Philip Morris International Inc. (PM Quick QuotePM - Free Report) began 2022 on a solid note, with first-quarter top and bottom lines rising year over year and topping the Zacks Consensus Estimate.

The strength in IQOS and the combustible business drove Philip Morris’ first-quarter performance despite headwinds. Management anticipates delivering solid top and bottom-line growth in 2022 on a proforma basis (excluding the results attributable to Russia and Ukraine). This keeps PM well-placed to achieve its 2021-2023 CAGR targets on a proforma basis alongside its target of becoming a majority smoke-free company by 2025.

Quarter in Detail

Adjusted earnings per share (EPS) came in at $1.56, which beat the Zacks Consensus Estimate of $1.48 and increased by 14% year over year on a currency-neutral basis. On a proforma basis, adjusted EPS of $1.46 grew 16% on a currency-neutral basis. The upside was backed by solid net revenues, elevated pricing, cost efficiencies and an expanding IQOS size.

Adjusted net revenues of $7,746 million increased by 9% on an organic basis. The top line surpassed the Zacks Consensus Estimate of $7,281 million. The upside was backed by the total volume increase, which stemmed from IQOS’ underlying strength, the combustible business recovery in several markets and certain favorable timing impacts, such as inventory movements. The relaxation of device-supply limitations helped replenish channel inventories, which is likely to continue in the second quarter as well.

Net revenue per unit rose 5.3% on an organic basis due to the higher proportion of heated tobacco units in the company’s sales mix, increased device sales and greater pricing. Pricing for combustible products rose more than 3% and by roughly 6% on excluding Indonesia.

During the quarter, proforma revenues from combustible products were up 5.5% to $5,062 million. Revenues from reduced risk products or RRPs increased by 22.8% to $2,145 million. Total cigarette and heated tobacco unit shipment volumes increased by 3.5% to 167.2 billion units. Cigarette shipment volumes rose 1.9% to 148.2 billion units in the quarter, while heated tobacco unit shipment volumes of 24.8 billion units rose 14.2% year over year.

Adjusted operating income came in at $3,340 million, up 8.3% on an organic basis. The adjusted operating income margin fell 30 basis points (bps) on an organic basis. The decline can be attributed to comparisons with the solid margin performance in the year-ago period, the increased initial cost of IQOS ILUMA devices, inflation across some key supply-chain elements like wage, energy and direct materials and higher air freight (which, in turn, was aggravated by the Ukraine war).

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Region-Wise Performance

Net revenues in the European Union increased by 10.5% on an organic basis to $3,012 million. This was backed by an improved volume/mix and little favorable pricing. Total shipment volumes rose 4.2% to 45,010 million units.

In Eastern Europe, net revenues increased by 0.3% organically to $726 million on improved pricing variance, largely countered by an adverse volume/mix. Total shipment volumes decreased by 4.8% to 24,380 million units.

In the Middle East & Africa, net revenues jumped 42.3% to $991 million on an organic basis due to a positive volume/mix and pricing. Total shipment volumes in the region rose 8.3% to 30,368 million units.

Revenues in South & Southeast Asia dipped 0.5% on an organic basis to $1,123 million. This downside was a result of adverse pricing variance, compensated by a favorable volume/mix. Shipment volumes ascended by 7.5% to 37,555 million units.

Revenues from East Asia & Australia advanced by 2.6% to $1,404 million on an organic basis, backed by a slightly positive volume/mix and favorable pricing variance. Total shipment volumes rose 1.7% to 20,841 million units.

Revenues from America increased by 0.7% to $424 million on an organic basis on positive pricing variance, partly offset by an adverse volume/mix. Total shipment volumes dipped 0.6% to 14,903 million units.

Other Financials

Philip Morris ended the quarter with cash and cash equivalents of $4,622 million. It had long-term debt of $24,019 million and a shareholders’ deficit of $8,203 million as of Mar 31, 2022. Management expects an operating cash flow of nearly $10 billion in 2022, with capital expenditure likely to be around $1 billion. The effective tax rate is envisioned in the 21-22% band.

In the quarter, the company bought back nearly two million shares for $199 million. In the same time frame, Philip Morris announced a quarterly dividend of $1.25 per share.

Update on Smoke-free Products

On Mar 11, 2022, the U.S. Food and Drug Administration approved the marketing of the IQOS 3 tobacco heating system as a Modified Risk Tobacco Product. At the end of the first quarter, proforma IQOS users were estimated at roughly 17.9 million, which increased by more than a million compared with Dec 31, 2021. Out of them, 12.7 million quit smoking and moved to IQOS.

Revenues from smoke-free products formed 31.2% of total net revenues in the first quarter and 30.4% on a proforma basis.

Guidance

Adjusted EPS for 2022 is envisioned in the $5.45-5.56 band compared with $6.08 reported in 2021. Proforma adjusted EPS, excluding currency impacts, is expected to grow 9% to 11% to the $5.98-$6.09 range.

The forecast includes contributions from Russia and Ukraine only for the first quarter, with no further contributions as of Apr 1, 2022. However, proforma forecasts exclude results from Ukraine and Russia for all periods. In 2022, this Zacks Rank #4 (Sell) company expects continued uncertainty concerning the recovery pace from the pandemic-led operating landscape, especially in the South & Southeast Asia Region.  Management expects continued gradual recovery in the duty-free business outside Asia and no meaningful recovery in Asia.

It expects an improving IQOS supply situation, while the timing of full availability remains uncertain. The total international industry volume growth (proforma basis) is estimated in a range of negative 1% to flat, excluding China and the United States. The total cigarette and heated tobacco unit shipment volume growth (proforma) is likely to come in the range of about flat to an increase of 1%. Proforma heated tobacco shipment volumes are envisioned between 88 and 92 billion units.

For 2022, PM expects proforma adjusted net revenues to increase by nearly 4.5-6.5% on an organic basis. Proforma adjusted operating margin growth on an organic basis is likely to come in the range of flat to an increase of 100 bps in 2022. This is likely to be backed by a continued favorable product mix shift from cigarettes to smoke-free products along with increased operating efficacy. The gross margin is expected to be moderately low due to the increased initial cost of IQOS ILUMA, elevated logistic costs, growth-oriented investments in the smoke-free space and inflation related to supply-chain elements.

For the second quarter of 2022, proforma adjusted EPS is expected in the band of $1.19-$1.24, including the currency headwinds of 15 cents per share. This includes the proforma net revenue growth in the low single-digits on an organic basis. The proforma operating margin is likely to decline further on an organic basis.

For 2021-2023, management’s compound annual growth target for organic net revenues is more than 5% and more than 9% for currency-neutral adjusted EPS on a proforma basis. The company also remains on track to generate cost savings of roughly $2 billion during this time frame.

Shares of the company have rallied 9.3% in the past six months compared with the industry’s rise of 13.7%.

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