The Most Important Things Philip Morris International Just Told Investors

By Markets

Following every aspect of Philip Morris International(NYSE: PM) can be challenging. With global operations reaching throughout the world, Philip Morris has done an impressive job of selling its Marlboro and other brands to millions of smokers in dozens of countries. To help investors keep up with everything that's going on, Philip Morris recently held its investor day presentations, and in keeping with the size of the tobacco giant's operations, its investor day actually spanned two days. Below, you'll find the three most important things that Philip Morris told investors about at its presentations.

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Image source: Philip Morris International.

1. Philip Morris now sees better earnings than it previously expected.

The first thing that Philip Morris did at its investor day presentation was to give its latest update on its financial results. Most importantly, the tobacco giant increased and narrowed its earnings per share guidance, now expecting to make between $4.53 and $4.58 per share for the full 2016 year.

However, drilling down a bit more into that figure, there are actually two things going on. First, Philip Morris reduced its estimated impact of foreign currency fluctuations on its earnings by a nickel per share. Based on previous guidance, that would have led to a figure between $4.50 and $4.60 per share for 2016. The narrowing squeezed Philip Morris' guidance into the center of that adjusted range, showing greater confidence in its fundamental performance. Strength in the European Union markets and solid pricing overall helped offset certain regional challenges, including higher excise taxes in Argentina, political instability in North Africa, and Philippine economic weakness. Overall, Philip Morris seemed pleased with its roughly 10.5% to 11.5% earnings-per-share growth in currency-neutral terms.

2. Philip Morris is making the most of a declining cigarette market.

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Philip Morris is aware of the declining trends in smoking, and it anticipates that they'll continue. CEO Andre Calantzopoulos said that current projections show industry volume declines of 2% to 2.5% per year, which is consistent with Philip Morris' experience.

Yet Philip Morris remains optimistic about its cigarette offerings. Marlboro is of course the key to the company's portfolio of products, with Senior Vice President of Marketing Werner Barth calling it "the only truly global cigarette brand." When you consider the Marlboro and Parliament brands together, they make up more than half of the premium and above segment worldwide, with the current figure of 51.5% up more than a percentage point over the past year.

Even more important than the particular brands are the way that Philip Morris approaches marketing them. Barth pointed to "best-in-class understanding of category trends, consumer preferences, and key purchase drivers" in helping it choose where to focus on discount brands, mid-priced category sales, or premium products in any particular market. By considering additional factors like flavoring of products, social marketing campaigns, and promotional platforms, Philip Morris expects to keep moving forward with its traditional tobacco products.

3. Reduced risk products will be a key focus.

The key to reduced risk products for Philip Morris and its competitors is that they offer a new world for the industry. The uncertain regulatory environment for reduced risk products introduces difficulties in predicting how they'll affect the business in the long run, but their novelty and innovation offers huge potential upside. As Calantopoulos explained it in justifying the important of reduced risk products, "Existing and contemplated regulatory measures are only likely to have a modestly positive impact on aggregate population harm, as they do not fundamentally change underlying consumption patterns."

In particular, Philip Morris sees room for a range of different potential reduced risk products. On one hand, many companies are focusing on e-vapor products, and Philip Morris sees some potential for increased adoption there. Yet the company estimates that considerable dual usage makes e-vapor less attractive than it would otherwise be. By contrast, Philip Morris' heat-not-burn iQOS technology has seen much higher conversion rates. That allows investors to argue that if heating tobacco rather than burning it offers a more attractive health picture, Philip Morris stands out as being on the optimal track going forward. With efforts to increase production of iQOS, as well as rolling it out in additional markets, Philip Morris expects that part of its business to grow extensively.

Philip Morris had a lot to say in its investor day presentations, and these elements just scratch the surface. Yet overall, these three areas formed the framework for Philip Morris' strategy going forward, and investors should feel more comfortable that the tobacco giant has a firm handle on where it wants to go in the future.

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