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    Philip Morris International Inc (PM)

    Q4 2023 Earnings Summary

    Reported on Jan 10, 2025 (Before Market Open)
    Pre-Earnings Price$91.44Last close (Feb 7, 2024)
    Post-Earnings Price$89.00Open (Feb 8, 2024)
    Price Change
    $-2.44(-2.67%)

    What went well

    • Philip Morris expects gross margin and operating margin expansion based on their guidance, as confirmed by CFO Emmanuel Babeau.
    • Strong growth of IQOS in key European markets like Germany, Italy, and Spain, with significant progress despite competitive pressures, demonstrates the company's ability to drive growth in the smoke-free product segment.
    • Quick market share gains in new categories and markets, such as achieving double-digit market shares in Italy and Czech Republic within less than 12 months, show PM's effectiveness in capitalizing on sustainable opportunities with better margins and profitability.

    What went wrong

    • Philip Morris International expects lower revenue growth from combustibles in 2024 due to reduced pricing power, as they do not intend to repeat the exceptional 9% price increase from last year and are guiding to mid-single-digit price increases instead. This may negatively impact revenue growth in their combustible business.
    • Currency devaluations, notably the Argentine peso, have adversely impacted EPS, with a $0.19 negative effect linked to balance sheet revaluation. Further devaluations, while uncertain, could continue to pose a risk to earnings.
    • The rise of disposable vaping products in markets like the U.S. and U.K. could pose a competitive threat to PM's business, especially if these products gain traction in key markets where PM operates, potentially impacting their combustible cigarette and smoke-free product volumes.

    Q&A Summary

    1. Margin Outlook
      Q: Are you expecting operating margin expansion in 2024?
      A: Yes, management confirms that they expect both gross margin and operating margin expansion in 2024, supported by progress in profitability of smoke-free products like IQOS and ZYN. They anticipate continued margin improvement despite investments, with U.S. operations being "super nicely accretive" to financial performance.

    2. Regulatory Risks on ZYN
      Q: How are you addressing potential regulatory challenges for ZYN?
      A: Management acknowledges recent concerns about ZYN in the U.S. but emphasizes their commitment to responsible marketing practices targeting adult smokers. They highlight that ZYN has been in the U.S. market for 10 years with underage usage remaining well below 1%, according to CDC data. They are confident in ZYN's sustainability and growth, underpinned by strong science and pending PMTA with the FDA.

    3. U.S. IQOS Launch After BAT Settlement
      Q: How does the BAT settlement affect your U.S. IQOS strategy?
      A: The settlement allows PMI to sell IQOS in the U.S. using their international supply chain from day one, benefiting from economies of scale. This clarity accelerates their commercialization plans, avoiding elevated costs associated with alternative U.S. manufacturing.

    4. ZYN Growth Outlook
      Q: Is ZYN’s growth guidance conservative given recent performance?
      A: While acknowledging ZYN's phenomenal growth in the U.S., management suggests the guidance implies volume growth similar to prior years. They attribute ZYN's success to its appeal among adult smokers switching from combustibles and other nicotine products. Cautious guidance reflects potential regulatory uncertainties and prudent forecasting.

    5. Smoke-Free Revenue vs. Group Revenue
      Q: Why doesn't smoke-free acceleration translate to higher group revenue growth in 2024?
      A: Despite expecting acceleration in smoke-free products, management anticipates a softer performance in combustibles due to less pricing variance compared to last year's 9% increase. They guide to a mid-single-digit price increase for 2024, impacting overall revenue growth.

    6. Argentine Peso Impact
      Q: What is the impact of Argentine peso devaluation on earnings?
      A: The devaluation led to a $0.19 EPS impact linked to balance sheet revaluation. Any further devaluation would have a reduced effect, as the basis has already been significantly adjusted.

    7. Heated Tobacco Growth Drivers
      Q: What markets will drive heated tobacco growth in 2024?
      A: Management expects mid-teens growth in heated tobacco sales, with Europe within that range despite potential distortions from flavor regulations. Growth is also anticipated from opening markets like Taiwan and Saudi Arabia, while the U.S. contribution will come from test markets of IQOS 3.0.

    8. Threat from Disposable Vaping Products
      Q: Could disposable vaping products threaten your business in 2024?
      A: Management believes these products pose less of a threat in their key markets, attributing their limited success to focus on flavors and lack of appeal to core smokers preferring traditional tobacco experiences. Regulatory environments in Europe also limit their impact compared to markets like the U.S. and U.K.

    9. Investment Levels and Margin Expectations
      Q: Will increased investments affect margin expansion in 2024?
      A: Management asserts that continued investments to support revenue growth will not hinder margin expansion. They anticipate enough resources to invest in growth opportunities like the U.S. market while still improving margins, aided by economies of scale and easing cost pressures from 2025 onward.

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