How the Russian war is hurting Philip Morris Cigarette Manufacturer

Philip Morris International Inc. (PMI) is a Swiss-American multinational cigarette and tobacco manufacturing company, with products sold in over 180 countries. The company is the maker behind Marlboro cigarettes—which is their most recognized and best-selling product. Philip Morris International is often referred to as one of the companies comprising Big Tobacco—the world’s 4 largest transnational tobacco companies.

In August 2018, Reuters reported that Philip Morris “has been among foreign companies with exposure to Russia’s tobacco market. The company’s sales exposure to Russia is 7 percent, according to a note from Goldman Sachs.” Indeed, Philip Morris does have one of its biggest factories in Russia with over 3,200 workers. The company also has a factory in Ukraine with nearly 1,300 employees.

Today, against the backdrop of the ongoing the Russo-Ukrainian war between the countries of Russia and Ukraine which has been going on for almost a decade now and recently underwent a spike in aggression from both sides, Philip Morris announced a suspension of its planned investments in the Russian Federation. This announcement was made by the cigarette manufacturer on Wednesday, 9^th March, 2022, following Russia’s invasion of Ukraine.

The now-suspended investments included new product launches as well as commercial, innovation, and manufacturing investments. Nevertheless, just like many Western brands including McDonald’s Corp, Philip Morris has continued to pay salaries to its employees in both Russia and Ukraine during this period. Ukraine, where Philip Morris temporarily suspended its operations on Friday, 25^th February, 2022, accounted for less than 2% of its total net revenue in 2021, while Russia made up around 6%. Ukraine also accounted for around 2% of PMI’s total cigarette and heated tobacco unit shipment volume, while Russia accounted for 8.4% of cigarette shipments and more than 17.1% of heated tobacco unit volume.

Sources have revealed that in the past few weeks, Philip Morris shares have declined after Russia’s invasion of Ukraine. The stock is now down more than 10% from its high as investors are curious as to how this military engagement may impact the company.

The tobacco industry is already grappling with supply chain issues, and so the current disruption in production as a result of the war is certainly not helpful. Ukraine may not be a major sales country for Philip Morris, but Russia on the other hand is. Russia is the second most important sales country for Philip Morris after Indonesia.

Being that the conflict only started late in February, the Philip Morris management has not made a statement on the overall impact that the company has experienced as a result of the war so far. However, based on ordinary business analysis, it is likely that we will see some sales pressure, perhaps impacting total revenues by a couple of percents. It certainly does not help that the Russian Ruble has dropped more than 36% already against the US Dollar since the Q4 earnings report, which only adds to revenue headwinds. With a heavy decline likely to significantly affect the Russian economy moving forward, cigarette demand and supply could easily be hit here.

As for hearing from Philip Morris, we will likely get a major update from the company at the Q1 earnings report, which should be in mid to late April. Beyond the potential for revenue growth to be lowered, we are also looking at an increase in the negative earnings impact from currencies. This conflict, along with the possibility for the Federal Reserve to start raising rates at the March meeting has been good for the US Dollar, up nearly 2% against the Euro for instance, since the Q4 report. The only good news here is that management did not include any share repurchases in its yearly guidance, so the EPS hit will be softened a little if Philip Morris shares are bought back during the year.

And while we may not have heard from the tobacco giant about the current state of affairs within the company, Philip Morris has previously reassured its investors that it did not expect to be hurt very much by the US sanctions on Russia. “Our primary concern is the safety and security of our colleagues and their families, and we are monitoring the situation closely,” the company stated, in response to investor questions about the current geopolitical situation. “At this time, we do not anticipate any material impact on our business related to the announced sanctions.” President Biden announced sanctions on Russia after the country ordered troops into breakaway regions of Ukraine. Separately, Philip Morris expressed “confidence” in its 2021 to 2023 compound annual growth targets for net revenue of more than 5% and adjusted earnings per share of more than 9%. The stock has run up 21.1% over the past three months, while the S&P 500 SPX, -0.74% has dropped 8.2%.

Another firm, Imperial Brands Plc, which is a British multinational tobacco company has also suspended all operations in Russia, following international sanctions against the country. So the effect of the Russo-Ukrainian war is far-reaching in the tobacco industry.

In the end, Philip Morris shares have been hit recently after Russia’s invasion of Ukraine. The company has closed its factory in the war zone, but the larger impact may come from Russia being the company’s second-largest sales country. It would not surprise us to see a guidance cut at the Q1 report, especially on the earnings side of the US dollar continues to strengthen. The good news is that the company’s long-term prospects remain rather healthy, so Philip Morris may have indeed been telling their investors the truth about having no need to worry.

More Business Updates in the Wake of the War.

Outside of the tobacco industry, more and more companies are pulling back from Russia in terms of their business operations and investments. Nestle has recently joined the list of multinationals stepping back from Russia as pressure mounts from consumers in the West to take a stand against the invasion of Ukraine. The world’s biggest packaged food group fell into line with rivals Procter & Gamble and Unilever in halting investment in Russia.

The move came after Coca-Cola and McDonald’s halted sales in Russia, where a senior member of the ruling party has warned that foreign firms which close down could see their operations nationalized. McDonald’s said the temporary closure of its 847 stores in the country would cost it $50 million a month.

PepsiCo and Starbucks have also joined the dozens of global companies closing stores, factories, or exiting investments to comply with sanctions or due to supply disruptions. Those supply hurdles include the world’s top three shipping giants suspending container routes. Yum Brands Inc, the parent of fried chicken giant KFC, said it was pausing investments in Russia, a market that helped it achieve record development last year.

In response to this exodus, Andrei Turchak, secretary of the ruling United Russia party’s general council, warned that Moscow might nationalize idled foreign assets.

“United Russia proposes nationalizing production plants of the companies that announce their exit and the closure of production in Russia during the special operation in Ukraine,” Turchak wrote in a statement published on the party’s website on Monday evening. The statement named Finnish privately owned food companies Fazer, Valio, and Paulig as the latest to announce closures. “We will take tough retaliatory measures, acting in accordance with the laws of war,” Turchak said.

Moscow, which calls its invasion of Ukraine a “special military operation”, has been hit by sweeping Western sanctions that have choked trade, led to the collapse of the Ruble, and further isolated the country. Banks and billionaires have also been targeted, with the European Commission preparing new sanctions targeting additional Russian oligarchs and politicians and 3 Belarusian banks, Reuters reported.

While the war in Ukraine and the sanctions have bolstered prices for commodities that Russia exports such as oil, natural gas, and titanium, those sanctions have largely barred Moscow from taking advantage of the high prices. For example, the US has banned Russian oil imports.

US oilfield services company Schlumberger, which derives about 5% of its revenue from Russia, said the ongoing conflict would likely hurt its results this quarter. On the other hand, global commodities trader Trafigura Group raised a $1.2 billion revolving credit facility from banks to help address soaring energy and commodity prices. Norway’s Yara, a top fertilizer maker, has said that it would curtail ammonia and urea output in Italy and France due to surging gas prices.

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