Philip Morris International Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Unaudited results are prepared under U.S. GAAP. PMI sells cigarettes and smoke-free products globally; Swedish Match, acquired in November 2022, is included in current-period results, limiting direct comparability with 2022.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net revenue | $9.141bn (+13.8%) | $8.032bn | $26.127bn (+10.7%) | $23.610bn |
| Gross profit | $5.976bn | $5.097bn | $16.696bn | $15.419bn |
| Operating income | $3.370bn (+13.5%) | $2.968bn | $8.667bn (-7.0%) | $9.322bn |
| Net earnings attributable to PMI | $2.054bn | $2.087bn | $5.617bn | $6.651bn |
| Diluted EPS | $1.32 (-1.5%) | $1.34 | $3.61 (-15.5%) | $4.27 |
| Operating cash flow | Not separately provided | Not separately provided | $5.902bn | $7.710bn |
Margins: Gross margin was approximately 65.4% in Q3 (63.5% prior year) and 63.9% year to date (65.3% prior year). Operating margin was approximately 36.9% in Q3 (37.0% prior year) and 33.2% year to date (39.5% prior year).
Balance sheet and liquidity: At September 30, cash and cash equivalents were $3.017bn; current assets were $19.193bn and current liabilities $21.547bn. Total debt was $47.7bn, versus $43.1bn at year-end 2022; long-term debt was $42.914bn and short-term borrowings plus current long-term debt were $4.801bn. PMI had $6.3bn of committed revolving facilities fully available and no borrowings under them. Stockholders’ deficit was $7.706bn.
Cash flows and capital returns: Nine-month investing cash outflow was $3.030bn, including the $1.775bn remaining payment to Altria for U.S. IQOS rights; financing cash outflow was $2.685bn. Capital expenditures were $1.010bn. Dividends paid were $5.941bn; the quarterly dividend was raised 2.4% to $1.30 per share. Share repurchases remained suspended.
Material changes and operating trends
- Smoke-free revenue, including Swedish Match and Wellness and Healthcare, was $9.282bn for nine months, up 28.0%, and $3.309bn in Q3, up 35.6%. Combustible revenue grew 3.0% year to date. Smoke-free products represented about 35.5% of nine-month revenue.
- Excluding currency and acquisitions, revenue increased 7.4% year to date and 9.3% in Q3, reflecting pricing and stronger heated tobacco unit (HTU) volumes. Cigarette shipments fell 1.3% year to date, while HTU shipments rose 18.3%. Oral-product volume growth was driven substantially by Swedish Match; on a comparable basis, its oral-product shipments rose 15.4% year to date, including 50.3% growth in nicotine pouches.
- Year-to-date operating income fell despite revenue growth, reflecting foreign exchange, inflation and one-time costs. PMI cited approximately $500m of inflationary impact during the first nine months. Q3 operating income rose, helped by pricing, HTU volume and lower year-on-year acquisition-related and impairment charges.
- Net earnings attributable to PMI declined 15.5% year to date. Management’s EPS bridge attributed a $0.43 per-share headwind to currency and a $0.18 headwind to interest, partly offset by a $0.65 contribution from operations.
- Operating cash flow declined by $1.808bn year over year. Management attributed the deterioration principally to working-capital needs and currency; cash flow also benefited from receivables sales. PMI sold $9.4bn of receivables cumulatively in the period, with $670m still outstanding at period-end.
Outlook, commentary, risks and unusual items
- 2023 outlook: PMI expected full-year operating cash flow of around $10bn at prevailing exchange rates, subject to year-end working capital; capital expenditures of approximately $1.3bn; total cigarette and HTU shipment growth of 1.0%–1.5%; cigarette shipment decline of approximately 1.0%–2.0%; and nicotine pouch shipments of 390–410m cans. HTU shipments were expected in the lower half of the prior 125–130bn-unit range. Management estimated international cigarette and HTU industry volume would decline 1.5%–2.0%. The filing estimated a full-year effective tax rate of 20.5%–21.5%, excluding discrete tax events.
- Significant charges: Nine-month 2023 results included a $680m non-cash Wellness and Healthcare impairment, a $204m South Korea indirect-tax charge, $140m paid to terminate the Foundation for a Smoke-Free World pledge, $109m of e-vapor restructuring costs, and an $80m revenue reduction from terminating a Middle East distribution arrangement. Ukraine-related charges were $19m. Together with higher amortization, these items materially affected year-to-date earnings.
- The Wellness and Healthcare impairment followed unsuccessful clinical results for an inhalable aspirin product and slower-than-anticipated CDMO development. Management warned further impairment could result from weaker assumptions, clinical outcomes, regulatory setbacks or market factors.
- PMI reacquired U.S. IQOS commercialization rights effective May 1, 2024, after paying Altria $2.7bn plus interest. The filing said accounting allocation would be finalized when PMI obtains the rights; future amortization could increase significantly.
- War-related exposure remains material: Ukraine operations were disrupted and the Kharkiv factory remained suspended; Russia operations faced sanctions, regulatory constraints and potential difficulty realizing asset value. PMI reported approximately $0.5bn of Ukrainian assets and $2.4bn of Russian assets, including $0.7bn of cash primarily held in rubles.
- Risks include extensive tobacco litigation, product regulation and taxation, smoke-free product approvals and adoption, foreign exchange and capital controls, inflation, supply-chain dependence, and cybersecurity. PMI generally had not accrued losses for pending tobacco-related cases because management had not concluded losses were probable and estimable; it cautioned that an adverse outcome could materially affect results or cash flows. A South Korean Supreme Court ruling did lead PMI to conclude an adverse tax outcome was probable and record the $204m charge.
Important facts for investors to verify
- Whether the 2023 cash-flow and shipment outlook was achieved, particularly given working-capital sensitivity and currency movements.
- Smoke-free growth quality: comparable Swedish Match performance, ZYN momentum, HTU volume and pricing, and the effect of EU flavor restrictions and inventory movements.
- Debt costs and refinancing exposure following the increase in debt and higher interest expense; confirm maturity profile and liquidity access.
- Final Swedish Match purchase-price accounting and the financial effect of U.S. IQOS rights beginning in May 2024.
- Progress and potential further impairment in Wellness and Healthcare, including clinical and regulatory milestones.
- Developments in Korean tax proceedings, tobacco litigation, and Russia/Ukraine exposures, including any change in accruals, asset recoverability or cash accessibility.