Will Philip Morris International Really Stomp Out Its Own Cigarette Business?

Source from:  Motley Fool 03/28/2018

Tobacco use dates back for centuries, and cigarettes have been a huge business that have driven business for Philip Morris International (NYSE:PM) for decades. Yet the holder of international rights for the world-renowned Marlboro brand has said that it expects cigarettes to become a thing of the past, and it believes that alternatives like its iQOS heated tobacco system could be the answer for both Philip Morris and its customers.

iQOS has had early success in Japan, and Philip Morris is now moving to ensure that adequate supplies of the tobacco inserts needed for the system will be available as it expands across Europe. The company's efforts to boost production have shown its commitment to the massive strategic shift, and substantial spending projects are now starting to come to fruition.

No more cigarettes
Philip Morris said earlier this week that it had completed work on converting a key factory in Greece toward production of iQOS tobacco units, also known as Heets. The tobacco giant had said last year that it would spend 300 million euros on the conversion, constructing three new buildings and replacing the production lines that had formerly produced cigarettes with newer facilities that could produce Heets at a pace of roughly 600,000 units per hour.

Now that the facility is complete, Philip Morris said that it has now fully converted the former cigarette factory to exclusive production of Heets. The company called it "a landmark step in our vision of a smoke-free future where people who smoke switch from the most harmful form of nicotine consumption -- cigarettes -- to scientifically substantiated smoke-free alternatives." No more cigarettes will be produced at the Greek plant, although Philip Morris said it could take until the end of 2018 before the facility is expected to be fully operational.

Moreover, Philip Morris sees this becoming a new trend for the tobacco maker. In the words of CEO Andre Calantzopoulos, "We will continue to convert existing sites and invest in new facilities to answer global adult smoker demand for better alternatives to cigarettes."

Building momentum
The Greek facility now becomes the second plant fully dedicated to iQOS-related production. Philip Morris completed initial work on its Italian production facility in Bologna about a year and a half ago, and the company subsequently announced that it would spend 500 million euros to expand capacity further at the site.

Philip Morris has a number of major projects in its pipeline. A $320 million investment announced last year will go toward establishing high-tech production capabilities in Germany, with full operation expected in 2019. Now, the tobacco giant will add to those expectations future conversions of plants in Korea, Romania, and Russia. Some of those moves will be complete transformations, while others will involve only partial switches from traditional tobacco product manufacturing.

Meeting demand for iQOS
The moves from Philip Morris are aggressive, but the way in which customers have embraced the heated tobacco product has made the new strategy a necessary one. According to the company, almost 5 million smokers have already given up traditional smoking and adopted iQOS in its place. Some of those customers are likely former Philip Morris cigarette customers that the iQOS unit has essentially cannibalized, but Philip Morris hopes that it's also drawing smokers away from other brands into the company's broader ecosystem.

Amid calls for increased regulation of tobacco around the world, it's easy to understand the urgency that Philip Morris has in shifting itself away from traditional cigarettes. As iQOS becomes available in an increasing number of markets, it'll be interesting to see if consumer demand for the product is as strong as it has been in Japan. If Philip Morris can sustain the positive momentum from the earliest release of iQOS products and translate it into worldwide success, it could mark one of the most unlikely yet successful about-faces for major corporations in stock market history.  Enditem