Philip Morris International Earnings Fall Short on Volume, Currency Pressures

Source: Philip Morris International.

Looking more closely at Philip Morris' worldwide exposure, each of its geographical segments suffered from currency woes. The biggest declines came in Asia, which saw sales fall 19% on a dollar basis and almost 13% on a currency-neutral basis. Encouragingly, the Eastern Europe/Middle East/Africa segment posted constant-currency revenue gains of nearly 10%, and despite weak economic conditions in the European Union, sales there rose 2.7% in local-currency terms. Yet in the end, only the Latin America and Canada segment managed dollar-measured sales gains of 0.5%, and even there, falling currencies all but wiped out a 13.1% local-currency gain.

Yet different areas of the world showed much different performance in operating income. The Eastern Europe segment saw extensive profit growth of more than 40% on a currency-neutral basis, but Asia experienced a huge 35% decline that was even worse measured in U.S. dollars. Overall, operating income fell 3.6% even when you take out the impact of currency fluctuations.

One contributing factor to poor operating-income performance was the drop in cigarette demand. Shipment volumes were weak across the board, with all four major regions showing drops that added up to a company-wide 3.7% decrease. Again, Asia was the worst performer, while the EU fell just short of matching its results from the previous year.

What's ahead for Philip Morris International?

Philip Morris gave guidance for 2015 that acknowledge the likelihood that currency headwinds will continue. The tobacco company expects earnings of between $4.27 and $4.37 per share, which would be down as much as 10% from 2014 levels. Currency impacts will reduce earnings by $1.15 per share according to the company, and if you take out those effects, then Philip Morris expects earnings growth of 8%-10%.

CEO Andre Calantzopoulous.

Still, Philip Morris remains confident. CEO Andre Calantzopoulos accentuated the positive aspects of the company's results, boasting the company's "robust pricing, strong market share gains, notably in the EU region, and very substantial progress in addressing the specific market challenges that we outlined at the beginning of [2014]." In addition, Calantzopoulos noted that Philip Morris' launch of its iQOS reduced-risk product was successful, as were efforts to optimize its manufacturing capability and roll out its new Marlboro 2.0 campaign.

Philip Morris International's currency woes appeared to come as no surprise to investors, as the stock traded up 1% following the mid-morning announcement. Still, in order for Philip Morris to sustain its long-term performance, it will need to see adverse currency impacts come to a halt in the future. Otherwise, the persistent headwinds against Philip Morris' bottom line could eventually cause problems in allowing the tobacco giant to keep up its history of solid dividend growth.

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