What Led To The Poor Performance Of Philip Morris In Its Latin America And Canada Region In The Second Quarter?

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During the recent earnings announcement of the second quarter, it could be seen that the Latin America and Canada region was the worst performing segment for Philip Morris International (NYSE:PM). The net revenues in the region, excluding excise taxes, fell 13.6%, as compared to the second quarter of 2015. The main reason for this was unfavorable currency movements, which negatively impacted the revenues by $136 million. If the currency impact is excluded, the net revenues actually increased 3.2%. This growth was driven by a favorable pricing of $74 million, primarily in Argentina and Canada, partially offset by an unfavorable volume mix of $48 million, reflecting the impact of excise tax-driven price hikes.

PMI- LAC

While the fall in revenues was high, the decline in operating companies income was even greater, coming in at over 31%. If currency headwinds of $78 million are excluded, this metric still declined by 7.1%. The unfavorable volume/mix, primarily in Argentina, negatively impacted by $39 million. Furthermore, higher costs, again primarily inflationary-driven in Argentina, further impacted the results. These factors, in turn, negatively affected the OCI margin, which declined 820 basis points, to 32.1%.

The company’s cigarette shipment volume fell close to 6%, to 21.3 billion units, predominantly due to Argentina. The one bright spot in all of this was an improvement in Marlboro’s market share, which increased 0.4 points to ~15.3%, despite a fall in its shipment volume by 5.1%. This improvement was mostly driven by Brazil, which increased by 0.6 points to 10%, Colombia, up by 0.2 points to 9.3%, and Mexico, a rise of 1.7 points to 47.8%.

The performance of Philip Morris’ key markets in the regions have been shown below.

PMI- Argentina

While the total cigarette market declined 12.5%, as a result of weakness in the economic environment, the shipment volume of PMI fell by a higher rate, reflecting growth in the competitors’ super-low priced products.

PMI- Canada

During the quarter, the total cigarette market in Canada declined 6.4%, while the company’s shipments fell a comparatively smaller 1.5%. This was a result of a higher market share gained by the company, particularly the improved performance of premium Belmont, low-priced Next, and super-low priced Philip Morris.

PMI- Mexico

In the second quarter, Mexico’s cigarette market increased by 1.2%, reflecting improved market conditions and a lower prevalence of illicit trade. This also resulted in growth for cigarette shipments by PMI, further aided by an improvement in the market share for the company, driven by Marlboro and premium Benson & Hedges, and low-priced Delicados. The company’s share in the premium segment in the country, 56.5% of the total market, increased 1.3 points to a massive 93.3%.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Philip Morris International.
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