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Why Philip Morris’s Net Margin Narrowed in 1Q18

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Performance in 1Q18

Philip Morris International (PM) had gross, EBIT (earnings before interest, and tax), and net margins of 61.8%, 35.2%, and 22.6%, respectively, in 1Q18, compared with 64.1%, 39.5%, and 26.2%, in 1Q17.

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Factors affecting PM’s net margin

Between 1Q17 and 1Q18, Philip Morris’s costs of sales rose from 35.9% to 38.2%, impacting its gross margin. Unfavorable volumes and mix in GCC (Gulf Cooperation Council) countries (primarily Saudi Arabia), higher marketing, administration, and research costs, and an $80 million donation to the Foundation for a Smoke-Free World impacted the company’s EBIT margin. Marketing, administration, and research costs rose from 23.9% to 26.6% due to higher investments in reduced-risk products, primarily in the European Union. Some of these declines were offset by a favorable pricing variance in all regions and lower manufacturing costs. Philip Morris’s effective tax rate rose to 25.5% from 24.9% YoY, which also impacted its net margin in 1Q18.

Peer comparison and outlook

Altria Group’s (MO) gross, EBIT, and net margins are expected to be 60.9%, 49.4%, and 37.4%, respectively. Analysts expect Philip Morris’s gross, EBIT, and net margins to be 63.6%, 40.1%, and 25.9%, respectively, in the next four quarters, compared with 63.2%, 39.0%, and 24.9% in the last four quarters. The expansion is expected to be driven by price variance. Next, we’ll look at Philip Morris’s 1Q18 earnings.

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