|
(Continued)
Domestic Tobacco
Philip Morris USA (PM USA) met its targets for market share and operating companies income growth in an environment that remained fiercely competitive.
Net revenues increased 1.9% to $18.5 billion, while operating companies income of $4.8 billion was up 5.0% versus 2005, but up 4.4% absent the net effect of spending incurred to oppose various excise tax ballot initiatives in 2006 and the 2005 Boeken charge.
Marlboro continued to drive PM USA's performance, reaching a record retail market share of 40.5%, up 0.5 points versus 2005. The brand's growth was due largely to the strong performance of Marlboro Menthol, which remained one of the fastest-growing premium brand families in the menthol segment. In addition, in March 2007, PM USA introduced Marlboro Smooth at retail, a new menthol product that we believe will extend PM USA's leadership in the premium category.
2006 witnessed PM USA's first entry into the smokeless tobacco category with the test market launch of Taboka TobaccopaksTM; in July 2006. Other initiatives in both the adjacent smoking and smokeless categories are also being finalized for launch in 2007. There was continued progress on the state excise tax front. Indeed, legislation or ballot initiatives to increase taxes were considered in 27 states, but enacted in only six. The defeat of the ballot initiative in California that called for a tax increase of $2.60 per pack of cigarettes was particularly notable.
PM USA continues to be effectively and efficiently managed, and its 2006 results are clearly in line with its long-term objective of consistently balancing share and income growth, while meeting its ambitious societal alignment objectives.
International Tobacco
Philip Morris International (PMI) fared remarkably well in 2006, given the extremely challenging regulatory and competitive environment that prevailed in several key markets, most notably in Spain. PMI's share of the international cigarette market (excluding the U.S. and worldwide duty-free) increased by 0.4 share points to an estimated level of 15.4%.
Cigarette shipment volume increased a solid 3.4% versus 2005, fueled in large measure by Indonesia, as well as strong performances in France, Russia and Ukraine.
Operating companies income of $8.5 billion was up 8.1% over the previous year, benefiting from pricing, the Dominican Republic transaction and a $232 million benefit from acquisitions, partially offset by negative currency of $183 million.
PMI's income was significantly lower in Spain versus the previous year, reflecting its decision to drop prices in the face of a surging low-price segment. The resulting income erosion was aggravated by two tax increases and the implementation of a minimum excise tax at a level insufficient to narrow price gaps. This was corrected in early November 2006, when the government announced an increase in the minimum tax. Importantly, PMI's market share in Spain improved as 2006 unfolded, and PMI expects improved profitability in 2007.
PMI's share performance in 2006 was robust, especially when viewed within the context of the market dynamics that it faced. Indeed, Marlboro is enjoying renewed signs of vitality. For the first time in several years, worldwide in-market retail sales volume rose by an estimated 0.7% in 2006. This is a considerable achievement given the intense competition from discount brands, and is testament to the strength of Marlboro's brand equity.
Efforts to enhance PMI's innovation capability are being rewarded. Two very recent examples stand out, Marlboro Wides and Marlboro Filter Plus. We have high expectations for both line extensions, which are highlighted in the Business Review section of this report.
Importantly, PMI's business development efforts bore fruit during 2006. In the Dominican Republic, PMI restructured its minority investment in tobacco operations into a 100% ownership interest. In Pakistan, in early 2007, PMI entered into an agreement to acquire an additional 50.2% stake in Lakson Tobacco, which will bring its stake to approximately 90% upon completion, and commenced a tender offer for the remaining shares.
Developments in China have been slower than we originally hoped. It is clear that the international joint venture is the key to our future in China, and this will be a priority for 2007. PMI expects that this year, licensed production of Marlboro in China will begin and the joint venture will become fully operational.
Overall, PMI enters 2007 with positive momentum, improving trends in the key markets of Western Europe and a pipeline of new products and potential business development opportunities, such as the acquisition in Pakistan, to drive long-term growth.
|