How Volume Mix Influenced Philip Morris’s 4Q15 Operating Margin



Operating income

Philip Morris’s (PM) reported operating income declined 27.6% to $1.9 billion in 4Q15 compared to $2.6 billion in 4Q14. The decline was primarily due to the negative impact of foreign currency of $0.4 billion. However, on a constant-currency basis, the reported operating income declined 8.7% in 4Q15.

How Volume Mix Influenced Philip Morris’s 4Q15 Operating Margin

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Adjusted operating income

The company’s adjusted operating income, excluding an unfavorable currency impact, declined 7.2% in 4Q15. This was primarily due to an unfavorable volume/mix of $196 million, mainly due to EEMA (Eastern Europe, the Middle East, and Africa). It was also due to higher costs, notably in the European Union and Asia, principally related to the same factors as for the full year and partly offset by favorable pricing.

Despite an adverse currency impact of $1.9 billion on net earnings, the company’s free cash flow (or FCF) increased by more than $300 million in 2015 to reach $6.9 billion for the full year.

Operating income of peers

Altria Group’s (MO) operating income increased 2.8% to ~$2 billion compared to $1.9 billion in fiscal 4Q14. This was due to an increase in operating income for all reportable segments. Reynolds American’s (RAI) adjusted operating income increased 48.5% to ~$0.7 billion, primarily due to the addition of the Newport brand, R.J. Reynolds Vapor’s Vuse Digital Vapor Cigarette, and American Snuff’s Grizzly brand.

British American Tobacco’s (BTI) 2015 revenue declined 6.2% due to foreign exchange headwinds.

Increasing margins through increased prices

In its 4Q15 earnings release, PM announced that it expects a pricing variance of ~6% in 2016. It expects this to help the company achieve a full-year pricing broadly in line with its historical annual average. During economic uncertainty, consumers purchase lower-priced brands, which significantly affects the volume of premium-priced and mid-priced brands, and thus profitability. So higher prices could reduce volumes. In 4Q15, organic cigarette volumes declined by 2.4%, due to lower cigarette industry volumes and lower market share.

PM makes up 2.1% of the PowerShares S&P 500 High Dividend ETF (SPHD) as of March 23, 2016.

In the next part, we’ll look at how Philip Morris stock is doing.


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