Philip Morris International Inc. PM reported third-quarter 2020 results, wherein earnings and sales beat the Zacks Consensus Estimate, though both metrics declined year over year. Results were hurt by adverse volume/mix (largely due to soft cigarette volumes) and currency headwinds. However, favorable pricing variance was an upside.
Markedly, management perked up its earnings per share guidance for 2020 on the back of greater-than-expected third-quarter total industry volumes (especially in the European Union and Indonesia) and a slight expected decline in fourth-quarter cigarette industry volumes in Indonesia, among other factors.
Quarter in Detail
Adjusted earnings per share came in at $1.42, which beat the Zacks Consensus Estimate of $1.36. However, the bottom line dipped 0.7% year over year. On an organic basis, the bottom line grew 5.6%.
Philip Morris International Inc. Price, Consensus and EPS Surprise
Philip Morris International Inc. price-consensus-eps-surprise-chart | Philip Morris International Inc. Quote
Net revenues of $7,446 million beat the Zacks Consensus Estimate of $7,262 million. However, the top line decreased 2.6% from the figure reported in the year-ago quarter. Net revenues, on excluding currency headwinds, declined 1.5%. This was due to adverse volume/mix mainly stemming from soft cigarette shipment volumes, somewhat made up by greater heated tobacco shipment volumes. The company also received some respite from favorable pricing variance, particularly in the combustible category.
During the quarter under review, revenues from combustible products were down 9.2% to $5,716 million due to declines in all regions, except the European Union. Revenues in the RRPs grew 28.6% to $1,730 million.
Total cigarette and heated tobacco unit shipment volumes dropped 7.6% to 184.4 billion units. Cigarette shipment volumes fell 9.8% to 165.5 billion units in the quarter, while heated tobacco unit shipment volumes of about 19 billion units rose 18.7% year over year.
Adjusted operating income rose 1.9% to $3,243 million. After excluding currency, or on an organic basis, adjusted operating income increased 5.8% year over year. Adjusted operating margin expanded 1.9 percentage points to 43.6%, while it increased 3.1 percentage points to 44.8% on an organic basis.
Net revenues in the European Union increased 11.5% to $2,950 million. Revenues rose 10% at constant currency (cc), courtesy of improved volume/mix and favorable pricing variance. Volumes were mainly backed by a rise in heated tobacco unit volumes. Total shipment volumes in the region fell 0.7% to 50,360 million units.
In Eastern Europe, net revenues remained flat at $899 million, while it grew 7.3% at cc. The upside can be attributed to favorable pricing and volume/mix. Total shipment volumes dropped 2.2% to 30,543 million units.
In the Middle East & Africa region, net revenues declined 31.9% (down 29.4% at cc) to $768 million due to adverse volume/mix, partly made up by favorable pricing. Further, total shipment volumes fell 17.3% to 31,082 million units.
Revenues in South & Southeast Asia fell 14% (down 14.3% at cc) to $1,071 million. The downside was a result of adverse volume/mix as well as pricing variance (mainly in Indonesia). Shipment volumes collapsed 12.1% to 37,248 million units.
Revenues from East Asia & Australia advanced 8.5% (up 7% at cc) to $1,358 million due to pricing gains (mainly in Japan), partly offset by adverse volume/mix. Total shipment volumes slipped 6.2% to 19,385 million units.
Finally, revenues from Latin America & Canada dropped 15.4% (down 5.9% at cc) to $400 million due to adverse volume/mix, somewhat compensated by improved pricing. Moreover, total shipment volumes declined 6.7% to 15,813 million units.
Other Financials & Developments on IQOS
This Zacks Rank #3 (Hold) company ended the quarter with cash and cash equivalents of $4,821 million. Also, it had long-term debt of $27,346 million and shareholders’ deficit of $10,245 million. During the quarter, Phillip Morris raised its quarterly dividend by 2.6%, taking the annualized rate to $4.80 per share.
Notably, total users of IQOS as of the end of the third quarter were estimated at about 16.4 million, including almost 11.7 million who have shifted from smoking to IQOS.
COVID-19 Update & Guidance
Philip Morris has been on track to lower COVID-19-related business disruptions. The company notified that it currently has adequate access to inputs and is not encountering any major supply-related hurdles. Most of the company’s production facilities are operational as of now, including all heated tobacco unit factories. However, some cigarette manufacturing facilities have been temporarily affected by government-imposed shutdowns or production limitations. They form about less than 5% of the company’s total cigarette production capacity globally. Considering all factors and the current sales trend, Phillip Morris does not anticipate any out-of-stock situation in any core operating income market.
The company doesn’t expect any national lockdown recurrence in any of its core international markets in the remaining parts of 2020. It does not expect a near-term recovery in the duty-free business due to travel-related uncertainties. In fact, management expects the existing dynamics to persist at least through the end of 2020. Further, the company expects complete enforcement of requirements for minimum retail selling price in Indonesia earliest by 2020-end.
Additionally, total cigarette and heated tobacco unit shipment volumes are likely to fall 8-9% (on a like for like or LFL basis) in 2020 compared with an 8-10% decline expected earlier. Total industry volumes are anticipated to decrease 7-8% (excluding China and the United States) compared with a 7-9% fall expected earlier. For 2020, Phillip Morris expects net revenues (at cc) to drop in low-single digits (on an organic basis). The same is expected to grow in low-single digits on excluding Indonesia and the duty-free business.
Encouragingly, the company raised its adjusted operating margin growth and the bottom-line view for 2020. Adjusted operating margin on an organic basis is likely to jump 200 basis points now compared with more than 150-basis-point growth anticipated earlier.
The company now envisions adjusted earnings per share to be $5.05-$5.10 in 2020 compared with $5.13 reported in the year-ago period. At cc, adjusted earnings per share are expected to grow 5-6% to $5.37-$5.42 now. In the second-quarter earnings release, management projected adjusted earnings for 2020 in a band of $4.92-$5.07 per share. At cc, adjusted earnings per share were expected to grow 2-5% to $5.23-$5.38.
For the fourth quarter, the company expects earnings per share of $1.16, including currency headwinds of about 4 cents. This reflects expectations of almost the same underlying consumption trends as the third quarter. Also, various costs that were originally planned for the third quarter are now anticipated in the fourth quarter.
Shares of Phillip Morris have gained 4.2% in the past three months compared with the industry’s growth of 2.1%.
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