Philip Morris International Inc. annual report, FY2023

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Philip Morris International Inc. — FY2023 Form 10-K

Reporting period: Fiscal year ended December 31, 2023. Although the request metadata references 2023 Q4, the supplied filing reports full-year results; it does not provide a clear set of Q4-only financial results.

Business context

PMI is an international tobacco and nicotine company pursuing a transition from cigarettes to smoke-free products (SFPs), including heated tobacco, vapor and oral nicotine. Swedish Match, acquired in November 2022, added the ZYN nicotine pouch business. SFPs were available in 84 markets at year-end. Beginning in 2024, PMI plans to include Swedish Match results in its four geographic segments.

Financial and operating performance

  • Revenue: Net revenues were $35.174 billion, up 10.7% from $31.762 billion. Excluding currency and acquisitions, revenue grew 7.6%, mainly on pricing and higher heated tobacco unit (HTU) volume. Smoke-free revenue was $12.840 billion, versus $10.190 billion; combustible tobacco revenue was $22.334 billion, versus $21.572 billion.
  • Profit and margins: Operating income was $11.556 billion, down 5.6%; net earnings attributable to PMI were $7.813 billion, down 13.6%. Diluted EPS was $5.02, down from $5.81. Calculated from reported figures, gross margin was approximately 63.3% (64.1% in 2022), operating margin 32.8% (38.6%), and attributable net margin 22.2% (28.5%).
  • Shipments and market share: Cigarette and HTU shipments rose 1.0% to 738.2 billion units: HTUs increased 14.7% to 125.3 billion, while cigarettes fell 1.4% to 612.9 billion. Marlboro shipments declined 1.9%. PMI’s total international cigarette-and-HTU market share increased to 28.3% from 27.7%. Swedish Match oral product volume rose 17.1% on a comparable basis, led by U.S. nicotine pouches.
  • Cash flow and investment: Cash from operations was $9.204 billion, down from $10.803 billion; management cited currency and higher working-capital needs. Capital expenditures were $1.321 billion, implying approximately $7.9 billion of operating cash flow less capital expenditures. Cash used in investing was $3.598 billion, including $1.775 billion paid to Altria for U.S. IQOS rights. Dividends paid were $7.964 billion.
  • Liquidity and debt: Cash and equivalents were $3.060 billion. Total debt was $47.9 billion, up from $43.1 billion, and the weighted-average financing cost was 3.3% versus 2.5%. Current assets of $19.755 billion were below current liabilities of $26.383 billion. As of February 8, 2024, $6.2 billion of committed revolving facilities was available with no borrowings. PMI reported a stockholders’ deficit of $9.446 billion.
  • Segments: Europe revenue was $13.598 billion and operating income $6.012 billion; SSEA, CIS & MEA revenue was $10.629 billion and operating income $3.047 billion; EA, AU & PMI DF revenue was $6.201 billion and operating income $2.481 billion; Americas revenue was $1.944 billion and operating income $62 million. Swedish Match reported $2.496 billion of revenue and $824 million of operating income. Wellness and Healthcare had $306 million of revenue and an $870 million operating loss.

Material changes and unusual items

  • Operating results included a $680 million non-cash Wellness and Healthcare impairment ($665 million goodwill and $15 million other intangible assets), following unsuccessful clinical results for an inhalable aspirin product and slower-than-expected CDMO development. The segment’s goodwill impairment was not tax-deductible.
  • Other 2023 items included a $204 million South Korea indirect-tax charge after an adverse Supreme Court ruling; $140 million paid to terminate the Foundation for a Smoke-Free World pledge; $109 million of e-vapor manufacturing restructuring and impairment costs; and an $80 million reduction in revenue following termination of a Middle East distribution arrangement.
  • Net interest expense rose to $1.061 billion from $588 million, primarily due to Swedish Match acquisition financing. The effective tax rate increased to 22.4% from 19.3%, including effects related to Russian subsidiary earnings and the non-deductible impairment.
  • Currency reduced diluted EPS by $0.63; operating factors increased it by $0.84. Inflation added approximately $580 million to cost of sales in 2023, with management saying pricing, productivity and other actions offset much of the pressure.
  • Operating cash flow benefited from receivables sales: cumulative receivables sold were $13.3 billion, with $1.6 billion still outstanding at year-end. The filing reports $49 million of losses on receivables sales in 2023.

Outlook, risks and contingencies

  • For 2024, PMI expects international cigarette-and-HTU industry volume, excluding China and the U.S., to decline 2% to flat; its own cigarette, HTU and oral smoke-free shipment volume is expected to be flat to up 1%. It expects approximately 520 million U.S. nicotine-pouch cans, $10–$11 billion of operating cash flow, approximately $1.2 billion of capital expenditures, and a 21%–22% effective tax rate excluding discrete tax events.
  • PMI expects inflationary pressures to ease in some areas, with a moderate increase in 2024. U.S. IQOS commercialization rights return to PMI effective May 1, 2024. PMI estimates incremental amortization of about $370 million pre-tax for the remaining eight months of 2024 and about $555 million annually for 2025–2028.
  • Russia and Ukraine remain material uncertainties. At year-end, Russian operations had about $2.7 billion of assets, including $773 million of cash largely in rubles; Ukrainian operations had about $446 million of assets. Sanctions, currency controls, operational disruption, divestment constraints and potential impairments could affect results and cash access.
  • Product adoption and returns depend on consumer uptake, regulatory approvals and the ability to communicate product information. Risks include restrictions or bans, excise-tax changes, youth-use concerns, illicit trade, competition, supply constraints, inflation, foreign exchange and cybersecurity events. ZYN U.S. supply is concentrated at one facility, which PMI identifies as a production risk.
  • Pending tobacco litigation includes 9 smoking-and-health class actions and 17 healthcare-cost recovery cases. PMI says it has not concluded that losses in these cases are probable or estimable and has not accrued estimated losses; potential outcomes could nevertheless materially affect a period. The filing also describes other tax and regulatory disputes, including the South Korea charge already recorded.
  • On February 1, 2024, PMI and BAT agreed to settle ongoing global heated-tobacco and vapor patent disputes, including requesting rescission of relevant U.S. ITC exclusion and cease-and-desist orders. This was a post-year-end development.

Most important facts for investors to verify

  • Whether smoke-free revenue and volume growth—especially ZYN and IQOS—continues to offset cigarette volume declines, and whether reported growth is organic or acquisition-driven.
  • Whether 2024 guidance is achieved, particularly operating cash flow, shipment growth, U.S. pouch supply and the expected effect of returning U.S. IQOS rights and related amortization.
  • Debt refinancing needs, interest costs and liquidity in light of $47.9 billion of debt, near-term maturities and current liabilities exceeding current assets.
  • Further developments in the Wellness and Healthcare business, including clinical progress, commercial performance and risk of additional impairment.
  • Outcomes of material legal, tax and regulatory matters, including tobacco litigation, South Korea assessments, U.S. IQOS commercialization requirements and implementation of the BAT settlement.
  • Exposure to Russia and Ukraine, foreign-exchange movements, working-capital swings and the contribution of receivables sales to reported operating cash flow.