Philip Morris International Inc. PM posted first-quarter 2023 results, wherein the bottom line came ahead of the respective Zacks Consensus Estimate, though it declined year over year. However, the top line increased due to favorable pricing.
The company reported results based on its new regional structure (unveiled in November 2022). This includes four regions instead of six, which is likely to take Philip Morris forward toward its goal of becoming a majority smoke-free business (in terms of net revenues) by 2025.
Quarter in Detail
Adjusted earnings per share (EPS) came in at $1.38, which dropped 4.4% year over year (excluding currency). On a reported basis, the EPS of $1.28 tumbled 6% (excluding currency). However, the bottom line beat the Zacks Consensus Estimate of $1.33 and our estimate of $1.32.
Adjusted net revenues of $8,099 million grew 4.6% year over year. On an organic basis, the metric increased 3.2%. The Zacks Consensus Estimate for the top line was pegged at $8,075 million and our estimate stood at $7,319.2 million. The year-over-year upside was backed by higher combustible tobacco pricing and growth in heated tobacco unit shipment volumes, partly negated by lower cigarette shipment volumes.
Philip Morris International Inc. Price, Consensus and EPS Surprise
During the quarter, net revenues from combustible products were down 1.5% to $5,233 million. However, on an organic basis, net revenues from combustible products were up 1.5%. Revenues from smoke-free products (excluding Wellness and Healthcare) jumped 14% (or up 2.6% on an organic basis) to $2,710 million.
During the quarter, net revenues from smoke-free products formed 34.9% of the company’s total revenues. Total IQOS users at the end of the first quarter were estimated at roughly 25.8 million (of which nearly 18.5 million had switched to IQOS and stopped smoking).
Total cigarette and heated tobacco unit shipment volumes decreased by 1.1% to around 171.1 billion units in the quarter. Cigarette shipment volumes dropped 3.1% to 143.7 billion units in the quarter, while heated tobacco unit shipment volumes of 27.4 billion units rose 10.4% year over year.
The adjusted operating income tumbled 10.7% on an organic basis due to elevated marketing, administration and research costs, an adverse volume/mix and escalated manufacturing costs, partly compensated by favorable pricing variance.
The adjusted operating margin contracted 5.8 points on an organic basis due to cost headwinds, including global inflationary pressures on the cost of sales (mainly hurting the combustible tobacco business), supply-chain hurdles associated with the transition to ILUMA, the overall inflation of operating costs, and the phasing of various investments and other costs.
Net revenues in the European region decreased by 9.7% (or down 3.6% on an organic basis) to $2,910 million. This was a result of an adverse volume/mix, with pricing being slightly favorable. Total shipment volumes fell 3.6% to 49,256 million units.
In the SSEA, CIS & MEA region, adjusted net revenues increased by 4.6% (or up 9.1% organically) to $2,557 million on improved pricing variance, as well as a favorable volume/mix. Total shipment volumes fell by 1.5% to 81,978 million units.
In the EA, AU & PMI DF region, net revenues declined 4.2% (but jumped 6.5% organically) to $1,520 million due to a positive volume/mix and slightly better pricing variance. Total shipment volumes in the region grew 4.5% to 24,858 million units.
Revenues in the Americas advanced 5% (or up 2.8% on an organic basis) to $445 million. This was a result of improved pricing variance, partly negated by an adverse volume/mix. Shipment volumes rose by 0.7% to 15,012 million units.
Philip Morris became the majority owner of Swedish Match on Nov 11, 2022. In the first quarter, revenues from the segment came in at $581 million, with smoke-free products forming more than 75% of the segment’s total net revenues.
Revenues from the Wellness and Healthcare unit surged 30.3% (or 37.9% on an organic basis) to $86 million in the first quarter. Management expects net revenues of about $300 million for the Wellness and Healthcare segment for the full year. It also expects a robust performance from Swedish Match’s existing operations.
Philip Morris ended the quarter with cash and cash equivalents of $2,428 million, long-term debt of $40,416 million and a total shareholders deficit of $7,053 million.
Management expects a top-and-bottom-line recovery in 2023, which is likely to be more weighted toward the second half. Management anticipates certain margin pressures in the first half. The company’s 2023 guidance includes the full contribution from its operations in Russia and Ukraine.
For the full-year 2023, the company expects adjusted EPS in the band of $6.10-$6.22 compared with the $5.98 reported in 2022. Excluding currency movements, adjusted EPS is envisioned in the band of $6.40-$6.52, suggesting 7-9% growth from the year-ago period figure. On a reported basis, management expects an EPS in the range of $5.88-$6.00 compared with the $5.81 reported in 2022.
The total international industry volume decline is estimated in the range of 1-2%, excluding China and the United States. The total cigarette and HTU shipment volume growth is likely to come in the range of around flat to an increase of 1%. HTU shipment volumes are envisioned between 125 and 130 billion units.
For 2023, PM expects net revenues to increase by nearly 7-8.5% on an organic basis. The adjusted operating margin on an organic basis is likely to decline 50-150 basis points due to persistent global inflation, transitory effects related to the ILUMA roll-out and additional growth investments.
The company expects increased net interest costs of around $200 million from 2022. Management expects operating cash flow in the band of $10-$11 billion in 2023, with the capital expenditure likely to be around $1.3 billion. The adjusted effective tax rate is envisioned in the 20.5-21.5% band. Philip Morris stated that it would not make share repurchases in 2023.
For the second quarter of 2023, PM expects adjusted EPS in the band of $1.42-$1.47, including a currency headwind of 13 cents per share. The EPS guidance reflects HTU shipment volumes of about 30-32 billion units and organic top-line growth in the high single digits.
Shares of this Zacks Rank #3 (Hold) company have rallied 11.9% in the past six months compared with the industry’s growth of 7.3%.
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