The tobacco industry often reacts differently in times of economic stress than other types of businesses, in part because demand for tobacco products tends to be resilient among customers. Across the globe, Philip Morris International (NYSE:PM) relies on its customers to stick with it through thick and thin. The company has worked on helping investors make a transition from traditional cigarettes to lower-risk alternatives like its IQOS heated tobacco system with significant success.
Yet with the coronavirus pandemic having reared its head to start 2020, investors came into Philip Morris' first-quarter financial report concerned about what the company might say about the impact of the outbreak on its performance. Philip Morris' results were quite strong, but it did warn that worse times could lie ahead for the tobacco giant.
The latest from Philip Morris
Philip Morris International's first-quarter results included a lot of good news. Revenue net of excise taxes climbed 6% to $7.15 billion, and that was even including the downward impact of having a portion of its business deconsolidated from its financial results. Net income surged 35% to $1.83 billion, and adjusted earnings of $1.21 per share climbed 11% year over year.
Gains were even stronger when you accounted for the change in accounting treatment of Philip Morris' Canadian subsidiary, Rothmans, Benson & Hedges. On a "like-for-like" basis, revenue jumped 10%, and adjusted earnings soared 30% from year-ago levels.
As we've seen for a while, total shipment volumes were slightly down, but not by a huge amount. Shipments fell 1.2%, led lower by a 4.4% drop in movement of traditional cigarettes. However, heated tobacco unit volume jumped more than 45% to 16.7 billion units, minimizing the overall decline. Philip Morris saw the most strength in its European businesses, while the Middle East & Africa and Latin America & Canada segments saw the largest declines.
CEO Andre Calantzopoulos put the results in perspective. "We started the year with a very strong first quarter," Calantzopoulos said, "reflecting continued structural growth momentum driven by our smoke-free portfolio and favorable combustible tobacco pricing." The CEO noted that the company's primary focus has been on protecting its employees and communities as the coronavirus pandemic has spread.
What's next for Philip Morris?
However, Philip Morris admitted that it hasn't seen the worst of the pandemic's impact on its results. As Calantzopoulos explained it, "We experienced a limited impact on our performance from the early stages of the COVID-19 pandemic, as the onset of government restrictions related to social distancing and travel were generally only implemented in our key markets over the course of March." Even so, Philip Morris has already seen some reductions in duty-free sales, as well as slower adoption of its IQOS platform from new users. The company expects to see further adverse impacts during 2020.
How big those impacts will be, however, are beyond Philip Morris' knowledge. Without knowing how long the pandemic will last and how disruptive restrictions will be, it's impossible for the company to project when a recovery is possible and what financial damage the outbreak will do. As a result, Philip Morris withdrew its previous 2020 guidance on earnings.
All that said, Philip Morris believes it's in a solid position to make it through the pandemic in solid financial shape. That should leave it better poised to move forward with efforts to make the IQOS heated tobacco system more popular.
Investors weren't entirely pleased with the cloudy outlook, and Philip Morris shares fell 6% on Tuesday following the announcement. Nevertheless, the tobacco giant appears to have a handle on what its challenges could be as long as the coronavirus lasts. With the strength to outlast the pandemic, Philip Morris International offers an attractive dividend along with stability that many other consumer products companies can't match.