Remarks by Geoffrey C. Bible, Chairman and Chief Executive Officer, Philip Morris Companies Inc., to the Council of Institutional Investors Spring Meeting in Washington D.C. March 27, 2001
I would like to begin by thanking Sarah for inviting me to speak to you today. I do believe we have an important story to tell and I welcome the opportunity to do so.
I will start by giving you a brief overview of Philip Morris and its financial results for 2000 so that you will have an understanding of the scope of our company and its performance. I will then briefly discuss the tobacco litigation that has been so much in the news, and will explain how we have been successful in managing the litigation environment.
Finally, I will devote the remainder of my remarks to telling you about how we have changed the way we run our tobacco businesses in response to deep-seated changes in society's views of tobacco use.
We have instituted a comprehensive program of changes that are designed to align our tobacco businesses – as well as our food and beer businesses -- with the expectations that society has of them as manufacturers and marketers of consumer products, especially those that involve serious health risks. We are being held to a high standard, and we are rising to the challenge of meeting that standard.
Philip Morris Companies Inc. is the largest and most profitable consumer packaged goods company in the world. We are in three primary businesses – food, beer and tobacco.
We have an unmatched product portfolio, with 91 brands that each generated $100 million or more in revenues in 2000 – including 16 from the acquisition of Nabisco. Fifteen of our brands generated one billion dollars or more in revenues last year; great brands like Marlboro, Kraft, Miller Lite, Maxwell House and our newest addition, the Nabisco trademark.
Kraft Foods is the largest and most profitable food and beverage business in North America and second largest in the world. Miller Brewing is the second largest beer company in the United States. Our tobacco businesses, Philip Morris USA and Philip Morris International, are the largest and most profitable tobacco businesses in the United States and in the world.
For the full year 2000, on a consolidated underlying basis we had operating revenues of $80.4 billion, net earnings of $8.4 billion and diluted earnings per share of $3.71, an increase of 12.4 percent. Significantly, we achieved that performance despite an unfavorable currency impact of just under half a billion dollars. On a constant-currency basis, our underlying diluted earnings per share would have been up 16.3 percent.
In August, we raised our dividend by 10.4 percent, to an annualized rate of $2.12 a common share. This marked the 33rd time in the past 31 years we have increased our dividend.
We also bought back 138 million shares, or 5.9 percent of our outstanding common shares, at a cost of $3.6 billion. And in February of this year, we announced a new three year, $10 billion share repurchase program.
In conjunction with the Nabisco acquisition, we also announced our plan for an initial public offering of less than 20 percent of our Kraft Food business. We recently filed a registration statement for the IPO with the Securities and Exchange Commission, and we are awaiting their comments. Because we are now in registration, I am unable to say any more about the offering at this time.
Our businesses are in fine shape, and we believe that the outlook for the future is very positive.
In 2000, our share price rose 91.3 percent, making Philip Morris the best performer in the Dow Jones Industrial Average.
While we are encouraged by this performance, we believe our shares remain undervalued based on our strong business fundamentals and future growth opportunities.
Some investors argue that the attractiveness of our shares is diminished because of the steady stream of litigation that we, like other companies in the tobacco industry, have to deal with. In fact, and this may come as a surprise to many of you, our litigation environment has improved over the past couple of years.
All of you will have seen the headlines about the Engle case in Florida. That is the kind of case that makes news.
What you generally do not read about in the headlines are the many other cases in which, for example, courts continue to reject attempts to certify smoking cases as class actions. To date, 20 courts have ruled in 31 cases that claims against tobacco companies should not be litigated as class actions.
These cases make it all the more clear that the Engle case, despite its size and attendant publicity, is an aberration and should never have been certified as a class. We also believe the Engle verdict resulted, in large part, from an unconstitutional and unlawful trial plan, and that the trial judge made numerous errors of law.
We are appealing the Engle verdict and believe that it should be overturned.
As the appellate process moves ahead in Engle, we have continued our record of successful management of other types of litigation.
There are now 10 opinions from seven federal courts and one state appellate court rejecting claims brought by third-party payors of health care costs, as state and federal trial courts continue to dismiss such cases. The only such case to proceed to trial resulted in a unanimous verdict for the industry.
Since an early loss in an individual case on the West Coast in March of last year, which is on appeal, juries returned verdicts in favor of the defense in five of the six other individual smoking and health cases that have gone to trial. In the sixth, the trial court reversed a jury verdict against one of our competitors and ordered a new trial.
In September last year, a federal district judge granted our motion to dismiss a substantial portion of the health-care cost-recovery case filed by the Department of Justice. The remaining claim will be allowed to proceed to the fact-finding stage, but will be subject to a motion for summary judgment prior to trial.
Outside the United States in 2000, Philip Morris and other tobacco companies achieved significant success in several key cases, including the dismissal of a class action in Australia, the dismissal of individual cases in key European and South American countries, and the dismissal of a third-party payor case filed in Israel.
In short, while litigation is a fact of life in the tobacco business, and will continue to pose a variety of challenges, we are proving that the litigation is manageable and we will continue to allocate the resources necessary to defend the interests of the company.
We also believe that the adverse climate of public opinion that has nourished some of this litigation is beginning to change as a result of the public’s understanding of changes we have made in our ways of doing business.
I would like to tell you now about what we are doing to align our tobacco businesses with society’s expectations, because you may not be familiar yet with this part of our story.
I am quite sure that everyone here is aware of the Master Settlement Agreement between the domestic tobacco companies and the state attorneys general.
The MSA, as we call it, fundamentally changed the way tobacco is marketed in the United States.
Among other things, the MSA banned billboards and transit advertising. It banned the use of tobacco logos on clothing or merchandise. It banned the use of cartoon characters selling cigarettes.
It strictly forbids the marketing of cigarettes to kids.
And each state attorney general has independent enforcement authority to ensure compliance with the MSA, and a $50 million enforcement fund has been established for this purpose.
The MSA went into effect more than two years ago. From the outset, Philip Morris USA has used it as a springboard for change because it is the right thing to do, and because the company can only prosper in a changed environment by changing itself.
Only responsible manufacturers will have a role in shaping the industry’s future. And only the most responsible company will have earned the right to lead the way.
That is why Philip Morris USA has a company mission that clearly defines its path and its commitment to remain the industry leader.
That mission says: Philip Morris USA’s goal is to be the most responsible, effective, and respected developer, manufacturer and marketer of consumer products, especially products intended for adults.
Its core business is manufacturing and marketing the best quality tobacco products available to adults who choose to use them.
It is this mission and its focus on responsibility and effectiveness that underpins every one of Philip Morris USA’s efforts moving forward.
And instead of engaging in certain activities that, while legal, would be contrary to the spirit of the MSA in our opinion, Philip Morris USA has in many areas instituted voluntary practices that exceed what is required.
For example, last April, Philip Morris USA stopped placing ads on the back covers of all magazines – because kids can come across the back cover even if the magazine is not intended for them. Philip Morris USA was the first major cigarette manufacturer to take this step.
The company also augmented its standard for placing print ads to further reduce exposure to kids. For guidance, it looked to the standard proposed by the FDA in 1996 even though it is not in effect. To date, Philip Morris USA has suspended its branded advertising in more than 50 national publications.
As a result, it no longer advertises in Rolling Stone, Sports Illustrated, Better Homes and Gardens and Newsweek. It is also working with the state attorneys general to develop a new standard for placing print ads.
Again, Philip Morris USA was the first major cigarette manufacturer to take these actions.
In April, 1998, Philip Morris USA voluntarily created a Youth Smoking Prevention Department with an annual budget of $100 million and a single mandate: to help reduce tobacco use among minors.
Because this complex problem has no single cause and no single solution, Philip Morris USA’s youth smoking prevention efforts involve four key strategies.
The most visible strategy is communications. The company has been airing TV commercials since 1998 to discourage kids from smoking by changing their perceptions about smoking. They convey a “Think, Don’t Smoke” message through peer-to-peer communications to underscore that it is not cool to smoke.
Philip Morris USA has complemented these commercials by developing “parent advertising” that encourages parents to talk to their children about not smoking.
The next strategy is education. According to research, school programs that build self-esteem and teach social skills play an important role in helping kids resist negative behaviors.
such program is called Life Skills Training. It was designed by a
professor from Cornell University and was singled out by the Centers for
Disease Control as only one of two programs that work.
Philip Morris USA helps fund the Life Skills Training curriculum at middle schools around the country. It is making grant commitments of more than 11 million dollars to school districts in 18 states so that more than 300,000 middle school students receive Life Skills Training in the classroom. The company has also commissioned a three year independent evaluation of the program to help expand the body of knowledge about preventing risky behavior among kids.
The third strategy is community action. Communities can provide social outlets and structured activities to reinforce positive behaviors. That is why Philip Morris USA supports leading youth and community based organizations such as Boys and Girls Clubs and the 4-H.
As part of its fourth strategy, access prevention, Philip Morris USA supports the coalition for Responsible Tobacco Retailing’s “We Card” program, which has provided training and education sessions to approximately 50,000 retailers.
For 2001, the company has added a progressive merchandising option to its Retail Leaders trade program that pays retailers to put cigarettes behind the counter instead of using self-service displays.
The program also offers financial incentives to limit tobacco signage in stores, to provide additional “We Card” access prevention education, signage and training for their employees and to comply with the MSA marketing restrictions relevant to retail stores.
The company has also launched a print advertising campaign that is running in magazines nationwide to remind parents and other adults to keep their cigarettes away from kids.
It will soon provide new materials at retail that deliver the message, “Don’t Buy Cigarettes for Kids,” because research shows that 30 percent of kids who smoke say they get their cigarettes by giving money to someone else who buys them.
Philip Morris USA’s pursuit of youth smoking prevention continues to be a core business priority with resources on a par with its other business efforts.
This year Philip Morris USA again expects to spend more than 100 million dollars supporting an array of programs that help build protective factors in kids’ lives.
Building positive relationships is a key protective factor, so the company is intensifying its focus on parents by supporting educational efforts like the Work for America Institute’s Parent Connection program and creating advertising directed towards parents.
Outside the United States, Philip Morris International is actively involved in more than 130 programs in nearly 70 countries in an effort to prevent youth smoking. In many cases it has formed alliances with respected organizations that work with and understand minors.
Initiatives include support of youth access prevention and youth smoking prevention advertising; placing the message, “Underage Sale Prohibited,” on every pack and working actively with governments and competitors to achieve the reforms necessary to reduce youth smoking in each country where it operates.
Philip Morris International actively advocates and supports laws that establish a minimum age of at least 18 for the lawful sale of tobacco products. Today, approximately 90 countries outside the United States have such laws.
The company participates in more than 70 youth access prevention programs in countries ranging from Brazil to Turkey to Kazakhstan and Singapore.
It is also participating in more than 50 youth smoking prevention programs, including advertising, school-based, community and other campaigns similar in many ways to those conducted by Philip Morris USA.
Governments in nearly 40 countries support many of Philip Morris International’s youth smoking prevention initiatives.
For example, the “Yo Tengo P.O.D.E.R.” education program has the support of a number of federal and local government authorities throughout Latin America.
Philip Morris International is committed to working with governments and its competitors to reform cigarette marketing practices in line with societal expectations.
It adheres to worldwide standards to ensure that marketing efforts are directed solely towards adults who choose to smoke. These standards are part of the Philip Morris International Cigarette Marketing Code and are obligatory for all employees worldwide.
The company also seeks the cooperation of competitors to adopt voluntary cigarette marketing codes and to date such codes have been adopted in 80 countries.
Some people will tell you that this is all a smokescreen, and that Philip Morris USA and Philip Morris International don't mean a word of it. Some people will tell you that they do and must market cigarettes to kids because they must recruit the next generation of smokers while they are still young. I say to you today that those views are completely and utterly untrue. We will persevere in our commitment to youth smoking prevention and no amount of criticism will cause us to alter our course.
keep its brands growing in a responsible manner, Philip Morris USA is
investing in focused marketing initiatives.
It believes focused marketing -- such as equity enhancing promotions, relationship marketing and direct mail programs – is the most responsible way to communicate directly with adults who smoke.
Philip Morris USA and Philip Morris International further believe that it is their responsibility to aggressively pursue reduced-risk technology that provides products adults find acceptable while potentially reducing risks associated with smoking.
You may have heard about Philip Morris USA’s Accord smoking system. Accord is a specially designed cigarette that is smoked in a unique, patented electronic lighter that heats rather than burns tobacco.
Its attributes include virtually no lingering odor, ashes or sidestream smoke. Philip Morris USA has assiduously refrained from making any health claims and is seeking guidance from the public health community about what it can and cannot say.
But as Philip Morris USA continues to improve the system, more is being learned about how to reduce smoke constituents.
Reducing potentially harmful smoke constituents in conventional cigarettes is an important effort it has underway. The goal is to develop and launch a conventional cigarette with a significant reduction in these smoke constituents. Philip Morris USA is giving special focus to this effort, from both an organizational and resource point of view. And, it is continuing to have conversations with the public health community about which constituents should be reduced or removed and what, if any, health benefits could result from doing so.
I mention all this to provide a context for the business success our tobacco businesses have experienced despite the MSA and the voluntary actions they have taken themselves.
Our tobacco businesses are proving and have proven they can succeed in this environment. As the industry leaders, they are committed not only to achieving outstanding business results, but also to actively defining their future in a competitive marketplace.
We see that future as one in which Philip Morris USA and Philip Morris International will lead the way by delivering social value as well as economic value.
One of our corporate goals at Philip Morris Companies is what we call Societal Alignment. This means we want all of our businesses to meet society’s expectations of them as responsible manufacturers and marketers of all their products, especially those that carry significant health risks.
We want to understand what is expected of them and meet or exceed those expectations. We admit that we were slow in recognizing the changes in social attitudes that have required us to change the way we pursue our tobacco business. We want to be a highly respected family of companies, with strong ties to society, and with employees who take public pride in being part of the family.
One of the cornerstones of our effort is something we call constructive engagement. Those two words characterize the way we are now dealing with different issues and societal concerns.
Today and in the future, when we face such issues and concerns, we do so in a constructive manner, trying to find win-win solutions through cooperation. We and our critics will not agree on everything, but we can work together on issues we do agree on, such as youth smoking prevention, and move forward from there to find ways to break through an impasse when one exists.
Constructive engagement requires us to engage in a proactive, two-way dialogue with others who have a legitimate stake in our issues. It means for us to pick up the phone and not wait for others to call us first. We want to open up the dialogue and keep it open as changes in society and in our own activities affect our thinking and the thinking of those we are talking to.
Let me give you some examples of what I mean.
Last year, Miller Brewing voiced its support for landmark drunk driving legislation in Wisconsin that would result in significantly stiffer penalties for repeat drunk driving offenders and under age drinkers who drive. This was the first time a beer company supported such legislation.
Miller also played an active role in developing and working with a coalition of unlikely partners that included Mothers Against Drunk Driving, law enforcement officials and others. Miller expects to work with these coalition members in the future.
In our food business, Kraft is leading an industry program that is designed to address childhood obesity, the prevalence of which has increased 50 percent in the last 10 to 15 years.
Obesity is a serious issue among all age groups because of the diseases it can cause, including heart disease, hypertension, stroke, cancer and, most of all, diabetes.
There has been a sharp increase in type 2 diabetes in the last decade and the incidence among young people, who were seldom afflicted before, has increased substantially.
overall program is called ACTIVATE. Kraft and others in the
have conducted unprecedented consumer research to understand how consumers look at this issue, what causes it, what its physical and emotional effects are, and, most importantly, the kind of help they need to prevent further increases in obesity.
Based on these findings, they have developed a plan that will focus on eight to 12-year-olds and their parents, their eating and activity behaviors as well as the healthy family dynamics needed to effectively deal with the problem.
Kraft is currently leading the effort to bring a number of other companies into the fold and it expects to launch publicly sometime later this year.
Another example involves Philip Morris USA’s and Philip Morris International’s work with the World Health Organization and its proposed Framework Convention on Tobacco Control.
It should come as no surprise that Philip Morris International’s testimony and submission at last year’s WHO hearing in Geneva were met with a great deal of skepticism and distrust. Many of our critics urged the WHO to keep us out completely, now and in the future. But we believe the reasonableness of our positions did strike a chord with some and a number of our people are now working with the WHO, particularly in the reduced risk product area.
Both on a global scale and specifically here in the United States, we believe the tobacco industry should be regulated to a much greater extent than it is now.
Whether it is through the World Health Organization’s proposed Framework Convention on Tobacco Control, or, in this country, as a result of legislation that provides the FDA regulatory authority over tobacco, we embrace the notion of sensible and tough federal regulation of cigarettes.
Although until very recently we were known for our opposition to federal regulation of the tobacco industry, we have re-thought our position on regulation as part of the comprehensive changes we have made in how we do business and relate to society. Having taken a new look at the issue, we are now convinced that regulation will be good for our tobacco businesses.
It will provide the stability and predictability that comes with knowing what the rules are, and how to follow them. It will further address the serious problem of youth smoking.
It will address the very complicated issues associated with the development and marketing of reduced risk products.
It will help establish a level, competitive playing field, with all manufacturers being required to adhere to the same restrictions with uniform and equitable enforcement.
Overall, cigarette consumption will likely continue to decline over time, both here in the United States and overseas.
But we believe our tobacco businesses can profitably grow in a regulated environment that permits them to compete fairly for their fair share of the adult smoker market. And we believe they will benefit by aligning their business practices with the reasonable concerns and expectations of society.
It may be that in the long run, the use of tobacco products will decline noticeably as a result of changes in adult behavioral preferences – though we believe that adults should be free to choose to smoke if they wish with due consideration for others. If tobacco consumption declines significantly, we say – so be it.
Philip Morris Companies defines itself not as a tobacco company, but as a consumer products company with particular expertise in products intended for adult consumers and we intend and expect to prosper in the consumer products business long into the future, come what may.
I hope my remarks today have given you a better understanding of and appreciation for the changes taking place inside our organization.
I hope, as well, that you have become more informed about the steps we are taking and will continue to take to meet society’s expectations of us.
Philip Morris has broadened its view of the world and the responsibilities inherent in its role as a member of society. I will be very pleased if my remarks today have prompted you to broaden your view of Philip Morris.