Chip supply shortage may hurt cigarette makers

Cigarette giant Philip Morris (PM) is keeping a close eye on whether the yawning semiconductor shortage will impact its fast-selling electronic heat-not-burn product called IQOS, which houses a microchip.

"That's certainly something that we are monitoring very closely" Philip Morris CFO Emmanuel Babeau told Yahoo Finance Live, adding the situation so far is "manageable."

Keeping IQOS on the shelves despite the chip shortage roiling everything from the auto to computer hardware industries is critical for Philip Morris.

IQOS was a hot performer for Philip Morris in the first quarter as the company expanded it to more countries and promoted efforts to reduce traditional smoking. The company said this week that strength in IQOS helped the heated tobacco unit segment to make up 13% of its volumes and 28% of its revenues in the first quarter. A year earlier, heated tobacco products comprised 21.7% of sales. Philip Morris said the products reached 19.1 million people in the first quarter.

In this Oct. 22, 2018 photo, a visitor tries out an iQOS at a store in Tokyo. While New York-based Philip Morris is hoping to woo the world with its penlike “heat-not-burn” device iQOS (EYE-kose) as a better option than old-style smoking, nowhere else has it scored greater success than in Japan. (AP Photo/Eugene Hoshiko) (ASSOCIATED PRESS)

Overall heated tobacco unit volumes rose 29.9% in the quarter compared to a 7.3% drop in cigarette volumes.

Strength in IQOS — a high margin product for Phillip Morris — did its part to power first quarter adjusted earnings growth of 29.8% from last year.

"There is a situation [chip shortage] that remains extremely fluid. And we have to keep monitoring what that means in the coming months to see whether there will be potentially more impact than what we see today," explained Babeau.

Philip Morris raised its full-year earnings guidance to $5.93 to $6.03 this week, estimating a 15% to 17% improvement from 2020. The new guidance assumed limited impact to IQOS from the chip shortage. Previously, the company saw 2020 earnings of $5.90 to $6.00.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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