菲利普莫里斯國際 (PM) 2010 Q2 法說會逐字稿

Good day welcome to the Phillip Morris International, Second Quarter 2010 earnings conference call.

(Operator Instructions) I will now turn the call over to Mr.

Nick Rolli, Vice President of Investor Relations and Financial Communications.

Please go ahead, sir.

Welcome.

Thank you for joining us.

Earlier today we issued a news release containing detailed information on the 2010 second quarter results.

You may access the release on our website at www.pmi.com.

During our call today we will be talking about results in the second quarter of 2010.

Comparing it with the same period 2009 unless otherwise stated.

References to volumes or for PMI shipments, industry volumes and market shares are the latest data available from a number of internal and external sources.

Net revenue data excludes excise taxes.

Acquisitions for the purpose of this presentation also include our business combination with Fortune Tobacco Corporation in the Philippines.

You'll find data tables showing how we made adjustments to net revenues and operating Company's income or OCI, for currency, acquisitions, asset impairment and exit cost, free cash flow calculations and adjustments to earnings per share or EPS as well as reconciliations to US GAAP measures at the end of today's webcast slides which are posted on our web site.

Today's remarks contain forward-looking statements and projections of future results and I direct your attention to the forward looking and cautionary statement's disclosure in today's presentation and news release for review of the various factors that could cause actual results to differ materially from projections.

It's now my pleasure to introduce Hermann Waldemer, Chief Financial Officer.

Hermann?

Thank you Nick, and welcome ladies and gentlemen.

I am pleased to report that we had a strong quarter as a result in line with the business expectation that we shared with you during our investor day last month.

At that time we announced reported diluted EPS guidance for 2010 of $3.70 to $3.80 based on the then prevailing exchange rate.

Since then concerning surrounding the future of the euro [zone] have calmed somewhat and the euro has therefore strengthened against the US dollar.

Based on the currently prevailing exchange rates, we expect to achieve reported diluted EPS for 2010 of $3.75 to $3.85.

This guidance represents a strong growth rate of 16 to 19%, compared to $3.24 in 2009 and approximately 14 to 17% excluding currency.

Let me now turn to a brief review of our quarterly results.

(inaudible) volume in the quarter was 241 billion units, up by 8% on a reported basis and by 0.3% excluding the additional 17.2 billion units generated by our business combination Fortune Tobacco Corporation in the Philippines.

Our shipments in the quarter were also boosted by the buildup of stocks at our distributor in Japan.

At the end of June, the inventories at our distributor in Japan were approximately 3.4 billion units higher than at the same time last year.

We expect these stock levels to be sufficient to meet the forecasted higher demand from retailers and consumers ahead of the October tax and price increases.

The depletion of these stocks will result in a significant reduction in shipments to Japan in the second half of this year.

Finally we expect revaluation of inventories held by our distributor to benefit our income during the fourth quarter of 2010.

Volume performance in the quarter was achieved thanks to our superior import brand portfolio.

The volume of our top ten international brands increased by 3.6%, held of course by Japan.

Not surprisingly, in the current economic environment our low price brands have performed particularly well.

In addition our key premium and mid priced brands are also performing solidly.

Parliament achieved the volume growth of 2.3% in the quarter with Japan, Korea and Russia more than offsetting the impact of (inaudible) consumer down trading in Turkey.

Marlboro volume declined by just 0.5%, as higher volume in North Africa and Middle East, Japan, Korea and the Philippines largely offset the decline in the (inaudible) region attributable to continued challenging environment for premium brands.

Chesterfield's vibrancy is confirmed by a 6.2% volume growth in the quarter.

Despite continued down trading in Spain, one of its key markets.

Finally L&M achieved safer volume overall thanks to growth in Algeria, Egypt, Germany, Greece, the Netherlands, Slovakia and Thailand which compensated for volume declines in Eastern Europe and Turkey.

Our competitiveness is confirmed by our continued (tradable) share trends in both OETD and non OETD markets.

I would like in particular, to highlight our strong performance in Russia.

Our market share grew by a further 0.2 share point to 25.5%, in the second quarter.

Thanks mainly to the growth of mid price Chesterfield and low priced Bond Street, as well as resilient performance from above premium price Parliament, the volume of which was up in the quarter.

It should be noted that Bond Street is now mostly gaining share from competitive trends in the same pricing.

Overall in the second quarter, our volume increased by 4.9%, indicating that the total market is stabilizing.

Consumer down trading continues to moderate in Russia as evidenced by the fact that this year's second quarter 3.3% decline in the sales to the trade of PMI premium brands was the lowest in the last 18 months.

During the second quarter, we were able to grow our premium volume in several emerging markets such as Algeria and Indonesia.

These economies are generally emerging faster from the economy downturn than those in Europe.

Their price sensitivity remains high.

Increased employment levels remained key to globalization of consumer up trading.

We are also concerned about the growth of elicit trading in markets that have recently implemented significant excise tax increases such as Greece, Pakistan, Romania and Turkey.

Higher prices in nearly all key markets enabled us to achieve a favorable pricing variance of $341 million in the second quarter Furthermore, we have just implemented a two to three ruble price increase in Russia.

We learn from the media last Friday that the minister of finance in Japan has approved Japan's tobacco application to amend its retail prices this coming October.

The new price list represents increases of between 100, 140 income tax for Japan's tobacco [key brand], well above the excise tax past of 82 yen per pack.

PMI's distributer has also submitted a request to the minister of finance for an increase on PMI brands effective in October, and await their response.

We were able to more than offset both the recent large excise tax increase in Australia, and the higher (inaudible) rate in Spain through higher prices.

We are pleased that the Italian government have introduced through a decree a re-enforced minimum excise tax system.

In Greece, if we had fully passed on the tax increases, the price gap between Marlboro and the lowest price brands would have expanded from EUR 1.20 to EUR 2.45 This would have rendered the brand completely uncompetitive and therefore we were forced to partially absorb these tax increases.

Marlboro has, nevertheless, been under pressure at the significant increase in prices in the difficult economic environment has resulted in consumer down trading and a sharp market contraction.

We have, however, been able to largely offset share losses on Marlboro through relaunch of L&M which grew to a market share of 6.1% in June.

The unfavorable price volume mix variance in Greece was a considerable drag on the regions OCI in the quarter.

PMI's net revenues reached $7.1 billion in the quarter, an increase of 15.1% compared to last year, and a very robust increase of 5.3% excluding currency and exhibitions.

Our active cost management and productivity sailing programs are being used to offset the previously communicated increases [leaf and] (Inaudible) material costs.

During the second quarter, we were able to grow adjusted OCI by 7.4% excluding currency and [requisitions].

Let me now briefly review our results on the regional basis starting with the [EU] region.

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The net revenues and OCI were down slightly excluding currency.

More than three quarters of our 6.2% volume decline in the EU region is attributable to lower total markets.

In particular in Spain where the market continued to decline at the double digit rate.

Our year to date June cigarette share in Germany of 5.6% is 1.8 share points below the previous year's level but is showing a sequential improvement and L&M remains the fastest growing brand on the market.

In the EU region excluding Greece, our favorable pricing variance in the second quarter was one of the hard times our unfavorable volume experience.

During this period, the share of Marlboro grew notably in Italy, the Netherlands, Poland, Portugal and Slovakia.

And, L&M increased in share notably in Belgium, Czech Republic, Germany, Greece, the Netherlands, Slovakia and Spain (inaudible) and Switzerland.

The EMR region is expected to be a source of renewed strength for PMI going forward.

It had a tremendous second quarter with volume up 1.6%, net revenues increasing by 8.2% excluding currency and acquisition, and OCI 16.9% higher on the same basis.

As mentioned previously our business is very strong in Russia.

The profitability in the second half of the year is expected to be enhanced by the recent price increase.

We have strong business momentum in North Africa behind both Marlboro and L&M.

Egypt there has been important structure improvement in excise taxes.

Those tax and price levels are now significantly higher than originally expected which will have an unfavorable near term impact on market demand.

The one market of concern is Turkey.

Their very large excise tax and price increases have resulted in the significant market contention in consumer down trading.

However, our market share now appears to have stabilized around 41%.

The level relevant as recently as 2008 and Lark is the fastest growing brand in Turkey.

In Asia, volume was 5.2% ahead of last year excluding acquisitions and essentially stable after taking into account the inventory buildup in Japan.

Net revenues were 11.5% higher and OCI was up by 14.7%, excluding currency and exhibition.

We achieved higher prices in unit margins across several markets, in particular Australia, Indonesia and Pakistan.

Our business momentum in Korea continues with volume growing by 15.9%, and market share up by a third of three share points to 16.6%.

In Indonesia our volume decreased slightly as price increases have slowed the overall market growth.

While volume was lower in Pakistan where the duty paid market has declined significantly due to tax driven price increases and the growth of elicit trade.

Asia is the growth engine for Marlboro.

The brand gained volume in many markets including Indonesia, Japan, Korea, and the Philippines and was supported by our Marlboro fresh initiatives,such as Marlboro menthol and Marlboro ICEblast.

Volume in Latin America and Canada increased by 0.9%, driven primarily by an increase in the size of the legitimate market in Canada following more rigorous provincial legislation and most importantly improved enforcement.

We achieved strong market share performance with continued gains in Argentina and Mexico.

Net revenues increased by 6.1% excluding currency, while adjusted OCI, excluding currency, was 0.5% higher as the increase volume in higher prices partly offset by higher lease and manufacturing costs.

Adjusted diluted EPS reached $1 in the second quarter.

Significant increase of 20.5%, over 2009, and up by a very robust 16.9%, excluding currency.

As previously announced in June, reported diluted EPS of $1.07 was boosted in the quarter by a favorable one time tax item of $0.07 for the reversal of provision largely due to the completion of US tax audits.

Our strong business results have fueled a further increase in our operating cash flow, which was 10.1% higher at $3.5 billion.

Excluding currency, operating cash flow was up by 6.3%.

Free cash flow increased at the slightly faster rate of 11.1%, and by 7.4% excluding currency.

Our financial strength has enabled us to continue to reward our shareholders.

In April we completed our $13 billion share repurchase program on time.

And in May we started a new $12 billion, three year program.

In the quarter we spent $1 billion to purchase an additional 21.7 million shares.

Our dividend of $2.32 per share on annualized basis represented a yield of 4.6%, on July 20th.

Let me summarize.

We again achieved strong financial results this quarter.

Thanks to improved volume performance, intact pricing power driven by superior brands and broad portfolio and activity saving that has enabled us to absorb the foreseen increase in these costs.

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These results were achieved despite some additional challenges with regards to excise taxes and EMT.

Our improved foreign performance is based on our unmatched brand portfolio.

So, please keep in mind that our quarterly shipments in the second half are expected to be unfavorably impacted by this quarter's inventory buildup in our distributer in Japan.

The new architecture and consumer element for accumulation are strengthening the Marlboro franchise.

During the second quarter, Marlboro's market share was sequentially up or stable in 21 of our top 30 OCI markets.

Since we established our 2010 EPS guidance in June, the euro has strengthened against the US dollar.

Consequently currently prevailing exchange rates our positive business momentum should enable us to achieve a reported diluted EPS in 2010 of $3.75 to $3.85.

Compared to 2009 this represents a strong growth rate of 16 to 19%, and approximately 14 to 17% excluding currency.

Thank you.

I will now be pleased to answer any questions you

Thank you (Operator Instructions) Our first question is coming from Judy Hong of Goldman Sachs.

Thanks, hi, Hermann.

Hi Judy.

Couple of questions on EMA, first just in terms of Russia, obviously the improvement here is pretty encouraging and the premium segment moderating I think is also encouraging.

Can you talk about how you see that playing out for the balance of the year, do you actually think the premium segment can grow by year end in that market?

Yes.

You are right.

The situation in Russia is encouraging.

We see clear signs of improvement.

The down trading is not fully yet over.

But it's substantially improving.

If we look at the decline rate of the premium segment in Q1 that was still down by 12.2% (inaudible) In this quarter it's minus 3.3.

The mid segment which was down in Q1, 11% was now down minus 6% only but only in the second quarter so that is a clear, clear sequential improvement.

Let's see how it shapes out going forward.

Overall measured unemployment in Russia is down to 7.3% is the last year to date number I have seen that was 8.4% before.

So it's substantial improvement, also in terms of total market size, I would expect at least a stable market for the full year.

Despite the recent price increases that we have implemented.

Okay.

Then another important market in that region Ukraine, you talked about the benefit in terms of the inventory movement in the quarter, can you quantify how much that was and then if you think about the consumption trend post the excise tax driven price increases what do you think the impact at the consumption level would be.

There are, I would say, about on average old price volumes in the market of duration of about 1.5 months.

So there is still no affective forestalling regulation in place.

That's why we have that situation.

The market reaction you remember it's still very affordable in the Ukraine overall but we had a number of consecutive steep price increases so total market nominally in Q2 was down only 3%, year to date it's down 11%.

I think we will still look in the third quarter result at double digit market decline.

Overall situation will improve also in the Ukraine at the slower pace than Russia that's for sure but it will improve.

GDP in the first quarter in the last seen the last number was up 4.9%.

Inflation is down now to 8-- 8.5% year on year may but unemployment is still higher at 9%.

It will come there as well but it will take longer.

But in the second quarter, Herman, the 4% increase in Ukraine, do you know how much that was boosted by the inventory movement?

I would say you would have seen a double digit result inventory-- double digit decline without the inventory.

Okay, got it.

Finally on Japan, is it your expectation that all of the $3.4 billion inventory build in the quarter will come out in Q3 what is the timing of when that gets flushed out in the marketplace?

I mean essentially the $3.4 billion is the inventory build up because that's the number, the hard number what was the inventory (inaudible) last year and what is it now.

Therefore, I mean essentially it's at least a $3.4 billion figure number to take in to account.

You will see quite a bit of inventory deload because of additional consumer demand.

But of course also additional retailer purchases in the third quarter and then in the fourth quarter, it will of course come on to the overall market reaction of consumers then too the new prices and that's the harder impact to predict.

Essentially I must say not really new insights to when we discussed a month ago the negative remains the higher percentage retail price increase and the positive remains that even in the 400 price range prices in Japan will still be very affordable given the purchasing part of the Japanese consumer.

Okay.

Thank you Hermann.

You're welcome.

Your next question comes from the Christine Farkas of Bank of America Merrill Lynch.

Thank you very much.

Good morning Hermann.

Good morning Christine.

A quick follow up on Japan.

In the third quarter, given there was inventory buildup in to the third quarter, would you expect demand and some more inventory to build or just basically demands pull up your shipments in the third quarter before we see declines in the fourth?

No.

The shipment is our sales in to the distributer, and I would say our inventories that we have built up now are sufficient to cover both the consumer demand and the retailer demand.

Consumer increase demand in the third quarter will be reflected in the inventory reductions but will not anymore be reflected in the shipments on our side (inaudible) our financials.

Okay, that's helpful.

Then moving to Marlboro,, I'm wondering if you could tell us how much the inventory pick up in Japan was Marlboro or helping Marlboro, when you look at Marlboro's underlying trends can you speak to the architecture.

There were certainly some comments about us having a stabilizing affect.

But, I'm curious if we pull out the inventory build what underline Marlboro might have looked like.

Inventory build up in Japan the brands contributed that buildup essentially according to their market shares in the market.

Then more broadly, Marlboro (inaudible) with Japan but your question is broader and goes to other markets there as well.

In Japan Marlboro is doing well, it is up 0.2% share to 10.8%.

It has about doubled the young adult smoker share than its actual market share.

But it's not the only place where we see nice improvements in share increases of Marlboro give you a couple of examples Korea would be up 1.2 share points to 6.8.

Poland would be up 0.7 to 10.2.

Netherlands is up 0.8 to 34.7.

Italy is up 0.3- to 23.

Argentina, going into Latin America as well is up 0.3 to 23.4 So there is really good trends in may different places around the world.

We of course still also have a couple of places in the world where we have to continue our work and the good work that has been done there.

The ones where Marlboro is really down is first of all those markets which were really hit by the economy take Turkey, Greece, and Spain, Turkey is down 20.5 share points to 8.1, Greece down 3.7 to 19.3.

And Spain is down 0.6 to 14.8.

That is really the economy that drives the down trading in those markets and then there is Germany where we now are down to a share of 21.6, which is however sequentially stable over the last couple of months.

That is not the economy, that is simply an overall price sensitive market overall, that is really a bit more difficult to act on the other hand if you are being successful in debt -- (Inaudible) -- to the market situation there.

Thank you Hermann.

You're welcome.

Your next question comes from David Adelman of Morgan Stanley.

Hi Hermann

Hi David.

Let me ask you some follow up questions in Japan if I could.

First, can you review with us on the major brands how much pricing you've requested.

Yes, I can.

The request for Lark and Philip Morris is up 110 yen to 410 yen per pack Virginia Slims Marlboro up 120 to 440 yen And the king size variance of Parliament was up 120 to 450 yen.

100 versions actually retail even 20 and higher, we have requested 470.

Okay.

Great.

Then am I right Hermann that the favorable operating income impact of the trade buildup in the second quarter might have been about $75 million-- is that on the right ballpark?

$75 million for the trade inventory buildup of Japan only?

Yes.

Think that u being a bit too modest.

Then the release Hermann mentioned that the Japanese market volumes were down 7.1% is that a consumption number during the Q2?

It is the market number we see there, there are a couple of one time effects, the results are a lot of talking going on about the price increases although they have not even materialized in the market yet.

I would say for that quarter probably number is rather five, than seven.

Okay, then lastly in Japan, Hermann, can you explain the comment you made in your prepared remarks that in the fourth quarter after the price increase there will be a favorable variance in your operating income from the revaluation of inventory in the trade.

Exactly what is going to occur and how does it effect your P&L?

Okay.

There will be a certain inventory level then on September 30th, October 1st.

Okay?

At the distributor.

The additional value arising from the price increase of those inventories accrues to us.

And, that will be then reflected in adjustments of the selling prices in October.

So therefore this is an effect in our P&L in the fourth quarter.

The inventories held by the retailers, that added value is actually for the benefit of the retailers.

Okay, I understand, thank you very much.

You're welcome.

Your next question comes from Chris Growe of Stifel Nicolaus.

Good morning Hermann.

I wanted to follow up if I could on David's question, it would be in terms of the benefit to you in the Q4 on the inventory valuation in Japan would be only based on the inventory that's still left at the distributor where prices gone higher is that the right way to say it?

That's correct.

We can't predict necessarily where the inventories may stand at this time, right?

No because we don't know yet what the additional consumer (inaudible) will be and how much additional volume will go into retail There will be substantial number of volume still there.

Sure, fair enough, okay.

And then, I just had two questions.

First will be-- in this quarter we're seeing a bit of an improvement overall in premium and especially with Marlboro doing well.

Can you say even in rough terms if mix was positive in the quarter.

I presume it was I just want to get a sense of that.

We have a number of places around the world where Marlboro is just doing well.

This is principally in Asia which, as I said in my prepared remarks, is kind of the growth engine for Marlboro That's where you probably get the most.

But it's not only in Asia.

You will also see some market which is would be Latin America, also in Mexico.

It goes through a broad range of markets I would say.

Kind of goes along with my earlier remarks on where Marlboro is doing really well.

And there, due to economy or price sensitivity Marlboro there is still some work needed on the (inaudible)

Okay.

And, my other question is related to you call it some higher costs in Indonesia, was one of the markets you mentioned.

Could you just give a little more color on that and I think we saw it last quarter too, if I recall.

Yes, it is in manufacturing costs, it is in lease, in Indonesian lease.

It is also a bit in close So these are really the cost increases in the manufacturing area.

Higher lease costs.

Yes.

Okay.

Thank you.

You're welcome.

Your next question comes from Adam Spielman of Citigroup.

Hello I hope you can hear me.

Yes, I can hear you well.

Thank you very much.

I had a lot of problems with this call.

You may have answered this already because I missed out on the call.

Is there any way of quantifying what the pricing variance in Greece was?

Another way of doing that is what the EU might have looked like if it hadn't been for the problems in Greece.

I would say roughly the situation in Greece has been a 3% drag on the growth rate of the region in the quarter.

That's very helpful.

Are you able to say what it would be as a drag on net revenues as well.

(Inaudible) very precise, no?

Okay.

Thank you very much.

You're welcome.

Your next question comes from John Fell of Deutsche Bank.

Hello, couple of things, first off all on Canada, very strong bounce back in the legal market there and had a good first quarter as well.

Do you see improvement in the situation with regards to the sustainable or their particular one of factors which pushed the market up temporarily.

Secondly through the Philippines the incremental benefits that you are getting from acquisition there is the $17.2 billion of volume in the Q2.

Are we done with the impact of the Philippines still in terms of the rest of the year or will we be feeling impacts as well in the third and fourth quarters?

Okay.

So Canada first.

The market actually the legal market in the second quarter up 20%, there was additionally effect in there which were price increases actually due to the harmonization of the Provincial and Federal sales tax in Ontario and Quebec.

If you take estimate for that effect out then the increase is still about 15%.

That compares to 10.5% in the first quarter.

I think together with enforcement that I of course really hope will continue to increase, increases should be possible further it will not be forever 15% though.

Then on the Philippines, well, on the volume this is of course-- we will separate that out until the year has lapsed and then this becomes part of the organic underlying business.

So it will continue until then for Philippines itself maybe in the world avert there is going really well.

The market is growing.

Expected to grow 8 to 10% for the full year.

Marlboro is growing strong in the market benefiting from improved distribution.

A share market of 21% there.

Integration is going really well.

Cost saving potential that we saw before the acquisition is concerned -- we see that for example in terms of tobacco usage.

It's going well it's going nicely I'm happy to get this combination in the Philippines.

Thanks a lot.

You're welcome.

(Operator Instructions) Your next question comes from Thilo Wrede of Credit Suisse.

Hermann, at the beginning of the year you talked about you already taken two-thirds of the prices that you saw necessary to achieve your guidance.

Are you done with all the necessary price increases by now or more coming in the second half of the year.

Pricing is always a little bit skewed, or very much skewed, towards the beginning of the year because this is when government makes their budget and this is when the pricing decisions follow these governmental budget decisions.

So I would only -- I always have to limit myself to the actual hearing we just announced price increase in the Russian market, or we are implementing price increase in the Russian market.

Let me put it this way, we are fully on track with our passing plans to achieve the results that are reflected in tour GS guidance.

Okay, Then, are you still planning to buy back $4 bullion of your own shares this year?

I think you are running ahead of that pace by now.

We have a higher amount so far that is driven by the old share repurchase program that we finished in April.

So that was a higher growing rate in there.

The decision is to be in the range of $4 billion, for the full year that's still the plan.

Okay.

Any updates on the attempts to buy pro tobacco in Columbia, are there any new developments in that story?

It's still a pending process, an ongoing process we don't have a decision yet I would say the outcome is open.

Okay.

Thank you.

Our final question comes from Tom Russo of [Gardener].

Hi, Hermann, congratulations.

Good morning in the western European markets that are sagging for Marlboro and generally show challenging due to the economic conditions.

To what extent are you beginning to see evidence of increased elicit or contraband coming in to those markets.

Well in the German market there is a little bit of an increase maybe a percentage point or something in the border sales so that is 20, 21% right now of consumption in the German market.

Moderate increases in the other markets no I don't see.

Thank you Hermann, good quarter.

Thank you.

Thank you.

Thank you that was our final question I will now turn it back to management for closing remarks.

Okay.

Let me close just couple of remarks then.

I think we had another strong quarter our underlying business is there.

Pricing power continues.

We are competitive in the marketplace.

Thanks to our global foot print we are able to compensate excise tax hiccups which we are managing through.

And based on the currency at prevailing rates that situation look as bit better hence the increase in our guidance.

Thank you very much.

I will hand it back to Nick.

Thank you, Hermann, and thank you all for joining us.

That concludes our call for today.

If you have any follow-up questions please contact the investor relations team in Luzon, Switzerland.

Telephone number is posted on our web site and also our press release.

Thank you again and have a great day.

Thank you for participating in today's conference call.

You may now disconnect