Philip Morris International raised its annual profit forecast, banking on higher cigarette prices and its growing nicotine pouch brand ZYN while trimming the outlook for its core heated tobacco business.
The world's top tobacco company by market value has put heated tobacco device IQOS at the centre of its effort to grow revenues from smoking alternatives, but lower-than-expected shipments disappointed some investors last year.
ZYN has emerged as a bright spot thanks to booming growth, while regular hikes to cigarette prices have helped offset consistent volume declines across the industry.
PMI upgraded its forecasts for both annual revenues and profit, with higher ZYN shipment volumes a key driver.
"We are on track for a strong 2024," CEO Jacek Olczak said, flagging strong momentum across PMI's business.
Shares in PMI were up 2% in premarket trading after it also beat expectations for second-quarter revenue.
Growth Drivers
IQOS and other heated tobacco products gained users in the second quarter, with new product launches in places like Japan and Indonesia helping drive in-market sales volume growth of 10.2%, in line with expectations.
However, PMI said it expected annual heated tobacco in-market sales volume growth to be lower than previously forecast, flagging a greater-than-anticipated impact from a ban on flavoured heated tobacco in the European Union.
Mark Giambrone, a portfolio manager at Barrow Hanley, a sub-adviser to American Beacon's Large Cap Value Fund which invests in PMI, said this did not overshadow its results and forecasts. "The quarter was excellent," he said.
PMI expects full-year adjusted earnings per share of between $6.67 and $6.79, compared with its earlier forecast of $6.55 to $6.67. Its second-quarter revenue of $9.47 billion (€8.7 billion) beat an $9.18 billion (€8.5 billion) average analyst estimate, LSEG data shows.
US IQOS Launch Delayed
The company has pushed the test-launch of its heated tobacco device, IQOS, in the US to the fourth quarter. The company declined to comment on why the launch had been delayed.
The pilot was earlier scheduled to run in Austin, Texas, in the second quarter.
Philip Morris has invested billions to promote and expand its portfolio of alternatives to traditional combustible cigarettes amid stricter regulations and falling smoking rates in some markets.
The launch of its flagship heated tobacco device in the United States is also facing resistance from health campaigners, who have written to regulators in the country accusing the company of misrepresenting past regulatory decisions, Reuters reported last week.
The company also awaits market authorisation from the US Food and Drug Administration for its IQOS ILUMA device, which it expects by the second half of 2025.
ZYN Shortage
Philip Morris is taking steps to remedy supply problems that have dented US growth of nicotine pouch brand ZYN, its chief financial officer said, as analysts warned of illicit trade in the brand.
The world's top tobacco company has enjoyed booming growth of ZYN ever since it took over the brand via its acquisition of nicotine company Swedish Match, which completed in 2022.
PMI reported the first slowdown in ZYN's growth since then on Tuesday amid the shortages, ending five quarters of accelerating uptake in the US, ZYN's largest market. It grew by 54% in the second quarter, down from 90% in the first three months of the year.
The company was working to expand ZYN production, including by expanding a manufacturing facility in Kentucky and via the recently announced investment in a new manufacturing plant in Colorado, its CFO Emmanuel Babeau told investors on the day of the company's second-quarter results.
These and other initiatives would result in enough production to meet expected consumer demand in the fourth quarter and a capacity of 900 million ZYN cans in 2025, he continued.
Analysts from Jefferies and Bernstein told Babeau on the call that ZYN pouches intended for the Scandinavian market were being sold in the US, with one warning this seemed widespread in New York especially.
This suggested retailers were filling supply gaps by purchasing product from other regions, they said, adding the sale of these products was likely illegal as they did not have required regulatory approvals.
Black market trade in ZYN products could also eat into PMI's legitimate sales.
"I don't have any data on what you are saying," Babeau responded, adding the company does everything it can to control the flow of ZYN and to ensure compliance with regulations. "If we knew, we would certainly tackle that," he continued.
Reuters was unable to immediately verify the analysts' claims.
PMI's suspended online ZYN sales in the US in June after it found some flavoured products had been sold in the District of Columbia, where flavoured tobacco products are banned.
