Philip Morris ups forecast despite La Niña

BY BEVERLY T. NATIVIDAD, BusinessWorld Reporter Cigarette manufacturer Philip Morris, Inc. still expects sales to increase to 34 billion sticks in 2006 from only 24 billion sticks in 2005 despite an expected shortfall in tobacco supply this year due to the La Niña-induced heavy rains in Region 2 last January. Philip Morris managing director Chris Nelson said the company is banking on their planned expansion of distribution networks, and maintaining cigarette stick prices to an average of P1.50 per stick. They also plan to tap existing buffer stocks and the possible importation of raw materials to fuel a sales increase in 2006 and cope with the expected difficulties for the year. "We are looking to increase our sales this year since we’re expanding our distribution force. In this market, availability is critical. That should help in increasing our sales despite the market decline," said Mr. Nelson. He explained that several market pressures are currently affecting the local tobacco industry. For one, continuous and heavy rainfall from December to January due to the effects of La Niña in Region 2 had already devastated about P150 million worth of crops. Heavy flooding in four of the six provinces -- Isabela, Quirino, Cagayan and Nueva Vizcaya -- in the region had wiped out tobacco crops in about 2,441 hectares of farmland. Accordingly, the Magat dam had to be opened to prevent further damage by the excessive rainfall, thus sending out excess water to the farmlands. Mr. Nelson said Philip Morris initially had high growth expectations for 2006 had it not been for the devastating effects of the La Niña. For example, they were earlier considering buying 5,500 tons of raw tobacco from their provincial suppliers, but due to the heavy rains, they can now only buy about 2,500 tons of raw tobacco. Philip Morris, said Mr. Nelson, had also earlier eyed to export up to 400 tons of both raw and processed tobacco but now had to scale back to 300 tons due to the weather disturbances in the tobacco farmlands. "This year, we were expecting a large crop supply, until the January rains came. Now, we want to get the farmers back on track," said Mr. Nelson. Despite the shortfall in the tobacco supply, Mr. Nelson said Philip Morris still has inventories or buffer stocks that can still supply the rest of the requirements. Philip Morris is also looking at importing raw tobacco from other countries if they can find supplies similar to the local burley they buy. In 2004, total tobacco market sales for the industry in general had reached 96 billion sticks and fell to 82 billion sticks in 2005. The market contraction in 2005, said Mr. Nelson, was due to the increase in excise taxes last year. For 2006, the industry was initially expected to sell about 88 billion cigarette sticks, given that there are no tax increases set for this year, but also tempered with the effects of the value-added tax (VAT) increase. While the tobacco industry has started off "quite soft" in the first two months, he said the cigarette firm’s focus for 2006 will mainly be on strengthening their sales and distribution. This year, he said, Philip Morris is working on expanding their present 30,000 points of sale out of a total 500 million points of sale in the country today. Another key element, said Mr. Nelson, is maintaining their stick prices at an average of P1.50 given that 70% of all sales in the Philippines are by single stick.