Philip Morris Falls On A Weak Third Quarter

by Trefis Team
Philip Morris International
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Currency has been a big headwind for Philip Morris International (NYSE:PM) in recent years and continues to put a dampener on the company’s earnings. Its earnings came in at $1.27 per share, missing estimates by 11 cents. The revenues were up year-on-year, but this metric also missed the consensus expectations. However, if the foreign currency impact is discounted, the revenues would be up by 9%, while its adjusted EPS would be higher by an impressive 11%. A higher than expected unfavorable currency impact has also forced the company to lower its EPS guidance for the year to a range between $4.75 and $4.80, as against $4.78 and $4.93 earlier. Price increases and the strong growth of iQOS have resulted in improved revenues for the company this time around as well.

iQOS’ Strong Sequential Performance Continues

  • The company’s reduced risk portfolio (RRPs) recorded net revenues of $947 million, owing to the exceptional performance of iQOS devices.
  • However, iQOS’ margins continue to remain negative as a result of the introductory discounts offered to accelerate switching among adult consumers.
  • In Japan, the brand’s weekly offtake share trended upwards by 1.9 points to 14.6% nationally.
  • iQOS has now been launched in key cities in 31 markets globally, with more than 3.7 million adult consumers already switching to the device. By the end of the year, the company is targeting the product to be present in 30 to 35 markets globally, subject to capacity.

Margin Pressure Remains

  • The increased investment into the company’s reduced risk products has consequently resulted in a rise in the marketing, administration, and research costs of the company.
  • Moreover, as mentioned earlier, the margins of iQOS remain in the red due to the high promotional activities being carried out to improve consumer awareness.
  • These factors in conjunction resulted in lower margins for Philip Morris in the third quarter – the gross profit margin fell by 180 basis points, while the operating margin declined by 150 basis points.

Shipment Volume Growth Expected

  • In the fourth quarter, the company expects a shipment volume growth, driven by the continued improvement of the iQOS device sales.
  • Meanwhile, cigarette volumes are expected to remain pressured, particularly in Saudi Arabia, where excise tax increases resulted in a doubling of the cigarette prices.
  • Industry volume fell by 30% in Saudi Arabia in the third quarter, and is expected to remain poor even in 2018.
  • Other Gulf countries are expected to implement a similar tax structure, which will result in a poor showing there as well.

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