Philip Morris International Inc: 5 Keys to Continued Success

International tobacco farm. Source: Philip Morris

Philip Morris International (PM +0.00%) has a global presence in the tobacco market, and that has given it opportunities that its better-known domestic counterparts do not enjoy. But as the rest of the world starts to impose more regulatory oversight over tobacco, Philip Morris has had to work harder to make the most of these opportunities. Recently, executives shared their thoughts about the company in multiple presentations, providing some insight into future strategy. Let's look at some of the things Philip Morris identifies as its most important prospects to promote growth.

"While Marlboro performed strongly in 2014, the performance of Parliament was nothing less than spectacular." -- CFO Jacek Olczak.

Source: Wikimedia Commons

Most people associate Philip Morris with its Marlboro brand, which makes up a huge part of overall sales. But other brands also make important contributions, and Parliament sales volume in particular jumped by 5.6% in 2014 to 47.2 billion units. Eastern Europe and Turkey played a big role in that success with margins exceeding those of Marlboro in these regions. That has spurred Philip Morris to expand Parliament in the Middle East, and it shows the company has other tools beyond the Marlboro brand.

"We have also been strengthening our position in the important below-premium segments with L&M, Chesterfield, and Bond Street." -- Olczak

High margins are an essential element of tobacco sales in the U.S., where high taxes prevent prices from falling below certain levels. Internationally, though, discount brands can get more traction, and Philip Morris has had dramatic success with its entrants in the discount market. L&M earned volume gains of more than 4 billion units in 2014, with Russia showing some of the strongest results. Chesterfield is the fastest-growing international brand in the Philip Morris lineup, gaining almost 23% last year on the back of its popularity in Italy, Poland, and Turkey. By ensuring it can serve customers of all income levels, Philip Morris can profit from discount tobacco sales while still catering to higher-end smokers.

"Conventional tobacco products will remain the key driver of our profit growth in the near to mid-term. However, our greatest growth opportunity lies in the area of reduced-risk products." -- Olczak

The cigarette industry has become a lot more upfront about the risks of conventional tobacco -- Olczak pointed to 100 "smoke constituents [that] have been identified as harmful or potentially harmful." The company hopes that alternatives, such as heating tobacco rather than burning it or distilling nicotine-containing liquid into vapor, will provide a favorable customer experience without the dangers of traditional smoking. With the rollout of iQOS and Marlboro HeatSticks products, Philip Morris is moving forward with efforts to address health concerns through reduced-risk products.

Source: Philip Morris

"We do not currently envisage initial repurchases in 2015, although we will revisit the potential for such repurchases as the year unfolds should the currency environment improve." -- Olczak

Philip Morris has been aggressive in returning capital to shareholders, paying $6 billion in dividends last year and buying back another $3.8 billion in stock. For 2015, exchange-rate challenges have forced Philip Morris to look more closely at its cash flow management, thus leading Olczak to rein in expectations on buybacks. That slowdown could result in slower earnings-per-share growth, but increasing financial flexibility could prove to be a smart long-term move.

"While we maintain an ongoing dialogue with regulators and hope that reason will ultimately prevail, we are prepared to pursue other alternatives, including litigation, to ensure the protection of our intellectual property." -- CEO Andre Calantzopoulos

Plain packaging regulation has grown popular around the world, with the U.K. becoming one of the latest to adopt similar proposals. Clearly, given the extent to which Philip Morris and its peers promote their products with brand-enhancing imagery and advertising, requiring companies to use plain packaging crushes the ability to drive customer loyalty. Tobacco companies have legal arguments in most jurisdictions that they can use to try to protect their investment in intellectual property, but results from elsewhere in the world have been mixed at best. As a result, it is difficult to predict the long-term impact of such measures for the company.

Philip Morris has a strong business, but as has often been the case for the tobacco industry, it has plenty of obstacles to overcome. Nevertheless, executives remain committed to solving the worst of their problems and finding smart solutions to drive sales and profits higher in the future.