Philip Morris Churns Out Profit for Atlria
With Americans taking fewer puffs, you might think the nation's biggest cigarette maker _ Philip Morris USA _ would gradually fade into the background of U.S. corporate history.
But instead, the Richmond, Va., company is churning out sales and profits for its parent company, Altria Group Inc. It is doing so by beating back discounters, regaining pricing power and pushing its dominant Marlboro brand farther ahead of the pack.
Last week, Philip Morris USA emerged as the star of Altria's first-quarter earnings, reporting a nearly 8 percent increase in operating income while Philip Morris International and Kraft Foods Inc. struggled. Its sales rose about 4 percent to $4.32 billion.
"I believe that (Philip Morris) USA's strategies are clearly working," Louis C. Camilleri, chief executive officer of New York-based Altria, told shareholders Thursday at the company's annual meeting in East Hanover, where Kraft Foods has a technology center.
Even some critics acknowledge the company has done an impressive job managing its business.
"Who would have thought 20 years ago that this corporation would be out there promoting its new smoking prevention programs?" said Kathryn Mulvey, executive director of Corporate Accountability International, which along with its allies called attention to smoking health risks, overseas expansion and other issues at the annual meeting.
How long Philip Morris USA can sustain its growth in a shrinking market is another matter. The tobacco company still faces several large lawsuits. And thanks to falling consumption and inflation costs, it must generate minimum income growth between 3 percent and 5 percent just to stay even with the prior year's results.
In this country, cigarette volumes have declined by an average annual rate of 1 percent to 2 percent in the past two decades because of health concerns, smoking restrictions and rising prices. Meantime, inflation has averaged about 2 percent to 3 percent a year, though Philip Morris USA notes that it agreed to a 3 percent minimum "inflationary adjustment" on payments to states as part of a landmark, 1998 tobacco settlement.
"It is against this backdrop that (Philip Morris) USA goes about growing its cigarette income," David R. Beran, Philip Morris's executive vice president of finance, planning and information, said in a speech last fall in New York.
Philip Morris has been trimming costs in line with contracting consumption. But it is benefiting from lower wholesale and retail promotional allowances as well as market-share growth, driven by the industry-leading Marlboro brand.
Yet Philip Morris will need new vehicles to sustain its growth, especially following Altria's anticipated yet unscheduled break-up into two or three pieces. Analysts expect Altria will first spin off Kraft Foods sometime after the resolution of high-dollar lawsuits such as the $145 billion Engle case in Florida and perhaps the federal government's civil-racketeering case.
"Any potential restructuring will proceed on our own timeline, and we will not act prematurely," Camilleri said.
Altria shares rose 56 cents to close at $71.93 on the New York Stock Exchange.
