PM – Getting Smoked

This note was originally published July 18, 2013 at 12:43 in Consumer Staples

Philip Morris International reported Q2 2013 results this morning and as we expected volumes were heavily impacted, down -3.9% Y/Y, contributing to top and bottom line misses versus consensus. FY 2013 EPS guidance was revised down to $5.43-5.53 versus prior guidance of $5.55-5.65, and FX was a $0.07 headwind to earnings.

 

PM – Getting Smoked - marl

 

CFO Jacek Olczak described today’s results as a “surprise”, despite being foreseen as a challenged quarter. Volumes were down across all four of its regions (EU, EEMA, Asia, and LA), with only Asia outperforming expectations with a result of -3.5%.

 

We think PM will be challenged to meet its full-year guidance, given a weak macro environment, dampened consumer spending across many of its regions, a persistent FX headwind with our #StrongDollar call, and the company’s only main lever against volume declines: taking up price.  

 

Our quantitative levels are flashing bearish across the immediate and intermediate term TRADE and TREND durations.

 

PM – Getting Smoked - hedrick

 

 

What we liked:

  • CFO’s belief that Russia’s excise tax increase will be passed on to consumer and outlook for a reasonable tax environment in 2H
  • Japan - expected FY 2013 volume down only  2% 
  • In the EU, PM cited slight optimism in the reduction of government austerity measures throughout the region as a tailwind for discretionary spending and was optimistic that the region’s volume results, at -5.9% Y/Y this quarter (versus -10.1% last quarter), would improve in 2H

What we didn’t like:

  • Q2 adjusted EPS $1.30 vs consensus $1.41
  • Revenue $7.92B vs consensus $8.17B, and down -4.4% Y/Y
  • Devaluation of the Australian Dollar, Indonesian Rupiah, Mexican Peso, Russian Ruble, and Turkish Lira cost 7 cents to the bottom line
  • EU volume -7% for FY 2013 vs 6.5% previously
  • Russia - impacted by higher excise taxes (9-22%) implemented in the beginning of the year, expect FY 2013 volumes down 6-7%
  • The CFO cited the impact of higher excise taxes in Russia and macro headwinds on discretionary income: Lower wage dynamic, as utilities prices up 10% this quarter (vs 5% last year), with broader inflation running at 7%
  • Turkey - resurgence of illicit trade. Expect FY 2013 volumes down by 7-9%
  • Philippines weak on tax increases

 

Other: On E-cigs


On the Q&A there were a couple questions on E-cigs. CFO Olczak kept his words brief but said that the market is difficult to estimate, and he doesn’t think it is more than 1% of the industry, which itself might be a high estimate. He believes demand and interest overall is much stronger in the U.S. than in Europe and that what’s distinguishing the category is its lower price points versus traditional cigs, and that the taste profiles don’t compare. He cannot size up if the category will be one with staying power, or one that is a fad. Finally, he hinted that PM could get involved in the market in 2016/7.  

 

Matthew Hedrick

Senior Analyst


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