February 11, 2011 - Philip Morris International (PMI)
The Company divides its markets into four geographic regions: The European Union (EU); The Eastern Europe, Middle East and Africa (EEMA); The Asia Region, and The Latin America and Canada Region.
Louis Camilleri, chairman and CEO, = LC
LC: 2011 - We expect our organic volume performance to mirror that recorded in 2010. Japan and Mexico will dampen our volume prospects in 2011, and given the economic uncertainty, we continue to project volume softness in Greece, Pakistan, Spain, and Ukraine. Also, we project a slightly weaker volume trend in both France and Italy reflecting retail price increases ahead of inflation. Elsewhere, we anticipate a solid volume performance led by Indonesia, Korea, and Russia as well as a projected recovery in Turkey.
QUESTION: with regards to sort of the new Marlboro architecture, is that now being fully rolled out to your satisfaction, or are we actually sort of seeing the annualization of some of the results in many of these markets now?Acquisitions and Agreements:
(Menthols - part of the new architecture: Marlboro Ice Mint, Marlboro Black Menthols, Marlboro Crisp Mint, Marlboro Ice Chill, Marlboro Ice Fresh - to help to get the new smoker started on a life of nicotine addiction.)
CAMILLERI: New Marlboro architecture: LC: I mean it clearly is being deployed in numerous markets, but we’re still not there. There is still a lot to be done and there is still quite some exciting innovations to come. I think as I mentioned in my remarks, you have to look at the consumer research we do in the demographic profile of the brand, and it has improved significantly. I mean we can see the trends. For example, we have seen significant turnarounds in the demographic profile of the brands in places as varied as Italy, Japan, France, Spain, Switzerland, Netherlands and the list goes on. So we’re seeing improvements in the brands equity and demographics, and we still have quite a lot to do with the brand.
Japan - study shows the promotion of menthol cigarettes to women had increased the rate of female smoking even as men smoked less..
And then lastly, could you update us on the status of plain packaging in Australia? And then also your view on the plain packaging discussions underway in the UK and European Union?
Yes. It appears that the Australian government remains intent on pursuing legislation calling for plain packaging. We’ll see what happens. My guess is we’ll know a lot more by this summer, but there certainly seems to be a strong intent to pursue it. It sort of defies logic, because I don’t think that it will affect consumption levels in any way.
Furthermore, the big concern is illicit trade, which since the tax increase last summer illicit trade has increased by 25% in Australia. So, I’m hopeful that the government is looking at that very closely, because plain packaging will certainly not address that issue and will not address smoking incidence or smoking prevalence.
The U.K., I said that, they would study it, but that they would have to have clear unequivocal evidence that it would in fact address smoking prevalence or incidence and that they would have to look at very carefully. Legal ramifications of such a measure with regard to constitutional issues as well as IP issues also related to trade issues in the trade agreements and the intellectual property protection that comes with those trade agreements, so, the UK is looking at it very sensibly.
In the EU, DG SANCO, the Health Commission as it were, has started a revision of the tobacco product directive, and is looking at host slew of measures. That’s probably a three-year to five-year process. But as I said, I think plain packaging doesn’t make any sense and we’ll fight plain packaging in every way possible.
EU - proposing a full-scale ban on branded cigarettes..
In February 2010, PMI announced that its affiliate, Philip Morris Philippines Manufacturing Inc. (PMPMI), and Fortune Tobacco Corporation (FTC), one of the five largest privately-owned cigarette companies in the world. (Philippines - PMFTC has 90% of the tobacco market..) (LC: The strategic highlight of the year was the highly promising transaction with Fortune Tobacco in the Philippines.)
In June 2010, PMI announced that its affiliate, Philip Morris Brasil Industria e Comercio Ltda. (PMB), was to begin directly sourcing tobacco leaf from tobacco farmers in Southern Brazil following separate agreements with two current leaf suppliers in Brazil, Alliance One Brasil Exportadora de Tabacos Ltda. (AOB), a subsidiary of Alliance One International, Inc., and Universal Leaf Tabacos Ltda. (ULT), a subsidiary of Universal Corporation. (PMI - to buy directly from Brazilian tobacco growers..)
Effective January 1, 2011, PMI established a new business structure with Vietnam National Tobacco Corporation (Vinataba) in Vietnam. Under the terms of the agreement, PMI will further develop its existing joint venture with Vinataba through the licensing of Marlboro and the establishment of a PMI-controlled
branch for the business building of PMI brands. The Vietnamese cigarette market is the fourteenth largest in the world, excluding the USA, with an estimated 2010 volume of 77 billion cigarettes. (Viet Nam - foreign tobacco firms feel the squeeze, lose business certificates..)
In January 2011, PMI announced that it would no longer pursue its intention to acquire Productora Tabacalera de Colombia, Protabaco Ltda. Whilst approval to proceed with the acquisition was granted by the Superintendent of Industry and Trade of Colombia in October 2010, the approval was subject to several significant conditions and constraints that ultimately proved to be too burdensome. (PMI ends pursuit to acquire Productora Tabacalera de Colombia, Protabaco Ltda (Protabaco S.A.)..)
SHIPMENT VOLUME & MARKET SHARE:
PMI’s cigarette shipment volume of 899.9 billion units was up by 4.1%. In the EU, cigarette shipment volume decreased by 5.2%, predominantly due to: lower total markets, notably in the Baltic States, Greece, Poland and Spain, due to tax-driven pricing and adverse economic conditions; and lower market share, mainly in the Czech Republic, Germany, Greece and Portugal. In EEMA, cigarette shipment volume declined by 3.2%, primarily due to: Romania, reflecting a lower total market and lower market share following excise tax increases in 2009 and January and July, 2010, as well as unfavorable trade inventory movements; Turkey, reflecting the unfavorable impact of a significant excise tax increase in January 2010; and Ukraine, reflecting the unfavorable impact of steep tax-driven price increases in January and July, 2010; partly offset by increases in Russia, mainly driven by higher market share and favorable distributor inventory movements, and North Africa, mainly in Algeria, reflecting higher market share. In Asia, PMI’s cigarette shipment volume increased by 24.8%, primarily driven by growth in Indonesia, reflecting a higher total market, Korea, driven by higher share, and the favorable impact of the business combination with Fortune Tobacco Corporation in the Philippines of 57.4 billion units. This was partially offset by Japan, due to the lower total market reflecting the impact of the October 1, 2010, tax increase and unfavorable trade inventory movements, partly offset by higher market share. In Latin America & Canada, cigarette shipment volume increased by 1.5%, driven mainly by Canada, reflecting a higher tax-paid market, and Mexico, driven by trade inventory movements ahead of the significant January 1, 2011, excise tax increase. On an organic basis, which excludes acquisitions, PMI’s cigarette shipment volume was down by 2.5%.
Total cigarette shipments of Marlboro of 297.4 billion units were down by 1.5%, due primarily to a decrease in the EU of 5.8%, mainly reflecting: lower share in Germany, lower share in Greece, driven by excise tax and VAT-driven price increases, and a lower total market in Spain; a decrease in EEMA of 1.5%, primarily due to Turkey, reflecting tax-driven price increases, Romania and Russia, partially offset by strong growth in North Africa; an increase in Asia of 3.0%, led by robust growth in Korea and the Philippines, offset by Japan following the significant tax increase of October 1, 2010; and growth in Latin America and Canada of 2.1%, driven by Colombia and Mexico.
Total cigarette shipments of L&M of 88.6 billion units were down by 2.4%, with shipment growth in the EU, primarily in Germany and Greece, more than offset by EEMA, primarily due to declines in Russia and Ukraine, partly offset by growth in Algeria. (LC: L&M remains a two-pronged story. It continues to grow and is highly successful in the European Union region, but also continues to shed volume and share in Eastern Europe, and particularly, in Russia.) Shipments of discount brand Bond Street of 44.1 billion units increased by 5.7%, driven by double-digit growth in Russia, partly offset by declines in Turkey and Ukraine.
Total shipment volume of other tobacco products (OTP), in cigarette equivalent units, grew by 35.1%, benefitting from the acquisition of Swedish Match South Africa (Proprietary) Limited. Excluding acquisitions, shipment volume of OTP was down by 4.3%, primarily due to lower volume in Poland, reflecting the impact of the excise tax alignment of pipe tobacco to roll-your-own in the first quarter of 2009, partly offset by the growth of fine cut in Belgium, Germany and Spain. (Swedish Match - stock rises - bid interest Philip Morris USA..)
Total shipment volume for cigarettes and OTP was up by 4.8%, or down by 2.5% excluding acquisitions.
PMI’s market share performance for the full-year was stable, or registered growth, in a number of key markets, including Algeria, Argentina, Belgium, Brazil, Egypt, Indonesia, Japan, Korea, Mexico, the Netherlands, Pakistan, Poland, Russia, Singapore, Switzerland and Thailand.
For the quarter, PMI's cigarette shipment volume of 224.9 billion units was up by 3.1 percent. In the EU, cigarette shipment volume decreased by 5.4 percent and EEMA cigarette shipment volume declined 6.0 percent. Asian volumes increased 24.1 percent and Latin American & Canadian cigarette shipment volume increased by 2.4 percent.
LC: A lot of the market has shifted to what I call big packs and maxi packs. So, big packs are 24, 25 cigarettes a pack versus the traditional 19s and there’s been a proliferation of now maxi packs, which are 28 cigarettes or 29 cigarettes a pack. Both big packs and maxi packs sell at a considerable discount to the conventional packaging of 19 cigarettes. Marlboro was at a competitive disadvantage because we were somewhat slow to react with the maxi pack in particular.
References: PMI Press Release: Reports 2010 Results; Philip Morris International CEO Discusses Q4 2010 Results - Earnings Call Transcript; Philip Morris International CEO Discusses Q4 2010 Results - Earnings Call Transcript - Questions and Answers.