PMI: Q2 2023 Results

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Key Business Metrics1

Revenue: up +10.5% to $8.97Bn (expected $8.7Bn)

Adjusted diluted EPS: up +16.9% to $1.60 (expected $1.48)

Total volume: up +3.3% to 188.4Bn (HnB volume: +26.6% to 31.4Bn; cigarette volume: -0.4% to 157Bn)

Smoke-free revenue: $3.2Bn => 35.4% of total revenue (2025 target: 50%)

Key Highlights

– Combustibles: Strong pricing (over +9%) & resilient volume (-0.4%) resulting in net revenue growth of 6.0% (7.4% on an organic basis) => implies some deterioration in product mix (down-trading)

– Heated Tobacco: HnB SoM in IQOS markets up by 1.6pp to 9.2%. Adjusted HnB in-market sales volume up +16%. Total IQOS users at quarter-end: 19.4Mn exclusive, 27.2Mn total (up by 1.4 Mn vs. March 2023)

– Oral Tobacco: Shipment volume up +13.8% to 197.4Mn cans. ZYN volume in the US up +53% to 89.9Mn cans. Snus volume in Scandinavia down -10.2% to 56.9Mn cans (mainly reflecting the comparison versus an exceptionally strong total market in the prior year period)

– Wellness & Healthcare: $76Mn net revenue and $38Mn adj. operating loss (reflecting R&D investments)

Difficulties in the Wellness & Healthcare (W&H) Segment

– Asset impairment charge of $680Mn ($0.44 per share): estimated fair value of the W&H below its carrying value, primarily reflecting: (1) the unsuccessful clinical trial results for the inhalable aspirin product, (2) slower-than-anticipated development of the contract development and manufacturing organization (CDMO) business

– Postpones the ambition to reach $1+Bn net W&H revenue in 2025

Other Highlights

– Completed the sale of Swedish Match’s subsidiary, SMD Logistics AB (as requested by the European Commission)

– Russian operations: $2.4Bn in total assets, of which ~$0.6Bn cash (mostly held in Russian rubles)

– On track for IQOS ILUMA PMTA & MRTP submissions in Q4 2023. “Equivalence” between IQOS ILUMA and the previous blade versions of IQOS (previously granted marketing order)

Operating Income: margin pressures

– Adj. operating income margin down 1.8% to 39.4% (vs. 41.2% in Q2 2022)

– On 12-month rolling basis, adj. OI margin of 38.7% (6th quarter of sequential decline) over $33.2Bn revenue (highest ever)

– Higher SG&A costs (primarily due to inflationary impacts, notably related to wages) and higher manufacturing costs (primarily due to inflationary impacts, notably related to direct materials, tobacco leaf and energy, partly offset by productivity)

– Strong organic OI growth expected to support H2 2023 margin expansion (notably in Q4 2023)

– FY23 Guidance: adj. OI margin decline of 50 to 150 bps; likely towards the upper end (-150 bps)

Q3 2023 Guidance

– High-single digit organic net revenue growth (vs. +6.8% in H1 2023)

– EPS: $1.60-1.65 (vs. $2.98 in H1 2023)

– HnB volume: 31-33Bn (vs. 58.8Bn in H1 2023)

FY23 Guidance

Revenue growth: +7.5%-8.5% (previously,+7% to +8.5%)

Adj. EPS (ex-FX) growth: a projected increase of 8%-9.5% to to $6.46-$6.55 v.s adj. diluted EPS of $5.98 in 2022 (previously,+7% to +9%)

Reported EPS: revised down from $5.88-$6.00 to $5.36-$5.45. Adjustments revised up from $0.22 to $0.77 (Wellness and Healthcare asset impairment charge: $0.44; S. Korea indirect tax charge: $0.11)

FX impact on EPS: worsened from -$0.30 to -$0.33 (weakness of Yen, Ruble and the Egyptian pound)

International (ex-China & US) industry volume: down -0.5% to -1.5% (previously down 1%-2%; cigarette volume trend improving)

PMI volume: up +1% (previously flat to up +1%)

HnB volume: 125-130Bn (no change)

PMI cigarette volume: down -1.5% to -2.5% (previously down -2.5% to -3.5%)

Operating cash flow: $10-$11Bn; Capex: $1.3Bn; No share repurchases in 2023 (no change)

Wellness & Healthcare revenues of $300Mn with an operating loss of $150Mn (no change)

Our takeaway

The maximum performance you can expect from a tobacco company

– Strong pricing power & below-the-average volume decline in combustibles

– Two crown-jewels (IQOS & ZYN) of the Industry, driving volume/profit growth & transformation to smoke-free

However, this stellar performance is clouded by

– the losses incurred in the (reckless) Healthcare endeavors

– the deteriorating operating income margin (creating question marks on cost control; SG&A cost per unit sold is up 7%)

We trust in PMI’s Management and their ability to take corrective actions. PMI is a diamond in disguise, ready to shine if polished right. We continue to believe that PM is on its way to a new all-time high (ATH: $123.5 in June 2017) in 2024 provided that

(1) the (12-month rolling) operating income margin moves back above 40% (preferably to ~42%): unlikely before the Q1 2024 earnings release (prerequisite for guidance improvement & multiple expansion)

(2) IQOS is launched in the US in Q2/Q3 2024 (prerequisite for increased coverage & market interest)


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