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What Drove PM’s EU Segment’s Operating Income to Fall?

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Updated

Revenue for the European Union

Philip Morris International (PM) is geographically divided into four business segments:

  1. European Union (or EU)
  2. Eastern Europe, the Middle East, Africa (or EEMA)
  3. Asia
  4. Latin America and Canada

The EU region’s reported net revenue fell 6.8% to $1.9 billion in 4Q15 compared to $2.1 billion in 4Q14. The fall was primarily due to an unfavorable currency impact of $0.3 billion and a lower cigarette market share in Italy. However, excluding the negative impact of currencies, net revenue for the European Union region rose 2.6%

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Reasons for the rise

Revenue rose for the EU segment primarily due to favorable pricing of $72 million in Germany and Italy, partially offset by unfavorable volume and product mix of $16 million. Shares for Marlboro rose by 0.3 points to 19.1%, driven by strong performances in France and Spain.

Operating income

Reported operating income fell ~30% to $0.6 billion in 4Q15. Excluding unfavorable currency of $125 million and the impact of acquisitions, the EU region’s 4Q15 adjusted operating income fell 16.8%. The fall was partly due to the unfavorable impact of asset impairment and exit charges related to region-wide organizational streamlining initiatives.

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Performance of peers in Italy

PM’s moderate fall in estimated total cigarette business in Italy was driven by an improved macroeconomic environment and a lower prevalence of illicit trade and e-vapor products.

Similarly for British American Tobacco (BTI), cigarette volume fell in Italy. However, its Rothmans brand delivered strong performance. Imperial Tobacco’s (ITYBY) cigarette share was up in Italy, with Davidoff gaining traction in key cities.

Other companies such as Altria Group (MO) and Reynolds American (RAI) do not have presences outside of the United States.

Favorable pricing and product launch

The company aims to have favorable pricing and new product launches in order to improve cigarette shipment volume. For example, PM’s cigarette shipment volume rose by 1.8% in France, driven by Marlboro, benefiting from a round retail (XRT) price point of 7 euros per pack and the launch of Marlboro 25s.

PM has exposure to the iShares S&P Growth ETF (IVW) with 0.9% of total weight in its portfolio.[1. Updated as of February 5, 2016]

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