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Earnings Preview: Tougher 3Q at P. Morris Int'l

RICHMOND, Va. -- Cigarette maker Philip Morris International Inc., which sells Marlboro and other brands abroad, expects a slowdown in the third quarter as it laps large cigarette volume gains last year. The company is releasing results for the July-September quarter on Thursday before the market opens.

WHAT TO WATCH FOR: Whether fewer cigarettes were sold because of tax hikes and growing tobacco control efforts. Smokers face new tax increases, bans, health concerns and social stigma worldwide, but the impacts are starker in the U.S. than in many other countries.

Philip Morris International has compensated for consumers buying fewer, or cheaper, cigarettes _ and for the weak economy _ by cutting costs and raising prices.

Cigarette shipments fell about 1 percent to 238.3 billion in the second quarter that ended in June, but its market share increased or remained stable in many key areas.

Shipments grew about 5 percent in the company's region that encompasses Eastern Europe, the Middle East and Africa, but fell 9.4 percent in the European Union and 3 percent in Latin America and Canada. Meanwhile, shipments in Asia, one of its largest growth areas, fell nearly 1 percent during the quarter on a tough comparison with last year, when shipments shot up in Japan following the March 2011 earthquake and tsunami.

The events offered the company a sales opportunity because supply disruptions led Japan Tobacco Inc., the world's No. 3 tobacco maker, to stop shipping cigarettes within Japan.

The company also bought Philippines company Fortune Tobacco Co. in February 2010, bolstering its Asian business.

Last month Philip Morris International cautioned a "particularly difficult comparison" in the third quarter as it experienced a more than 4 percent jump in volumes a year ago.

Swings in currency markets are also having an effect. The company cut its earnings guidance for the year twice because of unfavorable foreign currency exchange rates.

When the U.S. dollar is rising against the world's other currencies, companies that sell goods internationally take a hit when converting revenue in foreign currencies back into the dollar. That effect is particularly strong for Philip Morris International, because it does all its business overseas.

WHY IT MATTERS: Philip Morris International, with offices in New York and in Lausanne, Switzerland, is the world's second-biggest cigarette company after state-controlled China National Tobacco Corp.

Richmond, Va.,-based Altria Group Inc., the owner of Philip Morris USA, spun off Philip Morris International in 2008. Altria is the largest U.S. cigarette seller.

WHAT'S EXPECTED: Analysts on average expect Philip Morris International to report adjusted earnings of $1.39 per share on revenue of $8.21 billion, according to FactSet. Analysts typically exclude one-time items.

LAST YEAR'S QUARTER: Philip Morris International reported adjusted net income of $1.37 per share on revenue of $8.4 billion, excluding excise taxes.

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Michael Felberbaum can be reached at http://www.twitter.com/MLFelberbaum.

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