Philip Morris Lights Up Growth As Asia & EEMA Compensate For European Woes

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Philip Morris International ( PM ) announced its fourth quarter earnings on February 7. The global tobacco giant reported a strong quarter and full year results as volume growth from Eastern Europe, Middle East & Africa ( EEMA ) and Asia more than offset the declining cigarette market in the European Union. Excluding excise taxes, revenues for the full year, which exclude the impact of currency movements and acquisitions, grew 5.6% y-o-y driven by favorable pricing across regions. Cigarette shipment volume grew 1.3% for the full year led by EEMA (up 4.7%) and Asia (up 4.2%), partially offset by European Union (down 6.4%) and Latin America (down 1.6%).

See our full analysis for Philip Morris

Russia, Turkey Drive EEMA Volumes Higher

In EEMA, Philip Morris reported a sharp 11.3% increase in net revenues, excluding the impact of currency and acquisitions, driven by higher pricing and a favorable volume mix as the premium brands volume grew almost 7% led by Parliament and Marlboro . Cigarette shipment volume in the region increased by 4.7%, reflecting market growth in Turkey and higher market share in Russia. Volume in Turkey grew 8.8% for the full year fueled by inventory build up during the fourth quarter before the planned hike in special consumption tax implemented on December 31, 2012. In the long run, we expect cigarette volumes in Turkey to decline led by higher prices.

In Russia, the company saw an almost 4% increase in shipment volume even as the total market is estimated to have declined by around 1.3% during the year. Volume growth came in with a 0.5% gain in market share in Russia led by Parliament , Bond Street and L&M . However, it will be interesting to see how Philip Morris fares in Russia this year as the road ahead for tobacco companies in the country is not going to be easy with the proposed anti-tobacco legislation on track for phased implementation starting June 2013. (Read: What's The Impact of Russia's Anti-Smoking Law On Philip Morris? ) The law aims at bringing down smoking rates in the country drastically by banning smoking in public places, including hospitals, government offices and public transport, restricting marketing and sales of tobacco products and increasing excise taxes.

Indonesia Leads Volumes Growth in Asia

Excluding the negative impact of currency, Philip Morris reported 5.7% growth in net revenues for the full year in Asia. Shipment volume in Asia grew by 4.2% during 2012 compared to the previous year led by Indonesia, where the total cigarette market was up by 8.2%, primarily driven by growth in premium and mid-price segments.

The company reported a sharp 17.5% volume growth in Indonesia, taking its market share to 35.6% in the country led by Sampoerna A and U Mild brands. The world's fifth largest tobacco market is expected to continue to grow driven by a high smoking rate, rampant tobacco advertising and relatively lax anti-tobacco legislation. (Read: Key Earning Drivers For Philip Morris International )

Volume growth in Asia was dampened by exceptionally large shipments made by the company in Japan during 2011. Following the natural disaster in March 2011, Japan Tobacco witnessed huge supply disruptions that resulted in distorted volume growth for Philip Morris during the year. Excluding the impact of  additional cigarettes sold by the company in 2011, shipment volume in Asia for 2012 increased by 6.4%.

EU Cigarette Volumes Continue to Decline

The total cigarette market in the EU declined by 6.3% on tax-driven higher prices, uncertain economic environment, and increasing illicit trading of cigarettes. The market decline was led by Spain (down 11.7%), Italy (down 7.9%) and France (down 4.9%). Philip Morris reported a 6.4% decline in cigarette shipment volume in the EU during 2012 primarily due to lower market while maintaining its market share at 38.1% in the region.

The growth of lower priced other tobacco products (OTP) is also a factor driving cigarette volumes lower in the EU. 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' shipments of OTP in cigarette equivalent units grew by 16.1%, reflecting a higher total market and share. We expect the declining cigarette volume trend in the EU region to impact the company's performance in 2013 as well.

We will update our $87 price estimate for Philip Morris based on the recent developments.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: EEMA , PM

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