenced by the fact that this year's second quarter 3.3% decline in the sales to the trade of PMI premium brands was the lowest in the last 18 months.
During the second quarter, we were able to grow our premium volume in several emerging markets, such as Algeria and Indonesia. These economies are generally emerging faster from the economic downturn than those in Europe, where price sensitivity remains high. Increased employment levels remain key to a global resumption of consumer up trading. We are also concerned about the growth of illicit trade in markets that have recently implemented significant excise tax increases, such as Greece, Pakistan, Romania and Turkey. Higher prices in nearly all key markets enabled us to achieve a favorable pricing variance of $341 million in the second quarter. Furthermore, we have just implemented a two-for-three ruble price increase in Russia.
PMI learned from the media last Friday, July 16th that the Ministry of Finance in Japan has approved Japan Tobacco’s application to amend its retail prices this coming October. The new price list represents increases of between JPY 100 and JPY 140 per pack for Japan Tobacco’s key brands, well above the excise tax pass-on of JPY 82 per pack. PMI’s distributor has also submitted a request to the Ministry of Finance for an increase on PMI brands effective in October and awaits their response.
PMI was more than able to offset the recent large excise tax in Australia and the higher VAT rate in Spain through higher prices. We are pleased that the Italian government has introduced through a decree a reinforced minimum excise tax system.
In Greece, if we had fully passed on the tax increases, the price gap between Marlboro and the lowest-priced brands would have expanded from EUR 1.20 to EUR 2.45. This would have rendered the brand completely uncompetitive, and therefore, we were forced to partially absorb these tax increases.
Marlboro has nevertheless been under pressure after significantly increasing prices in a difficult economic environment has resulted in consumer down trading and a sharp market contraction.
PMI has been able to largely offset share losses on Marlboro through the relaunch of L&M, which grew to a market share of 6.1% in June. The unfavorable price volume mix variance in Greece was a considerable drag on the EU region's OCI in the quarter.
Briefly review our results on a regional basis, starting with the EU region. The net revenues and OCI (Operating Companies Income) were down slightly excluding currency. More than 3/4 of our 6.2% volume decline in the EU region is attributable to lower total markets, in particular in Spain, where the market continued to decline at a double-digit rate.
Our year-to-date June cigarette share in Germany of 35.6% is 1.8 share points below the previous year's level but is showing a sequential improvement, and L&M remain the fastest-growing brand on the market.
In the EU region, excluding Greece, our favorable pricing variance in the second quarter was 1.2x our unfavorable volume mix variance. During this period, the share of Marlboro grew notably in Italy, the Netherlands, Poland, Portugal and Slovakia, while L&M increased its share notably in Belgium, the Czech Republic, Germany, Greece, the Netherlands, Slovakia, Spain, Sweden and Switzerland.
The EEMA region is expected to be a source of renewed strength for PMI going forward. It had a tremendous second quarter, with volume up 1.6%, net revenues increasing by 8.2%, excluding currency and acquisitions, and OCI, 16.9% higher on the same basis.
As mentioned previously, our business is very strong in Russia, where our profitability in the second half of the year is expected to be enhanced by the recent price increase. We have strong business momentum in North Africa behind both Marlboro and L&M. In Egypt, there has been an important structural improvement in excise taxes, though tax and price levels are now significantly higher than originally expected, which will have an unfavorable near-term impact on market demand.
The one market of concern is Turkey, where very large excise tax-driven price increases have resulted in a significant market contraction and consumer down trading. However, our market share now appears to have stabilized around 41%, the level prevalent as recently as 2008. And Lark is the fastest-growing brand in Turkey.
In Asia, volume was 5.2% ahead of last year, excluding acquisition, and essentially stable after taking into account the inventory buildup in Japan. Net revenues were 11.5% higher, and OCI was up by 14.7%, excluding currency and acquisition. We achieved higher prices in unit margins across several markets, in particular, Australia, Indonesia and Pakistan. Our business momentum in Korea continued, with volume growing by 15.9% and market share up by a further three share points to 16.6%.
In Indonesia, our volume decreased slightly, as price increases have slowed the overall market growth, while volume was lower in Pakistan, where the duty-paid market has declined significantly due to tax-driven price increases and the growth of illicit trade.
Asia is the growth engine for Marlboro. The brand gained volume in many markets, including Indonesia, Japan, Korea and the Philippines, and was supported by our Marlboro Fresh initiative, such as Marlboro Black Menthol and Marlboro Ice Blast.
Volume in Latin America and Canada increased by 0.9%, driven primarily by an increase in the size of the legitimate market in Canada, following more rigorous provincial legislation and most importantly, the improved enforcement. We achieved a slow market share performance with continued gains in Argentina and Mexico. Net revenues increased by 6.1% excluding currency, while adjusted OCI excluding currency was 0.5% higher, as we increased volume and higher prices were partly offset by higher leaf and manufacturing costs.
Our improved volume performance is based on our unmatched brand portfolio, though please keep in mind that our quarterly shipments in the second half are expected to be unfavorably impacted by this quarter's inventory buildup at our distributor in Japan.
in Japan, Marlboro is doing well. It is up 0.2% a share to 10.8%. It has about double the young-adults smokers share than its actual market share. But it's not the only place where we see nice improvements in share increases of Marlboro. Give you a couple of examples: Korea would be up 1.2% share points to 6.8%; Poland would be up 0.7% to 10.2%; the Netherlands is up 0.8% to 34.7%; Italy is up 0.3% to 23%; Argentina, to go into Latin America as well, is up at 0.3% to 23.4%. So there is really good trends in many different places around the world. And we, of course, still also have a couple of places in the world where we have to continue on our work and with the good work that has been done there. The ones where Marlboro is really down is first of all those markets which were really hit by the economy, like Turkey, Greece and Spain. Turkey is down 2.5 share points to 8.1; Greece down 3.7 to 19.3; and Spain is down 0.6 to 14.8. So that is really the economy that drives the down trading in those markets. And then there is Germany, where we now are down to a share of 21.6, which is, however, sequentially stable over the last couple of months. That is not the economy. That is simply an overall price-sensitive market overall, where it’s really a bit more difficult to act. On the other hand, if you are being very successful in that market with L&M, which is our answer to the market situation there.
For the Philippines itself, maybe let me add a word there. It’s going really well. The market is growing, expected to grow 8% to 10% for the full year. Marlboro is going strong in the market, benefiting from improved distribution, so -- it has a share of market of 21% there. The integration is going really well. Cost-saving potential that we saw before the acquisition, more and more is confirmed. We see that, for example, in terms of tobacco usage. So it's going well. It's going nicely.
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