Image Shown: Shares of Philip Morris International moved higher in the wake of its second quarter earnings report.
By Callum Turcan
Philip Morris International Inc (PM) reported second quarter 2022 earnings that beat both consensus top- and bottom-line estimates. The company raised its full-year revenue and adjusted EPS guidance for 2022 on a pro forma basis (excluding its operations in Russia and Ukraine) versus previous estimates in conjunction with its latest earnings update. Now Philip Morris International expects to generate 6%-8% net revenue growth on an organic basis and 10%-12% diluted EPS growth in 2022 versus 2021 levels (these are non-GAAP metrics). We include Philip Morris International in the High Yield Dividend Newsletter portfolio as we are big fans of its resilient business model and ample pricing power.
Earnings Update
Philip Morris International’s GAAP net revenues and GAAP diluted EPS both rose 3% year-over-year in the second quarter of 2022. Unit volume growth at its traditional and alternative tobacco products, pricing increases, controlled operating expense growth, and lower net interest expenses offset a modest reduction in its gross and operating margins namely arising from manufacturing hurdles (Philip Morris International has a large manufacturing presence in Ukraine) due to geopolitical shocks. Foreign currency headwinds also held down Philip Morris International’s financial performance last quarter.
The company’s non-GAAP pro forma adjusted revenues grew 6% year-over-year due to a 3% increase in shipment volumes, made possible via 2% growth in cigarette volumes and 7% growth in heated tobacco unit (‘HTU’) volumes. The firm noted that HTU shipments to Japan were delayed due to manufacturing hiccups in the wake of the Ukraine-Russia crisis, with those shipments now expected during the second half of this year.
As it concerns Philip Morris International’s pricing power, the firm noted that its pro forma adjusted net revenue per unit increased 3% last quarter, aided by HTU sales growing as a percentage of its total unit sales. The company’s pro forma pricing for its traditional cigarettes increased almost 4% last quarter and almost 5% when excluding Indonesia. Phillip Morris International’s pro forma adjusted diluted EPS rose by 6% year-over-year last quarter. We are big fans of Philip Morris International’s pricing power.
Non-GAAP figures always need to be taken with a large pinch of salt, though its clear that Philip Morris International’s growth trajectory has held up quite well in the face of major exogenous shocks. Sales volumes of its IQOS HTU offering have grown at a robust pace of late, aided by the launch of new devices, while demand for traditional cigarettes has held up well so far in the face of inflationary headwinds pressuring consumer spending power. Its unit volume sales growth last quarter was impressive.
Potential Acquisition
Philip Morris International announced a bid to acquire Swedish Match AB (SWMAY), a maker of oral nicotine products such as Zyn branded products, through a ~$17.5 billion deal by enterprise value in May 2022. According to data cited by Reuters, Swedish Match controls almost half of the global tobacco-free oral nicotine products market, a space that has grown meaningfully over the past decade or so. This potential acquisition is part of Philip Morris International’s plan to grow its smoke-free net revenues so they represent over half its total net revenues by 2025. Philip Morris International views this deal as being accretive to its earnings, margins, and cash flows.
Image Shown: Philip Morris International is in the process of acquiring Swedish Match by the end of 2022. Image Source: Philip Morris International – May 2022 IR Presentation
There are ample synergies to be had given the overlapping nature of both company’s operations (with a heavy focus on revenue-related synergies via geographical market expansion opportunities). However, we caution that Philip Morris International had a sizable net debt load of $23.0 billion (inclusive of short-term debt) on the books at the end of June 2022. We are keeping an eye on the deal which is expected to close during the final quarter of this year. Philip Morris International did not include a cash flow statement in its latest earnings press release, though the firm noted it generated $5.1 billion in net operating cash flow during the first half of 2022, up 26% year-over-year.
Image Shown: Philip Morris International expects its deal for Swedish Match will enhance its financial performance even before taking synergies into account. Targeted synergies are expected to bolster the enlarged company’s growth runway via geographical expansion opportunities and distribution-related synergies. Additionally, Philip Morris International’s cost structure is expected to benefit from “modest” procurement savings if the deal for Swedish Match goes through as planned. Image Source: Philip Morris International – May 2022 IR Presentation
Concluding Thoughts
Philip Morris International’s growth runway remains broadly intact in the face of major exogenous shocks. We are keeping an eye on its capital allocation priorities as the firm is actively buying back its stock and has been active in the M&A market of late, though Philip Morris International retains a steadfast commitment to maintaining its dividend through thick and thin. Its latest earnings report indicates demand for Philip Morris International’s traditional and alternative tobacco products remains robust, supporting its pricing power. We continue to like Philip Morris International in the High Yield Dividend Newsletter portfolio, and shares of PM yield a nice ~5.2% as of this writing.
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Callum Turcan owns shares of DIS, META, GOOG, VRTX, and XLE and is long call options on DIS, GOOG, META, MSFT, and V. Philip Morris International Inc (PM) is included in Valuentum’s simulated High Yield Dividend Newsletter portfolio. Some of the other companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.