PMI: FX Headwinds

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CAGNY Conference: Feburary 2024

In an attempt to re-assure the market of its ability to deliver growth in reported basis (before endless FX adjustments), PMI admits that US strength has been a major headwind in the past few years (limiting its financial performance) while re-confirming its objective to generate growth in US$ terms.

PMI notes that, as a result of the smoke-free growth, the weight developed country currencies (US$, € and others) in its revenue mix is increasing: 50% for combustibles vs. 76% for smoke-free products. Moreover, in order to mitigate the continued US$ strength, PMI tries to match its debt (>60% in €, directly or indirectly) and cash-flow generation, employs rolling-forward hedging programs (in JPY) and (as much as possible) aligns its invoicing (revenue) and transactional (cost) currencies. PMI underlines its focus to deliver growth in US$ terms in 2024 and beyond.

MS Global Consumer & Retail Conference: December 2023

Philip Morris International (PMI) reported $5.26 EPS in 2013. For FY23, PMI guides $4.95-4.98 reported diluted EPS. In 10 years, PMI’s reported EPS is down 6% despite 10% per annum average growth in fully adjusted EPS (i.e. adjusted for both one-off items and currency variations). Recall: our “PMI: Not All Roses” write-up.

20132014201520162017201820192020202120222023E
Reported EPS$5.26$4.76$4.42$4.48$3.88$5.08$4.61$5.16$5.83$5.81$4.97
Growth-10%-7%+1%13%+31%-9%+12%+13%0%-15%
Adjustments$0.14$0.26$0.84$0.02$0.58$0.01$0.25$0.17$1.10
Adj. EPS$5.40$5.02$4.42$4.48$4.72$5.10$5.19$5.17$6.08$5.98$6.07
Currency$0.80$1.20$0.46$0.21$0.11$0.13$0.32-$0.12$0.77$0.53
Fully Adj. EPS$5.40$5.82$5.62$4.94$4.93$5.21$5.32$5.49$5.96$6.75$6.60
Growth8%12%12%10%10%4%6%15%11%10%

In the 2013-2023 period, PMI has made $0.31/share one-off item adjustment and $0.40/share FX adjustment per year on average – adding up to $0.71/share adjustment every year and more than off-setting the ~10% per annum growth in the “underlying business”.

PMI reports in US$ although making ~10% of its revenue in US$: Swedish Match’s US business and Duty Free sales (i.e the latter is anchored to the local currencies). For valid reasons, PMI has been criticized about their (lack of) management of the structural FX headwinds (i.e. the mismatch between where they earn money and where they spend & report it). After long ignoring these criticisms, PMI Management has recently been more vocal about the issue.

At the MS Global Consumer & Retail Conference (December 2023), the PMI CFO disclosed a list of actions:

– further increasing exposure to US$ revenue (ZYN growth and IQOS launch in the US) as a stabilizer to the exposure to a range of currencies

– managing debt in line with cash flow generation (mainly in €), either directly or through swaps

– asset-liability management: a large part of debt in €, resulting in net cost of debt less than 3% and reduction in the debt level (in US$ terms) if € losses value

– smoothening the impact of Japanese Yen with 2-year plus hedging with some objective of coverage

–  re-balancing supply chain cost base

– hoping that the cycle of US$ appreciation will come to an end.

We like the fact that the PMI Management is now talking more about the structural FX headwinds. However, in order to alleviate the investor concerns, PMI needs to disclose more concrete plans, actions and numbers – including its massive transactional/cost exposure to CHF (world’s strongest currency).

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