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Philip Morris (PM) Q2 Earnings Top Estimates, Revenues Up Y/Y

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Philip Morris International Inc. (PM - Free Report) posted second-quarter 2022 results, wherein the top and bottom lines increased year over year and beat the Zacks Consensus Estimate.

Quarter in Detail

Adjusted earnings per share (EPS) came in at $1.48, which increased 3.8% year over year on a currency-neutral basis. On a proforma basis, adjusted EPS of $1.32 grew 5.6% on a currency-neutral basis. The bottom line exceeded the Zacks Consensus Estimate of $1.24. The year-over-year upside was backed by solid net revenues, elevated pricing and operating cost efficiencies amid certain margin pressures.

Adjusted net revenues of $7,832 million increased by 5.3% on an organic basis. Proforma adjusted net revenues of $7,218 million grew 6.2% on an organic basis. The top line surpassed the Zacks Consensus Estimate of nearly $6,609 million. The proforma adjusted net revenue growth was backed by the total shipment volume increase, which stemmed from the higher shipment volumes of cigarettes (up 2.4%) and heated tobacco units (up 7.4%).

The proforma adjusted net revenue per unit rose 3% on an organic basis due to the higher proportion of heated tobacco units in the company’s sales mix and greater pricing. Proforma pricing for combustible products rose 3.5% and nearly 5%, excluding Indonesia.

During the quarter, net revenues from combustible products were up 8.9% to $5,792 million (on an organic basis). Likewise, revenues from reduced risk products or RRPs jumped 8.2% to $2,462 million. Total cigarette and heated tobacco unit shipment volumes increased by 3.5% to 167.2 billion units. Revenues from the Wellness and Healthcare segment were $76 million. Cigarette shipment volumes rose 1% to 157.7 billion units in the quarter, while heated tobacco unit shipment volumes of 24.8 billion units rose 1.9% year over year.

The proforma adjusted operating income rose 1.6% on an organic basis due to better pricing variance, somewhat negated by escalated manufacturing costs. The proforma adjusted operating income margin fell 1.9 points on an organic basis. The decline can be attributed to tough comparisons with the last year’s productivity savings, the increased initial cost of IQOS ILUMA devices and heated tobacco units, investments to expand the smoke-free portfolio, supply-chain hurdles (especially due to the Ukraine war) and overall cost hikes for certain direct materials, energy, wage and transportation induced by the pandemic recovery and worsened by the Ukraine war.

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Region-Wise Performance

Net revenues in the European Union increased by 10.1% on an organic basis to $3,143 million. This was backed by an improved volume/mix, partly negated by adverse pricing (stemming from reduced device pricing). Total shipment volumes rose 4.6% to 50,629 million units.

In Eastern Europe, net revenues decreased by 1.7% organically to $898 million on an adverse volume/mix, partially offset by improved pricing variance. Proforma net revenues jumped 5.7% on an organic basis. Total shipment volumes fell by 10.4% to 26,555 million units.

In the Middle East & Africa, net revenues jumped 87.7% to $1,006 million due to the favorable comparison associated with Saudi Arabia customs assessments. Adjusted net revenues rose 30.4% on an organic basis due to a positive volume/mix and pricing. Total shipment volumes in the region rose 15.7% to 35,702 million units.

Revenues in South & Southeast Asia advanced 2.6% on an organic basis to $1,034 million. This was a result of improved pricing variance and a favorable volume/mix. Shipment volumes descended by 1.4% to 34,850 million units.

Revenues from East Asia & Australia tumbled 12.9% to $1,206 million on an organic basis due to an adverse volume/mix, partly made up by favorable pricing variance. Total shipment volumes declined 11% to 18,577 million units.

Revenues from America increased by 8.1% to $469 million on an organic basis on positive pricing variance and volume/mix. Total shipment volumes grew 5.4% to 16,186 million units.

Wellness and Healthcare Unit

Philip Morris acquired Fertin Pharma A/S, Vectura Group plc. and OtiTopic, Inc. in the third quarter of 2021. It consolidated these businesses to form a Wellness and Healthcare category on Mar 31, 2022. The company reports results of this business under the Wellness and Healthcare segment (formerly the Other category), which is evaluated separately from regional units. Net revenues from this segment came in at $76 million during the quarter.

Other Financials

Philip Morris ended the quarter with cash and cash equivalents of $5,036 million. It had long-term debt of $22,345 million and a shareholders’ deficit of $7,260 million as of Jun 30, 2022. Management expects operating cash flow of nearly $10.5 billion in 2022, with capital expenditure likely to be around $1 billion. The effective tax rate is envisioned in the 21-22% band.

On May 11, 2022, PM suspended its three-year buyback plan as part of the announcement of its recommended public offer to the stockholders of Swedish Match (discussed below). Before this, it made no buybacks during the second quarter. From Jan 1, 2022, to Mar 31, Philip Morris repurchased about 2 million shares for roughly $199 million.

Swedish Match AB Offer

On May 11, 2022, an affiliate of Philip Morris — Philip Morris Holland Holdings B.V. (PMHH) — declared a recommended public offer to the stockholders of Swedish Match AB (Swedish Match) to tender all Swedish Match (excluding treasury shares) shares to PMHH at a price of SEK 106 per share (in cash). On Jun 28, the offer document associated with the recommended offer was made public. The transaction is likely to conclude in the fourth quarter of 2022, subject to regulatory and other approvals.

Update on the Ukraine War

Philip Morris unveiled the temporary suspension of its operations in Ukraine, including its factory in Kharkiv, on Feb 25, 2022. During the second quarter, the company resumed some retail activities per safety. However, production at the company's factory in Kharkiv remains suspended. For Russia, Philip Morris had earlier announced concrete steps it had undertaken to suspend planned investments and scale down manufacturing operations in the country. It still plans to exit Russia in an orderly fashion.

Guidance

Adjusted EPS for 2022 is envisioned in the $5.90-6.05 band compared with the $6.08 reported in 2021. Proforma adjusted EPS, excluding currency impacts, is expected to grow 10-12% to the $6.09-$6.20 range.

In 2022, the company expects continued uncertainty concerning the recovery pace from the pandemic-led operating landscape, especially in the South & Southeast Asia Regions. Management expects continued gradual recovery in the duty-free business outside Asia.

It expects an improving IQOS supply situation, while the timing of full availability remains uncertain. It expects some impact on TEREA heated tobacco unit production capacity due to the cancelation of manufacturing operations in Russia. The total international industry volume growth (proforma basis) is estimated in a range of flat to increase 1%, excluding China and the United States. The total cigarette and heated tobacco unit shipment volume growth (proforma) is likely to come in the range of nearly 1.5-2.5%. Proforma heated tobacco shipment volumes are envisioned between 90 and 92 billion units.

For 2022, PM expects proforma adjusted net revenues to increase by nearly 6-8% on an organic basis. The proforma adjusted operating margin growth on an organic basis is likely to come in the range of flat to an increase of 50 basis points in 2022. This is likely to be backed by a continued favorable product mix shift from cigarettes to smoke-free products along with increased operating efficacy. The gross margin is expected to be lower due to a considerable rise in IQOS device volumes (with supply restrictions easing), the increased initial cost of IQOS ILUMA, elevated logistic costs, growth-oriented investments in the smoke-free space, raw material and energy cost inflation and incremental supply-chain costs.

Management expects net revenues of about $300 million for the Wellness and Healthcare segment for the full year.
 
For the third quarter of 2022, proforma adjusted EPS is expected in the band of $1.23-$1.28, including the currency headwinds of roughly 24 cents per share. This includes the proforma net revenue growth in the mid-single digits on an organic basis and a lower gross margin. Management expects solid IQOS growth in the third quarter.

Shares of this Zacks Rank #3 (Hold) company have dropped 11.4% in the past three months compared with the industry’s decline of 10.3%.

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