PMI – 2023 Investor Day: Preview

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PMI will host an Investor Day on Sept 28, 2023 – the first one since Feb 2021. This is an opportunity for the PMI Management team to address the buy-side concerns and generate a wave of buying interest among the large money managers – thereby, helping PMI share price to break out of the broad $90-$105 range it has been stuck in since April 2021 (except for a few short periods of upper/downward volatility). Also recall that PMI shares haven’t made a new ATH since June 2017 despite the significant business momentum gained through the IQOS success.

The Market will closely watch 8 key points at PMI’s 2023 Investor Day.

(1) Mid-term guidance: PMI broadly missed the 2021-23 targets set at the 2021 Investor Day. Adjusted EPS grew from $5.17 in 2020 to $6.13-$6.22 in 2023(E) – corresponding to CAGR of 6% (versus >9% targeted). Actually, 2023 Reported EPS ($5.36-$5.45) will be only 5% more than the 2020 Reported EPS ($5.16). Operating Income margin was 40.8% in FY20; in the first six months of 2023, OI margin was reported as 38.4%. Even if PMI expects OI margin improvements in H2 2023, the FY23 figure will still be below the FY20 level (versus >150bps annual increase targeted). In addition, 2023 HnB volume (125-130Bn) will be 15% below the 2023 target (140-160Bn). PMI will highlight the global inflationary pressures and the Russia-Ukraine conflict as the two main reasons of below-targeted performance; however, Market only cares about the results, not the reasons (- thus, the above-mentioned share price performance).

At the 2023 Investor Day, PMI will provide guidance (presumably) for the 2023-25 period. >5% net revenue growth and 10-12% Adj. EPS growth will be well appreciated by the Market. Although the 200Bn mark is no longer attainable for the 2025 HnB volume, 180-190Bn range is already expected. Market also wants to hear how quickly the OI margin will return back above the 42% level.

(2) Shareholder returns: PMI’s quarterly dividend grew from $1.14 in Sept 2018 to $1.30 in Sept 2023 -corresponding to CAGR of 2.7% over the 5-year period. This is well-below the expectations for a company guiding >9% EPS growth per annum. Moreover, PMI suspended share repurchases following the acquisition of Swedish Match. Market expects more commitment from PMI in boosting the growth in shareholder returns.

(3) IQOS launch in the US: This is the highest profile event in the horizon for PMI. As the launch is expected to take place within a year, Market would like to hear more concrete details on the timing, commercial strategy and financial plans/targets – as well as an update on the patent dispute with BAT Reynolds (i.e. ITC ban on IQOS imports). For further details, refer to our previous article on the topic: “Patent Wars”.

(4) Wellness & Healthcare (W&H) segment: It is disappointing that Market learned about PMI’s W&H segment plans from a WSJ article – on which (in addition) PMI did not have any comment to provide. Market would like to hear a meaningful update on the W&H strategy and financial plans/targets from the PMI Executives themselves. For further details, refer to our previous article on the topic: “PMI: Not All Roses”.

(5) Regulatory & fiscal risk analysis: The regulatory & fiscal landscape for the smoke-free products are evolving rapidly (and, mostly negatively) as the policymakers have started to realize the growing presence and importance of these products. As PMI’s future is mostly based on these products and their preferential treatment vis-a-vis traditional tobacco products, Market demands a full-fledged risk assessment on the regulatory & fiscal environment.

(6) RRP Strategy: Although PMI’s smoke-free segment is by-far the most successful in the Industry, its financial results are mostly dependent on IQOS in a handful of markets (Japan, Korea, Italy, Poland, Russia) and ZYN in the US. PMI is yet to broaden its smoke-free success and become less dependent on a few geographies (- thereby, being less susceptible to disruptive regulatory & fiscal changes). PMI should communicate a solid smoke-free expansion strategy and commit to a financial plan/target (i.e. development of the weight of other smoke-free markets in the overall smoke-free profits over time). Presenting just the number of launch markets and some selective penetration data have failed to convince the Market so far.

(7) Cost savings: Market believes that PMI has not been prudent enough (at least, lately) when it comes to cost control. For the 2023-25 period, $2Bn in cost efficiencies are already expected: $1Bn in SG&A and $1Bn in Manufacturing. Anything below this figure would be a disappointment.

(8) Financial practices (as a bonus): If PMI commits to improving its financial planning & reporting processes, its annual and mid-term targets would be more meaningful to the Investor community. For further details, refer to our previous articles on the topic: “PMI: Board Appointment” and “PMI: Not All Roses”.

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