Philip Morris Reports Strong Growth In Asia And Russia Offset By Europe

Philip Morris International (NYSE:PM) announced its Q2 earnings on July 19. Results were mixed for the tobacco giant as some regions performed worse than expected while others performed strongly. Total revenue for the quarter stood at $8.12 billion, down 1.2% from the same quarter previous year. Net revenues after excluding excise taxes declined 2.7% to $3.68 billion while net income decreased 3.7% to $2.3 billion. However, due to the company’s ongoing share repurchase program, EPS actually gained 0.7% to $1.36. Philip Morris International reaffirmed its full year diluted EPS guidance of $5.10-5.20.

We have a $94 price estimate for Philip Morris International, but we are in the process of revising our estimates to incorporate Q2 earnings.

Europe Suffers From Weak Marco-economic Conditions

Total market size for cigarettes in the European Union was down 9.7% due to a weak economy combined with tax-driven price increases. And hence the company was able to maintain its market share even though its volumes were down 9.4% for the quarter.

Currency headwinds exacerbated the tobacco giant’s performance most notably in the European Union. The operating margins declined by 2.4% to 48.9%, reflecting a higher proportion of lower-priced cigarettes such as Chesterfield in the region.

Asia Performance Remains Steady

Asia’s cigarette volumes declined 1.2% due to price increases and higher than usual shipment volume in Japan in 2011 because of the tragic tsunami (which negatively impacted Japan Tobacco’s shipment volume in the country). Excluding the extra Japanese shipment volume of 6.3 billion in the second quarter of 2011, PMI’s cigarette volume was up 8.2%.

The company continued to perform strongly in Indonesia, but its performances in South Korea and the Philippines were rather weak with the countries witnessing declines of 6.8% and 2.2%, respectively, in the number of PMI cigarettes consumed. The company reported flat operating margins for the quarter at 47.8%.

Eastern Europe, Middle East & Africa (EEMA) Does Well

This was easily Philip Morris International’s strongest performing region. Of late, the spotlight has been on Asia but if things progress the same way they have in this quarter, we could see increased significance of this region for the tobacco giant. Cigarette volumes jumped 5.1% helped by strong performance in Russia. Cigarette volume grew by 8.1% in the country helped by the launch of Marlboro Clear Taste. Russia is the second biggest cigarette consuming nation in the world, and Russians consume around 375 billion cigarettes annually. The company’s reported margins widened to 44.1% from 41.8% buoyed by higher shipment of premium brands such as Marlboro and Parliament. ^[1]

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