Key Earning Drivers For Philip Morris International

Philip Morris International (NYSE:PM) is set to announce its fourth quarter earnings on February 7. The global tobacco giant reported a decline of 2.2% y-o-y in earnings per share during the third quarter led by unfavorable currency impact. However, excluding currency, adjusted earnings per share was up 5.8% as compared to the same period in 2011. Cigarette shipment volume was down 1.3% y-o-y, led by declining tax-paid cigarettes market in the European Union. Overall, revenues net of excise taxes decreased by 5.3% y-o-y for the third quarter, primarily due to unfavorable currency impact and volume mix, partially offset by price increases. Here we look at some of the key trends that would be driving the company’s fourth quarter results.

Declining Cigarette Volume in The European Union

During the third quarter, Philip Morris reported an 8% decline in cigarette shipment volume in the European Union markets, primarily due to price increases driven by higher indirect taxes, unfavorable economic environment and increasing prevalence of illicit trade.

The economic environment in the European Union continues to be very uncertain with mounting unemployment rates, especially in the southern European countries as even the sectors traditionally considered defensive like tobacco are struggling. A sharp decline in tax-paid cigarette volume has been observed in these countries. According to Philip Morris, there was a double-digit rate of decline in cigarette volume during the third quarter of 2012, in Greece, Spain and Italy. ^[1] However, in countries with relatively lower unemployment rates like Germany the rate of decline in cigarette volume was much more moderate at around 2%. For the whole of European Union, total cigarette volume declined 7.5% during the third quarter as compared to the same period in 2011. ^[2]

The growth of lower priced other tobacco products (OTP) is also a factor lowering cigarette volume.  In most countries, excise taxes on tobacco products other than cigarettes (cigars, cigarillos, fine-cut tobacco for hand-rolling cigarettes, pipe tobacco, snus, chewing tobacco and so on) are subject to much lower excise tax levels compared to manufactured cigarettes, which makes them relatively cheaper. Philip Morris reported OTP shipments of 4.4 billion cigarette equivalent units during the third quarter, a growth of almost 11% y-o-y, reflecting a higher total market and share in the region. We expect the trend to negatively impact the company’s top line growth in the fourth quarter results. ^[3]

Asian Markets to Drive Volume Growth

Within Asia, we see volume growth coming largely from Indonesia, the world’s fifth largest tobacco market, and as a key growth opportunity for Philip Morris. The market is expected to continue to grow driven by high smoking prevalence rate, rampant tobacco advertising and lenient government policies to reduce or check tobacco consumption. ^[4]

The cigarette market in Indonesia grew 2.5% y-o-y, driven by growth in premium and mid-priced segments. Philip Morris’ shipment volume in the country grew 13% y-o-y, led by 3.3% increase in market share. Philip Morris occupies more than a third of Indonesia’s market and ties up with local heritage brands like Sampoerna A and Dji Sam Soe, to maintain a broad and deep product portfolio, to compete effectively across all price segments. We expect the positive trend to continue in the fourth quarter as well, backed by the company’s leading position and strong market share momentum.

Net of excise taxes, revenues for the third quarter from Asian markets declined 1.4% y-o-y, even as cigarette shipment volume grew by 0.6%, due to unfavorable currency and volume mix. Philip Morris’ third quarter results from the Asian markets were modest due to tough comparisons. The company saw distorted growth in Japan during 2011, due to additional volume shipped by the company as the supply chain of Japan Tobacco Inc. was disrupted, following the natural disaster in March 2011. We expect the distorted growth form Japan in 2011 to dampen fourth quarter growth figures.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. 2012 Earnings Results, PMI Investors [↩]
2. Unemployment in Europe, January 8th 2013, The Guardian [↩]
3. Tobacco Taxation, Tobacco Regulation, PMI.com [↩]
4. New Survey: Indonesia Has Highest Male Smoking Rate in the World, September 12, 2012, TobaccoFreeKids.org [↩]