Increased Prices To Boost Philip Morris’ Top-Line

July 18th, 2017 by Trefis Team
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PM: Philip Morris logo
PM
Philip Morris

Philip Morris International (NYSE:PM) is set to report its second quarter earnings on July 20, before the markets open. Earnings of $1.23 per share are expected in the quarter, a rise of 8 cents from the year ago period. Meanwhile a revenue growth of 6.3% is estimated, reaching $7.07 billion. Price increases are expected to drive the top-line growth, with a boost given by the increased sales of its reduced risk products (RRPs). These factors are also expected to improve the margins of the company, and hence, result in an improvement in the bottom-line.

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Strong Sequential Growth Of iQOS To Continue

iQOS has witnessed phenomenal growth in the markets it has been launched in, with its market share steadily climbing. This was witnessed in the first quarter as well, particularly in Japan, reflected in the weekly offtake shares for Marlboro HeatSticks used in iQOS. 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 demonstrated the growing potential of the heat-not-burn technology products in the country.

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iQOS had been launched in 24 markets globally by the end of the first quarter, following the city launches in Colombia and Lithuania, and in Poland and Serbia. 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.

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. In June, the company also announced the building of a new manufacturing facility in Dresden, Germany, to produce Heets, which would require an investment of €320 million. Construction of this facility is set to begin in late 2017, and will be fully operational in early 2019. Besides this, the company is also investing €500 million in order to increase the production capacity in its Bologna facility, in Italy. This expansion is expected to be completed by late 2018. Consequently, the company is also increasing its planned capital expenditure in 2017 to $1.6 billion, up from the $1.5 billion estimated earlier.

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 bigger than expected. For the full year, the company expects the volume to decline 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. The foreign currency translations are expected to impact the earnings of Philip Morris by $0.08, as opposed to an estimation of $0.18 earlier. The assumptions behind these numbers remains 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.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such 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.