I laid out earlier this month why I am still a buyer/holder of Philip Morris International shares and have a US$90+ target price (plus accumulated dividends over time). The company was speaking today at the CAGNY conference today. Here are a few thoughts from their conference presentation which struck me as particularly interesting.
Pricing -
70% of anticipated FY15 price rises have already been implemented
Japan/hedging -
Hedged 60% of exposure to the country but generally do not do this for Asia/EMs as it is too expensive. Japan was 25% of the FX hit nevertheless in FY14 (hence why they do it).
Debt -
40% of debt in euros (50% in US dollars). Kind of useful if the euro falls!
Brands -
8 out of their top 10 brands outperformed global tobacco markets in 2014
Noted that roll-out of new Marlboro Red moving beyond EU in 2015, feedback so far very positive
Parliament brand 'spectacular' with gains in Turkey especially noted
L&M got good share momentum, in a number of markets including Russia and Egypt
Chesterfield fastest growing international brand due to success in Italy and Switzerland
Reduced-Risk Products - possibly the most interesting part of the presentation in my view
'Greatest opportunity'. Most of the harmful constituents happens when tobacco burns, hence their RRP products focus on countering this whilst maintaining taste/experience etc. The company's first heat-not-burn product iQOS launched in two markets (Japan and Italy) and 'preliminary results are ahead of expectations...solid market penetration' 34% awareness in Japan, 16% awareness in Italy. Phase two to be launched next year (new products, more markets). Also working with regulators to get scientific evidence re reduced risk (aim H216 for this).
e-cigarettes
Solaris their latest brand and will be launched in Spain next month
Balance sheet
'fully committed to returning around 100% of our free cash flow to shareholders...operating close to maximum' to maintain a single A credit rating hence why not anticipating any share repurchases as announced at the Q4/FY results. Noted 4.8% current dividend yield above average over the last 15 years of 4.2% plus greater spread versus peers and Treasuries compared to this whole period too.
Q&A
How will get 8-10% constant FX growth given no buyback etc?
Pleased how dealing with difficult market situations e.g. The Philippines (excise duty/illegal cigarettes, issues 'significantly closed over the last 2-3 months), Japan market share improving, brands as noted performing well. Russia on 'watch out' list but L&M brand progress gives them confidence.
Marlboro - scope for growth of brand?
Noted Philippines scope, bounceback etc.
RRP products/how do they fit in?
Product that 'deserves a premium positioning...around Marlboro pricing...so should be an above margin product...equal if not better...especially given tax situation'. Believe volume potential as expand heat-not-burn product.
Solaris - pricing etc?
'compare quite favourably with other products in the market...working to come up with improved technology...pricing...we usually like the higher prices'
Russia - how big a risk factor?
'So far the momentum in Russia continues' despite rouble/Ukraine issues. 'We just have to watch it very carefully...no change in trends'. Noted portfolio/brand/infrastructure of company much better than in 1998.
Cheaper sourcing?
Noted that cheaper leaf etc. may 'buy me a quarter' but ultimately may compromise on quality of product and that is not their philosophy.
My conclusions?
Nothing here to change my view that the share is an interesting one to hold today. Very impressed by the pricing comments, brands update is good and the balance sheet as expected. However the most interesting newer aspect to me was the discussion around RRP products. A useful potential new growth area for the company.
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