Q1 2024 Earnings Summary
- Strong Expansion in New Markets for IQOS: PMI is experiencing promising trajectories in new markets such as Indonesia and Mexico, with acceleration expected in the second half of the year, demonstrating significant growth potential for their IQOS product line.
- Accelerating Operating Income Growth and Targeting Double-Digit Growth Before Currency Impact: PMI is in a position to deliver strong growth before FX impacts, with dynamic top-line growth and accelerating operating income growth, targeting double-digit growth before currency impact in 2024. They are leveraging tactical pricing and efficiency initiatives to enhance profitability.
- Progress in Vaping Category with VEEV Moving Towards Profitability: PMI is making strong progress in the vaping category, with VEEV showing promising volume growth and expected to become profitable in the second half of the year, expanding in key markets such as Italy, Czech Republic, France, UK, and Canada.
- PM has experienced minimal dollar EPS growth over the past decade, compounding at only about 1.5%, despite strong organic growth, due to persistent FX headwinds. The company's ability to offset these currency impacts remains uncertain, raising concerns about future dollar-denominated earnings growth.
- The company's strategies to mitigate currency headwinds through pricing and cost efficiencies may be insufficient, as there are challenges in further price increases, especially in combustible products, and ongoing currency volatility may continue to impact financial performance.
- Uncertainties in the growth of new markets and products, such as the unclear expansion plans for the Bonds product and reliance on newer markets like Indonesia, could limit PM's future growth potential if these initiatives do not meet expectations.
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Currency Mitigation Strategies
Q: How will you mitigate ongoing currency headwinds?
A: We aim to deliver performance in dollar terms despite significant forex headwinds, including a $0.06 impact from the Egyptian pound in Q1. We are using two main levers: pushing price increases across the board, especially in combustible products without risking market share, and accelerating productivity and cost efficiency initiatives, including our $2 billion savings program. While we can't offset all forex impacts, our Q1 results show our capacity to significantly mitigate them. -
Pricing Strategy for Growth
Q: Could pricing be higher than low single digits?
A: We plan to increase prices in heated tobacco products by low single digits, not at the level of combustibles. Our focus is on maximizing volume growth, which drives significant profit due to higher per-stick revenue and gross margins in smoke-free products. We believe it's important to balance price and volume to continue our strong momentum. -
Growth in New Markets
Q: Any upside potential in new markets like Indonesia and Mexico?
A: We're seeing very promising trajectories in new markets like Indonesia and Mexico, where we've just launched ILUMA. IQOS is gaining traction, especially in big cities where the potential is highest. We expect further acceleration in the second half of the year and believe IQOS is becoming an aspirational product in these markets, which is extremely positive for our future growth. -
ZYN Supply Constraints
Q: How have ZYN out-of-stocks affected volumes?
A: With ZYN growing 80%, we've faced supply chain tensions. While some references may not always be available, Nielsen data shows we're growing fast with limited impact on volumes. We're working hard to maximize capacity and are comfortable delivering around 550 million cans, though that's not our production limit. -
Driving Dollar EPS Growth
Q: What's new to drive dollar growth despite FX headwinds?
A: We're generating strong growth before forex impacts and targeting double-digit operating income growth in 2024. We're able to implement significant price increases, especially in combustibles, and are reaching critical mass in smoke-free products, allowing for greater efficiency. Our strategies include ongoing investments to maximize growth potential, differentiating us from other consumer staples. -
Impact of Russia on Results
Q: How does Russia affect your EPS and IQOS volumes?
A: Russia's contribution to EPS has decreased due to currency depreciation, from around 7-8% to less. While IQOS volumes in Russia grew, it's important to interpret shipments cautiously as they may not fully reflect consumer off-take. Russia hasn't shown meaningful growth since the Ukraine conflict began. -
Heated Tobacco Pricing
Q: Why not increase cigarette prices to boost IQOS growth?
A: While we could tactically use pricing in markets where heated tobacco is dominant, our focus remains on maximizing volumes. We prioritize growing IQOS volumes, which have higher per-stick revenue and gross margins. In markets like Japan, price increases require government approval, limiting our ability to adjust prices freely. -
Vaping Profitability
Q: What volumes do you expect in vaping, and profitability timing?
A: VEEV started well in terms of volumes. Though modest compared to IQOS and ZYN, we're focusing on markets where we can achieve profitability, like Italy, Czech Republic, France, the UK, and Canada. We expect VEEV to become profitable in the second half of the year. -
German Excise Tax Ruling
Q: Implications of EU court ruling on German excise tax?
A: The court ruling is a German-specific matter with no implications for other countries. It's about whether Germany implemented the extra tax according to EU law. We don't know when the Düsseldorf court will make its final decision, but it should be in the coming months. -
First-Quarter Performance
Q: Why was Q1 ahead of guidance, and outlook raised less?
A: Q1 benefited from an additional 1 billion heated tobacco units due to RESI, which we expect to reverse later in the year. SG&A increased only 1.4% organically, but we anticipate higher SG&A in the rest of the year due to phasing of commercial actions and marketing starting in Q2. These factors added to our strong underlying momentum in Q1.