Philip Morris International (
PM
) is set to announce its fourth quarter earnings on February 7. The
global tobacco giant reported a decline of 2.2% y-o-y in earnings
per share during the third quarter led by unfavorable currency
impact. However, excluding currency, adjusted earnings per share
was up 5.8% as compared to the same period in 2011. Cigarette
shipment volume was down 1.3% y-o-y, led by declining tax-paid
cigarettes market in the European Union. Overall, revenues net of
excise taxes decreased by 5.3% y-o-y for the third quarter,
primarily due to unfavorable currency impact and volume mix,
partially offset by price increases. Here we look at some of the
key trends that would be driving the company's fourth quarter
results.
Declining Cigarette Volume in The European Union
During the third quarter, Philip Morris reported an 8% decline
in cigarette shipment volume in the European Union markets,
primarily due to price increases driven by higher indirect taxes,
unfavorable economic environment and increasing prevalence of
illicit trade.
The economic environment in the European Union continues to be
very uncertain with mounting unemployment rates, especially in the
southern European countries as even the sectors traditionally
considered defensive like tobacco are struggling. A sharp decline
in tax-paid cigarette volume has been observed in these countries.
According to Philip Morris, there was a double-digit rate of
decline in cigarette volume during the third quarter of 2012, in
Greece, Spain and Italy. However, in countries with relatively
lower unemployment rates like Germany the rate of decline in
cigarette volume was much more moderate at around 2%. For the whole
of European Union, total cigarette volume declined 7.5% during the
third quarter as compared to the same period in 2011.
The growth of lower priced other tobacco products (OTP) is also
a factor lowering cigarette volume. In most countries, excise
taxes on tobacco products other than cigarettes (cigars,
cigarillos, fine-cut tobacco for hand-rolling cigarettes, pipe
tobacco, snus, chewing tobacco and so on) are subject to much lower
excise tax levels compared to manufactured cigarettes, which makes
them relatively cheaper. Philip Morris reported OTP shipments
of 4.4 billion cigarette equivalent units during the third quarter,
a growth of almost 11% y-o-y, reflecting a higher total market and
share in the region. We expect the trend to negatively impact
the company's top line growth in the fourth quarter results.
Asian Markets to Drive Volume Growth
Within Asia, we see volume growth coming largely from Indonesia,
the world's fifth largest tobacco market, and as a key growth
opportunity for Philip Morris. The market is expected to
continue to grow driven by high smoking prevalence rate, rampant
tobacco advertising and lenient government policies to reduce or
check tobacco consumption.
The cigarette market in Indonesia grew 2.5% y-o-y, driven by
growth in premium and mid-priced segments. Philip Morris' shipment
volume in the country grew 13% y-o-y, led by 3.3% increase in
market share. Philip Morris occupies more than a third of
Indonesia's market and ties up with local heritage brands like
Sampoerna A and Dji Sam Soe, to maintain a broad and deep product
portfolio, to compete effectively across all price
segments. We expect the positive trend to continue in the
fourth quarter as well, backed by the company's leading
position and strong market share momentum.
Net of excise taxes, revenues for the third quarter from Asian
markets declined 1.4% y-o-y, even as cigarette shipment volume grew
by 0.6%, due to unfavorable currency and volume mix. Philip
Morris' third quarter results from the Asian markets were modest
due to tough comparisons. The company saw distorted growth in Japan
during 2011, due to additional volume shipped by the company
as the supply chain of Japan Tobacco Inc. was disrupted, following
the natural disaster in March 2011. We expect the distorted growth
form Japan in 2011 to dampen fourth quarter growth figures.
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