Wednesday, April 21, 2021

Philip Morris Q1 2021 Earnings $PM

Yesterday, Philip Morris (PM) reported earnings for Q1 2021 and gave an investor presentation. Some highlights:

"Our business delivered a strong performance in the first quarter of 2021, well ahead of expectations, reaching a record high quarterly adjusted diluted EPS of $1.57, despite the continued challenges of the global pandemic.

Most impressive was the continued strong growth of IQOS, which made up 13% of our volumes and 28% of our net revenues, compared to 21.7% in the prior year quarter. We continued converting adult smokers at a very good pace and reached an estimated total of 19.1 million users, of which 14.0 million have switched to IQOS and stopped smoking. HTU shipment volumes grew 30% compared to the prior year quarter, with record market shares in key IQOS geographies, 12 markets with double-digit national share, and a share of 7.6% overall in IQOS markets excluding the U.S.

Our operating margins were also significantly above the prior year quarter, and while somewhat flattered by timing factors, the bulk of this improvement reflects strong underlying performance. The resulting combination of strong organic net revenue and adjusted diluted EPS growth leads us to raise our outlook for the year."

Another good summary of the quarter from Seeking Alpha:

Japan is a good example of IQOS’s continuing domination of the HNB category despite challenges from the likes of British American Tobacco (BTI), Imperial Brands (IMBBY), and Japan Tobacco (JAPAF). PM HTUs have now reached a 10%+ share in 12 markets, including Italy (11.3%), the Czech Republic (13.8%), Portugal (12.2%), and Hungary (17.0%). Italy (population 60m) is one of biggest tobacco markets in Europe while the other countries mentioned each has a population of approx. 10m. PM HTU's market share in key cities also shows the long-term potential for national market shares, especially outside IQOS's key current markets in Japan, Southern Europe, and Eastern Europe. IQOS has reached a high-single-digit share in Munich and Zurich, a 5.1% share in London, and a 12.3% in Kuala Lumpur in Malaysia. With respect to the mid-point of 2021 guidance, PM shares are trading at a 15.7x P/E and a 7.0% FCF Yield. Net Debt / EBITDA was at 1.92x, down another 0.1x sequentially, and Philip Morris “remain on track” to resume share buybacks in H2 2021. 

PM do not disclose their operating income segmented by cigarette vs heated tobacco (which would be nice to know), only segmented by geography. They do disclose net revenue for cigarette vs heated tobacco segments.

If IQOS is 13% of volume and 28% of net revenue, then IQOS is obviously higher priced per "heated tobacco unit". But the question is how the margins compare, since the business is shifting from cigarettes to IQOS. Here is what they said in the investor presentation about the drivers of their overall profitability:

"Our adjusted operating income margin increased by 590 basis points on an organic basis. This reflects the increasing weight and profitability of IQOS, the positive impact of pricing, productivity savings, including lower device costs; lower commercial spend due to the pandemic, a favorable comparison in Eastern Europe and certain other timing factors."

That makes me think that IQOS has higher profit margin than cigarettes. But for some reason, it seems like they are being quiet about it.

The degree of switching from cigarettes to IQOS is itself impressive. Heating the nicotine leaf might be more appealing than vaping pure nicotine, perhaps because this provides some of the MAOI benefits of cigarettes. They may have a big winner with IQOS. Note that Altria has the rights to it in the U.S. 

In our Value vs Growth bibliography, we linked to two important posts by Lyall Taylor, who has been doing some of the best recent writing on value vs growth.

Who knew that Lyall was writing brilliant theses about value vs growth while powered by nicotine? He is right on board with our Re-Nicotinization thesis. We will call him "Chainsmoker" LT3000 from now on.

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