Remarks by Laurent Boissart President, Philip Morris Japan. Asia Region Investor Field Trip Japan. Singapore, June 3, 2013

Transcription

1 Remarks by Laurent Boissart President, Philip Morris Japan Asia Region Investor Field Trip Japan Singapore, June 3, 2013 (SLIDE 1.) Good morning everyone. I am Laurent Boissart and on behalf of Philip Morris Japan, it is my great pleasure to provide you today with an update on the Japanese cigarette market and our continued success in this important country. (SLIDE 2.) My remarks today may contain forward-looking statements and I therefore direct your attention to the Forward-Looking and Cautionary Statements slide of today s presentation for a review of various factors that could cause actual results to differ materially from forward-looking statements. (SLIDE 3.) I will now give you an overview of this important and very dynamic market, describe some of the key opportunities we have to grow share and profitability in a sustainable manner, and explain our strategies to achieve this. (SLIDE 4.) Japan is roughly the size of California with 128 million inhabitants concentrated primarily in densely populated urban areas. It is currently the world s third largest economy in terms of GDP, exceeded only by the USA and China. In terms of GDP per capita, with some $47,000 in 2012, Japan is one of the wealthiest nations in the world. The economy generated moderate growth in Prices have been stable and the unemployment rate decreased slightly to 4.3%. However, the Japanese government is faced with the highest debt-to-gdp ratio in the industrialized world. The Japanese cigarette market is the fifth largest by volume in the world, after China, Russia, Indonesia and the USA. Smoking incidence is about 21% and average daily consumption around 18 cigarettes. 1

2 (SLIDE 5.) Let me turn now to the political and economic environment. (SLIDE 6.) In a landslide election victory, the Liberal Democratic Party of Japan (or LDP ) returned to power in December last year. Together with its coalition partner, the New Komeito Party, the LDP holds a two-thirds majority of the seats in the Lower House of the Diet, or parliament. Led by the new Prime Minister, Shinzo Abe, the government enjoys very high approval ratings of around 70%. In July this year, there will be elections for half of the seats of the Upper House, which is currently controlled by the opposition parties. I am sure you are all well aware of the economic policies of Prime Minister Abe s government, namely a sizeable fiscal stimulus and a call for aggressive monetary easing by the Bank of Japan in order to achieve 2% inflation within two years. I think the reaction of the Yen, which lost more than 20% of its value since December 2012, speaks for itself. (SLIDE 7.) Let s now have a look at our business arrangements in Japan. (SLIDE 8.) Our leadership team is a diverse group of accomplished professionals from 9 different countries. I am very proud to lead such a terrific team, which has an in-depth understanding of the local environment and extensive international experience. Four members of this team are joining us here today. (SLIDE 9.) Philip Morris brands have been available in Japan for decades. We established our first legal entity in Japan in 1985 when PMKK was incorporated. One of the most significant moments in our history in Japan was in 2005, when we took back the Marlboro license from Japan Tobacco (or JT ). This major change not only improved our profitability but also allowed us to take full control of our most important brand. Our headquarters are located in Tokyo and we employ nearly 1,800 fully dedicated employees across Japan. (SLIDE 10.) Philip Morris Japan sources most of its products from Europe and they are imported by Sojitz, one of the major Japanese trading houses. The products are then distributed to 2

3 more than 274 thousand licensed cigarette retailers by TS Network, which also distributes the tobacco products of our major competitors. (SLIDE 11.) Industry volume declined by a CAGR of 5.7% between 2008 and The sharp market contraction from 2010 to 2011 was mainly due to the disruptive 40% excise tax increase in October 2010 and the March 2011 earthquake. Although the excise tax driven price increase was substantial, we estimated a moderate price elasticity of Total industry volume in 2012 increased slightly mainly due to the market going back to normal inventory levels. (SLIDE 12.) In the first quarter of this year, the total market declined by a moderate 2% excluding the unfavorable impact of one less selling day. (SLIDE 13.) This slide shows the development of smoking incidence and average daily consumption over the last 5 years. In 2009 and 2010, the rate of decline in smoking incidence was about 4% a year. This accelerated to 9.2% in 2011 following the large excise tax-driven price increase. However, it has since softened to 2.8%. The trend in average daily consumption has been similar over this period. (SLIDE 14.) Now I would like to take you through our objective and key strategies in Japan. (SLIDE 15.) Our objective is quite simple: to achieve profitable long-term market share growth through successful innovation. (SLIDE 16.) To achieve this objective, we are pursuing four main strategies. First, we will remain a well-respected interlocutor for stakeholders in Japan. We will continue to effectively participate in the dialogue about future tobacco policies and regulations, including taxation and pricing. Let me at this point take you through the regulatory and fiscal environment in Japan. (SLIDE 17.) The tobacco industry in Japan is regulated by two laws that came into force in 1985: the Japan Tobacco Inc. Law and the Tobacco Business Law. 3

4 The Japan Tobacco Inc. Law that established JT now requires the state to maintain at least a one third ownership and to approve major corporate decisions. The Tobacco Business Law gives JT a monopoly on the manufacture of tobacco products in Japan. Under the law, JT must also purchase all locally-grown tobacco. Further, it mandates that a given tobacco product must be sold at the same price everywhere, and any price changes have to be approved by the Ministry of Finance. The final key provision is that all tobacco retailers must obtain a license to operate from the Ministry of Finance. (SLIDE 18.) In Japan, public smoking policies are driven at the local level, not the national level. Thus, a number of local authorities have enacted ordinances that restrict or prohibit smoking in streets or other outdoor areas. With regards to indoor public smoking restrictions, Kanagawa Prefecture was the first to enact an ordinance in This was followed by Hyogo Prefecture, which passed a similar ordinance in Both ordinances ban smoking in public places such as hospitals and government offices, while permitting physically separated smoking rooms at most facilities. Both ordinances further require restaurants and bars over 100 square meters to choose between being non-smoking or installing a separate smoking area. On the other hand, restaurants and bars under 100 square meters are exempt. We believe that these ordinances should serve as a model for future public smoking regulations in Japan. They provide a balanced approach that takes into account the desires of both adult smokers and nonsmokers. Since July 2008, all cigarette vending machines have been equipped with age verification technology. In order to purchase cigarettes from a vending machine, adult smokers over 20 years old must obtain a personal card known as Taspo (which stands for Tobacco Access Passport ) that verifies their age. The Taspo card contains a chip that, when swiped, connects to a central server and, upon verification, unlocks the vending machine. The holder s name and picture are also printed on the front of the card in order to discourage third-party use. As far as marketing restrictions are concerned, outdoor advertising is banned. However, brand communication is allowed at point of sale, in smoking rooms and in print media. Promotions at point of sale as well as one-to-one direct consumer contact activities are permitted, though regulated. The overall approach to tobacco regulation in Japan is characterized by rational and pragmatic discussions both in the general public as well as among key stakeholders including the industry. The current understanding of the need to balance the interests of public health, retailers, government revenues and adult smokers gives us confidence that the regulatory environment will remain reasonable going forward. 4

5 (SLIDE 19.) On the fiscal front, the excise tax system in Japan is fully specific with an excise tax incidence on Marlboro currently at approximately 56%. As you know, the last increase in excise tax took place in October 2010, when the tax increased by a disruptive 40%. However, we obtained approval from the Ministry of Finance to increase prices above the impact of the tax in order to compensate for the expected volume decline. While we oppose tax increases like the 2010 example, we acknowledge the necessity for moderate increases for the government to maintain excise tax revenues in a declining volume environment. We therefore advocate moderate and predictable excise tax increases. A bill, which foresees a VAT increase from 5% today to 8% in April 2014 and 10% in October 2015 depending on the economic situation at the time is still subject to the passage of implementing legislation, including a change to the VAT law itself. Prime Minister Abe has recently said that the government will make a final decision concerning the VAT increase in October this year. We strongly believe that, in case of an increase of VAT in Japan, excise taxes should not be increased in the same year in order to avoid an unfair double taxation impact. (SLIDE 20.) This slide illustrates the potential impact of the proposed VAT increase on the retail selling price of Marlboro. In order to maintain unit margins, the price would theoretically have to increase by JPY14/pack in April 2014 and JPY 10/pack in October 2015, respectively. We believe that both steps of the VAT increase are manageable and should offer us an opportunity to further improve our unit margins. (SLIDE 21.) Cigarette prices in Japan are relatively affordable compared to other OECD markets. This chart shows the average minutes of work required in selected OECD markets to purchase a pack of 20 Marlboro cigarettes as of September Japan ranks second lowest in this comparison, suggesting considerable potential for higher prices in Japan going forward. (SLIDE 22.) Our second key strategy is to drive innovation through consumer-relevant portfolio activities. Let me first give you an overview of our brand portfolio performance. (SLIDE 23.) 5

6 As you know, our market share significantly increased in 2011 after the March earthquake and tsunami, and reached more than 30% on a full year basis. Two years later, we have successfully maintained a gain of 3 percentage points compared to 2010 with 27.5% in Q1 this year. This is a very solid base for further market share growth through our innovation pipeline. JT remains the market leader with 59.5% market share while BAT is the other main player with 12.1%. (SLIDE 24.) The top 15 brand families accounted for more than 90% of industry volume last year. Our five key brands are all in the top 15, with Marlboro and Lark number two and three, respectively. (SLIDE 25.) As you can see from this slide, we have a comprehensive portfolio of well-established brands with strong brand equity. They are positioned in a complementary way to cater to different Japanese adult smoker preferences. (SLIDE 26.) Our strong brand portfolio is well positioned across the three main price segments. Parliament is the unmatched leader in the small but stable and highly profitable premium segment. We also lead the high-price segment with Marlboro and Virginia S, both priced at 440 Yen. Finally, we compete very actively in the mainstream-price segment, which is the largest by volume, with Lark and Philip Morris priced at 410 Yen. (SLIDE 27.) Consumer centricity is the key driver of our portfolio strategy, brand positioning and adult consumer engagement. Understanding and translating adult consumer insights is and will continue to be of paramount importance for our success. Next to the traditional market segmentation based on price, taste and cigarette format, as well as societal trends, we also segment the adult smoker population based on taste preferences, as well as behavior and attitudes. We just completed our updated consumer segmentation, which takes into account the latest consumer preferences and will enable us to continue to launch relevant innovations in the market place. (SLIDE 28.) Putting the adult consumer at the center of everything we do enables us not only to launch relevant new products but also to anticipate growing trends. As a result, we are very well positioned in growing strategic segments. In the menthol segment, for instance, we had a 48% segment share in 2012; and in the capsule segment, which has more than doubled over the last two years, we had a 60% segment share. 6

7 (SLIDE 29.) The one milligram segment is very large in Japan, and we achieved a 21% segment share in The last example of a very sizable and growing segment is the 100mm segment, which offers a longer-lasting smoking experience and where we are overindexed with a 33% segment share. Let me now take you through recent examples of relevant new product launches and successful consumer-centric innovations. (SLIDE 30.) Based on the successful launch of Lark Hybrid 6mg King Size in 2011, the 1mg 100s line extension was the first 1mg cigarette to offer adult smokers dual flavor, i.e. from regular taste to menthol when crushing the capsule. With 0.8% share of the market in the first quarter of 2013, the Lark Hybrid franchise has definitely contributed to strengthening Lark s equity. (SLIDE 31.) Last year in May, we entered the growing super-slims segment with two innovative offers, Marlboro Black Menthol Edge 8mg and 1mg king size, which quickly achieved a 10% share of the segment. (SLIDE 32.) Our solid understanding of Japanese adult smokers and trends enabled us to design one of the most successful launches ever for PMJ: Marlboro Ice Blast, the ultimate cooling offer from Marlboro. Following the great success of the 8mg variant and knowing the preferences of many adult smokers for lighter-tasting products, we extended the concept by launching Ice Blast 5mg and 1mg, increasing Marlboro Ice Blast s market share to 1.8% in the first quarter of (SLIDE 33.) Virginia S. has been the driver of our performance among female adult smokers. In October last year, Virginia S. Ice Pearl s success was built on a very clear Unique Selling Point: the first menthol slim cigarette with a capsule inside to provide a highcooling taste sensation. Ice Pearl helped the entire Virginia S. franchise to remain up-todate in this very competitive segment. (SLIDE 34.) Lark Ice Mint was our first strategic launch this year. It completed our presence in the growing high-cooling segment at a mainstream price. The two variants are intended for 7

8 more mature and traditional adult smokers who prefer Japanese style brands. In the first two months since the launch, they achieved a combined share of 0.6%. (SLIDE 35.) A couple of weeks ago, we were very proud to introduce a worldwide premiere with the launch of the first double-capsule product Marlboro W-Burst. For your information, W in Japanese is pronounced Dabburu, which means double. Two capsules are embedded in the filter, one being menthol and the other spearmint, so that adult smokers can customize the taste as they wish. It is still too early to assess this product s performance, though initial indications are encouraging. (SLIDE 36.) This key visual illustrates the customization of the smoking experience by crushing the two different capsules. We are very confident that this real innovation will enhance Marlboro s leadership in the Japanese market. (SLIDE 37.) As you can see from this slide, PMJ s portfolio enjoys favorable demographics overall. Moreover, Marlboro is the number one brand among 20 to 29 year old smokers. This augurs very well for the future. (SLIDE 38.) One of the best KPIs to measure the effectiveness of our innovation strategy is the market share of our new products. Among all new products launched since January 2012, PMJ s products have achieved a 39% share. This is clearly over indexed, and demonstrates the superiority of our innovation over the last 15 months. (SLIDE 39.) While we focus a lot on new products, an important element of our strategy consists in supporting the core, in other words existing products, in order to prevent share erosion triggered by intense competition. Here is an example of our Lark campaign, which went live recently in magazines and other print media, to celebrate 50 years in Japan. (SLIDE 40.) As I said, understanding adult consumer needs and trends is essential to designing the right product offers. However, it is also critical to engage adult smokers at the right place and time with the right brand and message. This is why we have a sizable team, equipped with the latest technology, designing and implementing adult consumer engagement programs. We have always been strong at engaging adult smokers in the nightlife arena and at special events. But we have recently expanded the adult 8

9 consumer touch points and focus to daytime programs as well. Daytime touch points include restaurants, bars and smoking rooms. In addition to manned activities, adult smokers can also interact with our key brands in an engaging and exciting way through our leading-edge, age-verified, internet platforms. (SLIDE 41.) Our third strategy is to reinforce our brand equity through an optimized trade channel approach. (SLIDE 42.) The retail universe in Japan can be split into three main categories. First, there is the vending machine channel, which is still significant with around 300,000 units, but has been on a continuous decline since the implementation of the Taspo card in It now accounts for less than 10% of industry volume. The second channel is general accounts, mainly tobacconists and independent supermarkets and groceries, accounting for 17% of industry volume. Last but not least, is the convenience store channel, which, although relatively small in terms of the number of outlets, accounts for 63% of industry volume and keeps on growing. (SLIDE 43.) Convenience stores are a very strategic channel where we are significantly investing to increase our permanent visibility and intensify our promotional programs for our existing products as well as new offers. Our estimated market share in convenience stores is nearly 30% and we are therefore over-indexed in this growing channel, positioning us well for the future. (SLIDE 44.) General accounts located in high traffic areas represent a great opportunity to promote our brands. Furthermore, we also support smoking rooms in selected stores, which enable us to run one-to-one adult consumer engagement activities in an entertaining manner. (SLIDE 45.) Our fourth strategy is to further develop our agile and winning organization. (SLIDE 46.) All our business processes fully integrate both the Marketing and Sales functions. This enables us to design relevant and comprehensive action plans - especially for new product launches - starting with the adult consumer insights that we have generated and 9

10 continuing all the way to the engagement of adult consumers at the point of sale and other touch points. As adult consumer segments have become increasingly fragmented, we are in the process of providing more sophisticated tools and training to our field sales and adult consumer engagement force. Our objective is to better equip them to further differentiate our activities, depending on the location and consumer profile in any given point of sale or other touch point. Part of the decision-making process is being gradually decentralized to enable our sales force to implement a more focused and relevant multibrand approach on the ground. Finally, outsourcing non-value-adding activities and the use of state-of-the-art technologies are two essential ways to drive efficiencies. (SLIDE 47.) I hope I have provided you a solid understanding of our operations in Japan. To summarize: - The total industry volume decline is moderate, and the regulatory and fiscal environment remains reasonable; - Cigarettes are relatively affordable in Japan. We believe that the planned VAT increases next year and the year after, should they be confirmed, represent good unit margin improvement opportunities for us; - Overall, we have managed to gain three share points compared to 2010; - We have a solid pipeline of relevant product innovations to meet evolving adult smoker preferences and are well-positioned in the strategic trade channels; - We are constantly optimizing our organization and business processes to improve efficiencies and boost our market share and profitability; (SLIDE 48.) To conclude, I strongly believe that we have the superior brand portfolio and winning organization to achieve long-term profitable market share growth. Thank you very much for your interest. I will now be happy to answer your questions. 10