Just launched and was growing rapidly in Japan. Year- to- date, PMI stock is up 35%, ahead of S&P 500 Staples Index, which is up 16%, and S&P and Nasdaq, which are each up about 20%. Now, PMI has been a very difficult stock to own at times over the last 10 years for various reasons, particularly effects and also investments associated with its NGP transition. But despite all of that, today, its 10-year returns are in line with broader Staples Index. So now the question for all of us is, that can PMI from here on systematically outperform S&P 500? So, Jacek.
This was a question or...?
This was just setting the expectation that I think all of us have. So the first question, just going back into history, when PMI split out of Altria in 2008 , it used to talk of volume growth and 10%-12% EPS growth without share repurchases, and it was growth driven by emerging markets. And now we are talking about volume growth again, which is driven by high profit pool markets like U.S. and Europe, and also driven by NGPs, which have better unit economics. So do you think that we can look back and actually at 10%-12% EPS growth and even north of that, like 12%-14%, because growth is now driven by NGPs?
This is actually a good way to start, because when I recall, I was at that time a CFO, so I recall it very well. Recall what was the first growth algorithm for PMI? So you may recall, especially those of you who follow us or known us even for a longer period of time. At that time, growth algorithm was 3%-5% on the top, with the slightly declining volume. So obviously there was a lot of pricing contribution at that time, translating to 6%-8% on the OI level, and 8%-10% on EPS, no buyback. With a buyback, we've been able to lift it to 10%-12%, and this is what we were delivering for quite a few years.
I remember the early conversations when we opened the smoke-free category, very much with a heat-not-burn with IQOS, that what will it bring to PMI from a, you know, growth profile perspective going forward, and at that time, I volunteered that I think we can lift the numbers by a good two points of a growth across all of this metrics, so here we are, a good few years later, and you could see that the volumes for the last three years, which is very difficult, is almost impossible in a classical tobacco cigarette industry, to be at the flat. I mean, we are actually in a growth combined volumes, despite the fact that obviously there was an underlying trend on a cigarette, amplified by the cannibalization to our own heat-not-burn platform, but we can lift it all to the positive territory.
Revenues are growing in a mid-single, at the mid-single level, with a good quality, again, coming from a volume mix, which enhance the margins of the unit revenues and the margins. And there is obviously the pricing, pretty strong pricing, I would argue, on the cigarettes, smaller for SFP, for smoke-free products, the categories in the different stages of development. And then we can deliver even with the reaffirmed guidance, which we just issued today, 11%-13%, no buyback, right? So it's pretty strong results compared to where we were, you know, a good few years ago. And I think there is still, ample room for a growth going forward.
I mean, you know very well that for the last almost two years, we're back to the U.S., on the back of acquisition of Swedish Match with ZYN, which, you know, adds very nicely to our profile growth on all metrics. I mean, the margins are very attractive, and the product squarely delivers on the promise of a smoke-free, a better alternative to cigarettes, and there is a growing market, essentially in almost every place in the world, unless for some unexplainable, you know, stupid type of reasons, the products are banned while cigarettes are being allowed, but other than that, you have a growth in every geography.
So, you know, this year, I think, will be another confirmations that, you know, this transformation was not only very attractive, obviously from a smoker's, consumer's perspective, but equally very attractive from an investor's perspective, because, I mean, at the margins, we're looking for the margin expansion. Importantly for us, also in the dollar terms, not just on the adjusted FX currency basis, we're looking, you know, in a very strong, very, very strong Q3 results. So every time, and every quarter starts bringing us more and more confidence. And, you know, question, should we expect more? I mean, definitely there is a role for PMI to continue with the current growth, which I would argue is very strong. But we're also trying to use every opportunity to enhance the growth profile.
Reentry to U.S. Sorry to be so long, but, you know, the one thing, and that's, you know, very much we all know it, which was behind the sort of, I guess, you know, share price performance always is, you know, more difficult as an insider to explain it, is the currency profile of PMI, right? Which was, you know, the underlying results of PMI on the new products, but also on the cigarettes, were extremely strong. And the question was that if the currencies were going against us, was difficult to lift it in the dollar terms. But I think as we all see, I mean, the currencies are starting to adjust in different directions, positive to us.
So I think if we address, and we're also increasing our profile by the presence in the U.S., not maybe in a very substantive manner, but it's, you know, better than we used to have before. The pricing comes strong, et cetera. So I believe not only we can deliver a very strong adjusted FX currency basis growth, but very importantly, also, the dollar growth, and you know, is very important to us from a cash flow perspective, and you know very well our strong commitment to the dividend, to the dividend. So obviously, you know, we're very much aligned, I guess, with the market expectations.
So, just going to the volume growth, which is happening now for you, and it is being driven by some of these high NGP penetration countries. So, we are seeing market volumes stabilize, particularly in Japan, Italy, Scandinavia, all regions where NGP penetration has reached 20% plus. So, do you think this is the right conclusion, that NGPs improve secular volume trends, or these are just some aberrations happening?
No, I believe that, okay, this is all the NGP markets, the, the smoke-free products markets, right, by category. Okay, we obviously very much focus, and they occupy a lot of our, quite rightly, a lot of space in our conversations, but these categories are still in the very early phases. I mean, obviously, the youngest one is, you know, nicotine pouches, that, you know, in the U.S., which obviously is the point of attention of many of us. I mean, the category has not even scratched or is scratching a 5% level, so it's in the 95% of the market is in a different form than the pouches. Okay, heat-not-burn is more advanced in many geographies, e-vape, but still majority of the product, you know, in any geography, is in a conventional form.
But what we see that each of the products, being a heat-not-burn, e-vape, and very much a product like the nicotine pouches, they offer adult smokers different opportunities compared to the cigarette smoking in terms of the moments of consumption. And I think that's some underlying factor behind the growth of this category, in addition, obviously, to the switching. I mean, it's pretty obvious that I'm not, you know, disclosing rocket science here, that they are more constrained when people would be free from a societal pressure perspective or from regulatory perspective of using a cigarette. But definitely, these pressures are different, and attitudes are different if you go to the heat-not-burn, e-vape or the pouches, right? The pouches, which obviously are the most discreet.
So it's very fair to assume that this will translate into the different consumption patterns going forward, compared to the beginning, if we take a cigarette, combustible cigarette, as the beginning of the category. So I believe the volume outlook, the way we measure, right, the volume outlook, I think is pretty, my view, is very positive. Obviously, for the companies like ours, when you, you know, take a lot of first mover advantage, and you're building the brand, and you create the category, it's obviously harder from a perspective that you need to take a lot of efforts on your organization, but also the returns are very nicely, rewarding you for, you know, for this first mover, sort of a strategy. But the volumes, I think, there's a lot of
I think over a period of time, we might be looking at the industry from a completely different volume perspective that we remember this from a combustible product. But the products which offer is completely different harm profile. I mean, it's, you know, this product are significantly reducing the exposure, as you know, we know all it to the harmful compounds you find in a cigarette smoke. So there is clearly the benefit compared to continuing smoking. And, you know, smokers, users are feeling more freedom in terms of how I can interact, how I can use the product.
Sure. So, you know, on our math, your volumes will be positive even if you start increasing cigarette prices, which historically you have increased at 5%-7%, if you take that algorithm up to 7%-9%. Now, that would lead to some great market share loss, but then you will gain share through NGPs, so net-net, you will still be positive on volume share. So the question is that, are you at a point where some of the countries you can now run on a total nicotine volume share basis, which means that one of your key KPIs, which is flat cigarette market share globally, is not met?
Yeah. Okay, let me translate your question, Guru. You're asking, can we do more pricing?
Yes.
Okay. Okay, so here is the thing. We do pay attention to market share, I'm talking about combustible part of a business, but not to the extent, obviously, that, you know, in a category which we all know or in our view, the destination of this category, that we should be too much worried about the market share, but not to the extent, just to do the pricing, which will accelerate our declines. Because still, we have to, you know, remember, the category offers attractive margins, right, in a consumer space. The second is a very strong cash flow, which is associated with these margins, and these cash flows are very important to, for a, you know, number of the corporate needs, including, as I mentioned, you know, our commitment to the strong dividends, et cetera. So that's the one thing.
Doesn't mean that we are not really, you know, in many markets, we are the market leader. Then we will, you know, don't shy from, you know, taking the pricing in the market. Even if you like last year or this year, right, what is baked into the guidance, we're coming with a very, very strong pricing variance, even including in the dollar absolute terms. Taking into consideration, sorry, this pricing variance in absolute terms will be higher than the pricing variance we were turning in the past, despite the fact that we lost quite a lot of cigarette volume. So we're actually delivering a much more absolute terms, dollar, dollar absolute terms, pricing variance than in the past, despite the fact that we have a less underlying, you know, cigarette volumes. So that's the one thing.
When it comes to the share on the total nicotine space, okay, by the fact that you're growing in pouches, the fact that you're growing with the heat not burn, and also recently with the vape, I mean, obviously our share will go up. Ambitions are much higher. But look, share is very important, but I remember one of my professors used to say, "I can't pay the dividend for market share." You always have to bear in mind what is the value behind that share. Yes, we do focus on maximizing the value on the cigarettes, on our business. Share is secondary type of the measure.
We will no doubt rapidly react to the, you know, at 10 or 20 basis points type of a movement, but we will not do the pricing, which will all of a sudden, you know, start collapsing our positions in a marketplace.
Now, investors think, and moving to IQOS, that investors think that PMI has been routinely bullish on IQOS and then had to adjust guidance down, especially on volumes. So do you think a change in approach to IQOS guidance is needed now where you have reached in terms of scale, on IQOS and its share in your business?
Then investors will tell us that we are lowballing, so, you know, you always go in this back and forth type of a conversation. I mean, yes, and it happened to us, that we had to adjust the outlook for, in a given period for IQOS. But let's also take it. I mean, the way I look into this is, you know, you're taking a billion, a couple of billion of adjustments in the, you know, final volumes you're delivering for a period, right? Usually, a year. There are number of other factors at play rather than, you know, something which would, you know, we should be worried about the longer term.
So yes, I mean, sometimes, you know, maybe we should be a more precise going forward than a factor number of the moving parts, you know, moving parts, and you know it very well. In addition to, you know, every new consumer to IQOS is gained for the new time, right? Nobody never did a smoke-free transformation before, and, you know, we cannot be arrogant that we know it all. There is a learning with the first cohort of consumers and the second cohort of consumers, et cetera. You well remember that we had, a few years ago, a bit of a slowdown in Japan, and everyone reacted very nervously. If you look from today's perspective, where is Japan? You would essentially consider the event of the some years ago as just a blip, which, you know, we shouldn't really react and definitely not overreact to this whole thing.
By the way, if you know Japan, and we have said it at the beginning of the year, volumes of heat-not-burn category, obviously very much driven by IQOS, in Tokyo, crossing a 50% mark. And I think everything indicates that if we continue like this, Japan will be the first market that next year, 2025, you will have more volume of heat-not-burn than the cigarettes. So, you know, the progress is there and the growth is there. I think, you know, the challenge which we have, we're not really debating whether there is a growth. It's more of a question of, is this growth going like this, or what is the angle of the growth, right? What is the rate of the growth? And, you know, we had an EU situation, right, with the ban on the flavors.
The beginning of the year, maybe was not as stronger. There were some pressures in Italy. But if I look at the Q2 or current performance of Italy, seems that we're going back where we wanted to be, et cetera. So some of these factors is, you know, difficult to very accurately, you know, estimate, if you like, assess and said, "Okay, this is what it is." And usually also try to come with a guidance which is not the, what I call the Swiss pharmacy, with the second digit after comma type of the thing. It's 140, it's 140. From my perspective, whether we deliver 139.5 or 141, to be very frank, from a scheme of the thing, it's the same number.
I understand the value of another billion, but this is more the question: Do we observe a consumer trend changes versus the past? People are trying and adopting the product. Are people happy with my product, with my brand? Do my brand- does my brand equity goes up? Do people keep on referring my product to others? If I score well on all of these parameters, by definitions, I will grow the volume. How much? I may be under- or overestimating this whole thing, but this is not, I think, something which, which personally, I would be very worried about.
Sure. And can you, in that context, just remind us of the impact of the EU flavor ban on IQOS this year? And I think the comments that were made on the last call was that 2025 should be better because things should accelerate, so for IQOS in EU. So can you just remind us?
Yeah. So we're looking at the second half of this year, right, to be stronger than the first in terms of the growth. And it seems that, you know, looks that we going into this direction, so, so we're fine with this. We have estimated that the challenge with the flavor ban in Europe is that it is not the one day or one week when the ban is being implemented across all the European markets, right? So different markets have a different timing, different sequence. So it's a little bit that puts a extra pressure, if you like, even on our own estimates. We have estimated at the beginning of the year that the impact in 2024 might be in the range of about $2 billion.
Presumably, it will be two billion point something, I mean, a couple of few hundred more millions, but the more the question is, what do we observe in the markets which relatively earlier have entered into the, or implemented the flavor ban, and what is the time they're returning to the growth comparable to they used to have before, so we look at Central Europe, I mentioned Italy, and this is coming back, so our assumption that flavor ban has some time sort of an impact or temporarily type of an impact, it's difficult now to say how long is temporarily, but seems that, you know, it's supported by what we observe in a marketplace, so you go through this distortion, and I'm not just talking consumer demand, because there is demand which is, demand meaning consumption.
But you know, this demand, people know, consumers know that the product will be banned. They're buying more. Trade is taking different actions. So it's a lot of, some level, not a lot, but some level of distortions in the marketplace. But I mentioned, Italy seems that they're regaining the momentum from the past. Okay, that's okay. Central Europe, I mean, the Czech Republic, etc., a few other markets, were going through this whole exercise of that situation. Seems that they're on a good path. There's the different rate of the growth in the different markets, but there is a growth, and it goes in the right direction. From the large markets, when there is still a relatively, you know, high proportion of the flavor product, would be Poland, the sizable market.
But the Poland, I don't think they're gonna implement anything this year. At earliest, presumably end of the year, but not nothing now. So this will be more a 2025, next year, event.
Sure. Now, quickly moving to ZYN, where the success in the U.S. has been clearly phenomenal, but currently you are constrained on capacity. Now, you are expanding capacity. You have given us some numbers, at least on gross CapEx, at your prior call. So you've lost some share, and the question is: as your capacity expansion happens, how confident are you that you will gain back the market share?
We must have some level of confidence, otherwise, we wouldn't announce in the span of four weeks, two capacity expansion plans. It means we would make a mistake somewhere else. Colorado, which we announced first, Aurora in Colorado, is more as the greenfields which will come in a, you know, two years' time in a, into the chain, into the supply chain. But we also obviously address Owensboro and max out what we could do with Owensboro. Owensboro is the existing current Kentucky Swedish Match operations, right? The only manufacturer in the U.S. of a ZYN product. So we max out, we're now maxing out what we could do with Owensboro. That's the 900 million next year. So this year, you know what is our guidance on the volumes.
Okay, 900 capacity, obviously, for next year assumes the growth, and I believe that growth is there. Now, we have lost Swedish Match, ZYN has lost a few, couple of few percentage points on the market share, but it's very interesting, if, especially if you follow news and other market statistics, is that since this unfortunate out-of-stock situation with ZYN, the entire category growth has stopped. Or it's differently, lost the dynamics which it has before, which tells me that this was a ZYN who was actually the, which was driving the category, not just any other product in the marketplace. So there is a bit of a, you know, shaving of the, or loss of the share going to some of the competitors' brand, but this is in a range of a few percentage points, okay? 4-5, presumably, not even.
But the category has stagnated now absent the ZYN continuous and unconstrained supply. We will unfortunately live with the situation because, you know, before we get to this nine hundred million capacity next year, I mean, this will not happen as of January 1. There is a time to get there, but I think. Sorry, I wanted to say that, the 900 million, how to phrase it properly, that I manage the expectations, that the growth might be obviously beyond the nine hundred million. And if that happens, and faster than we think, then we may be in the constraint situation beyond Owensboro expansion. This is what I wanted to say.
Very-
There's the Colorado expansion, but from a timing perspective, we don't know how it's gonna last, okay? So, sure, I am more comfortable that we'll get it. Now the question is how quickly we can pull the entire category, because since that the ZYN was the carrier of generating the growth for the full category.
So, you know, with such strong growth in ZYN, then I guess the concern that investors have is, you know, youth uptake, and there is a lot of conflicting data points.
Yeah
Which are floating around, and we will have the FDA's Youth Tobacco Survey out probably in the next month or so. But even beyond this Youth Tobacco Survey, that let's say even if there is, like, low prevalence in this survey, what are you doing to actively prevent youth uptake?
Yeah. So look, the whole conversation is about the youth access to the product, or exposure to the marketing, communication about the product. I mean, something which from the very beginning, and all of us, I'm talking PMI, we're taking very seriously, right? I mean, you know how we execute, we know everyone knows how we execute the nicotine market, no youth type of a issue whatsoever. You know, FDA and others obviously know, I mean, it's all transparent, et cetera. ZYN obviously creates a lot of unnecessary, you know, excitement, very much driven via social media. I think what we're doing on the physical access to the product, feel very strong about this and, you know, being the assistance of the retail networks, of the, you know, retail shops, et cetera.
So access, physical access to the product, it's actually very doable to have a strong grip on. Obviously, always may find one or two independent general type of retailers, but, you know, you can send the sales force, they list their account, and you have a quite a lot of input or pressure points on that thing. Controlling the access to information, especially with the, you know, the prevalence of the social media, et cetera, on the user-generated content, is becoming more difficult. So even if a PMI and the Swedish Match have a very strict policy, you know, the influencers or, you know, age limit for the models, if you're using any advertising, give it all, et cetera, and is a very well-known, documented, et cetera, practices which we have.
The one thing which is difficult for us to control is what exactly are the conversations in the social media, not triggered by us, not triggered by the brand, but just triggered by the users. We reaching out to social media companies for their help. I think there is the room for some moderation, et cetera. That some of this conversation depends on the followership that some people have should be more restricted, just not to, you know, expose not to the product, but to the information about the product. So I think the practices which Swedish had before, obviously now as the part of the Philip Morris group, et cetera, there I feel very confident. And, you know, these are the things which are known to important to stakeholders.
But obviously, you know, it's a public perception, and, you know, we all have to be very careful. These are the nicotine-containing products, et cetera, et cetera. These products are not for the underage people, and they were not designed for them. And, you know, the audience are the adult, adult smokers. This is what we should focus. So I think we have the things under control. Obviously, absolute zero doesn't exist because you always will find the one retailer or whoever who will be non-compliant, but you have a pretty good path, to control it. Another things which we're doing is also, protecting the market from access of products which are not authorized by FDA.
So you all know it, you know, Swedish ZYN has the pending PMTAs, and by the way, in the Q2 of this year, we file MRTPA for a ZYN product as well. On the regulatory side, we're obviously awaiting FDA decision, but we're also protecting the market from a diversion of the product in the formats which are not subject by even the pending PMTAs from outside, which also demonstrates how responsible we are in controlling the market. You've heard, you know, we shut down pretty fast ZYN.com, the internet site supporting the e-commerce sales, as the reaction of some situations in the D.C. I think that we're always... It's not that we demonstrate, but this is what we are doing. If we see that something is going out of hand, I mean, that our company can act very swiftly and with the full force to address the problem.
Sure. Now, coming back to the comment around share repurchases, you know, that we were making earlier. So you are clearly well north of your 2x leverage target. And the comment that has been made at times is that you will start buying back shares when you will have a line of sight to 2x leverage. So is it that, let's say, you're levered at 2.3x, but you see yourself going to below 2x next year, you will start share repurchases, or you will actually wait till it goes to, like, 1.8x, and that will get 2.4x?
Yeah. So there's always, and everyone knows, it's always up to the, to the board, right? To authorize or not the share repurchase, but I think we are on the good path post the acquisition of Swedish Match on the leveraging. And I think the outlook, which we have said that we should be in about two-ish type of a territory, somewhere in 2026, especially when you may take this year, that we are reaffirming that, okay, strong growth, but also expansion in margins in the dollar terms, et cetera. So I believe we are on a good path to be in the two-ish type of a territory, 2025, and then it's the moment. So somewhere, the visibility of this whole thing, you will have in the 2025, and I think this is the period which we'll start consider.
But remember, this is pretty obvious what I'm gonna say, but, you know, share buyback for us was always a subset of other uses of capital. Okay, obviously, dividend for us is very important. We have demonstrated even in a little bit under pressure, especially from a dollar perspective, that we'll focus on dividend and, you know, go with the dividend above what the, you know, dollar earnings would indicate. I think we cruise it or drove it to the right territories now. So dividend for us is very important. Share buyback, as I said, is the part, and then there are other uses of the cash, just for formality.
Sure.
From formality perspective.
Okay. Now, one of the criticisms against PMI historically was that the dollar EPS didn't really grow, and now, because of the growth in your U.S. business driven by ZYN, you can certainly, you know, I, I guess you can still have some ranges around FX, but you can definitely think about a minimum dollar EPS growth or some sort of, you know, communication to the market that you can actually grow, you know, dollar EPS number at this number, despite whatever could happen in FX. So is that something that you might think of, let's say, minimum dollar EPS growth of 5%?
Yeah, I mean, we have quite a few KPIs, right? For which the company is measured, assessed, and including me and my executive team, et cetera. So we obviously have a cash flow. So you have a dollar type of measures, and you have a few other measures. I don't think we would go into the direction of changing. I believe it served us pretty well for this whole period with the focus.
Obviously, we have said that by the fact that we committed so much to the rewarding shareholders, primarily through the means of a dividend, and obviously, it's not just the dividend, it needs to grow, et cetera, then obviously you go straight to the cash flow, and dividend is in the dollar, so your cash flow in the dollars have to cover all our needs and obviously for the dividend distribution. So somehow, if you like, directly or indirectly, the dollar focus is there. But having said so, and you know, we said it, I said on a number of occasions that, yes, there is a good environment for the pricing, right? We started with the pricing because of the excise type of environment. You don't have abrupt and disproportionate type of an excise increases.
So this obviously is the good block on which you could build the pricing strategy. It works with. You know, that obviously helps a lot also from a dollar in the dollar terms of the revenue and the margins, what we're bringing home. But pricing, making a domestic market pricing decision based on the currency, you know, the currency exchange rate, may also be a very bad idea, right? So, you know, if you take the yen, historically, now yen goes our direction, so there's a lot of strengthening. But, you know, consumers are spending money in their local currency. Okay, so if you exaggerate with the pricing driven by the exchange rate, you will end up with a pricing in the market which completely doesn't fit into what is the disposable, is the power of the purchasing power in the market.
So you need to balance this whole thing, which doesn't mean that you can still not optimize and search and look for the value to achieve the ultimate objective, which is keep on moving our performance measures, our performance numbers, in the dollar terms.
With that, we are out of time. We have a breakout as well. Thank you so much, Jacek-
Thank you
... for your time. And, the breakout is right around the corner, so see you all there. Thank you.
Thank you.