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It is easy to think of a company and its products as essentially identical, especially when it comes to the business of consumer goods industry. Tobacco giant Philip Morris International (NYSE: PM) is best known for its Marlboro cigarettes and iQOS heated tobacco system. In recent quarters, growing concerns about the demand for its two key products have weighed on investor sentiment.
In its third-quarter financial report last week, Philip Morris investors hoped the tobacco company would be able to find ways to keep its bottom line up. Philip Morris's results were pretty solid, but it's important to understand that the global giant has received key contributions from a number of areas that have nothing to do with product demand – income taxes and interest. Debtors – and that these areas might not continue to support its business clients in the future.
Source of the image: Philip Morris International.
How Philip Morris Behaved
The third quarter results of Philip Morris International showed considerable strength from the tobacco giant. Net revenues from excise taxes were $ 7.50 billion, up only 0.4% from last year, but still well above the 7.16 percentage point. billions of dollars that most investors were waiting for. Net income of $ 2.25 billion was up 14% from the third quarter of 2017, or $ 1.44 per share, easily exceeding the consensus of $ 1.28 per share announced by investors.
Yet Philip Morris' fundamentals have raised legitimate fears. The total volume of shipments decreased by 2.1% to stand at 203.7 billion units, but this percentage decline was not at odds with what the company has regularly suffered in recent years. The big problem, however, lay in the distribution of these results. The volume of cigarettes in the world fell by 1.7% to 195.1 billion, but iQOS heated tobacco sales fell 11% to 8.7 billion. This figure has now been divided by almost half from the peak of last year.
Regionally, the weakest segment of Philip Morris International was by far the East Asia and Australia division. The total volume of shipments was down 22% from last year, including a 48% drop in sales of heated tobacco units. Strong gains in the Middle East, Africa and the South and Southeast Asian regions were not enough to offset the decline.
However, Philip Morris had an explanation for the results. Distributor inventory movements included 6.9 billion units of heated tobacco, mainly in the key Japanese market. Without this negative impact, shipments related to iQOS would have increased sharply and the total volume of shipments at the company level would have increased by 1.1%. In addition, unfavorable currency effects weighed on Philip Morris, which cost him about $ 213 million in earnings and $ 0.09 in earnings per share.
Managing Director Andre Calantzopoulos was pleased with the way the company behaved. "Our total market share increased by 0.5 and 0.6 [percentage] Calantzopoulos said: "In addition, thanks to our leading brand portfolio, prices are solid." The CEO pointed out that the businesses of heated tobacco and fuel cigarettes played a vital role in pushing Philip Morris forward.
Can Philip Morris create a dynamic?
Philip Morris remains extremely optimistic. Between the ongoing expansion of iQOS in areas such as the European Union and Russia, the planned deployment of the next generation iQOS 3 device in the world and the increasing ability to support production of heated tobacco, the tobacco giant sees great progress. As Calantzopoulos said, "our business is booming, [and] As we enter the last quarter of this year, I am confident that the strategies and initiatives we have put in place are laying the groundwork for even better business performance in 2019. "
However, investors should not underestimate the impact of lower taxes and lower interest expense on earnings. During the quarter, Philip Morris International's net income increased by $ 277 million. Of this amount, $ 121 million came from reductions in the provisions for income taxes resulting largely from the US tax reform. An additional $ 78 million is derived from the savings realized by the Company on interest expense. Only $ 68 million in operating profit improvement – just over 2% year-over-year – and with rising rates and mitigating the adverse effects of the late 2017 tax reform, Philip Morris may have more trouble generating earnings growth in the near future.
Philip Morris reaffirmed his expectations in terms of monetary neutrality. The company is now expecting to earn between $ 4.97 and $ 5.02 per share. This represents an increase of 8% to 9% over the results of 2017, and we assume again that the growth of the business will be only 3% for the year. Philip Morris still thinks he can sell 44 to 45 billion units of heated tobacco, which he still sees as essential to his success.
Watch cautiously 2019
Philip Morris shareholders were satisfied with the report and the stock rose 5% within two days of publication. However, investors must keep an eye not only on the company's products, but also on its internal financial management to ensure that Philip Morris can maintain the momentum gained during the year.
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