Philip Morris International Inc. — Q1 2023 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2023, compared with Q1 2022; balance-sheet comparisons are with December 31, 2022. PMI manufactures and sells cigarettes and smoke-free products internationally, and is pursuing a transition toward smoke-free products. Swedish Match, acquired in November 2022, is included as a separate segment; PMI obtained legal title to its remaining shares in February 2023. PMI also reports a Wellness and Healthcare segment.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 / prior balance |
|---|---|---|
| Revenue including excise taxes | $19.318 billion | $19.341 billion |
| Net revenues, after excise taxes | $8.019 billion; +3.5% | $7.746 billion |
| Gross profit / gross margin | $4.981 billion / 62.1% | $5.138 billion / 66.3% |
| Operating income / operating margin | $2.731 billion / 34.1% | $3.298 billion / 42.6% |
| Net earnings attributable to PMI | $1.995 billion | $2.331 billion |
| Diluted EPS | $1.28 | $1.50 |
| Operating cash flow | $(955) million | $1.118 billion |
| Capital expenditures | $279 million | $229 million |
| Cash and cash equivalents | $2.428 billion | $3.207 billion at Dec. 31, 2022 |
| Total debt | $47.1 billion | $43.1 billion at Dec. 31, 2022 |
| Current assets / current liabilities | $19.571 billion / $22.985 billion | $19.619 billion / $27.336 billion at Dec. 31, 2022 |
| Dividends paid | $1.987 billion | $1.952 billion |
Margins are calculated from the reported figures. Q1 2023 net earnings included $107 million attributable to noncontrolling interests. The effective tax rate was 17.3%, versus 19.7%; PMI said a $79 million deferred tax benefit related to Swedish Match acquisition financing favorably affected the 2023 rate. The balance sheet reported a stockholders’ deficit of $7.053 billion.
Smoke-free products generated $2.796 billion of net revenues, up 14.5% from $2.443 billion; combustible products generated $5.223 billion, down 1.5%. Swedish Match contributed $581 million of net revenues and $193 million of operating income. Regional operating income declined in Europe ($1.175 billion versus $1.558 billion), SSEA, CIS & MEA ($712 million versus $965 million), EA, AU & PMI DF ($623 million versus $685 million), and the Americas ($66 million versus $121 million). Wellness and Healthcare recorded a $38 million operating loss.
Material changes versus the prior comparable period
- Net revenues rose 3.5%, but operating income fell 17.2% and PMI-attributable earnings fell 14.4%. Diluted EPS declined 14.7%; excluding the stated $0.13-per-share adverse currency effect, PMI said EPS declined 6.0%.
- Revenue growth excluding currency and acquisitions was 2.1%, primarily from pricing; volume/mix was slightly unfavorable. Cigarette shipments fell 3.1%, while heated tobacco unit shipments rose 10.4%. Total cigarette and heated tobacco shipments declined 1.1%.
- Operating income was pressured by inflation-related marketing, administrative and manufacturing costs, unfavorable volume/mix, currency, and specified charges. Interest expense, net, increased 49.4% to $230 million, primarily due to Swedish Match acquisition financing.
- Operating cash flow swung to an outflow, which management attributed primarily to higher working-capital needs, including inventory and accrued-liability timing. Cash flow also benefited from receivables sold: $2.9 billion of receivables were sold in the quarter, with $970 million still outstanding at period-end.
- Total debt increased by $4.0 billion from year-end. PMI issued $5.2 billion of U.S. dollar notes and used part of the proceeds to repay the remaining $4.4 billion of acquisition bridge borrowings; the Swedish Match euro term loan remained fully drawn.
Outlook, management commentary, risks and unusual items
For 2023, PMI expects operating cash flow of $10–$11 billion at prevailing exchange rates, subject to year-end working-capital requirements; capital expenditures of approximately $1.3 billion; and an effective tax rate of 20.5%–21.5%, excluding discrete tax events. PMI expects total cigarette and heated tobacco shipment volume to be approximately flat to +1%, including 125–130 billion heated tobacco units and a 2.5%–3.5% cigarette shipment decline. It expects international cigarette and heated tobacco industry volume, excluding China and the U.S., to decline 1%–2%. Management anticipates strong full-year Swedish Match performance, supported by U.S. ZYN growth, and does not currently expect to restart share repurchases in 2023.
- Q1 unusual charges: An $80 million pre-tax reduction in net revenues followed termination of a Middle East distribution arrangement. PMI recorded $109 million of pre-tax e-vapor manufacturing restructuring and impairment costs, including $78 million of supplier termination costs and $31 million of non-cash asset impairments. A further $18 million of Swedish Match inventory purchase-accounting charges was recorded in cost of sales.
- Product strategy: PMI initiated a plan to outsource and restructure e-vapor manufacturing and will focus VEEV commercialization on select markets and profitability, while prioritizing heated tobacco and nicotine pouches. Management noted that smoke-free growth may temporarily dilute margins, including through ILUMA rollout costs and device replacements.
- Ukraine and Russia: Production in Kharkiv remained suspended; PMI reported approximately $485 million of Ukrainian assets. PMI continued operating in Russia while scaling down manufacturing and suspending planned investments; Russian assets were approximately $2.4 billion, including $393 million of cash, primarily in local currency. PMI warned that the conflict and sanctions may adversely affect operations, cash flows and financial position and could lead to impairments.
- Litigation and contingencies: PMI said it had not concluded that losses were probable, and could not estimate possible losses, for pending tobacco-related cases generally; no estimated loss was accrued for those cases. Certain claims, including Canadian tobacco litigation, involve very large alleged damages and remain subject to a court stay and restructuring process. The filing also describes tax, customs, product and intellectual-property proceedings. PMI reported that a U.S. appeals court affirmed the ITC decision restricting imports of certain IQOS products; PMI estimated an immaterial financial impact.
- Regulatory and commercial risks: Risks include changing product authorization, marketing, tax and flavor rules; competition and illicit trade; currency and inflation; supply-chain reliance on third parties; and acquisition integration and purchase-price-allocation uncertainty. PMI noted that an EU ban on characterizing flavors in heated tobacco products was due to apply from October 2023, and described restrictions affecting smoke-free products in markets including Argentina and Mexico.
- Liquidity: PMI had $6.3 billion of committed revolving credit facilities available and no borrowings under them at March 31, 2023. Short-term borrowings included $4.095 billion of commercial paper, with a reported average rate of 5.0%.
Important facts for investors to verify
- Whether smoke-free revenue and shipment growth—especially heated tobacco and ZYN—continues, and how acquisition-related growth compares with underlying organic performance.
- Whether pricing can offset declining cigarette volumes, currency headwinds, inflation, and the near-term margin effects of smoke-free expansion.
- Whether working capital reverses sufficiently to achieve the $10–$11 billion operating cash-flow outlook, given Q1 operating cash use and receivables-sale activity.
- Debt servicing and refinancing needs, interest costs, and the effect of the Swedish Match acquisition on leverage and cash available for dividends.
- Developments in Russia and Ukraine, regulatory changes affecting smoke-free products, and material changes in tobacco litigation, tax disputes, or patent proceedings.
- Final Swedish Match purchase accounting and any resulting changes to acquired intangible values, amortization, or reported earnings.