Philip Morris (PM) Earnings, Sales Miss Estimates In Q1

Philip Morris International Inc. (NYSE:PM) reported weaker-than-expected first-quarter 2017 results, wherein both earnings and revenues lagged the Zacks Consensus Estimate. Shares were down 3.4% in the pre-market trading. The weak results were primarily due to lower cigarette volume and certain timing factors.

Adjusted earnings per share of 98 cents missed the Zacks Consensus Estimate of $1.03 by 4.85% in first-quarter 2017. However, it was flat from the year-ago quarter. While the company benefited from strong pricing, lower cigarette volumes related to low-price brands in specific markets however led to the decline. Notably, currency did not impact earnings in the quarter.

Revenues & Margins

Net revenue, excluding excise taxes, was $6.1 billion, which was down 0.3% (up 1.7% excluding unfavorable currency of $120 million) in the first quarter. Revenues were way behind the Zacks Consensus Estimate of $6.4 billion by 5.6%. Revenues benefited from favorable pricing across all regions, especially Eastern Europe, the Middle East & Africa (EEMA) and Asia, but were partly offset by unfavorable volume/mix in the regions of European Union (EU), EEMA and Latin America & Canada.

Revenues from combustible products declined 6.6% (down 4.3% excluding negative currency) to $5.6 billion. On the contrary, Reduced Risk Products (RRPs) reported a whooping increase from last year quarter, stemming from the shift of customer preference away from tobacco products.

Total cigarette and heated tobacco unit shipment volume fell 9.4% to 178.0 billion units, due to a tough year-over-year comparison as well as low-price volumes in specific markets, including Pakistan and Philippines. Last year, the results were benefited from the favorable estimated impact of the leap year.

While cigarette shipment volume declined 11.5% in the quarter, it was largely made up by heated tobacco unit shipment volume of 4.4 billion units which increased significantly from 453 million units recorded in 2016.

During the quarter, Philip Morris’ market share increased in Algeria, Belgium, France, Germany, Hong Kong, Japan, Kazakhstan, Kuwait, Poland, Saudi Arabia, Switzerland and United Arab Emirates.

Operating income was down 2.2% year over year to $2.5 billion due to lower revenues. Excluding currency impact, operating income declined 1.7%. Adjusted operating margin was also down 80 basis points to 41.1%.

Segment Details

European Union: Net revenue in the European Union region declined 6.6% year over year to $1.7 billion. Excluding the impact of currency, net revenue was down 3.7%, primarily due to 7.1% decline in cigarette and heated tobacco shipment volumes. Also, unfavorable volume/mix and the lower total market in Italy and Spain led to the decline. However, it was partly offset by a favorable pricing, notably in Germany, Italy and Poland.

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Eastern Europe, the Middle East & Africa (EEMA): Net revenue in EEMA region declined 7.8% year over year to $1.5 billion. Excluding the impact of currency, net revenue declined 1.6%,primarily due to 10.2% decline in cigarette and heated tobacco shipment volumes. Also, unfavorable volume/mix and lower total market share were overshadowed by the favorable pricing primarily in Egypt, Saudi Arabia and Ukraine.

Asia: The company recorded net revenue growth of 13.9% to $2.2 billion in Asia. Excluding currency impact, revenue was up 11% from the prior-year quarter, despite a 9.7% decline in cigarette and heated tobacco shipment volumes. The increase was supported by favorable pricing in Australia, Indonesia and Philippines, along with favorable volume/mix driven by favorable heated tobacco unit volume in Japan. However, it was partly offset by unfavorable volume/mix in Indonesia and unfavorable volume in Australia, Pakistan and Philippines.

Latin America and Canada: In Latin America and Canada, revenues declined 6.8% (down 3.4% excluding currency) to $606 million, primarily due to 11.1% decline in cigarette and heated tobacco shipment volumes. Also, unfavorable volume/mix was partly offset by a favorable pricing in Argentina, Canada and Mexico.

Financial Update

During the quarter, Philip Morris announced a regular quarterly dividend of $1.04 per share.

Guidance

Philip Morris raised its earnings guidance for 2017, owing to a favorable tax item of 4 cents. The company now expects 2017 earnings in the band of $4.84–$4.99 per share, compared with the earlier guidance of $4.80–$4.95, forecasted in February 2017 . This was also higher than adjusted earnings of $4.48 reported in 2016. Excluding unfavorable currency of 8 cents expected in full-year 2017 and favorable tax item of 4 cents reported in the first quarter, this earnings guidance reflects growth of nearly 9–12% over 2016. The Zacks Consensus Estimate for 2017 is currently pegged at $4.90, which is within the company’s guidance range.

Further, the company expects revenue growth, excluding excise taxes, to be more than its present target growth, which in the range 4–6%, annually. Moreover, the outlook excludes share repurchases in the year. However, the company anticipates a combined cigarette and heated tobacco unit volume decline of 3% to 4% for the full year.

Nevertheless, we believe the company’s strong pricing power and focus on accelerating IQOS volume growth will help the company deliver upbeat results in 2017.

Share Price Movement

If we look into past three months’ performance, Philip Morris’ shares have outperformed the Zacks categorized Tobacco industry. The stock rallied 20.2% in comparison to the industry’s gain of 10.4%. The company has also outpaced the broader Consumer Staples sector, which gained 6.0% in the same time frame.