Philip Morris International (NYSE: PM), is set to announce its Q1 2019 results on April 18, 2019. We expect the company to report revenue of close to $6.75 billion in Q1 2019, which would mark a decline of 2.1% on a year-on-year basis. Sequentially, net revenue is expected to decrease by about 10%. Lower revenue is likely to be a reflection of decreasing sales of cigarettes and a slower than expected sales growth in the heated products segment due to regulatory uncertainty. Market expectation is for the company to report earnings of $1.01 per share in Q1 2019, marginally better than $1.00 per share in the year-ago period. Marginal improvement in earnings would most likely be driven by lower interest expense following repayment of high-cost debt in 2018.
- Key Factors Affecting Earnings
- Declining cigarette sales
Revenue from the company’s combustible products segment is expected to drop by 1.2% in the first quarter of 2019 compared to the previous-year period, and by 10.6% compared to Q4 2018. The decrease would primarily be driven by lower cigarette volume sold.
- As millennials are moving away from combustible products to e-vapor/heated tobacco products due to health concerns, the cigarette shipment is expected to continue its downward trend. Though cigarette units are expected to be somewhat flat on a y-o-y basis, they are expected to drop by over 13% on a sequential basis.
- Marlboro, the company’s flagship brand, which has witnessed a decrease in its market share over the last couple of quarters, is expected to continue the trend in 2019 as well, adversely affecting segment revenues.
- Slow pick up in IQOS
Revenue for the company’s Reduced Risk Products segment is expected to decline by 6.8% on a year-on-year basis due to lower volume and price realization.
- The company’s primary vapor product, IQOS, has not been able to see its sales pick up the way the market had expected, mainly due to regulatory uncertainty surrounding heated tobacco products. Recently, with the FDA cracking down on vapor companies, sales are expected to head south in early 2019.
- Though IQOS is a brand that is expected to drive PM’s growth over the long term, the segment is projected to face dwindling sales in the short-term due to lower price realization on the back of heavy discounts offered to promote the product in the market.
- Net income margin is expected to increase from 22.6% in Q1 2018 to 26% in Q1 2019, driven by lower interest expense.
- As a step towards optimizing its capital structure, the company used its high cash balance to pay off $2.5 billion of its 10-year U.S. bonds in 2018, which with a coupon of 5.65%, was the most expensive debt instrument on the company’s books.
- Though an increase in marketing costs weighed on the margin in Q4 2018, interest saving is expected to provide an uptick to profitability in 2019.
Full Year Outlook
- For the full year, we expect net revenue to increase by 3.9% to $30.8 billion in 2019, from $29.6 billion in 2018, as sales under the company’s heated tobacco segment are expected to pick up in the second half of the year with expectations of regulatory clarity with respect to the product.
- Lower interest and tax outgo, coupled with a gradual phasing out of the discounts on IQOS is expected to drive profitability with net income margin expected to be ~27% in 2019, up from 26.7% in 2018.