Philip Morris International Inc.
Q1 2010 Earnings Call Transcript
April 22, 2010 9:00 am ET
Nick Rolli – VP, IR and Financial Communications
Hermann Waldemer – CFO
David Adelman – Morgan Stanley
Chris Growe – Stifel Nicolaus
Judy Hong – Goldman Sachs
John Leinster – UBS
Thilo Wrede – Credit Suisse
Christine Farkas – Banc of America/Merrill Lynch
Ann Gurkin – Davenport
Adam Spielman – Citigroup
Thomas Russo – Gardner Russo & Gardner
Previous Statements by PM
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Good day and welcome to the Philip Morris International first quarter 2010 earnings conference call. Today's call is scheduled to last about one hour, including remarks by Philip Morris International and the question – I'm sorry– by Philip Morris International Management and the question-and-answer session (Operator Instructions) Media representatives on the call will also be invited to ask questions at the conclusion of questions from the investment community. 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 our 2010 first quarter results. You may access the release on our website at www.pmi.com. During our call today, we'll be talking about results in the first quarter 2010 and comparing them with the same period in 2009 unless otherwise stated. References to volume are for PMI shipments, industry volume and market shares of the latest data available from a number of internal and external sources. Organic volume refers to volume excluding acquisitions and net revenue data excludes excise taxes.
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 costs and adjustments to EPS as well as reconciliation to U.S. GAAP measures at the end of today's webcast slides which are posted on our website. Today's remarks contain forward-looking statements and projections of future results and I direct your attention to the forward-looking and cautionary statements disclosure in today's presentation and news release for a review of the various factors that could cause actual results to differ materially from projections.
And now, it is my pleasure to introduce Hermann Waldemer, Chief Financial Officer. Hermann?
Thank you, Nick and welcome ladies and gentlemen. I'm pleased to report that we had a very strong financial performance in the first quarter. With all our financial results in line with our constant currency, mid-to-long-term annual growth targets despite some unwelcome developments on the excise tax front.
Cigarette volume in the quarter increased by 0.7% to 240.7 billion units, including 6.1 billion additional units resulting from our business combination with Fortune Tobacco in the Philippines. On an organic basis, volume declined by 2.3%, a very satisfactory result in what is still a difficult economic environment in many parts of the world and we remain confident that we can achieve our full cost, 1.5% decline in organic volume for 2010 as a whole. Overall, volume developments in Japan are obviously the biggest unknown element contained in this forecast.
There are four main factors that impact our volume, the economic environment, consumer behavior, excise taxation and our competitiveness in the marketplace. Emerging economies in Asia are continuing to grow and we are seeing an improved outlook in Latin America, particularly Brazil and Mexico.
We have commodity prices recovering, there are also signs of stabilization in Eastern Europe though this has yet to translate into higher employment levels and improved purchasing power. Across the EU, however, economic conditions remain difficult.
Premium volume is growing in several emerging markets such as Algeria, Argentina, Indonesia and Mexico. Consumer down trading is moderating in Russia and we are cautiously optimistic that the market will stabilize towards the end of the year. However, price sensitivity remains high across the EU, putting pressure on the premium segment in these markets.
On a global basis, improvements in employment levels will be the key for consumer trading to resume. The other element of adult consumer behavior that is impacting industry volume is illicit trade. While stricter laws and better enforcement have had a positive impact in Canada where a duty paid industry volume was up over 10% in the first quarter, illicit trade remains a significant issue across the wide range of geographies particularly those which has been subject to large tax driven price increases.
Excise taxation is, of course, a key factor influencing industry volume. Most governments are continuing to pursue a policy of reasonable increases as they recognize that this optimizes their long-term revenues and avoids the unintended negative consequences of increased illicit trade and consumer down trading.
Meanwhile, excise tax structures continue to improve on a global basis. The latest very important example of this is the new EU excise tax directive which is premised on gradual tax increases, includes three important structural improvements and provides visibility through 2018.
The increase in the maximum specific total tax ratio from 55% to 76.5% will allow governments to introduce excise tax systems with a very high specific element. A gradual reduction in the difference in taxes between fine cut and cigarettes will over time lessen the tax advantage of roll your own and make your own products.
Finally, the removal of the previous cap on minimum excise taxes provides governments with a much stronger fiscal mechanism to limit down trading, which is important in the context of the recent decision of the European Code of Justice not to allow the continuation of the current minimum reference price systems in Austria, France and Ireland.