PMI – Q1 2024 Results: Preview

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Release date: April 23, 2024 (before the opening bell)

Sell-side analyst expectations

Revenue: $8.47Bn (+4.6% vs. $8.1Bn adjusted net revenue in Q1 2023; +5.6% vs. reported)

EPS: $1.41 (+2.2% vs. $1.38 adjusted EPS in Q1 2023)

Latest FY24 Guidance

PMI first disclosed its FY24 guidance at the Q4 2023 earnings release (Feburary 8, 2024), then re-confirmed it at the 2024 CAGNY Conference (Feburary 21, 2024).

– Reported diluted EPS: $5.90-$6.02 (up +17.5% to +20% vs. $5.02 in FY23)

– Adj. diluted EPS, ex-currency: $6.43-$6.55 (up +7% to 9% vs. $6.01 in FY23)

– Adj. diluted EPS (Q1 2024): $1.37 to $1.42, including an adverse FX impact of ¢10

Latest FY24 Assumptions

– Total cigarette and HTP shipment volume growth: flat to +1.0%

– Cigarette shipment volume decline: min. -1.2% to -2.4% decline (implied)

– HnB shipment volume: more than 140Bn range (+14% to +16% in-market sales growth)

– Nicotine pouch shipment volume in the US: 520Mn cans

– Net revenue growth: +6.5% to +8% on an organic basis

– Operating income growth: +8% to 9.5% on an organic basis (acceleration in gross profit growth)

Commentary: resilience in the combustible category (driven strong pricing), continued growth of IQOS, stellar performance of ZYN in the US

Ahead of the Q1 2024 results

PMI shares are in the purgatory: stuck between the Hell (“de-rating”) and Heaven (“new ATH”). Over the past 3 years, PMI has bounced from $90 countless times – but, failed to break above. Actually, the height of these bounces have been steadily decreasing – alluding to diminishing buyer interest. Will the $90 floor continue to hold or will it break? It depends on PMI Management’s ability to address the market concerns about PMI’s business performance (such as, operating margin squeeze, slow-down in heated tobacco growth, sustainability of the explosive – yet somewhat uncontrolled – ZYN growth in the US, bottomless EPS adjustments, etc.) and re-build confidence. So far, PMI Management first ignored these concerns, then repeatedly failed to calm down the market with credible (data-supported) argumentation. Continued failure could eventually result in de-rating of PMI multiples to a level closer to – but, still substantially higher than – its peers.

What to watch out for?

In summary, we expect PMI to try to contain the concerns on heated tobacco growth and to re-energize the market on the upcoming IQOS launch in the US.

Heated tobacco product (HTP) growth: Dominance in the heated tobacco category is the most important USP (Unique Selling Proposition) for PMI. At the 2023 Investor Day, PMI already guided a slower HTP growth for the 2023-26 period: +14% vs. +18% in the 2020-23 period (despite the Russia – Ukraine War). However, in Q4 2023, PMI reported a dismal 6% growth in HTP shipment. Although PMI attributes the slow-down in shipment to inventory movements (so, were the previous shipment figures inflated?) and underlines that the in-market sales growth is still at an healthy 14%, market is still concerned about a more-than-disclosed slowdown in heated tobacco growth.

HTP growth will inevitably slow down. The base effect is one reason. But, more importantly, as highlighted in our PMI – 2023 Investor Day: Preview write-up, PMI’s IQOS success is mostly dependent on a handful of markets (Japan, Korea, Italy, Poland, Russia). PMI is yet to find new & sizable HTP growth markets to maintain the IQOS shipment momentum. Achieving 40% share in Vilnius (Lithuania) is impressive, but it practically has zero impact on PMI’s financials.

PMI’s 2024-26 financial guidance is very much dependent on the HTP growth and the Market is trying to assess whether these mid-term targets are achievable (without zillions of adjustments). Any disappointment in HTP shipment volume, either the Actuals or the Guidance, would flare up the “HTP softness” speculation and could cause a significant sell-off in the PMI shares.

IQOS launch in the US: For various reasons, IQOS has been absent from the US market. Recall: IQOS USA: History. World’s largest smoke-free product is eventually (re-)arriving at the world’s largest nicotine market (by value, ex-China). We expect PMI PR to go above & beyond to have IQOS US launch featured in mainstream media to the maximum possible extent. Media attention and coverage could offer some short-term support to the PMI shares well ahead of the commercial results that could justify a revaluation.

We expect PMI to disclose more information about the first city launch and kick start the publicity drive at the Q1 2024 earnings release. If PMI succeeds in generating enough buzz, HTP growth slow-down can be disregarded for a while. In other words, IQOS US launch could become the catalyst that reverses the diminishing buying interest and saves PMI shares from breaking below $90.

The other points to watch out for…

(1) ZYN growth: ZYN shipment volume in the US grew +62% in FY23. The latest NielsenIQ data (i.e. ZYN off-take up more than +70% year-on-year basis) indicate another “stellar performance” by ZYN in Q1 2024. ZYN is set to be the brightest spot in PMI’s Earnings release. However, legal troubles, public backlash and regulatory scrutiny are mounting for ZYN in the US. Recall: Nicotine Pouches. PMI needs to convince the market on the sustainability of ZYN’s growth and manageability of the associated legal & regulatory risks (i.e. that ZYN is not destined to become “the next JUUL”).

(2) Operating income (OI) margin recovery: In FY23, PMI’s adj. OI margin is down to 37.8 % – from 40.6% and 42.9% reported in FY22 and FY21, respectively. A substantiated road-map to recover the OI margin above the key 40% handle (in FY24 guidance) would help PMI to reassure the Market on its ability to grow (volume & revenue) profitably while keeping the operational expenses under control. Having said that, Market has already taken note of the absence of a concrete OI margin target in the FY24 Guidance. The chatter is heating up: has the “transformation expenditure” become pretext for a reckless spending spree at PMI?

(3) FY24 EPS Adjustments: PMI reported $5.02 EPS in 2023 – 5% below the $5.26 reported in 2013. PMI’s reported EPS (and, thereby, its share price) went nowhere in the last decade despite the 10% adjusted growth per annum “achieved”. Recall: PMI: Not All Roses.

FY24 Guidance already includes $0.53 of adjustments: $0.42 one-off items (amortization of IQOS commercialization rights in the US; one-off, but will be repeated through 2028) and $0.11 adverse currency. Since early-Feb, dollar index (DXY) went up from 104 to 106; thereby, PMI is likely to further adjust the currency impact at the Q1 2024 earnings release. PMI made a total of $1.62 adjustment in FY23 ($0.99 one-off items and $0.63 currency) to deliver 11% adj. EPS growth vs. 13.6% reported EPS decline. Market is increasingly frustrated with this mismatch.

Further Reading:

PMI: FY23 Results

PMI: Q3 2023 Results

PMI: FX Headwinds

PMI – 2023 Investor Day: Preview

PMI: Not All Roses

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