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Philip Morris International Inc.’s (PM - Analyst Report) adjusted second-quarter 2014 earnings per share of $1.41 beat the Zacks Consensus Estimate of $1.24 by 13.7%. Earnings also beat the prior-year quarter results of $1.30 by 8.5% due to higher year-over-year organic revenues.

Excluding an unfavorable currency impact of 15 cents, earnings exceeded the prior-year quarter figures by 20.0%.

Revenues and Margin

Net revenue went down 1.5% (up 4.5% excluding currency) to $7.8 billion and beat the Zacks Consensus Estimate of $7.7 billion by 1.3%. Revenues improved from the prior-year level due to higher sales in most of the geographical segments. Cigarette shipment volume, however, decreased 2.7% to 222.8 billion units mainly due to a decline in total market share.

Philip Morris' quarterly gross profit declined 2.2% from the prior-year quarter to $5.1 billion, mainly due to higher excise tax during the quarter. Operating income slipped 13.9% year over year to $2.8 billion in the reported quarter due to higher marketing, administration and research costs.

Segment Details

 Net revenue in the European Union region climbed 8.5% (up 2.7% excluding currency) from the prior-year quarter to $2.4 billion predominantly reflecting favorable volume/mix in Italy, and favorable pricing in Germany and Poland.

Net revenue in the Eastern Europe, the Middle East & Africa (EMEA) region increased 4.7% (up 13.7% excluding currency) from the prior-year quarter to $2.3 billion. Revenues improved in organic terms backed by favorable pricing of $323 million, principally in Russia. The new business structure in Egypt also contributed to the improvement.

Asia recorded net revenue of $2.3 billion, down 14.2% (down 3.6% excluding currency) from the prior-year quarter due to unfavorable volume/mix and lower total market share, primarily in Japan and Indonesia.

In Latin America and Canada, revenues slipped 3.3% (up 11.2% excluding currency) to $810 million. Earnings improved in organic terms mainly due to favorable pricing in Argentina, Canada and Mexico.

Financial Update

During the quarter, Philip Morris spent $1.0 billion to repurchase 11.6 million shares.

In Apr 2014, the Marlboro owner announced its decision to shift its production from the six-decade old manufacturing plant in Moorabbin, Melbourne, Australia to South Korea by 2014-end. 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 Sep 1, 2014.

On Jun 26, 2014, Philip Morris took over Nicocigs Limited (“Nicocigs”), a leading U.K.-based e-vapor company whose principal brand is Nicolites.

Guidance

Management maintains its outlook for fiscal 2014 that was announced on Jun 26. It now expects GAAP earnings in the range of $4.87 to $4.97, compared with $5.26 in fiscal 2013.  For fiscal 2014, the company expects currency impact of 61 cents per share. Excluding the currency impact and one-time restructuring charges, the company expects its earnings to increase approximately 6% to 8% from adjusted earnings of $5.40 in 2013.

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.

Management had lowered its fiscal 2014 outlook in June. 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 carries a Zacks Rank #3 (Hold). In order to combat macro difficulties, Philip Morris, along with other tobacco majors like Reynolds American Inc. (RAI - Analyst Report), Lorillard Inc. (LO - Analyst Report) and Altria Group Inc. (MO - Analyst Report), is putting greater focus on the growing alternative tobacco product category.

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