Philip Morris (PM) Q2 Earnings And Sales Miss Estimates

Philip Morris International Inc. (NYSE:PM) reported adjusted second-quarter 2016 earnings per share of $1.15 that missed the Zacks Consensus Estimate of $1.21 by 4.95%. Earnings also slipped 5.0% from the prior-year quarter figure due to soft sales.

Excluding an unfavorable currency impact of 8 cents, earnings inched up 1.7% year over year.

Revenues & Margins

Net revenue was down 3.1% (up 1.4% excluding currency) to $6.65 billion and also lagged the Zacks Consensus Estimate of $6.79 billion by 2.06%. The year-over-year decrease was attributable to lower sales in the tobacco category stemming from the shift of customer preference away from tobacco products. Cigarette shipment volumes also fell 4.8% to 2.13 billion units, mainly due to a decline in total market share.

Philip Morris' gross profit declined 4.4% year over year to $4.28 billion as lower cost of sales was offset by reduced revenues. Operating income slipped 4.8% year over year to $2.75 billion due to higher marketing, administration and research costs.

Segment Details

Net revenue in the European Union region grew 4.6% year over year to $2.2 billion. Excluding the impact of currency, net revenue went up 2.7%, primarily due to favorable pricing in Germany and Italy.

Market share in the region remained flat at 25.0% as the increase in Marlboro’s market share was offset by the decrease in overall cigarette market share. Moreover, cigarette shipment volumes slipped 0.8% to 50.4 billion units.

Net revenue in the Eastern Europe, the Middle East & Africa (EMEA) region declined 9.9% year over year to $1.7 billion. Excluding the impact of currency of $171 million, net revenue dipped 0.6%, primarily owing to unfavorable pricing in Russia and North Africa.

Shipment volumes decreased 4.0% to 68.3 billion units, mainly due to unfavorable pricingin North Africa and Russia.

The company recorded net revenue from Asia of $2.1 billion, down 0.6% (up 1.1% excluding currency) from the prior-year quarter, due to unfavorable volume/mix, mainly in Australia.

Shipment volumes of 69.3 billion units were down 7.9% because of reduced demand in Japan.

In Latin America and Canada, revenues declined 13.6% (up 3.2% excluding currency) to $697 million. Revenues, in terms of constant currency, increased year over year mainly in Argentina due to the impact of excise tax-driven price increases.

Shipment volumes of 21.3 billion units slipped 5.9% year over year due to lower volumes in Argentina.

Financial Update

During the quarter, Philip Morris did not repurchase any share. It, however, declared a regular quarterly dividend of $1.02, which represents an annualized rate of $4.08 per common share.

Guidance

For 2016, management raised its GAAP earnings projection. The company now expects GAAP earnings in the range of $4.45–$4.55 as against $4.40–$4.50 expected previously. The company reported earnings of $4.42 per share in 2015. The company expects currency impact of 40 cents per share. Excluding the currency impact and one-time restructuring charges, earnings are likely to increase approximately 10–12%.

Philip Morris carries a Zacks Rank #4 (Sell). In order to combat macro issues, the company, along with other tobacco majors like Reynolds American Inc. (NYSE:RAI) , British American Tobacco (NYSE:BTI) and Altria Group Inc. (NYSE:MO) , is focusing on growth of the alternative tobacco product category.