PM reported first quarter adjusted EPS of $1.38, which was down from $1.58 in last years first quarter. Of that $0.20 decline, negative currency caused $0.13, with the remaining decline caused by various higher costs that PM had announced in their previous earnings call. Those higher costs are expected to moderate over the course of 2023. Overall, the first quarter operationally came in somewhat better than the forecast, primarily due to strength in Swedish Match.
PM held to their full year outlook of 7-9% adjusted EPS growth, excluding currency. However, the negative currency outlook increased to $0.30 for the full year versus $0.15 previously due to continued weakness of the Yen and sharp declines in the Ruble and the Egyptian Pound. Those negative impacts more than offset some strengthening of the Euro. As such, the adjusted EPS guidance dropped by 15 cents to a range of $6.10 to $6.22.
Operationally, PM largely held to their 2023 forecast, however, there are some potential concerns. Shipments of Heated Tobacco Units (HTU's) grew only by 10.4% in the quarter, versus a total year expectation of growth of 15-19%. PM explains that the quarter was weaker due to distributor inventory adjustments and ILUMA changeovers, and that in market sales of HTU's were estimated to be 16% higher. That makes sense, however, with worldwide economies slowing, the question is whether those HTU sales can now be re-accelerated as PM is forecasting over the remainder of the year.
PM also announced they are eliminating all in-house production of vaping devices and consumables (most notably IQOS-VEEV), and took a $109 million charge to write off that business. They will now fully outsource all production of vaping products, and will only commercialize VEEV in select markets where they believe it can be profitable.
PM is estimating adjusted EPS in the second quarter of $1.42 to $1.47, which would be an increase from $1.32 earned in the second quarter of 2022. However, that would still require some obviously strong earnings growth in the second half of 2023 to meet the total year forecasts.
This quarter was a fairly tough one, as was expected, with the bright spot being continued strong growth from Swedish Match's Zyn in the US. PM management is holding firm that things will improve pretty strongly as we progress through the year. The question is whether their expectations can be realized in the current economic conditions.
