Philip Morris International (PM)

Q2 2010 Earnings Call

July 22, 2010 9:00 am ET

Executives

Nicholas Rolli - Vice President of Investor Relations & Financial Communications

Hermann Waldemer - Chief Financial Officer and Executive Vice President

Analysts

Thilo Wrede - Crédit Suisse AG

Judy Hong - Goldman Sachs Group Inc.

Christopher Growe - Stifel, Nicolaus & Co., Inc.

Thomas Russo - Gardner Russo

Christine Farkas - BofA Merrill Lynch

David Adelman - Morgan Stanley

Jonathan Fell - Deutsche Bank AG

Adam Spielman - Citigroup Inc

Presentation

Operator

Good day, and welcome to the Philip 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.

Nicholas Rolli

Welcome. Thank you for joining us. Earlier today, we issued a news release containing detailed information on our 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 and comparing them with the same period in 2009, unless otherwise stated. References to volumes are for PMI shipments, industry volume and market shares on the latest data available from a number of internal and external sources. Net revenue data excludes excise taxes. Acquisitions for the purposes 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 companies income, or OCI, for currency, acquisitions, asset impairment and exit costs, free cash flow calculations and adjustment to earnings per share or EPS, as well as reconciliations 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. It is now my pleasure to introduce Hermann Waldemer, Chief Financial Officer. Hermann?

Hermann Waldemer

Thank you, Nick, and welcome, ladies and gentlemen. I'm pleased to report that we had another strong quarter, with results in line with the business expectations that we shared with you during our Investor Day last month. At that time, we announced a reported diluted EPS guidance for 2010 of $3.70 to $3.80 based on the same prevailing exchange rate. Since then, concerning surrounding the future of the eurozone have calmed somewhat, and the euro has therefore strengthened against the U.S. dollar. Based on the currently prevailing exchange rates, we expect to achieve a 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.

Cigarette 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 with 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 the revaluation of inventory sales by our distributor to benefit our income during the fourth quarter of 2010.

Our volume performance in the quarter was achieved thanks to our superior and broad brand portfolio. The volume of our top ten international brands increased by 3.6% helped, of course, by Japan. Not surprisingly, in the current economic environment, our low-priced brands have performed particularly well. In addition, our key premium and mid-priced brands are also performing solidly. Parliament achieved a volume growth of 2.3% in the quarter, with Japan, Korea and Russia more than offsetting the impact of tax-driven consumer down trading in Turkey. Marlboro volume declined by just 0.5%, as higher volumes in North Africa, the Middle East, Japan, Korea and the Philippines largely offset a decline in the EU region, attributable to a 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 a favorable volume overall, thanks to growth in Nigeria, 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 favorable share trends in both OECD and non-OECD 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-priced Chesterfield and low-priced Bond Street, as well as the resilient performance from above-premium priced Parliament, the volume of which was up in the quarter. It should be noted that Bond Street is now mostly gaining shares from competitive brands in the same pricing.

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