Conference Transcript - PM 2026-09-08

Palav Mithal, Analyst — Barclays

Good morning, everyone. Thank you for being here. I'm Pallav Mithil, head of Global Tobacco at Barclays. I'm thrilled to have Yasek Olchak here with me, CEO of Philip Morris. Thank you so much, Yasek, for giving us this opportunity to host you. We will start with a few comments from Yasek, and then we'll move over to Q&A. Over to you, Yasek.

Jacek Olczak, CEO

Thank you. Thank you for having me. I guess we are recovering from a long weekend, at least in the U.S. So I'm recovering just from a jet lag. So everyone should have a bit of a forgiveness. The standard slide in the beginning, including the forward-looking and cautionary statements, which, as always, we encourage you to read. And earlier today, we issued a press release, revising our full-year guidance for currency only. So now we're cruising at the spot rates the favorable currency impact of about $0.24. We also give an update how we see the currency impact on the Q3 results. So, we're turning into $0.01 at the current spot rate favorable. I mean, there are a few big ticket items, if you like, which are happening this year, at least for a PMI. One is obviously the tax price change situation in Japan. As you remember, the prices, taxes, excise tax went up in April 1. Now we're going into the second stage of a tax increase and a price increase. The prices have been registered by all the main players, including us, so we have a visibility how it's going on. I have to admit that, obviously, in a country when the price is not happening very frequently, the absolute amount of the price increases. I mean, it always creates some shockwaves at the market, at the consumer level, especially that this year we had an asymmetry between a heat-not-burn category and a cigarette category. There is one more excise increase in the near term happening as of April 1. This will touch also cigarettes and a heated tobacco product. But I think so far the market is, category is doing very well, if you consider the magnitude of the changes which the consumers have to go to. So categories resuming to the growth. Obviously, there was some sort of a loading, deloading, pantry loading by consumers level. This whole thing has stabilized what we have seen over the last period before entering into October increase. I think it's all going in the right direction. Okay, there will be for the full year. We're still aiming at the net adjusted basis, IMS growth in Japan. Obviously, at the different levels that we used to have in the past, But I think if the category goes for this magnitude of changes, so April, now October, and the next April price changes, I think it all goes well for the future of the category. As you remember, about a year ago, the category of this year, the category has exceeded 50% volume terms, not value, volume terms of the total nicotine market. The Japanese market is essentially combustible cigarettes in the heated categories. ICOS somehow holds the very high share of the segment, despite the fact that there were different pricing strategies, if you like, or tactics applied by the competition. And ICOS is at the high end of the market, at the premium. But actually, it went very well. So this is an ICOS. The second thing is obviously the U.S. And over the last couple of months, literally two months, As we announced, as we were guiding the market before, we have extended the portfolio of Zyn, our flagship pouch product, into the moist version and the higher nicotine. This goes under the trademark or under the label of Zyn Ultra. In a very short period of time, the market has introduced more than 20 SKUs. So, obviously, there is a massive effort on building a distribution, but also a massive effort to communicate this change to the consumer because, you know, from one day or another in many accounts, All of a sudden, the portfolio rapidly expanded, so consumers have to find out what is this niosyn, both in terms of the nicotine strength, but also the flavors. There was more thing coming into the market as we speak, but our strategy for the U.S. on the pouch market was very clear. We'd like to, you know, obtain a sort of a symmetry in the market, our portfolio versus some other products, some other brands. Also having in mind that, you know, this historical price premium which the Zinn was carrying from the time, which essentially was by far the only player in the market. So despite the fact that we believe Zinn can carry the premium, but we need to adjust the premium to something which is more manageable. So we're doing this also while we're introducing a new product to the market. We're doing a conversion from a 15, which is a traditional pouch, count, can in the U.S. market. We're going to the 20, creating some extra value to the consumers. Jet olive is going to help tremendously. Zen already is helping Zen today, what we see from at least the last period's performance, but very much is going to support the future Zen growth in the market here. So we're very pleased with the developments. Obviously, we are watching carefully the FDA and how this regulatory environment is paying out. We're getting more and more clarity. Are we in the perfect situation? Yes, we are not. Are we happy with what we have today with all the PMTAs, which is in a portfolio has received? Absolutely, yes, because everything adds to our, you know, adds to clarity. You know, we can construct the plans more solidly going forward. Now, on the combustibles, which are doing, you know, the phase value will be better than one could expect from the past. But if you zoom in into which markets, et cetera, the combustible volumes are doing better than expected, I think there is a very strong correlation, the markets which do have some sort of a significant penetration of smoke-free products versus the markets which do not, for very much regulatory reasons, don't enjoy the – or consumers can't enjoy the access to the smoke-free products. So, I mean, clearly these volumes, better combustible volumes are coming mainly from the markets where SFP, smoke-free products are not allowed, are not marketed, are not commercialized. And it somehow also reflects the underlying dynamics, the demographics, et cetera, population growth, GDP, and some other factors which we all know. But having said so, yes, the category is doing a bit better than we thought. You know, it's nothing from our side, nothing wrong with this one, but our focus was on this and will be on the smoke-free product and opening the new markets. And obviously, U.S., which is, you know, a very big, a very great opportunity in front of us, but also the market in which we already have a significant position. and I mentioned Japan, but very much Union, European Union. There's also the pockets of geographies when the unit profitability is more attractive than the rest of the world. And that's from me. I guess you will have some questions.

Palav Mithal, Analyst — Barclays

Sure. That's some very good context, and we will go into the details on ICOS, ZIN, and combustibles one by one. But if you could just start high level, and as ICOS and ZIN and smoke-free penetration continues to increase, What we have seen over the last few years is you have had low double-digit, low-teens EPS growth. Do you think that growth is sustainable over the next few years as you expand in the market?

Jacek Olczak, CEO

That's our mid-term algorithm. I believe it's a very attainable algorithm. Obviously, the quarters may differ, etc., but if you take a bit of a longer outlook for us, I think we can deliver in these ranges. Now, this is all based on the major shift which has happened at PMI over the last good few years. We started the implementation of the smoke-free strategy about 11 years or so ago, as we remember, Japan and Italy. But the very important is that we broke the whole company volumes into the growth, and actually we're shooting for a six consecutive year of a total volume growth. So, you know, I think we started delivering a much better quality of the revenue growth that we used to have when we were very much the combustible cigarette company. We all know the algorithms in the past. There are a few things which we retained, and, you know, the current past and the current performance pros that we still command quite the pricing power, if you like. There is a pretty solid pricing coming from combustible cigarettes year over year. But also there is some pricing coming from smoke-free products, very much from the heated category, heated tobacco products category. Obviously to a different extent because the dynamic is different and the strategy is more into go after penetration, grow the segment, maintain a leadership or establish a leadership position in the segment. So you need to balance the share aspirations, volume growth aspirations, and the price somehow in this equation. But the above categories, combustibles and the smoke-free products, are contributing to the pricing variance in addition to the positive volume. So this is very good. So, you know, if you look down from the top line, the rest is, we know that this is not the extremely capex or cox, if you like, a heavy category. The margins at the gross level are very attractive. And the rest is essentially the reflections of a strategy of, you know, how far we want to go and open or penetrate. As I said earlier, grow the leadership or solidify the leadership in a category. It's very much, if you like, a discretionary marketing type of spend, which depends on the elections we make in a given period, may go up, may go down. So I feel pretty confident that the earnings, the bottom line, is going to grow and we're going to hit our algorithm. but also we don't try to feel that the algorithm is somehow too much of a straight jacket which would impair the company's ability to react to the market situation, opportunities, challenges on a much shorter period of time. And this is how we play this whole thing. I should mention one more thing because I have to talk about the pricing and I spent some time explaining Japan. So, yes, we have this tax increase price, price, sorry, excise driven price increases, high magnitude. Japan has changed the system of the taxations. You know, we call it the equalizations to the CC, but in exchange, the combustible cigarettes. But in exchange, actually, heated tobacco category is gaining now a price productivity, which is equal to the cigarettes. Because in a past system, despite the fact that the category was enjoying lower taxation than a cigarette, the price productivity was actually not very incentivizing the addition of the pricing to your growth mix. So essentially, as of now, the price productivity, essentially it means that for a given unit of the tax changes, we don't have to increase the prices so much. if we increase more is retained to the company.

Palav Mithal, Analyst — Barclays

Right. So going into some of the details and starting with ICOS, clearly it is on top of investors' mind in terms of the growth story. In 26, we have seen a couple of transitory headwinds, call it the flavor ban in Poland, the excise tax increase in Japan, as you were highlighting. So going forward, in the second half of this year and then 2027, Do you think it is fair to assume that you get back to the 15 billion sort of incremental sticks every year? Is that a fair expectation to have?

Jacek Olczak, CEO

Yeah, we try to guide the market more from how we see the total volumes of the company, rather than be very specific. As we know, in many countries, we have now what we call multi-category strategies. We don't stay shy of introducing the electronic cigarette into the ICOS users' portfolio. So I think we feel very positive on a total volume trajectory. Now, ICOS, I mean, they're always in the history of ICOS. We go back again to what has happened over the last 11, 10 years. There were always some heaviness. There were the flavor bans, majority, very much in the European Union. Majority of the countries has gone through this whole thing. I think one of the largest countries when we had the exposure on the flavors was Italy. And yes, Italy went through a couple of months or quarters of a bumpy road. And you look at the growth rates of Italy today. If you wouldn't know that there was a flavor ban, you wouldn't notice this from the volume performance, both for the category and for ICOs. So, you know, Poland is one of the large flavor markets and the last market from the large markets in the EU, which has to go through this transition. I mean, a base what we have observed in other European markets, yes, I mean, there will be some sort of shorter-term headwinds, but I don't think it's going to change the attractiveness of our category in the mid or longer term. Yeah, excise, look, the taxes, we are in the nicotine industry. In the past, we called it just the cigarette, the tobacco industry, but we need to broaden this whole thing. it's not that we like the taxes but the taxes are something which you know doesn't keep me awake for too long in a sense we've seen so many tax changes country by country year after year this is something built into the way we managing the business what we always were saying and I think this is true also in a smoke free category that there is an ability to manage the taxes for the prices as long as they are becoming a sort of a regular event and of some sort of a moderate level of increases. Now, from time to time, you always have one country, one government, which tries to do something unorthodox, And, you know, like Mexico recently, and, you know, you have a period of years of no tax changes, you know, some price changes driven by manufacturers, but no tax changes, and all of a sudden, you know, tax doubles. So, I mean, that's the shocking type of, you know, it's the sticker shock at the consumer level. And then we need to somehow moderate the impact by maybe partially absorbing or maybe taking some prices, some price increases ahead. And I catch up later on. I mentioned Japan again because that's the most recent event with this massive tax changes imposed on a hit-not-beam category. after our pricing which we announced as of October 1 we essentially pass through plus there's a margin improvement in the market so I think we had that capacity and I mentioned how ICOS in the category is performing I think we're going in the right direction the rest of the market is still my numbers are right in quite a significant absorption but we managed through ICOS with ICOS Sorry to pass it through. The headwinds are there. I'm not saying that this is, you know, the waters are flat and they are pretty choppy waters on occasions there, but, you know, we operate on a truly global basis. As always, you have a market which you're having very nice surprises, the market reactions, the fiscal regulator, and there are some markets which, you know, might have some hiccups and we just have to go through this whole thing.

Palav Mithal, Analyst — Barclays

If I can just ask on the Japanese heat-not-burn market, so I think this year you are still expecting the market to grow despite the excess tax environment. And then from next year, tax increases for cigarettes and heat-not-burn will be pretty similar. So do you expect strong growth to return to heat-not-burn ICOS in Japan from next year?

Jacek Olczak, CEO

Well, there will be some volume impact, right? I mean, today we have this misbalance that heated tobacco products took the price, cigarettes today, so obviously cigarettes is the only sourcing, if you like, full of consumers going into the heated tobacco products. So, you know, there is a temporary sort of a price disincentive to go, and instead of paying whatever yen for a pack of cigarettes, I have to pay a bit more for a pack of Terea. Okay, we have a cent here, 50 p.m. lower, but still it's in upper part of the market. But I think all these things should somehow wash out, iron out once we all have – assuming whatever pricing rate will happen in April. But this is the first time that the cigarettes will go up, so I think a consumer thinking will somehow incorporate this into their decisions. What I'm saying is despite the fact that there was this massive imbalance of price increases on heated products compared to cigarettes, and I still see how the category is performing so far. I mean, I'm assuming nothing will be broken in the second part of this year, but then the next year the situation is even better. But from a total overall consumption level, well, I believe the loss of elasticity somehow will kick in. We need to now see how much they're going to impact the heated category versus CC category. But I think, again, from a financial performance perspective, not a volume performance perspective, as Japan has a pretty attractive fiscal multiplier, how much you can retain from a given price increase into the company's margins, I think on the revenue we should be fine.

Palav Mithal, Analyst — Barclays

Before we move into nicotine powder, also just on ICOS Illuma in the U.S. Is there any update in terms of the PMTA timeline? Because last time I think when you were talking to the market you said it was pretty close. Any update on that would be great.

Jacek Olczak, CEO

No, well, I made this in the past public events like this one. I make this not a mistake, but then I was offering a timeline and I was always wrong, so I refrain from referring to any fortune telling with regards to when we can hear when we can get authorization for ILUMA from FDA. I guess the long weekend was also on the federal level so I guess the agency was not working over the long weekend. So let's leave it like this. I think clearly we are in my view we are shorter, sooner than later the file is with FDA for the a long time. I know that there are conversations, discussions with FDA, but until we have PMTA, then you can't do anything. But our focus is on executing the ZIN strategy. I mentioned what we have launched into the market over the last two months. That's quite the impressive portfolio enhancement. We are busy with you know, putting ZIN back on the growth trajectory, recover the share, at least to some extent, and, you know, we're busy with this one. I mean, I, of course, we are ready. We're ready because we have all this international, you know, experience, etc., so it's more the questions as of when we can bring it to the market. I still believe that, you know, heated tobacco products, ICOS in particular as the undisputed global leader has the room to play here. I still confirm that I see over a period of time heated tobacco products can take, say, 10% of the combined cigarettes and the heated product. This is what we see in other markets. So it's not that I am trying to develop here some different unique scenario. I mean, it's essentially the average sort of performance ICOS has achieved if I group all the markets in which ICOS is present today. By the way, I mean, the U.S. is the most developed, if you like, nicotine market. If you take into consideration all the product categories and emanations which you have, Okay, some are so-called illicit, some are illicit. Okay, that's more the issue which is on the regulatory side, very much on a vape to the much, much lesser extent on the pouches because the legal market is more developed, thanks also to some FDA decisions. But I think, you know, when ICOS will come to U.S., I mean, frankly speaking, ICOS will be a category on its own. So I think that the advantage is still in front of this opportunity, still in front of ICOS. I think, you know, whenever we'll get these authorizations, we are ready to go and introduce ICOS, ILUMA, to the market. Remember that we have authorization for ICOS, but due to all of this latency of FDA, etc., The long-lasting process, we ended up in that situation that technology for which we have ICOS version based on the technology which we have the full-fledged authorization and nothing technically stopped us from lunches to the market is the technology which we essentially retired on the international. normally in the consumer good space you would expect the US to be there at par or a step ahead on innovations to the market and now we ended up in a reverse thing for us to be very frank it doesn't make sense to go to the previous ICOs and got it here if we still have in view that ICOs the latest will come by the way ICOs will also not last forever and we're already gearing up for, without disclosing too much of the details, we're gearing up for the next big thing from ICO. So, you know, we cannot afford recycling on a global basis a very past technology and the latest modern technology. So, internally, it's extremely difficult.

Palav Mithal, Analyst — Barclays

So, moving to nicotine pouches and maybe looking at the big picture, I think at Q2 results, you were saying the category growth is 20% to 30%, but when we look at recent data, it has slowed down to mid-teens. How are you looking at the category in terms of the growth rate? In the medium to long term, I'm sure people are focused in the very short term, but in the longer term, how do you think about the growth rates in the category?

Jacek Olczak, CEO

Yeah, so I guess we're looking at the same numbers. So everyone is torturing Nielsen and the similar numbers left, right, and center. I still believe that, you know, the category is growing 20-plus percent. Now, the few weeks of the trend doesn't really, I think, changes the fundamentals. You could see more products coming to the market. I talk about other brands, but I guess, well, I know there are some other introductions into the market. Market, pouch market, unlike, unfortunately, The evade market is not competing with this massive so-called illicit product, very much because the legal part of the market is well-developed. Products are being introduced on the ladder of the nicotine strength to the upper end and to the lower end. So I think there's more choices for the consumers and some flavors as well. So the market is pretty well-structured. The second thing is, if we're looking continuously on the sourcing to the category, I mean, the U.S. has the three pretty sizable pools of sourcing, which I think are fueling or supporting the category growth. One is something which is obvious, which is other oral tobacco products, not maybe the largest category, but still existing here. and this on its own gives the support to the growth. But we know that the e-vape users and obviously combustible cigarette users are coming to the category. What is different is that each of these sourcing groups of consumers will come with a different pattern of consumption. So obviously for people who are coming from the oral tobacco categories, I mean, they will try to convert into pouches at the higher daily consumption rate, right? So the consumer, if you like switching from oral going to the pouches, will give you more support into the unit volumes. Vape and the cigarettes will tend to incorporate pouches as a part of the daily repertoire. And now is the whole journey, how quickly they will, you know, starting with one or two pouches per day, how quickly over a period of time they will go to six, seven, or maybe more even pouches per day. I mean, the only reference point which we have at this stage, which, you know, doesn't matter if it's a strong or weak point, but it's the only point which we have is the daily consumption in Sweden. Okay, but how Sweden can be replicated in the U.S., we don't know. But this is the only data point, right, which the whole industry, that the market has, which is well, well above what you have today on the daily consumption scheme. So again, to sum it up, I still believe it's a strong 20-plus percent growth of the category. Yes, on a week or whatever, a shorter period, it may look like a slowdown or acceleration. I'm not that much overly excited. I think the overall category has the future for a variety of reasons. Okay, the only bottleneck of headwind, if you like, to the category is that it's an extremely different ritual from an inhalation product. It doesn't matter if it's smoke-free or combustible. People have to, consumers have to, you know, adjust. But in exchange, they're essentially receiving much, much less restricted freedom of the usage of the product, which I believe is very important, you know, for the consumers of our category. Now, this takes time. And price is very attractive compared to the other categories in the market. So this is not an affordability, if you like, per se challenge. So I think future, the longer-term future of the oral category, I mean, it's absolutely great. What will happen in a shorter term, I mean, the variety of different factors which can play the role.

Palav Mithal, Analyst — Barclays

Just on Ultra, I mean, it's been now two to three months since you launched. Anything that you can add in terms of the incremental growth that it is providing and any cannibalization of the flagship Zin brand?

Jacek Olczak, CEO

Yeah, it's two months, but the Zimetum is a new product in the market. As I said, 20-plus ISC users went into the market. You need to build the distributions, put it on a shelf, and most importantly is that unlike a classical portfolio development and that every period or so consumer is noticing that there is one or two more SQUs coming into the market. It's 20-plus SQUs. It's quite a lot to absorb. Ultra is delivering, as we have been assuming, in a sense this gap above the 6 mg. Then we force inflation. We used to call it flagship, but this isn't flagship. It's 3 and 6 milligrams. Now we're going to the 9 and 11. There will be other additions. We're also looking into extending the portfolio to 1 and 1⁄2 milligrams. So I think now the spectrum of nicotine strength, you know, will be both addressing the people who are coming to the category because they tend to, obviously, most of them, tend to rather go with the lower nicotine strength. And once they're increasing their daily consumptions and being more familiar with how to use the pouch, they will trend to go up. We also see that some people are going up with a nicotine in another period of time. If their consumption changes, they're increasing the number of units per day. They will try to go down with the nicotine. So I think the Ultra was worth receiving. We also have extended for the flagship. We added a few flavors, which is somehow, I call it the whole strategy, brings into the symmetry as much as possible towards the dynamics in the marketplace. I mean, it starts yielding results. When there is this component, which we're also addressing as we speak, which is this price premium and a conversion from $15 to $20, creating that value to the consumer, which I think should be another nice tailwind, if you like, to the ZIN performance. So the majority of the things which we are doing post-FDA now authorization, I mean, we have strings in our hand, and we can start pulling them accordingly. So there is the increased investment behind the ZIN. Ah, by the way, we also start, we launch now the ZIN campaign when it clicks. So we also try to add to the classical support of a brand for the promotional type of events very much at the store level. We're also trying to add more emotional brand-building components into this whole thing. So it is all obviously calls for the increased investment in this period of time in the U.S., and this is what is happening. It's going to happen in the second half of the year, but it is all baked into the guidance, et cetera, which we have given to the market.

Palav Mithal, Analyst — Barclays

Just quickly on combustible, which is still 60% of the business, and in your comments you highlighted robust volumes over the last few years in Europe and then in some other emerging markets, Turkey, Egypt, Indonesia. Any particular markets that you would call out as we look into 2027?

Jacek Olczak, CEO

Look, there are still a lot of, if you like, the white spaces in a sense that, you know, category is not allowed. It's not only heat not burn, but the sizable market size, meaning, you know, the underlying size of a combustible business. There's obviously India, there's obviously Turkey, there's obviously Vietnam, and there are many others. We're, you know, successful in opening the markets, very pleased with the performance in Taiwan. volume size it is much smaller market financially from the unit economics margin profiles etc extremely attractive and Taiwan for us was this great opportunity that we had a very small presence in a combustible business so we also don't have this additional sort of a headwind for the cannibalizing cigarettes while going to SSP but it's doing very well we have a few months ago open Argentina also a very attractive market obviously the margin profile is different than Taiwan but white space is white space but these large markets like Turkey India, Vietnam obviously it's China but let's leave China aside this is in front of us now from white spaces if I take the size of the market unit, economics, etc By far, I mean, most of our attention is on the U.S. And we are in these unique situations that unlike companies are going from the U.S. and are trying to search for a growth in some other markets outside. I mean, in the case of a PMI, we have this particular case that we have a growth on international, but unaddressed till today opportunity to a large extent is the U.S., which is by far in the nicotine space, not only, but in the nicotine space, is the most profitable from a unit perspective, but from the absolute size perspective is the most attractive. So obviously we're assuming that the U.S. is and will be a significant contributor to the growth of PMI.

Palav Mithal, Analyst — Barclays

Right. And just quickly on capital allocation. So on our estimates, you are approaching your leverage target of around 2x by the end of this year. So in terms of your capital allocation priorities, is the share repurchase mix in your list for 2027?

Jacek Olczak, CEO

Yeah, I mean, look, the focus near term, we'll have discussions with the board. I think the focus will be, well, not that I think, I know the focus will be on the dividend. And then shortly after that, I guess, we'll start having conversations about the buyback. What brought us, I mean, absolutely, we delivered the company for the acquisition, etc., but we also entered the territory, which some of you may remember. There was, unfortunately, but it was a period in the PMI performance when underlying business on the underlying basis was doing, my view, extremely well. But unfortunately, because of our exposure to all the different currencies and a continuous strength of the dollar, this was eroding on a reported basis a big chunk of our profitability. And this obviously sent some shockwaves, which also we had to adjust our capital allocations in the past and stop the buyback, et cetera, in order to protect dividends. We've been very clear to the market that dividends for us is by far the highest priority when it comes to returning cash to shareholders. And obviously, absent any other ideas what to invest into, what behind, and I'm not talking OPEX, U.S., etc., because this is absolutely manageable for us. I mean, yes, the buyback is like the next page of the conversations, what we do and at which moment and how much, etc. But nothing for me to confirm or to announce today. But the dividend is the most preferred form of a returning dividend and dividend growth, obviously, the most preferred way of returning cash to shareholders. Right.

Palav Mithal, Analyst — Barclays

I think we are running out of time, so we will call it a day here. Thank you so much, Yasek, for giving us this opportunity.

Jacek Olczak, CEO

Thank you.