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Philip Morris International (NYSE:PM) is an independently Owned and operated tobacco company that spun off from its former parent company the Altria Group (MO) on March 28th, 2008. Phillip Morris is the world’s largest producer of tobacco products, holding 15.7% of the global market excluding the United States.

While international sales continue to grow for Phillip Morris, domestic sales revenues have been in decline as Altria struggles to cope with higher state tobacco tariffs and the tobacco industry's negative image in the United States. The newly independent Philip Morris International will sell tobacco products in international markets while Altria will maintain its own domestic operations. In addition to selling Marlboro branded cigarettes, the world’s highest volume cigarette brand, PMI also has seven of the top ten brands by volume global such as L&M, Philip Morris, Bond Street, Chesterfield, Parliament, Lark, A Mild, and Morven Gold throughout Europe, South America, and Asia.[1]

Company Overview

Philip Morris International's tobacco products include traditional cigars and cigarettes as well as smokeless products such as snuff and chewing tobacco. Although Philip Morris International is headquarted in New York, NY, all of its operations are conducted internationally though its operation center located in Lausanne, Switzerland. [2]

Prior to its spinoff from Altria on March 31st, 2008, as the international segment for Altria, PMI has historically generated the highest proportionate sales revenue and operating income out of all of the segments in Altria’s portfolio.

The main logic behind the spinoff of PMI from Altria Group was to allow shareholders to profit more directly from tobacco revenue. As a result of the spinoff, every shareholder of Altria received, for every share of Altria held, a share in the new independently traded and unaffiliated Philip Morris International. Another factor in the companies' separation is discrepancy in demand for international vs. domestic tobacco sales.

Business Segments

In 2009, PM earned a total of $25.0 billion in total revenues. This was a tiny decline from its 2008 total revenues of $25.7 billion. As a result of the decline in revenues, PM's net income was adversely affected. Between 2008 and 2009, PM's net income declined from $6.9 billion in 2008 to a net income of $6.6 billion in 2009.[3]

Business Segments/Cigarette Brands

In addition to providing service to about 15.4% of the global tobacco market, PM also owns seven out of ten of the top selling international cigarette brands. PM comes into contact with two distinct customers when marketing its cigarettes – the value consumer and the discriminatory consumer. Value consumers are more concerned with the price of the tobacco products, whereas discriminatory consumers are concerned with where the tobacco was grown and the quality of the product they are purchasing.

PM, for the most part produces tobacco for the discriminatory consumer, but does maintain a portfolio of three value company brands (Bond Street, Red and White, and Next branded tobacco products) that operate globally. To meet the needs of its discriminatory customers, in addition to owning globally recognized branded cigarettes such as Marlboro, L&M, Philip Morris, and Chesterfield, PM owns local brands such as A Mild and Diji Sam in Indonesia, Diana in Italy, and Assos in Greece to take advantage of established brands as opposed to marketing new brands in some regions.[4]

Trends and Forces

The Altria - PM Split in 2008

Recently, tobacco companies operating from within the United States market have faced significant challenges. As a result, Altria saw value in a split the between its domestic and international segments. Under a single company model, when either the domestic or international segment has a downturn in sales revenue, the other segment would be under pressure to increase sales and decrease expense to offset this weakness on the other side of the business. the company revenue and expense on the balance sheet. This was the case prior to the spin off, and Altria itself inherited both the domestic and international risk. From the shareholder’s perspective, separated segments allows investors to allocate their capital according to which market they see as the most lucrative based on that market’s risk profile.

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Tar and Nicotine Testing Methods

A number of world public health organizations have brought to the attention of tobacco corporations an issue with the “ISO” method of testing (an industry tar and nicotine testing standard). Specifically, the impact of tar and nicotine levels in tobacco products,as determined by the ISO method, provides inaccurate guidance as to the actual effect on the human body. Since the ISO method does not provide a comprehensive analysis of different inhalation methods of smoking, the results of the ISO method are not a reflection of the true population of smokers. A developing method for testing known as the Health Canada calls for Altria to change over to this newer, more expensive form of testing to satisfy the standards set by public world health organizations. Switching to new testing methods would cause Philip Morris to incur significant expenses in purchasing equipment and performing the new tests.

Ingredient Disclosure Laws

In a large number of international marketplaces, PMI is required by local law and regulation to disclose the ingredients and related toxicological characteristics that are in its tobacco related products, for consumer health reasons. From a tobacco company’s perspective, some of the standards of disclosure impact sales in two ways. The first is, along with a greater transparency in information, people be more health conscious when deciding whether to buy tobacco products, reducing the volume of sales. Additionally, some companies including PMI argue that full disclosure of ingredients to the consumer aids counterfeiting, and that full disclosure of tobacco products gives away “trade secrets” and ultimately the competitive edge of the tobacco company.

Bans and Restrictions on Marketing and Advertisement

With respect to brand advertisement and marketing, many countries impose partial or total restrictions not only on the way in which they advertise, but also the groups they advertise to and the physical size of advertisements. In some case, countries even view the packaging and form of tobacco products itself as an advertisement or marketing tactic, requiring all tobacco products to be marketed using generic packaging and standard forms. Seeing as the way in which advertisment and marketing is conducted greatly infulences the amount of customers that are aware of and are attracted to buy tobacco products, these restrictions directly influence PMI’s ability to earn sales revenue.

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