Philip Morris International (PMI) saw strong volume demand for Heated Tobacco Units (HTU’s) across all regions except the Middle East & Africa in the third quarter (ending September) but shipments of cigarettes fell – including by double digits in two regions.
HTUs – which are part of so-called RRPs (reduced-risk products such as IQOS that heat and do not burn tobacco)– saw global volumes soar by +84.8% in 3Q19. Growth would have been higher but for drag from Middle East & Africa where there was a -49% decline, impacted by lower HTU shipments in PMI Duty Free.
Globally cigarettes declined by -5.9% in the quarter, with all regions contracting and two – East Asia/Australia and Latin America/Canada – tumbling by -10.5% and -14.1% respectively.
PMI – whose five biggest cigarette brands are Marlboro, L&M, Chesterfield, Philip Morris and Parliament – said that in the Middle East & Africa, duty free shipments were down by -11.1% overall “mainly reflecting increased enforcement of traveller allowances, notably by China”.
Financially, despite being hit by an after-tax charge in Russia of US$315 million related to excise taxes and VAT for the 2015 to 2017 period, Chief Financial Officer Martin King said: “Our third quarter results continued to reflect strong underlying business performance.” Net revenues, excluding unfavourable currency, increased by +3.4% to US$7.64 billion (see end summary).
12.4 million IQOS users
Net revenues from RRPs reached US$1.3 billion in the quarter or over 17% of PMI’s total net revenues. “It is worth noting that our year-to-date September RRP net revenues of US$4.1 billion have essentially reached the full year 2018 total,” said King.
PMI estimates there were approximately 12.4 million IQOS users by the end of September of whom 71%, or some 8.8 million, have stopped smoking and switched to IQOS, with the rest in various stages of conversion. IQOS is now commercially available in 51 markets including travel retail, following recent launches in Belarus, the United Arab Emirates and in the US.
Last month, PMI took another step forward with its strategy for a smoke-free future, with the launch of IQOS 3 DUO, designed with features to help adult smokers switch more seamlessly from cigarettes.
Chinese headwinds and US vaping alert
On the hit to the duty free channel due to Chinese enforcement of limits, King said: “Duty free numbers have been affected by allowances – the amount of product that individual tourists or travellers can bring back into China has been reduced and is more strictly enforced. That is having an impact on what was a very robust duty free business of HTUs not just to travellers from China, but other countries as well.”
As for the lower HTU numbers for duty free in the Middle East and Africa region, King said this was partly because of the comparison with the previous year when the company was ramping up and building inventory to deal with higher sales. “This year, we’re in a reverse situation where we’re bringing some of the volume down in order to account for the new situation with traveller limits,” he said.
Following a recent outbreak of lung illness linked to vaping products in the US which has left 33 people dead, the Trump government last month said it was working on plans for a ban on e-cigarette liquid flavours.
How this could affect perceptions of RRPs was not clear. King commented: “We are working hard to ensure that IQOS is distinguished from the issues in the US by making it understood that this is not an e-cigarette but a heated tobacco product. We have 12 million users and we have lots of experience in over 50 markets ensuring that people who convert to IQOS are former adult smokers.”
Looking ahead, King said: “If you stand back and view the big picture, we have good momentum going forward, with a nice balance between volume, share, pricing, margin expansion and the growth of HTUs, especially coming from some higher margin locations like the European Union.
“We’re seeing broad geographic success of HTUs and our smoke-free future strategy is paying off. The favourable momentum for IQOS continues across geographies, further supporting our confidence in our HTU shipment volume target of 90 billion to 100 billion units by 2021.”
