Image: Philip Morris International.
Last week, Philip Morris International (PM +5.36%) reported earnings results that showed just how hard the strong dollar has affected the tobacco giant's earnings and revenue. Yet even with its currency challenges, Philip Morris did a good job of finding ways to bolster its growth, and the company's management team still has a lot of confidence in its ability to get sales and profits moving back in the right direction once the volatility in currency markets starts to wane. Let's take a closer look at five of the key aspects of Philip Morris International's business that CFO Jacek Olczak highlighted in his conference call with analysts following the company's most recent quarterly report.
"Our results in the third quarter were underpinned by continued market share gains. ... Marlboro was a key driver of this market share growth." -- CFO Jacek Olczak
Some investors were troubled by the fact that Philip Morris suffered a decline of about 1.5% in cigarette sales worldwide. Yet even though falling volumes are never good news, the rate of the drop is slower than that of the overall industry, and that has helped boost Philip Morris' market share in key geographical areas. Among the top 30 markets that Philip Morris tracks, market share grew in 18, pushing the average up by half a percentage point to 37.8%. Marlboro plays a vital role in that growth, with nearly 10% market share all by itself, and Olczak said that in some markets, smokers are trading up to Marlboro from discount cigarettes, further bolstering profitability.
"Strong pricing remains the key driver of our financial performance." -- Olczak
Over the long run, Philip Morris International has had to increase prices in order to offset the steady declines in cigarette volume that the company has seen. During the third quarter, Philip Morris increased prices in areas including Indonesia, Russia, and Argentina, and the result so far has been year-to-date pricing-related gains of $1.6 billion. If the company can sustain that pace, then the full-year pricing figures will be above the long-term average, and Olczak acknowledged how important that was to Philip Morris' overall success.
"Clinical trials are a cornerstone of our robust evidence package to substantiate reduced exposure and reduced risk claims." -- Olczak
Reduced-risk products are a key component of Philip Morris International's strategic plan, and building up support for favorable claims of these products will be vital to drive consumer interest. Olczak noted that Philip Morris has conducted four types of studies, including pharmacokinetic studies, short-term reduced-exposure clinical studies, intermediate-term reduced-exposure ambulatory studies, and long-term exposure response studies. Three are complete, with only the long-term study ongoing. Olczak shared some of the results, noting that customer satisfaction initially fell among those who switched from traditional cigarettes to the iQOS heat-not-burn product but then rebounded quickly. Similarly positive results will be helpful in demonstrating the value of Philip Morris' long-term vision for reduced-risk products.
"We can observe lower illicit trade levels in the EU in a number of markets, not just one in particular, and that's important." -- Olczak
Cigarette smuggling has a huge cost to Philip Morris, especially in areas where high taxes make it especially lucrative for those who seek to avoid them. Yet Philip Morris put a lot of resources into working with governments and connecting with customs agents, law enforcement officials, and other essential parties to crack down on illicit cigarette trade, and Olczak said that those efforts are finally starting to bear fruit, especially in Europe. The problem hasn't gone away completely, with various markets in Asia still seeing substantial levels of smuggling activity. Yet to the extent that Philip Morris can root out illicit trade, it can easily grab more profit for itself.
"The [Trans-Pacific Partnership] has no impact on pending cases that we have. ... Going forward, we'll have to see how TPP is going to be finally adopted." -- Olczak
Trade legislation connecting markets around the Pacific Ocean has been in the headlines lately, and one concern that Philip Morris has had about the TPP is the potential impact it could have on litigation between the company and regulatory agencies in countries like Australia. Olczak said specifically that the Australia case would not be affected by the TPP, but the bigger concern was the idea that the tobacco industry wouldn't benefit from expected foreign-investment rules that would cover most other industry sectors. Even with the TPP moving forward, it'll take time for the full implications of the agreement to become clear, especially as the national ratification process introduces new dynamics into the mix.
Philip Morris has done its best to deal with the strong dollar, and key issues like these have a big bearing on its overall success. For now, the company is working well at overcoming obstacles and keeping focused on its biggest opportunities for growth in the future.
