Philip Morris (PM) Q2 Earnings Beat Estimates, Decline Y/Y

Philip Morris International Inc. PM reported second-quarter 2020 results, wherein both top and bottom lines surpassed the Zacks Consensus Estimate. However, both metrics declined year over year mainly due to adverse volume/mix (largely due to soft cigarette volumes) and currency headwinds. However, favorable pricing variance was an upside in the quarter.

Quarter in Detail

Adjusted earnings per share came in at $1.29, which beat the Zacks Consensus Estimate of $1.09. However, the bottom line declined 11.6% year over year. On excluding currency, earnings per share fell 7.5%.

Philip Morris International Inc. Price, Consensus and EPS Surprise

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 $6,651 million beat the Zacks Consensus Estimate of $6,492 million. However, the top line decreased 13.6% from the figure reported in the year-ago quarter. Net revenues, on excluding currency headwinds, declined 9.5%. This was due to adverse volume/mix mainly stemming from soft cigarette volumes, somewhat made up by greater heated tobacco volumes. The company also received some respite from favorable pricing variance.

During the quarter under review, revenues from combustible products were down 19.1% to $5,045 million due to declines in all regions. Revenues in the RRPs improved 9.5% to $1,606 million.

Total cigarette and heated tobacco unit shipment volumes dropped 14.5% to 170.1 billion units. Cigarette shipment volumes fell 17.6% to 151.4 billion units in the quarter, while heated tobacco unit shipment volumes of 18.7 billion units rose 24.3% year over year.

Adjusted operating income fell 12.7% to $2,802 million. After excluding currency, adjusted operating income dropped 9.5% year over year. Adjusted operating margin expanded 0.4 points to 42.1%, while it remained flat on a constant-currency or cc basis.

Region-Wise Performance

Net revenues in the European Union dropped 4% to $2,475 million. Revenues slipped 0.1% at cc due to adverse volume/mix, largely countered by favorable pricing variance, courtesy of improved combustible pricing. Total shipment volumes in the region fell 9.8% to 44,544 million units.

In Eastern Europe, net revenues fell 4.7% to $783 million, while it grew 5.6% at cc. The upside can be attributed to favorable pricing and volume/mix. Total shipment volumes dropped 3.7% to 28,783 million units.

In the Middle East & Africa region, net revenues declined 29.9% (down 28.3% at cc) to $704 million due to adverse volume/mix, partly made up by favorable pricing. Further, total shipment volumes fell 15.5% to 27,373 million units.

Revenues in South & Southeast Asia fell 28.8% (down 25.1% at cc) to $889 million. The downside was a result of adverse volume/mix as well as pricing variance (mainly in Indonesia). Shipment volumes collapsed 28.1% to 33,346 million units.

Revenues from East Asia & Australia fell 5.9% (down 5.1% at cc) to $1,432 million due to unfavorable volume/mix, partly compensated by pricing gains. Total shipment volumes slipped 5.1% to 21,147 million units.

Finally, revenues from Latin America & Canada slumped 30.2% (down 19.2% at cc) to $368 million due to adverse volume/mix, somewhat compensated by improved pricing. Moreover, total shipment volumes declined 19.7% to 14,874 million units.

Other Financials & Developments on IQOS

This Zacks Rank #3 (Hold) company ended the quarter with cash and cash equivalents of $4,200 million. Also, it had long-term debt of $27,043 million and shareholders’ deficit of $10,120 million. During the quarter, Phillip Morris announced a quarterly dividend of $1.17 per share.

On Jul 7, the U.S. Food and Drug Administration (FDA) approved a version of IQOS’s marketing as a modified risk tobacco product (MRTP). Also, on Mar 30, the company submitted a supplemental premarket tobacco product application (PMTA) with the FDA for the IQOS 3 tobacco heating device.  Notably, total users of IQOS as of the end of the second quarter were estimated at about 15.4 million, including roughly 11.2 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 trends, 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 second half of 2020. It does not expect a near-term recovery in the duty-free business due to travel-related uncertainties. Further, the company expects complete enforcement of requirements for minimum retail selling price in Indonesia at the earliest by September 2020.

Additionally, total cigarette and heated tobacco unit shipment volumes are likely to fall around 8-10% (on a like for like or LFL basis) in 2020, mainly due to the duty free business as well as situation in Indonesia. Management also anticipates total industry volumes to decline roughly 7-9% (excluding China and the United States). For 2020, Phillip Morris expects net revenues (at cc) to drop in low-single digits (on an LFL basis). The same is expected to grow in low-single digits on excluding Indonesia and the duty free business. CC-adjusted operating margin on an LFL basis is likely to jump more than 150 basis points.

All said, the company envisions adjusted earnings per share to be $4.92-$5.07 in 2020 compared with $5.13 reported in the year-ago period. At cc, adjusted earnings per share are expected to grow 2-5% to $5.23-$5.38.

For the third quarter, the company expects earnings per share to be almost in line with the second-quarter figure. This is likely to be backed by sequential revenue improvement, offset by factors like timing of various costs.

Shares of Phillip Morris have edged down 0.2% in the past three months against the industry’s growth of 3.3%.

Consumer Staple Stocks to Bet On

Turning Point Brands TPB has a Zacks Rank #1 (Strong Buy) and an impressive earnings surprise record. You can see the complete list of today’s Zacks #1 Rank stocks here.

Helen of Troy HELE has a Zacks Rank #1 and a long-term earnings growth rate of 6.5%.

Nu Skin NUS, which also carries a Zacks Rank #1, has a long-term earnings growth rate of 10.7%.

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