Philip Morris's Net Down 6.3% on Lower Volume

Source from:  NASDAQ  10/19/2012

--Volume slumps in European Union and strong dollar against foreign currencies eats into the tobacco giant's sales

--Philip Morris' revenue slid across all regions due to unfavorable currency fluctuations

--Adjusted earnings missed Wall Street's expectations for the first time in two years

Philip Morris International Inc.'s (PM) third-quarter earnings fell 6.3% as volume slumped in the European Union and a strong dollar against foreign currencies ate into the tobacco giant's sales.

The maker of Marlboro and L&M cigarettes reported lower revenue across all regions as unfavorable currency fluctuations tempered the top line by $731 million. Excluding the currency woes and acquisitions, net sales would have risen by 3.4%, as higher prices offset volume declines.

Adjusted earnings missed Wall Street's expectations for the first time in two years. Shares slid 3.1% to $89.05 in recent trading.

A strong dollar had led Philip Morris, which derives all sales from outside the U.S., to stress to investors that weaker key foreign currencies would eat into profit this year. But with the dollar weakening since Philip Morris last offered up full-year guidance in July, the company said it now sees a full-year currency headwind of 23 cents, better than the prior target of 27 cents. Still, the woes contrast sharply with last year's benefit of 19 cents a share.

Total cigarette volume declined 1.3%. Shipments slid 8.1% in the European Union and dropped 4.9% in Latin America and Canada. Asia notched a modest 0.6% increase, while volume jumped 3% in Eastern Europe, the Middle East and Africa.

Cigarette volume in the European Union region was dragged lower due to tax-driven price increases, as well as a weak economic environment, particularly in southern Europe. Declines were sharper in Italy, France and Spain, while Poland and Germany showed more resiliency.

Chief Financial Officer Jacek Olczak told analysts during a conference call that the drop in the European Union sales could in large part be attributed to illicit trade--cigarettes that are counterfeit or even genuine products that are sold without paying required taxes.

Mr. Olczak said the trend was worse in southern Europe, where smoking levels have remained relatively stable.

"In the EU region as a whole, economic conditions will remain difficult until the issue of unemployment is tackled," Mr. Olczak said.

As a result of volume declines in developed countries, Philip Morris has implemented price increases in numerous markets it serves to help lift profitability. On Thursday, the company said prices remained strong in the European Union, as reflected by the price increase in France this month.

The company has also sought to increase growth in emerging markets as volumes have slipped in more-established European countries. It is targeting Asian markets, which have rising adult populations and more attractive growth opportunities than the mature Western markets.

Philip Morris reported higher volumes in Russia and Turkey, and in Asia, volume jumped in Indonesia, Thailand and Vietnam.

In Japan, shipments slid 13% because of a difficult prior-year comparison. The company has retained some of last year's market-share gains when product shortages caused by an earthquake and tsunami hurt rival Japan Tobacco Inc. (2914.TO). Nevertheless, the company warned rivals' new products have put pressure on its namesake and Lark brands.

Russia's shipments jumped 4.5%, though an expected rise in excise taxes over the next three years amid the government's tough antismoking efforts is causing concern about the market's strength. Mr. Olczak said though the tax increases will be substantial, he believes the industry has a firm sense of tax estimates through 2015.

Mr. Olczak calls regulation in Russia "manageable," though he concedes plans to limit cigarette sales in the world's second-largest tobacco market after China will dent volume.

Philip Morris reported a profit of $2.23 billion, or $1.32 a share, compared with $2.38 billion, or $1.35 a share, a year earlier. Excluding tax items and other impacts, adjusted earnings in the latest quarter were $1.38 a share. That figure includes a seven-cent currency hit.

Net revenue, excluding excise tax, fell 5.3% to $7.92 billion, though it increased 3.5% on a constant-currency basis.

Analysts polled by Thomson Reuters most recently had forecast earnings of $1.39 a share on revenue of $8.24 billion.

Philip Morris also narrowed its full-year earnings forecast to a range of $5.12 to $5.18 a share, an estimate that trims two cents on both ends of the target.

During the quarter, Philip Morris spent $1.5 billion to repurchase 16.7 million shares. The buybacks were part of a new three-year share-repurchase plan totaling $18 billion that Philip Morris unveiled in June. Enditem