WOOD Flash – Philip Morris CR: conference call takeaways – management raising more questions than answers

Philip Morris CR (PMCR) held its annual conference call for investors yesterday (3 October). The majority of the call was dedicated to the iQOS rollout and the cost structure related to the commercialisation of the product, the 1H18 performance and manufacturing services. In our view, management gave few specific answers to our concerns, and we reiterate our HOLD rating on the company. In our most recent downgrade (Czech Republic_Consumer Staples_Philip Morris CR_Downgraded to HOLD_17Jul2018.pdf), we noted the lack of visibility on the potential production takeover from the parent company (PMI), while we believe the accelerating sales of iQOS could have a negative impact on PMCR as it cannibalises its current combustible operations (production and distribution), where PMCR is achieving a 22-27% margin for a significantly weaker business, profitability-wise, as the company is only a distributor (only a c.10% margin for PMCR). We believe that these concerns were not fully dispelled by management yesterday, and we continue to see a lack of visibility into the iQOS business model and the potential upside for PMCR, along with a manufacturing boost related to the consolidation, which we would need to see to be more optimistic on the investment case.