Philip Morris Raises FX Outlook as IQOS, ZYN Fuel Smoke-Free Growth

Key Points

• Philip Morris raised its full-year outlook to reflect a favorable foreign-exchange impact of about $0.24, while maintaining its focus on smoke-free products and potentially achieving low-double-digit to low-teens medium-term EPS growth.
• IQOS continues to drive international growth: Japan’s heated-tobacco market is stabilizing after tax-related price increases, and PMI is preparing to launch IQOS ILUMA in the U.S. pending FDA authorization.
• ZYN expansion is a key U.S. growth initiative. PMI has broadened the pouch brand’s product range and nicotine strengths, adjusted pricing and packaging, and still expects the U.S. nicotine-pouch category to grow more than 20% over the longer term.

Philip Morris International NYSE: PM Chief Executive Officer Jacek Olczak said the company has revised its full-year guidance solely to reflect foreign-exchange movements, citing a favorable currency impact of about $0.24 at current spot rates. For the third quarter, the company expects a favorable currency effect of about $0.01, he said during a Barclays discussion hosted by Pallav Mittal, the bank’s head of global tobacco.

Olczak said the company remains focused on expanding its smoke-free product portfolio, led by IQOS heated tobacco products and ZYN nicotine pouches, while combustible cigarette volumes have performed somewhat better than previously expected in certain markets.

Japan tax changes and IQOS performance

Japan remains a key focus as the country implements successive excise-tax-driven price increases. Olczak said an April tax increase was followed by a second stage of increases in October, with another increase expected next April affecting both cigarettes and heated tobacco products.

He acknowledged that the magnitude and frequency of price changes can create “some sort of a shockwave” for consumers, particularly because heated tobacco and cigarettes have faced different pricing dynamics. Still, he said the heated tobacco category has stabilized following consumer inventory loading and deloading ahead of the October increase and is resuming growth.

Olczak said Philip Morris continues to target net adjusted in-market sales growth in Japan for the full year. He noted that heated tobacco had exceeded 50% of Japan’s nicotine market by volume about a year ago and that IQOS has maintained a high share of the premium segment despite competitive pricing strategies.

The revised tax framework also improves the economics of price increases for heated tobacco products, according to Olczak. He said Philip Morris was able to pass through the latest Japanese increase “plus,” resulting in margin improvement in the market.

While higher heated-tobacco prices temporarily reduce the financial incentive for cigarette users to switch, Olczak said the competitive pricing relationship should become more balanced when cigarette prices rise as well. He said the company expects Japan’s revenue performance to remain solid even as consumer elasticity affects volume trends.

Growth outlook and U.S. IQOS plans

Olczak said Philip Morris views low-double-digit to low-teens earnings-per-share growth as an attainable medium-term objective. The outlook is supported by a shift in the company’s business mix, including what he said could be a sixth consecutive year of total volume growth.

Both combustible and smoke-free categories are contributing pricing growth, he said, while positive volumes are improving the quality of revenue growth. Marketing investments can fluctuate depending on the company’s efforts to establish or strengthen leadership positions in smoke-free categories, he added.

On the U.S. market, Olczak said the company is prepared to launch IQOS ILUMA once it receives authorization from the U.S. Food and Drug Administration. He declined to provide a timeline for the pending premarket tobacco product application, saying only that approval appears “shorter” and “sooner than later.”

Philip Morris has authorization for an earlier IQOS technology, but Olczak said it would not make sense to launch that retired version in the United States while the company awaits authorization for ILUMA. He said the company is also preparing future IQOS innovations beyond ILUMA.

Over time, Olczak said heated tobacco products could reach roughly 10% of the combined U.S. cigarette and heated tobacco market, based on IQOS performance across other markets. He characterized the United States as the company’s largest unaddressed growth opportunity, citing its size and attractive nicotine-product economics.

ZYN expansion targets pouch-market growth

In the United States, Philip Morris has expanded ZYN through its ZYN ULTRA line, adding more than 20 stock-keeping units over roughly two months. The expanded offering includes moist-format products and higher nicotine strengths, including 9 milligram and 11 milligram options, compared with the flagship ZYN range of 3 milligrams and 6 milligrams.

Olczak said the company is also considering a 1.5 milligram offering. The broader nicotine-strength range is intended to serve consumers entering the category at lower strengths as well as those seeking stronger products, he said.

The company is transitioning from 15-pouch cans to 20-pouch cans and is adjusting ZYN’s historical price premium to a more manageable level, according to Olczak. He said the changes are designed to provide additional consumer value and support growth and market-share recovery.

Olczak said ZYN ULTRA has been received in line with company expectations, though distribution buildout and consumer communication remain important because of the scale of the portfolio expansion. Philip Morris has also launched a “When It Clicks” campaign and is increasing investment behind the brand during the second half of the year.

Despite recent market data suggesting mid-teens category growth, Olczak said he still expects the U.S. nicotine pouch category to grow at a rate above 20% over the longer term. He said growth is supported by consumers shifting from other oral tobacco products, e-vapor products and cigarettes, though usage patterns differ among those groups.

Capital allocation priorities

Olczak said the company’s first capital-return priority remains its dividend and dividend growth. He said Philip Morris expects to discuss the dividend with its board and could begin discussing share repurchases shortly afterward, though he made no commitment on timing or size.

“Dividend is the most preferred form” of returning cash to shareholders, Olczak said, adding that buybacks would be a subsequent consideration absent other investment opportunities.

About Philip Morris International (NYSE:PM)

Philip Morris International Inc is a global tobacco and nicotine company headquartered in Stamford, Connecticut. The company develops, manufactures and markets cigarettes, smoke-free products, nicotine products and related consumer offerings in markets around the world.

Its portfolio includes internationally recognized cigarette brands such as Marlboro, Parliament, L&M and Chesterfield. PMI is also expanding beyond traditional cigarettes through heated-tobacco products, including IQOS, e-vapor products such as VEEV, and oral nicotine products including ZYN, which became part of the company's portfolio following its acquisition of Swedish Match.

Philip Morris International was established as an independent company in 2008 after being separated from Altria Group, whose U.S.

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