Share price of Philip Morris International Inc. (PM) plunged almost 3% on Jun 26, 2014 after the company cut its fiscal 2014 outlook mainly due to currency headwinds and difficult pricing environment.
Philip Morris expects adjusted earnings to grow at the lower end of its previously provided guidance of 6–8%. This guidance excludes asset impairment and exit cost charges related to the discontinued cigarette production in the Netherlands in 2014 and unfavorable currency impact.
Including these effects, Philip Morris now expects fiscal 2014 earnings to be within $4.87–$4.97 compared with $5.09–$5.19 as expected previously. Weak macroeconomic environment in the European Union and rising illicit trade in Asia coupled with higher excise taxes have led the company to lower the outlook.
Philip Morris has been facing dwindling volumes due to declining demand resulting from the ongoing anti-tobacco campaigns. Governments around the world are levying higher excise tax on cigarettes and imposing packaging and advertising restrictions on cigarette makers. This has resulted in a pricing war among tobacco makers and significant cut in prices of low and mid-range cigarettes.
Recently, in Apr 2014, the Marlboro owner shifted its production from the six-decade old manufacturing plant in Moorabbin, Melbourne, Australia to South Korea. The plant closure will result in more than 180 job cuts representing about 25% of the nation’s workforce. Philip Morris feels that strict anti-tobacco rules in Australia are lowering sales and thereby profits in the country. Moreover, fire safety rules are affecting exports from the production facility in Australia. Again, in April, the company’s affiliate, Philip Morris Holland B.V., proposed to discontinue cigarette production at the Bergen op Zoom facility in the Netherlands by Sep1, 2014.
Further, Philip Morris is planning a global rollout of its Marlboro Architecture 2.0 and undergoing several restructuring programs to facilitate the launch of its ‘Next Generation Products (:NGP)’ in fiscal 2015.
To cater to the new consumer preference the company is slated to launch a set of NGP in 2016, to attract adult consumers while reducing the risks related to tobacco products. These products will help reinforce and expand Philip Morris’ position in the field of conventional tobacco. The company plans to complete its early clinical trials in fiscal 2014 and based on the results plans to increase investment in research and development for the category.
For fiscal 2015, Philip Morris expects adjusted earnings growth in the range of 8–10%. The company expects operating company’s income growth in the range of 4–6% and net revenue growth within 6–8% for the same period.