Philip Morris International Inc (PM)

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WHAT HAS CHANGED?

  1. Latest Annual Earnings Performance (FY2020)
    • The company reported net revenue of $28.7 billion in 2020, marking a decrease of 3.7% over 2019. Lower revenue was mainly driven by cigarette and heated tobacco unit shipment volume going down by 8.1% amidst the lockdowns imposed during the pandemic, which affected supply chains. Higher pricing for cigarettes helped in partially offsetting the impact of lower shipments. Market share for heated tobacco units in IQOS markets, excluding the U.S., went up by 1.7 percentage points to 6.1%. The company reported adjusted earnings of $5.17 per share in 2020, marginally lower than $5.19/share in 2019.
  2. Q3 2020 Earnings

    • Philip Morris Q3 2020 revenue came in 2.6% lower at $7,446 million compared to $7,642 million reported in the third quarter of 2019. Adjusted per-share earnings were down 0.7% to $1.42 in Q3 2020. Cigarette and heated tobacco unit shipment volume was down by 7.6% (reflecting cigarette shipment volume down by 9.8%, and heated tobacco unit shipment volume up by 18.7% to 19 billion units). During the quarter, PMI increased its quarterly dividend per share by 2.6%, representing an annualized rate of $4.80/share.
  3. Impact of Coronavirus
    • PM stock has dropped over 28% since January 31, 2020, when the World Health organization (WHO) had declared a global health emergency in wake of the coronavirus, to its March lows of $60. Tobacco stocks are generally viewed as good defensive bets through such crises. Lower consumer spending and supply constraints led to a drop in stock price. However, with global lock downs gradually being lifted and stimulus measures announced, we expect consumer spending to pick up, which will help in higher sales, especially of IQOS. This has led to recovery in the stock price over recent months. The stock is currently trading near $90 and is expected to rise even further in the near-term.
  4. Price hikes in a number of markets to combat declining volumes

    • The tobacco industry, in general, is a declining one, where volume drops have been a regular feature. In order to combat the falling volumes against increasing regulatory control, excise tax hikes, and increasing health consciousness among people, Philip Morris resorts to raising cigarette prices in a majority of its key markets.
  5. Innovations could drive volumes and ensure share gains

    • Philip Morris has seen soft cigarette volume trends for the past few quarters, due to a general shift away from tobacco products, amid accelerating prices of cigarettes and worldwide anti-tobacco campaigns.
    • Keeping this in mind, the company has undertaken significant investment to expand its reduced risk products (RRPs) range, in particular iQOS -- a black pen-shaped device that heats a Marlboro-brand ‘heatstick’ containing tobacco, instead of burning it.
    • Strong performance of the company's reduced risk portfolio (RRPs), notably HeatSticks and iQOS devices, helped push the company’s growth. The HeatSticks volume reached 76.11 billion units in 2020. The volume could have trended even higher without the capacity restrictions earlier, which forced the company to limit the iQOS device sales and the impact of the pandemic on supply chain.
    • In most countries where iQOS is launched, the company received a favorable tax treatment for heatsticks, as compared to cigarettes. This enabled it to price it lower than cigarettes in certain markets, such as Switzerland.
  6. FDA Approval for IQOS

    • IQOS is a flagship product of Philip Morris, which heats and not burns tobacco, while it is being used by a consumer. The FDA has given its approval to PM, for the marketing and sale of this product in the US. This decision, which comes after almost 2 years of the company trying to get the approval, is a shot in the arm for the company, which can now expand in, and reap benefits from, a large US market. The fact that in just two years, 7.3 million people around the world have switched to IQOS indicates the immense potential for the company to grow even in the US. A successful launch in the region could add close to $2 billion in segment (reduced-risk products) revenues for the company over the next 3 years.

BUSINESS SUMMARY

Philip Morris International is a leading international tobacco company, with a wide range of premium, mid-price, and low-price brands, comprised of international, as well as local brands. Until the spin-off in March 2008, Philip Morris International was an operating company of Altria Group. The independent Philip Morris International sells tobacco products in international markets, while Altria maintains its operations in the U.S.

PM's cigarettes are sold in more than 180 markets, and in many of these markets, they hold the number one or number two market share position. Their portfolio of international and local brands is led by Marlboro, the world’s best-selling international cigarette, which accounted for approximately 37% of their total 2019 shipment volume. Marlboro is complemented in the premium-price category by Parliament. The other leading international cigarette brands are Bond Street, Chesterfield, L&M, Lark and Philip Morris. The company also owns a number of important local cigarette brands, such as Dji Sam Soe, Sampoerna A and Sampoerna U in Indonesia; Fortune and Jackpot in the Philippines; Belmont and Canadian Classics in Canada; and Delicados in Mexico.

In addition to the manufacture and sale of cigarettes and other tobacco products, PMI is engaged in the development and commercialization of Reduced-Risk Products (“RRPs”). RRPs is the term PMI uses to refer to products with the potential to reduce individual risk and population harm in comparison to smoking traditional cigarettes.

The four divisions of Philip Morris International consist of the following four regional segments:

  • European Union
  • Eastern Europe, Middle East, and Africa (EEMA)
  • Asia
  • Latin America and Canada

SOURCES OF VALUE

Strong Pricing

Most tobacco and cigarette businesses today follow a Price-Profit First Strategy and enjoy significant room for strong net pricing and margin expansion. With declining cigarette sales, Philip Morris International's revenues and profits are maintained through higher pricing, which is a key driver of its performance.

Geographical Mix

Philip Morris International benefits from significant geographic diversification, with good exposure to emerging markets, which have high growth, and developed markets, which have higher operating margins.

Reduced Risk Products (RRPs)

PM's leading RRP brand, IQOS, is a precisely controlled device into which a specially designed heated tobacco unit is inserted and heated to generate an aerosol. The company markets its heated tobacco units under the brand names HEETS, HEETS Marlboro and HEETS FROM MARLBORO, defined collectively as HEETS, as well as Marlboro HeatSticks and Parliament HeatSticks. IQOS was first introduced in Nagoya, Japan in 2014. To date, IQOS is available for sale in key cities in 43 markets and nationwide in Japan.

KEY TRENDS

Declining tobacco consumption

The volume of tobacco products has been declining due to growing health consciousness among people about the extreme health risks of smoking. Governments have also been discouraging tobacco consumption through high excise duties and legislative controls such as bans on public smoking and strict restrictions on the advertising and marketing of tobacco products and compulsory health warnings.

High excise duty on tobacco products as well as proposed anti-tobacco legislation

Tax regimes, including excise taxes, sales taxes, and import duties, can disproportionately affect the retail price of cigarettes versus other tobacco products, or disproportionately affect the relative retail price of their cigarette brands versus cigarette brands manufactured by certain competitors. Because their portfolio is weighted toward the premium-price cigarette category, tax regimes based on sales price can place the company at a competitive disadvantage in some markets. State and local governments tax tobacco products for both revenue and public health purposes. Such excise taxes are at times as high as 30-80% of revenues for cigarettes in different countries. Regular excise tax increases or unfavorable changes in the tax structure lead to increases in cigarette prices and a fall in demand.

Governments also resort to anti-tobacco legislation and anti-smoking laws to discourage tobacco and cigarette consumption. Legislation, like that banning smoking in public places, lead to a reduction in cigarette sales. Proposed bills for disclosure in different countries and those mandating plain (generic) packaging for tobacco products (like Tobacco Plain Packaging Bill, 2011 in Australia) result in the expropriation of tobacco companies trademarks.

Significant regulatory developments will take place over the next few years in most of the markets, driven principally by the World Health Organization's Framework Convention on Tobacco Control (“FCTC”). The FCTC is the first international public health treaty on tobacco, and its objective is to establish a global agenda for tobacco regulation. The FCTC has led to increased efforts by tobacco control advocates and public health organizations to reduce the palatability and attractiveness of tobacco products to adult smokers.

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