June 21 - Fitch Ratings has affirmed Philip Morris International Inc's
(PMI) Long-term Issuer Default Rating (IDR) and senior unsecured rating
at 'A' and Short-term IDR at 'F1'. The Outlook on the Long-term IDR is Stable.
The affirmation and Stable Outlook reflect PMI's continuing competitive strength
and its ability to consistently increase profits despite a contraction of
cigarette consumption in the global tobacco market (excluding China and the US).
Other factors supporting PMI's 'A' IDR are its healthy operating EBITDA margin
of 46%, which has consistently grown over time, and its substantial pre-dividend
free cash flow (FCF) generation (USD9.0bn in 2011).
Fitch notes that PMI's operations are exposed to stagnant/declining volumes of
consumption of cigarettes and to continuing regulatory and taxation pressure
despite a balanced exposure to mature as well as to developing markets. Fitch
calculates that, excluding China and the US, global volumes of consumption of
duty-paying cigarettes have been declining by an average 0.7% pa over the period
2006-2011, with contraction being more severe in 2009 and 2010, when the world
economy was weaker.
These concerns are however well mitigated by PMI's demonstrated ability to raise
prices and generate revenue growth in the order of 6%-8% annually from price
increases and product mix improvements over the same period. The agency views
these trends as sustainable in the medium term and takes comfort from the
consolidated nature of the industry as well as from the track record of
manufacturer price increases that tend to accompany any gradual excise duty
increase imposed by governments.
Regulatory changes also continue to put pressure on tobacco consumption.
However, while Fitch considers the impact of smoking bans, cabinet display bans
and graphic health warnings on consumption as broadly manageable by the
industry, it cautions that plain packaging legislation - due to come into force
in December 2012 in Australia - could be more challenging if adopted widely
across the world.
PMI's operations in Australia are small in the context of its consolidated
profits and the industry is currently mounting a legal challenge to plain
packaging legislation. The extent and the timing with which such legislation
could become a serious challenge globally for PMI is therefore not clear at the
moment and the agency has not factored this risk in its ratings.
PMI's annual FCF before dividend payments (and excluding working-capital
movements in order to smooth out the volatility determined by build up of
inventory ahead of excise duty increases) has demonstrated high stability, at an
average of USD7bn a year in 2008-2010, followed by important growth in 2011.
PMI's financial profile remains strong and stable despite significant
distributions to shareholders in the form of dividends and share buybacks. The
latter will be increased to USD6bn per annum (from USD5.0 to USD5.5bn) over
2012-2014. Fitch however takes comfort from the historic stability of PMI's
leverage, which on a gross lease, pension and put option adjusted/operating
EBITDARP basis has remained between 1.3x-1.5x between 2009 and 2011 and which
the agency projects will grow only mildly above this level over 2012-2014.
An upgrade would be contingent on maintaining gross adjusted leverage
sustainably below 1.3x-1.4x, as well as maintaining the current level of
profitability and FCF generation in the absence of shocks derived from far more
stringent regulation. Fitch does not however currently expect management to
pursue financial policies that would be commensurate with an upgrade.
Spending on acquisitions or share buybacks, combined with an impaired rate of
growth for revenue and profit that move gross adjusted leverage above 2.0x,
would be negative for the ratings. A materially adverse judgement by a court
after all appeals processes requiring PMI to pay a large amount of money as
compensation following tobacco litigation would also be considered a negative
Additional information is available at www.fitchratings.com.
The ratings above were solicited by, or on behalf of, the issuer, and therefore,
Fitch has been compensated for the provision of the ratings.
Applicable criteria, 'Corporate Ratings Methodology', dated 12 August 2011 is
available at www.fitchratings.com
Applicable Criteria and Related Research:
Corporate Rating Methodology