8-K: Philip Morris International Reports Strong 2023 Results, Smoke-Free Products Lead Growth

Philip Morris International (PMI) announced its 2023 fourth-quarter and full-year results, highlighting significant growth in smoke-free products and providing a positive outlook for 2024.

Summary

• Philip Morris International reported its 2023 fourth-quarter and full-year results, showcasing a strong performance driven by smoke-free products.
• The company's full-year reported diluted EPS was $5.02, and adjusted diluted EPS was $6.01, representing a currency-neutral growth of 11.0%.
• Smoke-free products accounted for 39.3% of total net revenues in the fourth quarter and 36.5% for the full year.
• Total IQOS users reached approximately 28.6 million by year-end, with 20.8 million having switched from smoking.
• ZYN nicotine pouch shipments in the U.S. grew by 78.2% in the fourth quarter and 62.0% for the full year compared to 2022 Swedish Match shipments.
• Adjusted net revenues increased by 7.8% on an organic basis for the full year, driven by HTU volume growth of 14.7% and favorable pricing.
• The company forecasts a 7.0% to 9.0% increase in adjusted diluted EPS, excluding currency, for 2024.

Sentiment

Score: 8

Explanation: The document presents a positive outlook with strong growth in key areas like smoke-free products and adjusted EPS. While there are some challenges, the overall tone is optimistic and forward-looking, indicating a positive sentiment from an investment perspective.

Positives

• The company experienced strong growth in smoke-free products, particularly IQOS and ZYN.
• PMI achieved its third consecutive year of volume growth driven by HTUs.
• The company's adjusted operating income saw organic growth due to the performance of smoke-free products.
• PMI is entering 2024 with strong momentum and expects another year of excellent performance.
• The company is making progress towards becoming a smoke-free company.

Negatives

• Reported diluted EPS for 2023 decreased by 13.6% to $5.02.
• The company experienced a $0.20 unfavorable currency variance in the fourth quarter, including a $0.09 balance-sheet-related currency impact in Argentina.
• There was a decline in cigarette shipment volumes across several regions.
• The Wellness and Healthcare segment reported an adjusted operating loss of $132 million for the full year.
• The Americas region experienced a significant decrease in operating income.

Risks

• The company faces risks related to excise tax increases and discriminatory tax structures.
• Increasing marketing and regulatory restrictions could reduce competitiveness.
• Health concerns related to tobacco and nicotine products pose a risk.
• The company is subject to litigation related to tobacco use and intellectual property.
• Global economic, regulatory, and political developments, including the impact of the war in Ukraine, present risks.
• Unfavorable currency exchange rates and currency devaluations could impact financial results.
• The company's future profitability may be affected if it is unsuccessful in producing and commercializing reduced-risk products.

Future Outlook

PMI expects 2024 to be another year of excellent performance, underpinned by an acceleration in organic smoke-free net revenue and profit growth. The company forecasts a 7.0% to 9.0% increase in adjusted diluted EPS, excluding currency, for 2024.

Management Comments

• Jacek Olczak, Chief Executive Officer, stated that the business delivered a strong finish to 2023 and achieved remarkable milestones on the path to becoming a smoke-free company.
• He also noted that smoke-free products reached nearly 40% of total net revenues and over 40% of gross profit in the fourth quarter.
• Olczak highlighted that IQOS has surpassed Marlboro in terms of net revenues, confirming its position as the leading premium nicotine brand.
• He mentioned that the fourth quarter marked the first anniversary of the combination with Swedish Match, which delivered very strong results in 2023 driven by the stellar U.S. performance of ZYN.

Industry Context

The announcement reflects the broader industry trend of shifting towards smoke-free alternatives and the increasing importance of reduced-risk products. PMI's focus on smoke-free products aligns with the global movement towards harm reduction in the tobacco industry.

Comparison to Industry Standards

• PMI's performance in the heated tobacco category, particularly with IQOS, is a strong indicator of its competitive position against rivals like British American Tobacco and Japan Tobacco, who also have heated tobacco offerings.
• The growth of ZYN in the U.S. market is notable, as it competes with other nicotine pouch brands and demonstrates PMI's ability to gain market share in the oral nicotine segment.
• The company's focus on transitioning to smoke-free products is in line with the industry's move towards reduced-risk alternatives, but the pace of this transition and the success of these products will be key differentiators.
• PMI's financial results, particularly the adjusted EPS growth, are competitive with other major players in the tobacco industry, but the currency impacts and regional variations highlight the challenges of operating in a global market.

Legal Proceedings

• PMI reached a global settlement with British American Tobacco p.l.c. resolving all ongoing patent infringement litigation related to heated tobacco and vapor products.

Stakeholder Impact

• Shareholders will likely view the results positively due to the strong growth in smoke-free products and the positive outlook for 2024.
• Employees may benefit from the company's continued growth and focus on innovation.
• Customers will have access to a wider range of smoke-free alternatives.
• Suppliers may see increased demand for materials related to smoke-free products.
• Creditors may view the company's financial stability favorably.

Next Steps

• PMI will update its segment reporting to include Swedish Match results in the four existing geographical regions starting in the first quarter of 2024.
• The company plans to disclose select historical financial information for the 2021 to 2023 period reflecting the change in segment reporting in the coming weeks.
• PMI will continue to focus on the growth of its smoke-free products and the transition towards a smoke-free future.

Key Dates

Keywords

smoke-free products, IQOS, ZYN, heated tobacco units, HTU, nicotine pouches, financial results, earnings per share, combustible tobacco, Swedish Match