Low Cigarette Volumes And A Strong Dollar Result In A Disappointing Quarter For Philip Morris

by Trefis Team
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Philip Morris International
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Philip Morris International (NYSE:PM) declared its first quarter earnings on April 20, wherein it reported an EPS of $0.98, flat versus the same quarter a year ago, but which missed on the consensus estimate by 5 cents. Even the revenue of $6.06 billion, which was a fraction of a percentage point down from the corresponding prior year figure, missed the analysts’ expectations. However, once the foreign currency impact is discounted, the revenues were up by 1.7%. The total cigarette shipment volume was down by a massive 11.5%, with substantial drops seen across all of its major regions, which pulled down the growth of the company. The company has again guided its full year forecast upwards, driven by a favorable discrete tax item, to a range between $4.84 and $4.99. Optimism regarding the company’s reduced risk products (RRPs) had pushed the stock price of the company higher this year by over 25%; however, the disappointing earnings posted by PM sent the price down by almost 4%.

PM Q1 2017 Earnings

See Our Complete Analysis For Philip Morris International

Weak First Quarter Does Not Foreshadow A Weak Year

While a weak first quarter had been anticipated by the company, the decline in cigarette and heated tobacco unit volumes was larger than expected. For the full year, the company expects the volume to fall by 3% to 4%. After a strong performance in the fourth quarter of FY 2016, the company had set the FY 2017 EPS guidance to be in the range of $4.70 to $4.85. The company had since then revised this guidance upwards to $4.80 to $4.95. This has been further raised on account of a favorable tax item, as stated earlier. The foreign currency translations are expected to now impact the earnings of Philip Morris by $0.08, as opposed to an estimation of $0.18 earlier. The assumptions behind these numbers remain intact, namely the currency-neutral net revenue growth of 6%. This is expected to be supported by favorable pricing, as well as increased heated tobacco unit and iQOS device sales. The company is also targeting achieving break-even for iQOS this year. The growth is expected to be skewed towards the second half of the year, reflecting the increased RRP capacity, and improving returns on its investment as the year wears on.

Pricing Variance

A strong pricing variance in the first quarter helped to drive the currency-neutral growth of the company, a trend which is expected to continue through the year. The company announced or implemented price increases in a number of markets in the quarter, notably Algeria, Argentina, Australia, Brazil, Canada, Egypt, Germany, Indonesia, Poland, Mexico, Russia, Turkey, Ukraine, and the UK.

iQOS Performance Continues To Be Impressive

The product carried on with its strong sequential growth, reflected in the weekly offtake shares for Marlboro HeatSticks. The brand closed out the quarter with a weekly offtake share of 9.6% nationally, 11.6% in Tokyo, and 14.9% in Sendai. The strong performance in Sendai in particular demonstrates the growing potential of the heat-not-burn technology products in Japan. iQOS has now been launched in 24 markets globally, following the city launches in Colombia and Lithuania during the first quarter, and in Poland and Serbia earlier this month. By the end of the year, the company is targeting the product to be present in 30 to 35 markets globally, subject to capacity. More importantly, the company estimates that approximately 1.8 million adult consumers have already quit smoking cigarettes and switched to iQOS.

iQOS Japan

The company started the year with 15 billion units of installed annual HeatSticks capacity, and expects over 32 billion units in total capacity to be available for commercialization this year. The company anticipates an installed annual capacity of approximately 50 billion units by year end. Philip Morris is also implementing its plans to reach an installed annual capacity of 100 billion units by the end of 2018, which would translate to 75 billion units in total capacity available for commercialization. In support of these decisions, the company recently announced its decision to convert its cigarette factory in Greece to a heated tobacco unit production facility. Consequently, the company is also increasing its planned capital expenditure in 2017 to $1.6 billion, up from the $1.5 billion estimated earlier.

iQOS Share

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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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