Philip Morris International Ends A Challenging Year With No Clear Signs Of Turnaround

by Trefis Team
Philip Morris International
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Philip Morris International (NYSE:PM) posted modest earnings growth in 2013, as continued decline in sales volume and stronger U.S. Dollar significantly impacted its results. The company’s full-year diluted earnings per share (EPS) adjusted for one-time items grew by just 3.4% y-o-y and it also guided for a 3-5% y-o-y decline in adjusted diluted EPS for 2014, as it expects currency headwinds to have a significant negative impact. [1]

Although Philip Morris International’s sales volume declined in all of the operating regions last year, more than 50% of the total decline can be attributed to its Asian operations. This is primarily because the company lost significant market share to its prime local competitor in the Philippines, on pricing concerns amid a steep excise tax hike implemented earlier last year. Apart from this, macroeconomic headwinds in Europe and anti-tobacco legislation in Russia also weighed on the company’s performance last year.

Since there are no clear signs of fundamental improvements in any of these markets as of now, we have revised our price estimate for Philip Morris International to $83 a share.

Philip Morris International is a leading international tobacco company with its products sold in more than 180 countries worldwide. Until its spin-off in March 2008, it was an operating company of Altria Group (NYSE:MO). Excluding the U.S. and China, the company holds more than 28% of the total international cigarette market, which is led by its flagship brand Marlboro.

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Anti-Tobacco Measures Drag Down Sales Volumes

  • Philippines: Almost 47% of the total volume decline reported by Philip Morris International in 2013 can be attributed to its operations in the Philippines, where a sharp hike in indirect taxes implemented earlier last year disrupted an otherwise flourishing tobacco industry. Following the tax hike, the company increased prices of its Marlboro and Fortune brands by around 60% and 70% respectively. However, a local competitor, Mighty Corp., held back its pricing in the lower price segment, which allowed it to gain significant market share during the year. From mid-single digits in 2012, Mighty’s market share zoomed to over 20% in 2013. [2] As a result, Philip Morris International, that had a tight grip over the Philippines market with over 90% market share in 2012, recorded a steep (26% y-o-y) decline in cigarette shipments to the market during the year. The company believes that Mighty Corp. is understating its tax-paid cigarettes volume, which is allowing it to sell at extremely low prices. However, the Bureau of Internal Revenue (BIR) of Philippines is still investigating the case and there have been no findings supporting its claims yet. [3] Since there are no clear signs of improvement in the company’s deteriorating market share in the Philippines, we believe that it would remain a challenging market for Philip Morris International this year as well.

  • European Union: Philip Morris International had another rough year in the EU. However, it was primarily due to the decline in overall cigarettes market, as the company actually increased its market share by 40 basis points y-o-y in the region. Some of the key factors dragging down cigarette consumption in the EU are: increasing excise taxes, high unemployment rates due to weak macroeconomic conditions, the growing prevalence of illegally traded cigarettes and shifting consumer preferences towards other tobacco products (OTP). In 2013, Philip Morris International’s shipment volumes in the region dipped by 6.5% y-o-y, as a result of these factors. We expect the company’s shipment volumes to the EU to continue to remain under pressure in 2014 as we do not see these trends easing drastically in the short term. [4]
  • Russia: Russia, the world’s second largest market for cigarettes, further aggravated operating conditions for Philip Morris International last year. Sales volumes in the country declined by almost 7% as a result of the implementation of excise tax hikes and other anti-tobacco measures. Specific excise tax on cigarettes increased more than 40% y-o-y in Russia last year. Apart from this, the anti-tobacco bill that was signed into law on February 25, 2013, also came into effect on June 1, 2013. The law primarily aims at lowering annual smoking-related casualties in Russia by half over the next decade, by restricting the marketing and sale of cigarettes, and smoking in public areas. It initially banned smoking at schools and universities, museums, sports facilities, hospitals and on public transport, but would be extended to cafes, restaurants and hotels this year. It also includes provisions for implementing a minimum price on cigarettes starting this year and banning tobacco sales at street kiosks. Therefore, Russia is expected to weigh on Philip Morris International’s performance this year as well. [4]

Strengthening U.S. Dollar Drags Down Earnings Growth

Philip Morris International sells cigarettes in more than 180 countries. Since the company operates primarily in local currency in these markets, the strengthening U.S. Dollar negatively impacts its financial results. The U.S. Dollar strengthened against many international currencies in 2013, especially the emerging market currencies, amid talks of the U.S. Federal Reserve scaling back its bond-buying program. Strong currency headwinds dragged down Philip Morris’ reported EPS by $0.34 or 6.4% in 2013. The company also guided for its 2014 full-year diluted EPS to be 3-5% lower, compared to last year, as it expects the strengthening U.S. dollar to drag down its full-year earnings by $0.71 per share. It should also be noted that depreciation of a local currency against the U.S. dollar might also lead to higher relative prices of Philip Morris International’s brands in the local market, thereby weakening its competitive positioning as well. [4]

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  1. Press Release, []
  2. How A Small But Mighty Player Changed PH Cigarette Industry, []
  3. Mighty Tobacco Corp. Willing To Open Books, []
  4. Slide Presentation, [] [] []
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