How Much Will iQOS Contribute To Philip Morris’ Revenue In FY 2018?

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2017 was a transitional year for Philip Morris International (NYSE:PM). The company stated its intentions of committing to a ‘smoke-free’ future, even placing ads in leading UK newspapers, claiming its ambition to “stop selling cigarettes” in the region. Therefore, the development of reduced risk products, such as iQOS, can be expected to be a boon for the company, as it can help reverse the declining volumes it has been faced with recently. And it is this product that the company intends to market as one that can ultimately replace cigarettes. However, the reduced risk product’s (RRP) performance in 2018, particularly in Japan, has left much to be desired. While the company is undertaking certain initiatives to turn around the performance in the country, any meaningful benefit won’t be expected to be felt until next year. On a more positive note, the segment’s contribution to the total revenue (combustible tobacco + RRP revenue) is much higher than its share of the total volume (cigarettes + heated tobacco units), implying that its revenue per unit is greater than that of cigarettes. This is very encouraging, as greater revenue leads to better margins, and consequently higher earnings. In this note, we’ll estimate what iQOS’ contribution will be to Philip Morris in FY 2018.

We have also created a dashboard showing our estimates for the contribution of iQOS towards the total revenue of Philip Morris. You can access it by clicking here for the dashboard on Revenue Breakdown Of Philip Morris In FY 2018. If you don’t agree with our forecast, you can modify the metrics to arrive at your own estimates.

Estimating Key Metrics

1. Heated Tobacco Volume Share – We expect the volume share of heated tobacco to the total volume of the company to continue its strong growth in FY 2018. This is based on substantial growth in the markets it was present in at the end of FY 2017, as well as launch in a number of new markets. At the end of FY 2017, iQOS was available for sale in key cities in 37 markets and nationwide in Japan. This number has increased to 43 as of the end of September 2018. We expect the volume of heated tobacco units to cross 42.7 billion, as compared to company estimates of between 41 and 42 billion.

2. Heated Tobacco Revenue Per Unit – The revenue per unit has historically been higher for heated tobacco units as compared to cigarettes. This is because a pack of 20 heated tobacco units is priced similar or slightly higher than a pack of 20 Marlboros, which are premium cigarettes. We expect growth in this metric in 2018 as a result of reduced promotional spending, which the company usually undertakes at the time of the product launch. As the product was already present in a number of markets at the end of 2017, the discounting in these areas should have reduced.

As a result of a rise in the aforementioned metrics, the revenue contribution of RRPs is expected to increase substantially – from 4.9% in 2017 to 10.6% in 2018, although their volume share only increases from 4.5% to 5.4%.

We have a $105 price estimate for Philip Morris, which is substantially higher than the current market price. The charts have been made using our new, interactive platform. You can click here for our dashboard on Our Outlook For Philip Morris In FY 2018 to modify different drivers, and see their impact on the revenue, earnings, and price estimate for Philip Morris.

See Our Complete Analysis For Philip Morris International

 

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