Philip Morris International Inc · NYSE:PM
Philip Morris International — Investor Day (June 2014)
47 slides from Philip Morris International's investor day presentation, Jun 26, 2014
Slide 1: Investor Day – Operations
Investor Day – Operations Lausanne, June 26, 2014 Antonio Marques Senior Vice President, Operations Philip Morris International
Slide 2: Agenda
Agenda ● Operations Overview ● Focused Innovation ● Performance and Sustainability ● Cost Management ● Organizational Engagement ● Conclusions 2
Slide 3: Operations Objectives
Operations Objectives ● Manufacture superior quality products in a safe, cost effective and sustainable manner ● Contain annual cost of goods sold increases in the range of 1% to 3%, excluding currency, volume/mix and costs related to RRPs, through supply chain management, productivity improvements
Slide 4: Operations Scope
Operations Scope ● People (over 55,000): - 17,000 in machine-made operations - Nearly 27,000 in hand-rolled operations in Indonesia - Over 11,000 in fixed manufacturing and support functions ● Cigarette volume: 913 billion units ● Over 4,000 products on market ● COGS: $10.4 billion (61% of PMI’s tot
Slide 5: PMI Operates Cigarette and Non-Cigarette Manufacturing Facilities Worldwide
PMI Operates Cigarette and Non-Cigarette Manufacturing Facilities Worldwide 53 Manufacturing Facilities 23 Third-Party Manufacturers 38 Third-Party Operators 1 RRPs Manufacturing (under construction) Note: 2013 year-end. Reduced-Risk Products ("RRPs") is the term we use to refer to products that hav
Slide 6: Focused Innovation
Vp i sh i PHILIP MORRIS IN INTERNATIONAL Focused Innovation
Slide 7: Volumes of Innovative Formats are Growing
Volumes of Innovative Formats are Growing (units billion) (% change) (3)% 944 OTP 28 913 Hand-Rolled 15% 34 (5)% 33 32 Innovative 116 52% 176 Traditional 765 (12)% 672 2011 2013 Note: Volume includes TPMs. Traditional format: Pack type: Box, Round-Corner Box and Soft / Diameter: Regular / Length: Re
Slide 8: Focused Innovation
Focused Innovation ● Component pipeline: - Derived from adult smoker insights - Six-month cycle of concept evaluation - Continuously filled and refined pipeline with rolling 2-5 year horizon Translation Adult Smoker Concept Component Component Industrial Product Into Product Preferences Validation D
Slide 9: Specification Rationalization Program
Specification Rationalization Program ● Supports focused commercial approach to sales and elimination of unnecessary complexity in production ● Global program for specifications and POM rationalization: - More than 500 products delisted or morphed - Over 300 new introductions - Net 6% reduction in g
Slide 10: PMI Continues to Deliver Innovation
PMI Continues to Deliver Innovation Chesterfield Progressive Line Marlboro Eco Zip Pack 10
Slide 11: PMI Continues to Deliver Innovation
PMI Continues to Deliver Innovation Parliament Carat ● Innovative premium proposition ● 90mm cigarette with 7.0mm diameter ● "Bevel edge" pack ● Diamond cut copy line on inner frame 11
Slide 12: PMI Continues to Deliver Innovation
PMI Continues to Deliver Innovation ● Innovative "SmartSeal" pack Marlboro Premium Black ● Successful GCC launch ● Further roll-out planned 12
Slide 13: New Packing Technology to Address Format Complexity
New Packing Technology to Address Format Complexity ● Investment in flexible packing machines to accelerate the launch of innovative packs into the market Source: PMI Operations 13
Slide 14: Capital Investments to Support Innovation, Growth and RRPs
Capital Investments to Support Innovation, Growth and RRPs 2011 PMI CAPEX 2013 PMI CAPEX Other Other Innovation Operations Operations Innovation & Growth & Growth 30% 35% 20% 45% 24% 31% 4% Information 11% Services, G&A, RRPs Marketing & Sales Information RRPs Services, G&A, Marketing & Sales Note:
Slide 15: RRPs Footprint in Bologna, Italy
RRPs Footprint in Bologna, Italy ● Bologna home to our state-of-the-art filter factory and the first RRPs pilot plant ● Region provides great infrastructure ● Access to qualified workforce Note: Reduced-Risk Products ("RRPs") is the term we use to refer to products that have the potential to reduce
Slide 16: Performance & Sustainability
Performance & Sustainability 16
Slide 17: PMI Outperforms Competition: Visual Quality in Key Markets
PMI Outperforms Competition: Visual Quality in Key Markets % of Audited Markets 73% 82% 84% 87% 20% 11% 16% 13% 7% 7% 2010 2011 2012 2013 Green: PMI outperforms competition Yellow: PMI is statistically not different than competition Red: Competition outperforms PMI Note: As of 2011, PMI changed the
Slide 18: Our Commitment to Our People: Outstanding Safety in Manufacturing
Our Commitment to Our People: Outstanding Safety in Manufacturing Lost-Time Injury Rate / 200,000 hours (77)% World-Class 0.22 Performance 0.17 0.13 0.05 2010 2011 2012 2013 Source: PMI Operations 18
Slide 19: Our Commitment to Sustainability: Tobacco Production
Our Commitment to Sustainability: Tobacco Production ● Achieve safe and fair working conditions on all farms from which PMI sources tobacco ● Progressively eliminate child labor and other labor abuses ● Training sessions provided to more than 3,700 field technicians and ALP code communicated to almo
Slide 20: Our Commitment to Sustainability: Food Production
Our Commitment to Sustainability: Food Production ● Program to encourage smallholder tobacco farmers to grow food crops ● Increase farmer productivity in both tobacco and food ● Promote minimum 2:1 ratio (2kg of food : 1kg of tobacco) Food / Tobacco Ratio 2014 2016 Estimate Minimum Target Malawi 2.9
Slide 21: Our Commitment to Sustainability: Manufacturing Environment
Our Commitment to Sustainability: Manufacturing Environment kg CO2 per million cigarettes equivalent m3 water per million cigarettes equivalent (8)% (20)% (13)% (20)% 794 727 5.3 634 4.7 4.3 2010 2013 2015 2010 2013 2015 On track to achieve 2015 targets Source: PMI Operations 21
Slide 22: Our Commitment to Sustainability: Climate Change
Our Commitment to Sustainability: Climate Change Carbon Disclosure Project S&P/Global 500 Tobacco Sector Results 2012 2013 Disclosure Disclosure PMI 91% 97% JT 83% 96% BAT 86% 94% Imperial 75% 83% Altria 71% 75% Reynolds 63% 70% Source: Carbon Disclosure Project 22
Slide 23: Facilities Equipped with Latest Technology
Facilities Equipped with Latest Technology Renewal and increased productivity of manufacturing equipment Average Speed 10% ● Next generation high-speed lines 2011 2013 Source: PMI Operations 23
Slide 24: Cost Management
PHILIP MORRIS case: | DYE INVESTOR bay INTERNATIONAL Cost Management 24
Slide 25: Cost of Goods Sold
Cost of Goods Sold Shipping & Distribution Clove 3% Tobacco Leaf 8% Others 31% including 31% Labor(a) 27% Direct Materials COGS (2013): $10.4 billion (a) Conversion, fixed manufacturing expenses and other costs Source: PMI Financials 25
Slide 26: Tobacco Strategy
Tobacco Strategy ● Secure quality tobacco at predictable prices ● Drive programs which make tobacco production sustainable while increasing farmer income ● Develop more innovative and efficient production approaches 26
Slide 27: 2013 Tobacco Sourcing Model
2013 Tobacco Sourcing Model 30% of tobacco sourced through vertical integration Vertical Integration Suppliers Vertical Integration and Suppliers Source: PMI Operations 27
Slide 28: Tobacco Leaf Purchase Price Evolution
Tobacco Leaf Purchase Price Evolution Tobacco Leaf Price Evolution (average $ per packed kg) 8.0 CAGR 2010-2014F: 0.9% (1.9)% 4.2% 6.1% (4.4)% 6.17 5.81 5.89 5.69 5.58 4.0 2010 2011 2012 2013 2014 Forecast Source: PMI Operations 28
Slide 29: Tobacco Leaf Crop Usage Illustration
Tobacco Leaf Crop Usage Illustration 50% Other Crop 60% Years 90% 50% 40% Crop Year 1 10% Year 1 Year 2 Year 3 Source: PMI Operations 29
Slide 30: The Kretek Cigarette
The Kretek Cigarette ● Kretek: a blend of tobacco and clove Tobacco Clove + ● Accounted for 93% of the Indonesian tobacco industry in 2013 Source: PMI Operations 30
Slide 31: Clove Crop and Price vs. Cigarette Market Evolution
Clove Crop and Price vs. Cigarette Market Evolution Average Price (000 IDR/kg) (units billion) Clove Crop Size Cig. Market Size Average Est. Price Crop (million kg) 340 200 160 280 120 220 80 160 40 100 - 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Forecast Source: PMI estimates 31
Slide 32: Clove Supply Key Strategies
Clove Supply Key Strategies Short-term: ● Extend network of technical assistance and buying centers with field technicians to work with farmers ● Improve yields through introduction of GAP and use of fertilizers ● Increase clove plants distribution to farmers Long-term: ● Application of innovative t
Slide 33: Direct Materials Categories
Direct Materials Categories ● Three main categories represent 70% ● 2013 spend: approximately $2.8 billion Others Printed Board & Paper 18% Wrapping Films 34% & Inner Liner 12% 15% 21% Fine Papers Acetate Tow Note: Others primarily reflect shipping cases and ingredients Source: PMI Operations 33
Slide 34: Direct Materials Strategy
Direct Materials Strategy ● A competitive supplier base across the categories ● Economies of scale ● Centrally managed ● Viable and balanced supply chain base across all regions ● Anticipation of implications of regulation and industry volume evolution Source: PMI Operations 34
Slide 35: Direct Materials Price Index Evolution
Direct Materials Price Index Evolution CAGR 2010-2014F: 1.2% 3.7% 1.6% 0.4% 0.5% 2013 2010 2011 2012 2014 Forecast (0.8)% Source: PMI Operations 35
Slide 36: Supply Security
Supply Security ● Comprehensive risk evaluation and mitigation: - Addresses the global footprint including warehousing and logistics - Integral part of the annual strategy cycle ● Business continuity: - Business continuity plans in place for identified risks - Special situations management system fo
Slide 37: Labor Productivity of Machine-Made Cigarettes and OTP Production
Labor Productivity of Machine-Made Cigarettes and OTP Production (units million) Machine-Made Cigarettes and OTP Production per Headcount 2011 2013 55.2 +7% 52.9 50.3 46.3 42.6 39.9 35.1 30.9 32.0 27.3 PMI EEMA Asia LA&C EU Note: OTP was converted to cigarette equivalent Source: PMI Operations 37
Slide 38: Manufacturing Facilities Footprint Optimization (2012-2014)
Manufacturing Facilities Footprint Optimization (2012-2014) • Closures and Consolidations • Under Consultation/Planned Source: PMI Operations 38
Slide 39: 2013 Gross Productivity and Cost Savings over $300 million (Pre-Tax)
2013 Gross Productivity and Cost Savings over $300 million (Pre-Tax) Others Indirect Materials Sourcing & Services Manufacturing performance Procurement Operations Specification rationalization Total Operations Contribution Note: Indirect Materials & Services mainly includes marketing & sales, facil
Slide 40: Target Annual COGS Increase in the Range of 1% to 3%
Target Annual COGS Increase in the Range of 1% to 3% 3.8% 1% - 3% 2013 vs. 2012 2015-2017 Target Note: 2015-2017 target excludes Reduced-Risk Products ("RRPs") related costs. RRPs is the term we use to refer to products that have the potential to reduce individual risk and population harm. 2013 vs.
Slide 41: Inventory Duration Development
Inventory Duration Development Year-End Inventory Duration 2010 2014 Forecast 100.0% 100.0% 93.4% 78.3% Tobacco Leaf Regular Finished Goods Source: PMI Financials and PMI Operations 41
Slide 42: Organizational Engagement
Organizational Engagement 42
Slide 43: Operations Performance and Engagement
Operations Performance and Engagement OPEN is the way we conduct business in Operations Employee Opinion Survey Results: Progression Operations Population (% favorable) 85% Employee Engagement 79% 69% 2013 2011 76% 2009 Managerial Effectiveness 69% 57% Source: PMI Operations 43
Slide 44: OPEN Drives Performance
OPEN Drives Performance Portugal: Intertaba (Italy): Equipment Performance Improvement Direct Material Waste Evolution 65% 2000 0.1000 0.7 63.7% 9.2% 63.0% 0.0900 58% 62.9% 1800 0.6 0.0800 1,600 61.0% 1600 0.5 0.0700 6.2% 5.5% 1400 0.0600 5.1% 0.4 0.0500 4.0% 57.8% 1200 25% 0.0400 0.3 0.0300 1000 0.
Slide 45: Conclusions
Conclusions ● Leverage our superb workforce ● Maintain industry leadership in safety, quality and sustainability ● Innovate to enhance portfolio, margins and gain market share ● Build capacity to fulfill RRPs demand ● Contain annual cost of goods sold increases in the 1% to 3% range excluding curren
Slide 46: Investor Day – Operations
Investor Day – Operations Lausanne, June 26, 2014 Questions & Answers
Slide 47: Reconciliation of non-GAAP measures included in this presentation
Reconciliation of non-GAAP measures included in this presentation to the most comparable GAAP measures are provided on our website at: www.pmi.com/2014InvestorDay/RecSlides Glossary of Terms: www.pmi.com/2014InvestorDay/Glossary
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