PMI – Q4 2023 Results: Preview

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Release date: Feburary 8, 2023 (before the opening bell)

Sell-side analyst expectations

Revenue: $9.0Bn, EPS: $1.45

Latest FY23 Guidance

PMI last updated its FY23 guidance at the time of the Q3 2023 Earnings release (October 19, 2023).

– Reported diluted EPS: $4.95-$4.98 (down -15.5% vs. $5.81 in FY22)

– Adj. diluted EPS, ex-currency: $6.58-$6.61 (up +10.0%-10.5% vs. $5.98 in FY22)

– Total cigarette and HTP shipment volume growth: +1.0% to +1.5%

– Cigarette shipment volume decline: -1.0% to -2.0%

– HnB shipment volume: lower half of the 125-130Bn range (implied Q4 2023 volume: 34-35Bn)

– Nicotine pouch shipment volume: 390-410Mn cans (implied Q4 2023 volume: 95-115Mn cans)

– Net revenue growth: around +8.0% on an organic basis

– Adj. organic Operating Income margin decline: towards the upper end of the -50 to -150 bps range

Commentary: resilient combustible trends, strong IQOS performance and exceptional ZYN growth

What to watch out for?

Heated tobacco product (HTP) shipment volume: Q4 2023 Actuals and FY24 guidance. Anything else is secondary at this stage. PMI already guided a slower HTP growth for the 2024-26 period: +14% vs. +18.3% in YTD2023 and +21.5% in FY22, ex-RU/UA. However, market is concerned about a more-than-disclosed slowdown in heated tobacco growth.

Heated tobacco growth is the most important USP (Unique Selling Proposition) for the PMI stock. At the time of Q3 2023 Earnings release (October 19, 2023), we highlighted the fact that IQOS performance is “less than stellar” and PMI presenting $1Bn (net revenue) ZYN brand ahead of $10Bn IQOS brand would be heavily scrutinized.

At that occasion, PMI highlighted further delayed launch in Taiwan, very limited growth in Russia & Ukraine and inventory level uncertainty in the EU (caused by the upcoming flavor ban) as the main reasons to lower the FY23 HTP shipment volume guidance from the mid- to low-end of the 125-to-130 Bn range. PMI also underlined that the slow-down in HTP consumer acquisition in Q3 2023 (up only +0.2Mn) is “normal seasonality”.

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). PMI needs to re-build the market confidence on HTP: an actual/projected shipment volume of 35Bn in Q4 2023 and ~145Bn in FY24 would support PMI’s case. Any notable deviation from these figures would flare up the “HTP softness” speculation and could cause a significant sell-off in the PMI shares (towards $80s).

The other points to watch out for…

(1) ZYN growth: ZYN shipment volume in the US grew +65.7% in Q3 2023. The latest NielsenIQ data (i.e. ZYN off-take up more than +70% year-on-year basis) indicate another “stellar performance” by ZYN in Q4 2023. ZYN is set to be the brightest spot in PMI’s Earnings release.

(2) Operating income (OI) margin recovery: In the first nine months of 2023, PMI’s adj. OI margin is down 2.9pp to 39.2% (-2.1pp excluding currency & acquisitions). FY23 OI margin is likely to be in the 39%-39.5% range – well below the 42.9% and 40.6% reported in FY21 and FY22, respectively. A commitment to recover the OI margin above the key 40% handle (in FY24 guidance) could help PMI to reassure the Market on its ability to grow (volume & revenue) profitably while managing the SG&A and manufacturing cost pressures.  

(3) FY24 Guidance: Market has already priced in a mid-single digit (5%-6%) revenue growth and high single-digit (7%-8%) adjusted diluted, ex-currency EPS growth for PMI. We don’t expect PMI to disappoint the Market in terms of FY24 Guidance. However, the focus will be on the one-off item and FX-rate adjustments. While formulating the FY23 guidance (in Feburary 2023), PMI had already factored in $0.16 one-off item and $0.15 adverse currency impact adjustment. These adjustments grew to $1.10 and $0.53, respectively, by the time of the Q3 2023 Earnings release. We will closely watch to what extent PMI will (from the get-go) frustrate the Market with FY24 EPS adjustments.

Further Reading:

PMI: Q3 2023 Results

PMI: FX Headwinds

PMI – 2023 Investor Day: Preview

PMI: Not All Roses

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