Source: Debbie Tingzon via Flickr.
Investors in Philip Morris International (PM 0.68%) have seen good long-term gains since the company became an independent entity in early 2008. Yet with the stock recently hitting its lowest level in three years, Philip Morris is having to rethink its overall strategy to make sure that it can keep up its past pace and deliver the results that investors have come to expect from the global tobacco giant. CFO Jacek Olczak gave a presentation earlier this month before attendees at the Global Consumer Staples Conference, and what Olczak said shed some light on Philip Morris International's vision for the future. Take a look at seven of his comments below and see what they say about where Philip Morris is headed.
1. "Let me start with our favorable cigarette volume and [market] share performance, which has continued into the third quarter."
One of the big surprises so far in 2015 is that Philip Morris has seen cigarette volumes hold up well despite an industrywide decline globally. Even after adjusting for inventory movements, Philip Morris has seen volume year to date drop by just 1%, which is far less than the industry overall has seen. As a result, market share has climbed by three-tenths of a percentage point, hitting 28.6% when you exclude the U.S. and China.
2. "Marlboro was a key contributor to this share growth, recording an increase of 0.2 points to 9.5% as it continued to benefit from the rollout of Architecture 2.0."
The Marlboro brand plays a pivotal role for Philip Morris, and the company has been working on boosting the presence of the brand through its Marlboro 2.0 initiative. Olczak said that the move should take shape in 100 different markets by the end of the year, and at this point, Philip Morris is more than halfway done. By focusing on boosting interest and retaining pricing power, Philip Morris expects Marlboro to remain important in its overall success.
3. "Parliament in most places is retailing at a higher price than Marlboro, so margins are even more attractive."
Despite the importance of Marlboro, Philip Morris still relies on its other brands to offer a more complete portfolio of cigarettes to its global consumers. Olczak has noted that in some cases brand popularity eclipses that of Marlboro to such an extent that the company can charge a higher price for another brand, using Parliament as an example. By mixing premium, discount, and mid-range cigarettes, Philip Morris can deliver what smokers want in all of its markets.
4. "We believe that heat-not-burn products in particular will provide adult smokers with the best alternative to cigarettes based on taste, satisfaction, and ritual."
Reduced-risk products are gaining popularity throughout the tobacco industry, but Philip Morris isn't solely following the crowd into electronic cigarettes that don't offer a tobacco-based experience. It's also excited about its iQOS heat-not-burn product, and tests in certain markets in Japan, Italy, and most recently Switzerland have given promising early results. As iQOS and its Heat Sticks become better established, Philip Morris should be able to make its marketing for the products even more attractive, which could drive further growth.
5. "We'll need to make a decision that we'll go ahead with the issuance of stock in Indonesia."
Philip Morris has had to deal with some regulatory issues in Indonesia, where it holds more than a 98% stake in local unit Sampoerna. To stay listed on Indonesia's stock exchange, Sampoerna needs have at least 7.5% of its shares available for trading, with a deadline of January 2016. Philip Morris has looked at ways to comply with the requirement, including a rights offering to existing shareholders that would potentially raise about $1.9 billion. Olczak expects a decision shortly on the matter.
6. "What are we going to do with this cash? Look, Philip Morris was always very generous when it comes to rewarding the shareholders."
The obvious follow-up question to a potential Indonesian rights offering is how Philip Morris would spend nearly $2 billion in proceeds from it. Olczak wasn't ready to commit to a particular course of action, leaving open the possibility of investing the cash in other businesses and looking at other development opportunities. With a 5% dividend yield, shareholders in Philip Morris don't necessarily need a special dividend on top of its already lucrative payout.
7. "There's not really much evidence to support that the plain packaging achieves the health objective."
Philip Morris has had to deal with several governments seeking to impose plain-packaging restrictions, with Olczak pointing to places like Norway and New Zealand in addition to the U.K.'s recent legislation. Still, Olczak noted that in Australia, evidence is coming in on the efficacy of the practice, and he believes that it doesn't stand up to the health claims that advocates present. With several cases ongoing in forums like the World Trade Organization and the European Court of Justice, Philip Morris has a long way to go before any regulation becomes final.
Philip Morris stock has struggled lately, as investors seek to assess its future fundamental prospects. Nevertheless, the tobacco giant is working hard to set itself up as a force to be reckoned with in the global market for years to come.
