Philip Morris' low profit warnings put heat on Venture

The IQOS that Venture creates for PMI contributed 25% of 2017 revenue.

Philip Morris International (PMI) significantly cut its full-year guidance as it prepares for the next generation of IQOS devices. CGS-CIMB noted that investors will likely view PMI’s Q2 earnings read through as a negative sign for Venture Corporation’s FY2018 performance.

The I Quit Ordinary Smoking (IQOS) smokeless cigarette device that Venture creates for PMI made up about 25% of 2017 revenue and 40% of gross profit.

In a research note, CGS-CIMB analyst William Tng said, “PMI said that the worldwide introduction of the next generation of IQOS devices towards the end of 2018 will require the reduction of current generation device inventories, whilst the ramp-up of new devices is expected to occur in 2019.”

Moreover, it intends to launch a new heated tobacco mainstream-price product line for more price-sensitive consumers. “PMI expects heated tobacco unit shipments of 41-42 billion, including an anticipated net inventory reduction of around units. PMI also expects lower IQOS shipments,” Tng added.

On the upside, PMI will launch a new IQOS in 2019. “If the replacement demand is high, new users are converted, and Venture continues to engage with PMI as a customer, some benefits will accrue to Venture in FY2019, in our view,” Tng added.

Venture will report its Q2 results on 3 August, and CGS-CIMB expects reported earnings of around $87.6m. “Although difficult to quantify, the current macro uncertainties have already led to downward earnings revisions amongst brokers (including us) covering this name,” Tng said.