PMI’s 2022-Q3 Results: Strong Growth Fundamentals & Exciting Future

Philip Morris International (PMI) Third Quarter 2022 Earnings Conference Call took place on 20 October 2022. As a PMI employee, I also joined the conference to take some notes and read the press release containing detailed information on PMI’s 2022 third quarter results.

Firstly, the day that earnings conference is organized marks a historic day in PMI’s journey towards a smoke-free future, with the certainty that the company will have full control of IQOS, the world’s leading smoke-free product in the United States, the world’s largest smoke-free market from April 30, 2024.

PMI’s CFO Emmanuel Babeau stated that PMI sees IQOS as the primary vector for establishing a leadership position in the U.S. smoke-free industry and it will be followed by the other products in PMI’s smoke-free portfolio. In this context, Swedish Match offers an immediate position in the oral segment, and mutually beneficial synergies at sales force level. However, should the offer fail, PMI can certainly build a robust sales force as part of its commercial deployment engine during the transition period. With regard to Swedish Match, PMI announced on 20 October 2022 morning an update to its offer with its best and final price of SEK 116. The updated offer retains a 90% acceptance condition, which is critical to allow the company to capture the full potential of the combination.

What about Business?

PMI’s business delivered strong third-quarter and year-to-date performance, despite some challenging headwinds, and PMI expects to deliver another excellent year of double-digit adjusted diluted EPS growth on a pro forma currency-neutral basis. Most impressive was the continued excellent IQOS performance, with strong shipment volume and IMS growth reflecting broad-based momentum in the EU region, Japan, and emerging markets. PMI remains excited by the promising results of IQOS ILUMA, its rich pipeline of smoke-free innovation, and plans for further launches of both ILUMA and VEEBA in the fourth quarter and in 2023.

PMI continues to accelerate investment in its commercial programs, digital engine, and R&D for long-term growth, as well as behind a number of growth opportunities across categories and geographies. The return from such investments remains compelling, as demonstrated by the exceptional top- and bottom-line growth delivered over recent years.

In addition to growth in smoke-free products, PMI’s combustible business continues to perform well, with organic net revenue growth and essentially stable pro forma shipment volumes. Despite accelerated pricing in the current inflationary environment, temporary margin pressure from inflation and supply chain inefficiencies is likely to continue in the coming quarters.

Importantly, PMI’s underlying growth fundamentals remain strong and the management team looks forward with confidence. PMI has secured its near-term access to the substantial U.S. opportunity for IQOS, also forming the backbone for introducing our broader smoke-free portfolio. PMI is now advancing on its plans to launch at scale with or without Swedish Match.

And the Financials...

Turning to PMI’s Q3 earnings, the company delivered another very strong performance this quarter, with HTU volumes ahead of our forecast, and robust growth in total volumes, market share and combustible net revenues. With adjusted operating income margins in line with expectations, this resulted in total Q3 adjusted diluted EPS of $1.53, close to its all-time quarterly high despite notable currency headwinds.

PMI’s strong third quarter, combined with a robust H1, supported an excellent delivery for the year-to-date. It needs to be highlighted that PMI’s strong pro forma volume growth of plus 3.4% and organic net revenue growth of plus 7.7%, again reflecting continued strong IQOS performance, pricing, and the recovery of the combustible business in many markets against a pandemic-affected comparison. Smoke-free net revenues made up around 30% of its year-to-date pro forma total, putting it on track to reach its ambition of over 50% by 2025.

PMI’s year-to-date operating income margin contracted organically by 110 basis points on a pro forma basis.

PMI remains on track to deliver cost savings of $2 billion over 2021-2023. $1.5 billion of gross savings have already been delivered, including over $200 million in Q3. This allows the company to reinvest in the business and mitigate increasing inflationary pressures.

Year-to-date currency-neutral adjusted diluted EPS grew by 9.7% to $4.11 on a pro forma basis and 8.8% in total to $4.59; an excellent performance.

Lastly Dividends

And finally, PMI has increased the dividend every year as a public company, through the ups and downs of economic and currency cycles. It continues to be steadfastly committed to returning cash to shareholders, as it advances towards its ambition to become predominantly smoke-free by 2025.