Image source: Philip Morris International.
The fourth-quarter results that Philip Morris International (PM 1.39%) reported in early February once again highlighted the battle that the global tobacco giant is fighting to sustain its profit growth. Even though the strong dollar continues to hit earnings and revenue, Philip Morris has nevertheless looked for ways to continue to grow. In their quarterly conference call, CEO Andre Calantzopoulos and his management team talked about some of the most important aspects of Philip Morris International's current condition. Let's look more closely at some of what Calantzopoulos said.
"Our full-year 2015 results confirm that our business fundamentals are strong and that the incremental investments that we made throughout the year and in the fourth quarter in particular should further reinforce our momentum in 2016."
Philip Morris didn't make every investor happy with its results, which included a 1% drop in cigarette shipment volumes and double-digit declines in net revenue and adjusted operating income. Nevertheless, Calantzopoulos highlighted the fact that those top- and bottom-line hits would have turned into solid growth without the strength of the U.S. dollar. Fundamentally, market share gains and moves to innovate on the marketing side of the business have resulted in better results. Once currency issues stop impeding the company's progress, Philip Morris looks poised for solid growth.
"Pricing was the key driver of our full-year 2015 financial performance."
Success in managing to raise prices has been Philip Morris International's go-to strategy for years, and 2015 once again showed the payoff from that business model. Pricing increases added $2.1 billion to revenue last year. Calantzopoulos sees that trend continuing, and although the pricing gains included a one-time rise in Korea that won't repeat in 2016, he still believes that strong pricing-led contributions from all four of its major regions should add another 6% to revenue this year.
"During the year, we expanded the geographic presence of iQOS in our 2014 city launch markets."
Philip Morris remains committed to reduced-risk products, and the company has extended its partnership with former parent Altria Group (MO 0.12%) to collaborate on various reduced-risk product initiatives, granting Altria the right to commercialize Philip Morris products in the U.S. market where Altria operates. Internationally, the iQOS heat-not-burn technology has been the keystone of Philip Morris' strategy, and in the first two test markets the company entered, expansion in Japan has reached 60% of the adult smoker population and moves in Italy have gone beyond Milan to Rome and other major cities. Philip Morris has also launched in major Swiss cities as well as Moscow, Lisbon, and Bucharest. Overall, Philip Morris expects iQOS availability for 20 different markets by the end of this year, highlighting the priority of the iQOS program.
"I must say that I'm positively surprised by elasticities rather than the opposite. They come more on our side than I thought."
Global economic worries have some investors concerned about Philip Morris' ability to keep sales from falling. Yet Calantzapoulos' comments show that he hasn't seen much damage to his business from poor economic conditions, and customers appear committed to sticking with Philip Morris regardless of any weakening in the economies in which the company operates. Given how Altria Group has benefited from lower gas prices in the U.S., it's surprising to see Philip Morris relatively unconcerned about any potential negative impact on disposable income globally.
"The impact of plain packaging on Australia down-trading is extremely difficult to estimate."
Philip Morris has had to deal with several countries seeking to impose plain-packaging restrictions that prevent the company from using its own images on cigarette packs. Some analysts figure that looking at what's happening in Australia could be a guide for what might occur elsewhere, but Calantzopoulos noted that even at the lower-end of the cigarette market in Australia, margins are relatively high compared to how the low-end cigarette prices behave in other markets. In general, though, the CEO doesn't expect many smokers to switch to cheaper cigarettes even if plain packaging shows up in other jurisdictions.
Philip Morris enters 2016 on a strong footing, and the company has high hopes to keep up its momentum throughout the year. If it keeps following the same successful business model, then Philip Morris has the ability to give shareholders solid returns this year and beyond.
