Philip Morris Cuts Outlook for Year

Philip Morris Cos., the world’s largest cigarette maker and a major food products company, slashed its full-year earnings outlook Thursday, saying that despite heavy promotions of its premium-priced cigarette brands, consumers have turned to deep-discount rivals.

The lowered outlook, which was announced after the close of regular market hours, sent the company’s shares down sharply in after-hours trading.

The stock rose $1.25 to $42.73 in regular New York Stock Exchange trading, then plunged to $38.60 after hours, the lowest price since late 2000.

The maker of Marlboro, Virginia Slims and other cigarettes said it now expects per-share earnings to grow 3% to 5% this year, far below the 9% to 11% growth range it forecast in July.

New York-based Philip Morris blamed sharp increases in state excise taxes and heightened consumer frugality in the United States amid a slow economy.

On Sept. 4, Michael Szymanczyk, chief executive of domestic tobacco unit Philip Morris U.S.A., said the company was facing more pressure from deep-discount cigarettes and higher prices for consumers due to increased state excise taxes.

Thursday’s lowered earnings guidance followed a profit warning earlier this month from No. 2 U.S. cigarette maker R.J. Reynolds Tobacco Holdings Inc.

Reynolds, maker of Camel and other brands, said Sept. 6 that its third-quarter earnings would fall sharply as it boosts promotional spending in response to increased pressure from Philip Morris.

UST Inc., whose U.S. Smokeless Tobacco Co. is the largest U.S. smokeless tobacco maker, also cut its earnings forecast earlier this month, citing sluggish growth.

Philip Morris said in July that it would spend about $350 million to promote and market its premium cigarette brands to boost volume and market share.

The company now expects to spend between $600 million to $650 million on the domestic business in the fourth quarter, Chairman and Chief Executive Louis Camilleri said.

Spending on Marlboro is having the intended effect of boosting the brand’s market share, he said during a conference call with analysts.

The company said faster-than-expected growth of discount cigarettes, which exceeded 2 billion units in July, and an influx of illegally sold cigarettes, are among the factors eating away at its market share.

In many states, higher taxes are pushing consumers toward less expensive options, the firm said. “In August, the national average state excise tax was estimated to be 65 cents per pack,” Camilleri said. “That’s up more than 35%, or 17 cents per pack, since June.”

Philip Morris in 2001 spun off part of its giant Kraft Foods unit but retains 84% ownership. However, tobacco generates the bulk of the company’s sales and earnings.

Separately on Thursday, a Los Angeles jury ordered Philip Morris to pay $850,000 to a 64-year-old woman with lung cancer who blamed her tobacco addiction on the company’s failure to warn her of the risks of smoking.

Tyco Explains Ex-CFO’s

Severance Package

Tyco International Ltd. on Thursday said it got a great deal for a $44.8-million severance package it paid in August to a former finance chief who was under criminal investigation and has since been indicted.

People familiar with the severance paid to former Chief Financial Officer Mark Swartz said Tyco knew he was the focus of a Manhattan grand jury at the time the deal was struck.

In a jolt to the honeymoon of newly named Tyco Chief Executive Edward Breen, the sources said he was fully aware of the payout to Swartz, who is accused along with former Chairman L. Dennis Kozlowski of looting Tyco of $600 million since 1995.

“We had no choice but to give up the [$44.8 million],” said Tyco spokesman Gary Holmes, adding that Swartz received only one-third of the money to which he was entitled. “We got him to give up $91 million even though he was entitled to it.”

While Breen has moved to clean up Tyco’s oft-criticized corporate governance practices, the severance was not disclosed in an easily understood way.

The payout for Swartz came during Breen’s first week as CEO. Since Breen replaced Kozlowski in late July, his tenure has been warmly embraced by investors and Wall Street analysts who have applauded his apparent openness.

The nature of the payment was not disclosed in a massive filing Tyco made last week with the Securities and Exchange Commission. Tyco said the purpose of that disclosure was not to reveal negotiations with company executives.

The New York Times on Thursday first reported the terms of the severance package.

The money paid to Swartz was due to him under a previous binding agreement, and it was approved by Tyco and its compensation committee, Holmes said.

“He’s entitled to get this money unless he’s convicted of a crime,” Holmes said. “If the charges against him are proved, we will get all the money back.... We had no legal grounds to withhold the money paid to him.”

Tyco shares rose 23 cents to $15.23 on the New York Stock Exchange on Thursday.