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Philip Morris Trims View on Berlin Plant Closure Charges

Zacks Equity Research

Philip Morris International Inc. PM lowered earnings expectations for 2019 due to charges associated with the closure of a plant in Berlin, Germany. Currently, the company expects earnings of $4.53 compared with the earlier forecast of $4.73. In 2018, the company reported earnings of $5.08.

However, the company continues to expect adjusted earnings of $5.14, which suggests growth of 0.6% from the year-ago quarter’s figure. Excluding currency impacts, earnings are projected to rise at least 9% to reach $5.28.

Restructuring Moves in Berlin

The decision to end cigarette production at the Berlin plant is part of management’s plan to optimize global manufacturing infrastructure. The factory has a production capacity of almost 40 billion units.

Per the agreement reached with employee representatives, operations in the plant are expected to end on Jan 1, 2020. In relation to this move, Philip Morris expects to incur pre-tax charges of approximately $355 million.

The anticipated charges include employee separation and pension costs of almost $265 million as well as asset impairment expenses of nearly $90 million. The company expects to incur most of the pre-tax charges in the fourth quarter. Also, a major portion of the cash charges are likely to be incurred in 2020. Cost savings generated from this transaction will be included in the company’s earlier estimated annualized cost efficiencies target of more than $1 billion for the period 2019-2021.

Headwinds in the cigarette category might have compelled Philip Morris to shut cigarette production in the Berlin plant. We note that the company has been reporting declining cigarette shipment volumes for a while. In fact, revenues from combustible products, which include cigarettes, declined 5.7% during third-quarter 2019. Cigarette sales volumes have been eclipsed by stringent regulatory norms as well as consumers growing health consciousness.

Previously, the company had undertaken factory closures in other regions such as Pakistan and Colombia. Also, Philip Morris transformed its plants from cigarette to reduced risk products (RRPs) manufacturing facilities. This was witnessed in the company’s Papastratos factory in Greece, for the production of HEETS — a unit used with iQOS. Such moves are likely to enable the company to focus more on expanding capabilities RRPs arena.

Other tobacco companies like Altria MO, British American Tobacco BTI and Vector Group VGR are also striving to expand in the low-risk tobacco products arena.


 

Coming back to Philip Morris, consistent growth in the RRPs space along with efficient product pricing strategies are likely to keep aiding this Zacks Rank #3 (Hold) stock. Shares of the company have gained 4.3% in the past three months compared with the industry’s rise of 1.6%. You can see the complete list of today’s Zacks #1 Rank stocks here.

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