Will Philip Morris Beat Expectations This Earnings Season?

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Philip Morris International (NYSE:PM) is set to report its third quarter earnings on October 18. Philip Morris’ shareholders are no doubt waiting for the earnings slide to end. Consensus estimates expect a flat earnings report, with a slight gain in sales.

PMI- Q3 Pre Earnings

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During the second quarter, the company’s revenue, excluding excise taxes, fell by over 3%, while its earnings per share fell by 5%. At that time, the CEO Andre Calantzopoulos stated that he expected the growth to take place in the second half of the year. The company had also raised its EPS guidance, from $4.40-$4.50 to $4.45-$44.55, to reflect a 10%-12% growth. This was driven solely by currency, and included 40 cents of unfavorable currency, instead of 45 cents earlier. Recently, the company narrowed its forecast of reported diluted earnings per share to be in the range of $4.53 to $4.58, which includes an unfavorable currency impact of $0.35. For the full year, PMI forecasts a total cigarette industry decline of 2% to 2.5%, excluding China and the US, and the company’s volume to fall at a rate of 3.9%.

PMI- FY 2016

PMI also expects its Reduced Risk Products (RRPs) to approach break-even OCI (Operating Companies Income) in 2017, and to start contributing positively by 2018. The company is targeting 30 to 50 billion units in incremental volume through RRPs, which would add an additional OCI of $0.7 billion to $1.2 billion by 2020, with an increasing confidence of reaching the upper end of the target range. There are plans of increasing the annual RRP production capacity to 50 billion units, an increase of 20 billion units from its initial planned capacity of 30 billion units, by the end of 2017. The heated tobacco stick capacity is anticipated to be 7 billion units, available for commercialization, in 2016 with an installed annual capacity of 15 billion units by the end of the year. iQOS should be present in close to 20 markets by the end of 2016, and in 30 to 35 markets by the end of 2017.

Japan is the only country where the national roll-out of iQOS has occurred, and it has witnessed exceptional performance. The market share has steadily climbed since it was first introduced in the country. During FY 2015, the iQOS launch was expanded in Japan to reach 60% of the adult smoking population, and the national roll-out was completed in the beginning of the second quarter. For the second quarter, the HeatSticks market share increased to 2.2%, more than twice its share in the first quarter. Furthermore, the share in the week starting September 18, 2016, reached an estimated 5.2%, and an even higher 7% in Tokyo. The company also noted that the level of cannibalization from its own cigarette portfolio had reduced, from 40% when the initial geographic expansion started last September, to 35% in the second quarter. Moreover, the growth of these HeatSticks is also resulting in uptrading by adult smokers, as those across all price segments are switching to the premium-priced product. What is an even more compelling argument is that 70% of iQOS purchasers have either fully, or predominantly, converted to it. According to company estimates, this would mean about 600,000 people in Japan, who are exclusive or fully-switched users of iQOS.

iQOS

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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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