Strong Underlying Momentum towards Smoke Free Future: PMI's 2022-Q2 Results

Philip Morris International stock rose 4.2% on Thursday, July 21 just after Q2 2022 results were released. In this content, I will review PMI’s 2022 second quarter results and I will share some key financials and more about their drivers to make the numbers more meaningful. Since I am an employee of PMI, I prefer to use “we”, “our” and “Emmanuel” (for our CFO Babeau) in some parts of the below content.

The data used in this content are all publicly available and it does not include any investing recommendation.

Q2 2022 results reflect the exceptional one-off events that have impacted PM this year, notably the loss of earnings from Russia and Ukraine and the sharp appreciation of the U.S. dollar. Excluding these, the underlying drivers behind PM’s businesses have remained strong, and full-year 2022 outlook has been raised on an organic basis.

Before the highlights, we need to remember the announcement that PMI intends to exit the Russian market in an orderly manner, as the complexities of continuing to operate in Russia increase, such as supply chain challenges and financial and banking sector restrictions.

PMI demonstrated strong underlying momentum in the second quarter of 2022 with another quarter of positive volume supporting better-than-expected growth. Most impressive was the continued excellent IQOS performance and strong Q2 user growth of more than 1.1 million, demonstrating further acceleration compared to Q1 as device limitation and COVID restrictions continue to ease. This reflects strong momentum in the EU region, Japan and developing markets.

The proposed addition of Swedish Match would further boost our future financial profile. This is a value-creating offer for both sets of shareholders with a compelling strategic and cultural fit, providing an additional opportunity to accelerate our smoke-free future.

During Q2 2022, PMI had good volume growth and good currency-neutral revenue growth. However, EBIT growth was weaker due to margin contraction and, including currency, both revenues and EBIT fell year-on-year.

Volume growth would have been stronger except for supply chain constraints, and the margin contraction was also due to one-off factors.

Let’s dive deep into the stories behind these numbers and ratios.

In 2021, Ukraine accounted for around 2% of PMI’s total cigarette and heated tobacco unit shipment volume and under 2% of PMI’s total net revenues.

In 2021, Russia made up almost 10% of total shipment volumes and around 6% of PMI net revenues.

Despite the impact of war in Ukraine, PMI increased its shipment volume by 1.1% compared to previous year.

Net revenues increased by 5.3% and this has mainly two drivers. The first one is the continued strong growth of IQOS and the second one is ongoing recovery of the combustible business. Here it is critical to keep in mind that the recovery is realized against a pandemic-affected comparison.

When we look at the revenue per unit, we see an increase by 4.1% in total. This increase is especially important because this year there is a delayed timing of shipments, as the company manages the cancellation of planned heated tobacco unit manufacturing in Russia and company faces disruptions in global supply chains generally.

Our operating income margin declined, and this reflected:

Firstly, the investment to further expand and match the speed of PMI's smoke-free portfolio growth, including the initial higher cost of ILUMA devices and heated tobacco units, and the replenishment of distribution channels as device constraints ease to support re-accelerating IQOS user growth;

Secondly, the impact of supply chain extra costs, notably due to the war in Ukraine; and

Thirdly, cost inflation driven by the global pandemic recovery and by the war in Ukraine, notably for certain direct materials, wages, energy and transportation costs.

Lastly, the decline also reflected a challenging prior year comparison, which included productivity savings.

When we look at the assumptions for the next two quarters;

In the third quarter, it is expected that IQOS and combustible volume trends will lead the top line growth.

There are some temporary headwinds which not only impacted PMI but also the whole World and the expectation is that these will ease in third quarter.

And in the last quarter of this year, HTU capacity problems will be better, so shipment volumes for HTU will increase as well.

One of the key updates in last quarter for PMI was its interest in Swedish Match.

Philip Morris International is in takeover talks with Swedish Match over a multibillion-dollar deal that would expand its smoke-free business.

In May, 2022, Philip Morris Holland Holdings B.V. (PMHH), an affiliate of PMI, announced a recommended public offer to the shareholders of Swedish Match to tender all shares in Swedish Match to Philip Morris Holland Holdings at a price of almost 16 billion USD in cash.

This alignment is strategic because it has the potential to create a global smoke free champion with PMI’s leading heated tobacco and Swedish Match’s oral nicotine brands. It will also open US market for PMI with nicotine pouch which has long term opportunities for smoke free categories. But the deal is not completed yet and PMI announces that the transaction is expected to close in the last quarter of this year.

To sum up:

Across H1 as a whole, total shipment growth was strong.

IQOS’ growth was helped by the new ILUMA device.

Combustible products perform well to support smoke-free transformation.

PMI is focused on its smoke free portfolio. IQOS will continue its dominance of the Heat-Not-Burn ("HNB") category, to grow strongly in Europe and remain at least stable in Japan. PMI has also launched its own e-vapor products since 2020 and has entered the nicotine pouch market with its own products on a limited scale.

Management comments reiterated their “unwavering” commitment to the dividend and hinted at the possibility of increasing it with cashflows from Swedish Match after deal close.

In conclusion, PMI provides positive updates for its investors which make the share prices increase.

Smart investors and analysts are focused on how to earn returns and how to cash out. 

Investors and analysts make decisions by asking critical Questions. That’s why I prefer to give a special part for Q&A session from the Investors’ Meeting. The key Questions are on IQOS new user momentum, Swedish Match acquisition, OI Margin decrease, menthol ban in Heat Not Burn Products and reintroducing IQOS in the US market.

The first question is about the strong IQOS new user momentum.

According to Emmanuel, our CFO, People realize all the benefits they can get by switching from combustible cigarettes to the IQOS product.

Emmanuel also states that we are enlarging the choice and that makes IQOS even more desirable and attractive.

Additionally, Emmanuel highlights that launching ILUMA is the second stage of the rocket in the various countries to sell IQOS even higher, so it brings momentum. This can also easily be seen in the above graph.

The second question is about Swedish Match transaction and other potential acquisitions.

Emmanuel highlights that we continue to expect the closing of the transaction in Q4, of course, subject to Swedish Match shareholder acceptance.

He also mentions that the priority and the focus in terms of acquisitions is on Swedish Match for the time being.

The third question is about the decrease in the margins and its relationship with the higher costs of ILUMA and HTUs and if this situation will continue or not.

Our CFO says that inflation is one of the headwinds on the margin. Also, there are costs that are coming from the disruption in the supply chain, notably coming from the war in Ukraine.

Moreover, there is a temporary acceleration of air freight charges. Emmanuel mentions that We're not going to keep air shipping on the long term.

In conclusion, inflation and other headwinds seen in Half One are temporary from PMI perspective.

The fourth question is about the full availability of devices when there is chip shortage.

Emmanuel states that it is crucial for smokers to have Access to IQOS device in order to get converted. He mentions that we see a rapid replacement of existing IQOS blade device by IQOS ILUMA in the markets where ILUMA is launched. So, the main objective is to equip the core consumer with new devices. According to Emmanuel, this temporary shortage will finalize so its temporary impact on the margin will be cleared.

The fifth question is about the impact of the proposed elimination of menthol variants in the EU for heat-not-burn products.

Emmanuel highlights the facts that this plan needs to be approved by the Parliament and by the European Council. Emmanuel reminds that it already has happened on a combustible business with almost no impact or very limited impact. So, it isn't clear that this will have a meaningful impact if it happens on our heat-not-burn business.

The sixth question is about the timing of reintroducing IQOS into the marketplace in the US.

For those who are not aware of the latest IQOS situation in the US market, in November 2021, PM USA had to remove IQOS from the market due to an import ban and (cease-and-desist) orders from the U.S. International Trade Commission (ITC). Altria, which runs Philip Morris USA, announced it “does not expect to have access to IQOS devices” in 2022, but “remains focused on returning IQOS to the market and is working on re-entry plans.” 

Emmanuel only shares with the analysts that we expect to be in a position to introduce IQOS in H1 of 2023.

The last question is about Russia, mainly exporting IQOS devices to Russia and taking cash out of Russia for dividend payments are questioned.

Our CFO shares that there is no sanction for device export to Russia. Thus, although there are some limitations coming from supply chain related problems, exportation is not impacted.

For dividend Payment, it is not exercised by PMI so Emmanuel could not provide an answer about it. On the other hand, intercompany payments and royalties are paid without any problem.

All these announcements, investments and financials support PMI’s ambition to become a majority smoke-free product company by 2025, building on its 2016 commitment to a smoke-free future.

 

 

Unsmoke as a Sunday Evening Activity

Tonight, just after watching an animation movie with my son and wife, as a Sunday evening activity before sleep, my son asked for a special request: drawing

All he asked for was to draw something that each of us can work on different paper and share with each other when the whole drawing was finalized.

As a father who is not good at drawing figures, I came up with an idea: Unsmoke

Rather than a drawing, it is a little bit writing but at least it has an inspiration.

And here is the product:

Not the best drawing, but probably one of the best messages to the whole world!

For my other unsmoke related posts, please kindly visit:

http://volkanyorulmaz.blogspot.com/2019/04/unsmoke.html

http://volkanyorulmaz.blogspot.com/2019/06/how-i-unsmoked-my-best-friend.html

If you want to learn more about Unsmoke, then you should visit:

https://www.unsmokeyourworld.com

A Sustainable Tobacco Company and its Transformers in Greece

Philip Morris International (PMI) is moving towards a smoke-free future – one without cigarettes. PMI and its employees believe that something needs to start today to accelerate the arrival of an unsmoked world. That’s why the company wants smokers, nonsmokers and unsmokers to join them in making this conversation a global success and to help them grow a community of people who will help bring about a truly smoke-free future. So PMI started a campaign and called it ‘Year of Unsmoke’. It’s the global campaign to rid smoke from your life, the lives of your loved ones, and generally the world.

The ‘Year of Unsmoke’ is PMI’s urgent call to action to smokers, nonsmokers, regulators and agents of change across the world to drive a better future for the world’s 1.1 billion smokers and their families, loved ones and communities.

As PMI moves from cigarettes to smoke-free alternatives, its journey is also about transitioning to becoming a global sustainability leader. Recently, PMI has announced its sustainability report for 2018. This is the fourth Sustainability Report details the company’s sustainability strategy, which covers its products, operations and value chain, and is an integral part of PMI’s mission to unsmoke the world. It has four pillars:

• Transforming business
• Driving operational excellence
• Managing social impact
• Reducing environmental footprint

The report publication is part of the company’s commitment to transparency. As PMI moves from cigarettes to smoke-free alternatives, its journey is also about transitioning to becoming a global sustainability leader.

André Calantzopoulos, CEO of PMI, says it is not enough to focus on product alone “Our sustainability ambition extends to the way we operate, manage our social impact, and reduce our environmental footprint. Society’s expectations of businesses are changing, and we must play our part in addressing global challenges”.

For PMI, sustainability means creating long term value while minimizing the negative externalities associated with products, operations and value chain.

In 2018 Sustainability Report of PMI, a case study is shared which identifies the transformation to smoke-free future in Greek affiliate (Papstratos) and its impact on social and economic structure of Greece. This case is an important example of how PMI manages its social impact.

 

Transformers in Greece

Imagine for a moment that you are a machine operator in PMI’s factory in Greece, it is 2016 and you are told the factory is converting to deliver new products that will contribute to a smoke-free future. Fast-forward to 2018 – transformation is happening everywhere. Not just in factories but also in communications, commercial, and external affairs functions, for example. We are proud to face the challenges, and Papastratos, our Greek affiliate, is an exemplary story.

“The only constant is our values, which have been our guiding light since Papastratos was founded some 87 years ago,” says the managing director Christos Harpantidis. So, once we had explained to employees why a transformation is taking place, most understood it to be a logical step forward. And, while change is not free of challenge, Papastratos recorded no serious negative economic impact for staff through 2016–2018. Ultimately, staff motivation was secured because PMI is intensifying the social dimension of its corporate purpose.

Our staff “get it.” And there is a domino effect as neighboring teams, in Bulgaria for example, gear up for growth in IQOS sales. But what caught our attention was that our agility at work was further primed by the long-standing government-debt crisis. People are willing to adapt. And while trust in business during the tough times has faded, Papastratos is recognized as a role model for rebuilding it. As Christos says, “People here see the transformation as an amazing period of their lives, and other companies in Greece can’t believe how fast we are moving.”

IQOS in Greece is already used by 150,000 people and 400 jobs are being created there in the smoke-free category. Core internal tasks for us in Greece have included achieving cultural and behavioral change, installing crossfunctional “enabler” teams, training over 500 people on new standards and machinery. Alongside that, we are installing new customer care and digital services, operating retail IQOS stores and e-commerce, expanding the sales car fleet, amending supply chain management processes, and engaging on our transformation vision with new external stakeholders, such as scientists and physicians.

Against this backdrop, we have assessed in 2017 the socio-economic impact of our business in Greece. Our findings showed that Papastratos contributed 2.2% to the Greek state revenues, with an economic value added (EVA) of EUR 157 million (0.1% of Greek GDP). For every EUR 1 of EVA by Papastratos, EUR 2.30 is added to the Greek economy, an increase of 66.7% on 2016. Additionally, every job at Papastratos indirectly supports 2.5 jobs in the overall Greek economy, thus supporting the income of 7,130 Greek citizens. Equally significant is the social impact of the Corporate Responsibility Plan, which invested more than EUR 2.2 million during 2009–2017 and aims to provide the most vulnerable social groups with relief from the economic crisis, while creating new economic prospects, empowering women, facilitating access to education, and supporting Greek tobacco growers.





Author's note: 

It is great to see PMI’s, a tobacco company, programs focus on promoting employment and decent work to improve the financial and economic security of the socially vulnerable individuals and families. There are many other cases stated in the Sustainability Report of PMI. If you are interested, you may read it from here:

https://www.pmi.com/resources/docs/default-source/pmi-sustainability/pmi-sustainability-report-2018-low-res.pdf

What is Unsmoke?

Together We Can Unsmoke the World

This is a bold sentence which I truly believe. Why? Because I did so. You can read how I unsmoked my World just after learning that I would be a father. Here it is:

http://volkanyorulmaz.blogspot.com/2019/04/unsmoke.html

If I did this, everyone can do this. So now is the time to unsmoke!

What is unsmoke? In the video, you can find the definition of #unsmoke. So, how do you define unsmoke? Why don’t you create your own unsmoke story? Time to take action, time to make a change today!

Unsmoke

Today is an important day not only for me but also my company. My own story of unsmoking my home is shared by my company, Philip Morris International, on the day we are starting a new year. Yes, it is not the first day of January but today is the first day of “the Year of Unsmoke”. For those who are not familiar with “unsmoke”, let PMI’s Chief Operating Officer Jacek Olczak define it:

Unsmoke is meant “to enable people to make an informed choice about the better alternatives that are available to them”

In the video below, you may also see PMI’s Senior VP Global Communications Marian Salzman’s description of “Unsmoke”:

With the launch of “The Year of Unsmoke”, Philip Morris International kicked off an urgent call to action to smokers, nonsmokers, regulators and agents of change across the world to drive a better future for the world’s 1.1 billion smokers and their families, loved ones and communities. The World Health Organization predicts that there will still be more than one billion smokers in 2025. This is an important issue that needs to be addressed. As an employee of PMI and as an “unsmoker” who has things to tell in order to unsmoke the world, I shared my own story and it is published on pmi.com. Here it is:

Unsmoke Hero: Volkan Yorulmaz

“I’ve got one son and he’s got one life." For Volkan Yorulmaz, the prospect of fatherhood prompted his decision to unsmoke his life and home.

The Turkish senior tax analyst is one of hundreds of PMI employees to share their stories in our #Unsmoke campaign, which aims to tap into global efforts to rid the world of smoke.

Volkan decided to quit cigarettes and nicotine altogether when he and his wife were expecting their child. Together, they have given up and are not looking back.

“I had been smoking since I finished university,” he says. “I would describe myself as a social smoker, I really only smoked when I was out with friends or having meals. But that changed when I found out I was going to be a parent.”

“My partner and I decided to quit and we told our friends. From that moment on, they would have to smoke outside if they wanted to have a cigarette when they visited.”

For Volkan and his wife, the decision to unsmoke was the easy part. But getting their friends to agree was more of a challenge since they were accustomed to smoking in their living room when they visited.

Volkan says he and his wife want their guests to feel welcome and at ease. So he was apprehensive about telling them they could no longer smoke in their house.

“I was a bit shy when I first told my friends. I didn’t want them to think I was being rude. Fortunately, they understood why we wanted to do it.”

Volkan and his wife decided that as parents, they would ensure their house stayed smoke-free and their friends supported them. This support was valuable for Volkan because his decision to quit was driven by a desire to be around to enjoy every moment of his young son Okan’s life.

“I’ve got one son and he’s got one life. It’s the same for me and my wife. I unsmoked so I could spend every moment of my life with them. I would say, if you smoke you may see an episode of a television show. But if you unsmoke, you will see the whole series.”

This is my own “unsmoke” experience. I know everyone has different reasons, different stories, and behind all these drivers to unsmoke, the core message is:

If you don’t smoke, don’t start
If you smoke, quit
If you don’t quit, change
Unsmoke

PS. It is a great memory for me and my family to see our story shared by PMI’s social media accounts. I know we will look at these screenshots in the coming years and remember these early days of #unsmoke

Pmi.com: https://www.pmi.com/unsmoke/unsmoker-volkan-yorulmaz

Twitter: https://twitter.com/InsidePMI/status/1115222888364355586

Linkedin: https://www.linkedin.com/feed/update/urn:li:activity:6520988599146684416

The Boss of the World's Largest Cigarette Company: Stop Smoking

Peter Nixon, Managing Director of PMI's UK affiliate Philip Morris Limited, appeared live on Good Morning Britain on 13 March 2019 to talk about the company’s ongoing transformation for a smoke-free future. On National No Smoking Day, he appeared on ITV's Good Morning Britain to implore smokers to switch to new heated tobacco products because they are less harmful.

Speaking to co-hosts Piers Morgan and Susanna Reid and medical correspondent Dr. Hilary Jones on the ITV breakfast show, Nixon admitted it would be a big challenge for the company and society at large. He said: “There are a billion smokers in the world. What we’re trying to do is provide alternatives – less harmful alternatives – to those smokers."

Here are the some important highlights from the points he mentioned during the breakfast show:

• People die because of cigarettes and we sell them. I take that very, very seriously. We are part of the problem but we want to be part of the solution. What we're trying to do is give alternatives to smokers.
• I’d love to stop selling cigarettes. But we would go out of business and that wouldn't mean people give up they would just switch to another brand.
• We have been investing in alternative products and I have put all my energy into converting people from the most harmful form of tobacco, which is cigarettes, to less harmful, e-cigarettes and heated tobacco.
• “(When it comes to) heated tobacco – we give this product to smokers for one or two weeks for them to try if they’re not sure if it’s going to work or not. We give it for free for a week or two. Eighty per cent stop smoking at the end of that one or two weeks.
• If the smoker switches, it’s better for them, it’s better for society.

Here you can watch the most striking moment of the program:

PMI was at Davos - We are open for Conversation and Collaboration towards our Transformation

My company, Philip Morris International (PMI) is leading a change in its industry, simply we are going towards a transformation. We have a new focus: coming up with better alternatives to continued smoking, this is for the men and women who would otherwise continue to smoke cigarettes.

Last week top level executives of PMI took place in Davos because we know that we cannot take this journey alone. Our executives got together with World leaders in Davos to let them know about the scientific evidence in favor of alternative, smoke free products. By taking their support, our transformative change will be possible.

According to the recent data, my company PMI has already invested more than USD 4.5 billion in our central strategic goal—to provide adult smokers with better options than continued smoking.
Some people come up with this question “Why not just stop selling cigarettes?”

Cigarette smoking is a fact of life. More than 1 billion people worldwide smoke cigarettes and, according to the World Health Organization, there will still be more than 1 billion in 2025. For the large population of existing cigarettes smokers who would otherwise continue smoking, there has to be a sensible plan. In a world where smoking is a fact of life, we cannot simply ignore the compelling scientific evidence that demonstrates that not all forms of tobacco are equally harmful. What matters is what the consumer is inhaling. There is a huge difference between smoke from a burning cigarette and the aerosol from a non-combustible product. It is that burning process that creates the vast majority of the harmful and potentially harmful chemicals that are the primary causes of smoking-related diseases.

At PMI, we take our wider responsibilities as a company very seriously. And we urge others, in the same spirit of seriousness, to put aside their prejudices, reflect on the advantages of smoke-free alternatives to cigarettes and support us in our historic mission.

Those who are still in opposition should be aware that they are becoming disablers of public health solutions. They are blocking change, denying smokers these alternatives.

This truly is a once-in-a-lifetime opportunity.

We must seize it—and seize it together. Let’s collaborate towards this transformation!

Finally, let's listen and watch more about why PMI is in Davos from Marian Salzman, our senior VP Global Communications.