Philip Morris International Inc
NYSE:PM
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Philip Morris International Inc
Earnings Call Analysis
Q1-2024 Analysis
Philip Morris International Inc
Philip Morris International (PMI) commenced 2024 with a robust performance, surpassing expectations across key financial metrics. The company witnessed double-digit growth in organic net revenue and operating income, along with a 25% increase in smoke-free net revenues and a 38% rise in gross profit. Central to this momentum were the strong performances of IQOS and ZYN.
IQOS, PMI's flagship smoke-free product, experienced significant growth, with adjusted in-market sales volumes rising by 13% and shipments increasing by 21%. The IQOS ILUMA, now available in 64 markets, accounted for nearly all of these volumes outside of Russia. ZYN also showed remarkable progress, with U.S. volumes up by 80%. This broad-based momentum translated into strong shipment volume growth of 3.6%, fueling organic top-line growth of 8.6% when factoring in currency effects.
Despite facing currency headwinds, notably due to the devaluation of the Egyptian pound, PMI implemented effective pricing strategies and cost-saving measures. These actions helped offset the negative currency impacts and allowed the company to deliver an adjusted diluted EPS of $1.50, marking a 23.2% growth, even after accounting for a $0.20 unfavorable currency impact.
PMI's commitment to transforming into a predominantly smoke-free company is evident. With ILUMA leading the charge, PMI's HTUs have solidified their status as the second-largest nicotine brand in their respective markets, exceeding a 10% market share in key regions. The expansion of the ZYN oral nicotine portfolio, which saw a 35.8% increase in shipment volumes, further highlights PMI's strategic pivot towards smoke-free products.
Reflecting the strong start and positive business dynamics, PMI has revised its full-year guidance. The company now forecasts a 7% to 8.5% organic net revenue growth, with operating income expected to grow by 10% to 12%. Adjusted diluted EPS is set to increase by 9% to 11%, translating into a range of $6.19 to $6.31, despite an anticipated $0.36 currency impact.
PMI continues to invest in innovation and market expansion. The successful launch of new variants like Terrier in Japan and the global rollout of the IQOS ILUMA system exemplify PMI's focus on expanding its smoke-free product portfolio. This strategy aligns with the company's goal of achieving $15 billion in smoke-free net revenue by the end of 2024.
PMI remains steadfast in its sustainability efforts, seamlessly integrating its transformation strategy with long-term value creation goals. The company's commitment to responsible marketing, reducing environmental impact, and improving supply chain quality of life are key components of its journey towards becoming smoke-free by 2030.
With a strong foundation laid in Q1 2024, PMI is poised for a year of accelerated growth and innovation. The company's strategic emphasis on smoke-free products, coupled with effective financial management, positions it well to navigate market challenges and deliver sustained shareholder value.
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Good day, and thank you for standing by. Welcome to the Philip Morris International 2024 First Quarter Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, James Bushnell, Vice President of Investor Relations. Please go ahead.
Welcome. Thank you for joining us. Earlier today, we issued a press release containing detailed information on our 2024 1st quarter results. The press release is available on our website at pmi.com -- items, including the definition for smoke-free products as well as adjustments, other calculations and reconciliations to the most directly comparable U.S. GAAP measures for non-GAAP financial measures cited in this presentation are available in Exhibit 99.2 to the company's Form 8-K dated April 23, 2024. and on our Investor Relations website.
Today's remarks contain forward-looking statements and projections of future results. I direct your attention to the forward-looking and cautionary statements disclosure in today's presentation and press release for a review of the various factors that could cause actual results to differ materially from projections or forward-looking statements. I'm joined today by Emmanuel Babeau, Chief Financial Officer; and Jennifer Motles, Chief Sustainability Officer. Over to you, Emmanuel.
Thank you, James, and welcome, everyone. In Q1, we delivered outstanding performance that exceeded our expectations with double-digit growth in organic net revenue and operating income as well as currency-neutral adjusted diluted earnings per share, all supported by robust volume growth. Excellent smoke-free business momentum continues with plus 25% organic growth in net revenues and plus 38% in gross profit as IQOS operating leverage and ZYN contribute positively. IQOS continues to advance rapidly, with growth of plus 13% in adjusted in-market sales volumes and plus 21% in shipment. IQOS ILUMA is a key driver of this progress now available in 64 markets, representing nearly 100% of IQOS volumes outside Russia.
ZYN also continued its considerable growth in with U.S. volumes up plus 80%. Importantly, this top line performance translated into strong operating income growth and margin expansion both organically and in dollar terms. This was notably driven by accelerating profitability in both our IQOS and ZYN businesses in addition to improving combustible performance. We faced higher-than-expected currency headwinds in the quarter, primarily due to the devaluation of the Egyptian pound. We are taking mitigating actions including additional pricing and accelerated cost initiatives, which allowed us to deliver Q1 adjusted diluted EPS above our prior expectation despite these pressures. While the prior year quarter was favorable for certain growth comparison, this exceptional start to the year set the stage for us to deliver significantly better-than-expected 2024 currency-neutral growth and robust growth in U.S. dollar at prevailing rates.
Turning to the headline numbers. Very good shipment volume growth of plus 3.6% supported organic top line growth of plus 11 or plus 8.6%, including currency. This reflects continued excellent IQOS and ZYN momentum as well as strong combustible pricing. Operating income grew by plus 22.2% organically versus a softer prior year quarter, notably driven by gross margin expansion and a deceleration in SG&A growth.
As a result, our organic OI margin expanded by plus 3.7 percentage points. In dollar terms, adjusted OI grew by plus 11.3% and adjusted OI margin expanded by 90 basis points. We outperformed our Q1 adjusted EPS outlook due to 3 main factors: the first is the net revenue and profit impact of better volumes following the industry-leading performance of ZYN, the strong shipment growth of IQOS HTUs including some higher-than-expected time benefit and a resilient combustible delivery. Second is the benefit of our pricing action to mitigate currency headwinds. And third is on costs, including some timing benefit and a step up focus on manufacturing and back-office efficiencies to prioritize growth investments.
The majority of the outperformance was driven by underlying business dynamic which bodes well for the remainder of the year. Indeed, we delivered adjusted diluted earnings per share of $1.50, representing plus 23.2% growth excluding an unfavorable currency impact of $0.20. This includes $0.09 from the devaluation of the Egyptian pound, including a transactional impact of $0.06 primarily related to the balance sheet remeasurement of foreign currency payable. With increased liquidity in the Egyptian pound, we are now reducing our balance sheet exposure and this should be complete in the coming weeks.
Focusing now on volumes. Our Q1 HTU shipments of 33.1 billion units exceeded our outlook with robust underlying growth across geographies and higher-than-anticipated timing impact of shipments to Japan. The incremental trading impact was around 1 billion units and was primarily related to resi disruption. While uncertain, we assume this will normalize in the second half of the year. As mentioned previously, we believe the best indicator of underlying HTU growth is adjusted in-market sales as the closest metric to consumer offtake. Adjusted IMS volume grew nicely by plus 12.5%, including the expected impact from the characterizing flavor ban in Europe. We continue to see strong IQOS momentum with excellent growth in Japan, robust underlying fundamentals in Europe and a growing contribution from newer markets, such as Indonesia.
We continue to target plus 14% to plus 16% adjusted IMS growth for the year, with around plus 10% growth in Q2 followed by an H2 acceleration driven by the timing of commercial programs, ILUMA uptake, newer market and a less demanding prior year comparison. Total smoke-free volume growth of plus 22% and includes the impressive expansion of our oral smokefree portfolio, powered by ZYN, with pouch equivalent shipment volumes up by plus 35.8%. U.S. ZYN shipments grew by plus 80% to 132 million cans. Cigarette achievements declined by a modest 0.4% in the first quarter with a notable positive contribution from Turkey as we increased share in a strong overall market.
Let me now walk through the drivers of our Q1 net revenues. As I mentioned, volume grew by a remarkable plus 3.6%, including oral. Pricing contributed plus 5.5 points of growth, primarily from combustible as well as pricing of around plus 3% on HTUs. Smokefree category mix added plus 3.1 percentage points to the top line, reflecting the higher net revenue per unit of IQOS and to an even greater extent ZYN. Oral smokefree product overall boosted our organic net revenue growth by plus 2.2 points, showcasing its role as a meaningful accelerator.
To report a positive contribution from our e-vapor business, which was still small in the context of the group, delivered good revenue growth. In 2023, there was a negative geographic mix within our combustible business, oral margin market, smoke-free product, grew faster and smoke-free product accelerated cigarette decline elsewhere. The positive economic impact of smoke-free product and pricing are the 3 enduring engines for our transformation and growth.
Focusing now on the key dynamics of our Q1 profit delivery smoke-free gross profit grew by an impressive plus 38% organically and top line growth of plus 25%. This reflects the very strong performance of U.S. ZYN and the growth and scale effect of IQOS, including manufacturing productivity. This strong underlying acceleration was amplified by only a few percentage points due to HTU shipment phasing. Gross margin expanded substantially for both it not burn and oral nicotine and by a striking plus is 100 basis points organically for smoke-free overall, which made up close to 39% of total gross profit, an increase of plus 6 percentage points versus prior year.
Combustible organic gross profit growth was notably improved and exceeded our expectation at plus 2.3%. Gross margins were also better than anticipated, leading to an improved full year outlook. Resilient volumes, strong pricing and manufacturing productivity more than offset the continued cost pressure in the category, geographic mix and the impact of IQOS cannibalization. As previously flagged, cost increases in leaf, wages and certain other inputs carried over into 2024 and this should ease next year.
We were also impacted by around $30 million of cost from implementation of the EU single-use plastic directive, primarily on cigarettes. A key feature of Q1 was strong operating income margin expansion. Gross margin increased organically by 150 basis points and by 80 basis points, including currency. This reflects excellent expansion within smoke-free product their growing weight within our business at higher margin and better-than-expected evolution of combustible. These factors, combined with productivity savings significantly outweighed the unfavorable technical dilutive impact of third-party manufacturing in Indonesia, which equated to 30 basis points in the quarter. For SG&A cost, currency-neutral growth of only plus 1.4 drove plus 220 basis points of organic margin expansion. This benefited from our resource allocation and prioritization programs, including the delivery of approximately $160 million in gross cost efficiency across COGS and SG&A towards our $2 billion target for 2024, 2026.
Although the Q1 margin impact of SG&A cost evolution, including currency, was small due notably to Egyptian pound transactional currency. We continue to target SG&A progression below top line growth for the year. We expect higher organic SG&A increases in the remainder of 2024, notably reflecting investment spend phasing, which was favorable in Q1. Combination of these factors powered a remarkable plus 370 basis point expansion in our organic operating income margin. and plus 90 basis points, including currency. This exceeded our expectation, and we are now raising our full year operating income growth outlook as I will come back to.
Taking another lens on adjusted operating income margin by geography. We see broad-based global momentum with all regions delivering strong organic progress. In dollar terms, margin expanded in every region, except South and Southeast Asia, CIS and Middle East Africa region, mainly reflecting the transactional currency impact of the Egyptian pound and the technical dilution in Indonesia -- these factors, this region grew margin at a very similar rate to the group.
Two IQOS. With ILUMA now widely launched, PMI HTUs continue to strengthen their position as the second largest nicotine brand in markets where IQOS is present. PMI HTUs now exceed the 10% market share milestone on the prior basis, excluding Indonesia, which we now include following broader commercialization in the market. Our HTUs are the #1 nicotine brand in 11 markets and as shown at CAGNY IQOS net revenues have surpassed those of Marlboro.
Focusing on IQOS in Europe. Q1 HTU share increased by plus 09 points. also crossing the 10% regional share milestone for the first time. While still early in many markets, the growing availability and uptake of ILUMA is a key driver, and we are seeing a strong acceleration in a number of historically slower growth markets. Adjusted IMS volumes continued to exhibit robust sequential growth and reached a record high of 12.6 billion units on the 4-quarter moving average. This reflects a year-on-year progression of plus 9.4% in Q1 with excellent growth in Greece, Tugal, Germany, Spain, U.K. and the Netherlands. Growth was slower in certain Central European markets such as Poland and Czech Republic, where increased economic pressure and price sensitivity are visible. We continue to evolve our portfolio in this market under the recently launched ILUMA systems to drive further growth.
Excluding Ukraine, where growth was absent adjusted in-market sales grew double digit. As anticipated, the 11 markets, so far affected by EU characterizing flavor restriction saw an impact in line with our total regional estimate of around CHF 2 billion for the year. Consistent with similar past situation, we observed an initial consumer adjustment followed by a reversion of growth rates to previous loans. We have not seen meaningful shifts towards e-vapor or competitor is not 1 product. And we expect the structural growth of IQOS to fuel continued HTU progression over the rest of the year.
The strong fundamental progress in the region is highlighted by the expansion in key city of tech shares. Very strong gains in cities with already high IQOS adoptions such as Lisbon, Iceland and Budapest demonstrate the potential for further growth at the national level. Consistent acceleration in London, Madrid, Munich and Amsterdam is also very promising for the IQOS brand in this market and for Europe overall. In Japan, the adjusted total tobacco share for our HTU brands increased by an excellent plus 3.1 points to 29.3%. Adjusted IMS volumes increased by plus 13%, maintaining the rapid progress of recent quarters. Such impressive growth in the market with already high category penetration is a clear testament to the sustainable growth potential of IQOS around the world.
In connection with IQOS strong brand equity and commercial footprint, we are fostering growth through continued innovation on both devices and consumables. In March, we launched the latest IQOS device ILUMA i in direct channels with national expansion ongoing. We remain laser focused on innovation. Our innovation in consumables has included a number of new variants and test experiences on the premium Terrier brand. As shown by the offtake data on this chart, this has helped Terrier to continue growing Japan share at the same time as mainstream price sent. This successful strategy of broadening consumer appeal with different price tiers while reinforcing and growing the premium lineup is a good illustration of how our IQOS business is evolving across market as the category continues to grow.
The potential of the category is clearly demonstrated by the performance in Tokyo as shared at CAGNY it not ban category volumes surpassed combustible in January and have continued to grow since then. Led by Japan and Korea, the East Asia and Australia region reached almost 2/3 smoke-free net revenue in Q1. While somewhat flattered by shipment timing, this clearly demonstrates the path forward for the broader company as we strive towards our ambition of becoming substantially smoke-free surpassing 2/3 by 2030.
Outside of Japan and Europe, we continue to see very promising IQOS growth across the globe, including low and middle income market, as highlighted by TCT offtake shares. Notable call out in Indonesia, where we have expanded commercialization to targeted areas in New City and introduced -- variant catering to preferences. We have witnessed an uplift in user growth and now have over 150,000 estimated IQOS users in the country. Our city of tech share in Jakarta is 1 indicator of this with plus 1.6 percentage point growth to 3.4% in a growing total industry.
We are also pleased to report the re-acceleration of IQOS growth in South Korea, following the introduction of ILUMA, Teria recently became the #1 HTU brand as measured by National sister offtake and in Seoul, IQOS market share grew by 1.8 points to 12.8%. Egypt continued to stand out with -- offtake share up plus 1.3 to 9.1%. And despite recent pricing, and we also see promising results in Malaysia, Morocco, Lebanon and the Balkans. While not shown on this slide, Saudi Arabia also had a promising restart with Q1 national offtake share of 1.3% following the resumption of IQOS commercialization in late 2023.
In a similar vein to some of our European markets, the novable launch of ILUMA in Canada has coincided with an acceleration in key city growth as shown here by Toronto. While still early days for ILUMA and in a very restrictive regulatory environment, this is clearly a positive development. Moving now to ZYN, where excellent U.S. progress continued in Q1 with plus 70% sequential growth in 12 months rolling shipments. Impressively, category volume share grew for the fourth consecutive quarter to 74.3%, an increase of plus 6.9 points year-on-year and plus 1.3 points sequentially despite a $0.15 per ton price increase in March.
Retail value share also grew to 79.3%, highlighting ZYN's premium positioning and superior brand equity. This accelerated growth again reflect a broad step-up in nationwide store velocities and gradual distribution expansion as the category gained strong traction with adult nicotine users. As outlined at CAGNY, we remain focused on marketing ZYN responsibly to prevent unintended use. We support the FDA's effort to ensure only consumer over 21 have access to nicotine product. Swedish Match follows a robust U.S. marketing code that prohibit using social media influencer, age-gated digital platform to 21 plus and includes partnering with -- to help ensure retail sales only to legal age adults.
I'd like to spend a moment now on combustibles, where our portfolio delivered a robust organic net revenue growth of plus 3.7% in Q1. This primarily reflect better-than-expected pricing of plus 7.9% with a notable contribution from Germany and stepped up pricing in Egypt. The pricing environment remains favorable, and we now forecast a full year increase of plus 6% to plus 7% with annualization effect lessening in H2. Our cigar category share grew by plus 0.3 points in Q1, and this includes positive contribution from Algeria, Poland and Turkey resulting in only a modest volume decline in the total cigarette industry, which fell by 0.6%.
Our global brands gained category share during the quarter with Marlboro gaining plus 0.4 points. As previously flagged, our 2023 share of segment was flattered by a competitor supply constraints in Egypt, which may normalize this year. As I already mentioned, strong pricing in Q1, coupled with accelerated manufacturing productivity also resulted in a better-than-expected margin evolution. Now let me provide an update on our latest innovation and expansion plans as we further accelerate our Smokefree transformation.
As I covered earlier, we recently launched IQOS ILUMA i, our most innovative offering to date in Japan. The ILUMA I portfolio consists of 3 devices, offering a range of adaptable new features. This includes the new touch screen on the device order, which allows users to see experienced relevant information quickly and easily as well as the pause mode, so user can pause and resume their smoke-free moment where they left off. Initial consumer feedback has been very positive. Japan was the first market to launch ILUMA in H2 2021, and we plan to gradually roll out ILUMA i to more geographies over time. As shown in our Japan and Indonesia performance, consumable innovation on the ILUMA platform is also critical as we broaden offering a credit.
Livia HTUs, which contain nicotine, but no tobacco leaf, were launched nationwide in the Czech Republic and Romania in Q1 with promising initial results. More markets are planned later this year. Delia, our new mainstream price brand for HTUs was rolled out in Switzerland, Hungary and - In the U.S., we continue to prepare for the first consumer pilot in select cities with the IQOS 3 system. As mentioned previously, the commercialization will be initially limited in scope and will be focused on direct activation of select legal edge nicotine users in a few cities allowing us to experiment with different elements of the commercial model.
The main purpose of this consumer activation is to fine-tune our approach in anticipation of the at-scale launch of IQOS ILUMA, following authorization from the FDA. The international expansion of nicotine pouches remain a key focus, notably for ZYN, as the world's leading brand. We have launched or relaunched in 11 markets so far with more planned later this year. In e-vapor, our focused strategy for VEEV is showing very good early results. Positive consumer feedback is translating into promising repeat purchase and conversion rate, and we are on a path to profitability in H2.
This brings me to our outlook for 2024. With unparalleled smoke-free volume momentum, best-in-class pricing and expanding margin we are raising our full year currency-neutral growth forecast. This strong pricing combined with positive more mix and efficient cost allocation also helps us to mitigate currency headwinds and should allow us at prevailing rates to deliver on our objective of robust growth in dollar terms.
Given continued in volume progress, we are increasing our U.S. shipment forecast to around 516 million cans. We have further accelerated our capacity expansion plans to support this additional step up. We continue to target strong growth in both adjusted IMS and shipments of IQOS HTUs and to reach close to $15 billion in 2024 smoke-free net revenue at prevailing exchange rate.
Factoring the increase in shipment forecast and a strong pricing outlook on both combustible and smoke-free product we are increasing our organic net revenue growth forecast to plus 7% to plus 8.5%. In addition to higher revenue growth, we expect accelerated organic margin expansion. This is strongly driven by a significant expected uplift in our smoke-free gross margin due to IQOS scale effect, ZYN mix and accelerated manufacturing productivities. It also includes organic gross margin expansion in combustible, where we had previously assumed a negative development. In addition, we are focused on delivering further SG&A efficiency while continuing to invest in smoke-free growth. As a result, we are raising our organic operating income growth forecast to plus 10% to plus 12%.
Accordingly, we are raising our forecast currency-neutral adjusted diluted EPS growth to plus 9% to plus 11%. This translates into an adjusted diluted EPS range of $6.19 to $6.31 and including an unfavorable currency impact of $0.36 at prevailing rate. The increased forecast headwind is primarily explained by the devaluation of the Egyptian pound and recent weakness in the Japanese yen. As I mentioned, we are taking proactive actions to mitigate the incremental impact. We expect full year growth and operating income margin expansion in both organic and dollar terms at prevailing exchange rates.
This includes organic expansion in both H1 and H2. After the excellent Q1 performance, we expect a strong H1 overall with organic net revenue and/or growth around the high end of our full year ranges. For Q2 specifically, we assume HTU shipment volume of 34 million to 35 billion and continued strong volume growth for ZYN. We forecast currency-neutral adjusted diluted EPS of $1.50 to $1.55, including an unfavorable currency variances of $0.14 at prevailing rates. With regard to our balance sheet, deleveraging remains a key priority. We continue to target a 0.3 to 0.5x improvement in our net debt to adjusted EBITDA ratio in 2024 driven by profit growth and strong cash flow generation.
We also continue to target reaching around 2x by the end of 2026 and will consider buybacks once confirmed we are on track. Switching gears. As this quarter coincides with the publication of our 2023 integrated report, I would like to welcome Jennifer Motles, PMI Chief Sustainability Officer to share an update on our sustainability progress. Jennifer, over to you.
Thank you, Emmanuel. I'm very pleased to be joining today's earnings call. As Emmanuel mentioned, our sustainability, transformation and business strategies are one and the same. We are focused on creating value for the long term, we're generating shareholder returns requires us to deliver on transformation and delivering on transformation requires us to deliver on sustainability. As shown in our recent results, our product transformation fosters profitable growth and short, medium and long-term value creation. However, our transformation also means reshaping both our value chain and how we engage with society. As we venture into new product categories, we actively collaborate with different stakeholders and advocate for regulatory frameworks that can accelerate industry change and end smoking.
Business transformation is a company-specific journey with sustainability reporting standards and frameworks often fail to adequately capture. To help illustrate our progress towards achieving our smoke-free purpose, we regularly report our business transformation metric, a bespoke set of financial and nonfinancial KPIs. Some of them were already presented by Emmanuel in our financial results. Others, you can see here. For example, the growing proportion of commercial and R&D spend on smoke-free products demonstrates the allocation of resources away from our legacy business and towards replacing cigarettes with better alternatives.
As another example, increasing the availability and access of adult smokers around the world to smoke-free products are 2 key pillars of achieving this replacement as our geographic expansion continues, low and middle income market now make up 47% of our market presence. These metrics, together with our overall performance for 2023, can be latest integrated report published last month and available on our website. It is a comprehensive document covering our most important sustainability topics, starting with our products. The report highlights progress on our continued expansion of smoke-free alternatives across categories and geographies. as well as social and environmental to the progress, which and in parallel to these products in support of sustainable value creation.
This includes responsible marketing and sales practices, use -- and efforts to reduce post-consumer. Further, it highlights our progress on improving quality of life of people in our supply chain, decarbonizing our operations and value chains and preserving nature. We're also very pleased with the continued recognition of our sustainability performance and our robust reporting. To highlight just a few from 2023 PMI was included in the Dow Jones Sustainability World Index for the first time and for the fourth year in the DGSI North America.
In addition, PMI was the only U.S. company to obtain a AAA rating from CDP, more than 20,000 companies worldwide participated in this rating and only 10 obtained this prestigious recognition. Notably for investors in parts of Europe, but also in ESG or sustainability team funds in the U.S., we are subject to sector exclusion policies because we're a tobacco company. It is clear that excluding companies or sectors from the consideration set, does nothing to address the underlying reasons for the exclusion, which, in our case, would be the harm linked to combustible tobacco use. Many funds that may be excluding tobacco on ESG considerations, we'll still own stocks in other consumer sectors.
Despite many of these companies not having comparable harm reduction strategies in place to address the impacts of their product. As we transform our company away from combustible and work to end smoking at a societal level, we welcome the engagement and challenge investors to help us accelerate this critical shift. Thank you. I'll now turn it back to Emmanuel.
Thank you, Jennifer. I will conclude today's presentation with some key messages. Our excellent IQOS and ZYN volume momentum, best-in-class pricing, positive category mix and step-up cost efficacy puts us on track for a strong 2020 with accelerated top line growth and margin expansion. Following an exceptional and better-than-expected start to the year, we have raised our full year currency-neutral growth forecast. Critically, we are also focused on delivering performance in dollars. We are taking measures to mitigate currency headwind through pricing, accelerated manufacturing productivity and judicious resource allocation to prioritize growth event.
Our 2024 outlook places us firmly on track to deliver our 2024-2026 CAGR targets. Beyond 2026, we have further exciting opportunity to grow our smoke-free business as we progress towards our ambition of being substantially smoke-free by 2030. Finally and importantly, our strong growth outlook and highly cash-generative business underpins our ability to deleverage while maintaining a steadfast commitment to our progressive dividend policy. We look forward to further rewarding our shareholders as our transformation delivers sustainable growth. Thank you, and we are now very happy to answer your questions.
[Operator Instructions] Our first question comes from Matt Smith with Stifel.
If we start -- the first quarter, it was a strong start to the year. You noted a better revenue and margin performance supporting your ability to raise the outlook for both organic revenue and constant currency EPS. From a high level, on a constant currency basis, the first quarter EPS was about $0.20 ahead of your 1Q guidance. And you raised the full year outlook somewhat below that. Can you talk about unique benefits in the first quarter that may have changed the timing through the year? Or how are you viewing the rest of the year different now in terms of the fundamental environment or investment level?
Sure, Matt. Happy to explain why some of the bids, but on part of it, of course, because we started as I explained in my prepared remarks, the year in a very strong manner in an underlying manner. But in addition to the very strong momentum that we are experiencing, indeed, there was around an additional 1 billion HTU stick because of RESI. So that has been a plus in Q1, and we expect to reverse later in the year for the time being. So that's 1 element that is important. .
We may have been helped a bit by some volumes on combustible, but it's probably more marginal. And at the scale of the combustible business, it's probably smaller. And then the other element, of course, is the SG&A evolution, organically, 1.4% increase only. We want to grow organically revenue faster than SG&A. But of course, we will have the 10 points of difference that we've been experiencing in Q1. So that will also reverse partially in the rest of the year as we are coming with some phasing on commercial actions and marketing, advertising later in the year and starting in Q2, where we will have more SG&A. So I think that with that, you have the key element that have been adding to what was, as I said, a very strong momentum anyway in Q1.
Next question comes from Bonnie Herzog with Goldman Sachs.
All right. Emmanuel, I wanted to maybe ask for a little bit of more color on a point you made about or at the end of your script regarding currency headwinds and how you're hoping to mitigate these headwinds. You highlighted pricing and productivity savings, et cetera. So maybe just provide a little bit more color on those, I guess, levers if you can pull them in maybe why you're more optimistic going forward given the never-ending currency headwinds since it continues to impact your business, I think that would be helpful.
Sure, Bonnie. Happy to share our view and what we're doing on that one. So we said it at the beginning of the year, and then we're at CAGNY, we want to deliver performance in dollar terms. And therefore, that means that even when we have another significant ForEx headwind and some of that, I mean, we have in Q1, actually $0.06 coming from the Egyptian pound that won't be there next year. So that's not something that's going to stay with us. So it's a kind of one-off negative impact, but we want to deliver robust growth in the large term.
So in order to deliver that we have 2 big levers, I would say. The 1 is on price. And to be clear, when I look about price It's, of course, in the countries where we can see some devaluation, but not only. It's really across the board how can we push the boundaries and push it to the maximum of the limit the price increase? Well, we think that we're doing in a way that is not necessarily taking a big risk on market share, but we are clearly here and notably on combustible pushing on price increase. So that's something that we can do that is taking into account a certain economic environment.
And in the current environment, we are doing what we think is optimized and the best we can. Of course, if there was some more depreciation, more devaluation, we would -- we consider whether more can be done. And then on productivity and on cost efficiency, that means really accelerating everything we can do on productivity, and we are working across the board It's, of course, on procurement, it's on optimizing the manufacturing teens. It's on logistics. I mean it's on everything where we can generate extra savings and playing with this environment of a strong dollar.
And then on cost allocation. I mean, of course, we are working permanently as part of our $2 billion saving program on plans to be simpler, to generate efficiency, to work in a more efficient manner. So we do that, we try to accelerate that here again, we're trying to do things faster. And we are also making sure that when it comes to investment allocation, we really prioritize on what is having the biggest and strongest than, I would say, clearest return, which is allowing us to also generate some profitability improvement to partially offset the negative ForEx.
So that's really everything that -- all the actions that we are doing. We're not saying we can offset any kind of course of ForEx environment. But I think our Q1 numbers and the outlook for the year is showing that we have some good capacity to mitigate to a very significant extent, the ForEx impact.
Okay. That is helpful. And then I just had a quick question, if I may, on ZYN. We're actually hearing about some out of stocks in the U.S. from our industry trade contacts. So maybe hoping for a little more color on this and how much it might have impacted volumes in the quarter. Also, curious if these issues are related to maybe specific production issues or more related to the strong demand and ultimately, when you expect that to -- result.
Thank you, Ben, this is very much the latter. I mean you can imagine when 1 business is growing 80%, and we are growing 80%. That is indeed creating some tension on the supply chain without any doubt. I'm not sure that out of stock is still the proper word given where we are today. I think that maybe some time a reference is not going to be available. Not everything is going to be fully available in the range at a certain point in time, but look at what the Nielsen are telling us on Q1 and our volume, I mean, we seem to be growing fast, and it's difficult to see any kind of impact coming from restriction on availability.
As we said, we are working very hard to maximize our capacity in this fast-growing environment for ZYN. We are comfortable, of course, with our capacity to deliver around our 550 million can. That is not the limit that we are putting, of course, in terms of production capacity. But we are in this phase of adaptation to this strong growth and fast raising demand. I think so far, maybe we mentioned but with limited impact on volumes.
Our next question comes from Owen Bennett with Jefferies. .
Okay. First question on heat. Can you maybe talk a bit more about the contribution from newer market? Is this trending in line with expectations? Or do you see potential for upside here because some of the trends you called out sound very encouraging, also love an update on bonds and the latest with this, if possible.
Yes, with pleasure, Owen. So I think we see -- and you said it, I've been elaborating on a number of markets where we see very interesting trajectory for new market. We've been speaking about Indonesia, we could have been speaking in addition to what the market has been covering speaking about Mexico, where we have also a nice acceleration, and we are just launching ILUMA now. So the good thing is that we're not relying on 1 or 2 names but we start to have a growing team of new markets where we see clearly, IQOS is getting traction and increasing its stake first, as always, in the big cities that's where in many of these countries, we have the biggest potential.
But that's, I would say, happening in line with expectation. And as I said, we expect even a further acceleration in the second part of the year. We believe that then in Taiwan, we also start adding to the flow of this newer market so it's in line with expectation and clearly coming with a great potential with IQOS being perceived as in many big cities rapidly as an aspirational product, which is extremely positive for the future and the brand franchise that we're going to be able to build there. Then on top of this, new market and the IQOS trajectory in this new market. We have indeed bonds that we plan to develop in the future.
We've been making the test, as we explained in the Philippines and Colombia. We are working on the results. We are making a number of adjustments and will come with a detailed plan in the coming quarters. We want to make sure that we come with a product that has all the ingredients, all the features to be a great success, and we're working on it. So that's going to be really important in all this market because we know that the affordability here is different to come with a portfolio that is segmented and where IQOS will have a role to play, but we need to also come with the rest of the portfolio bonds will in order to cover this market.
Very helpful. And I'll just add 1 more. I wanted to talk a bit more about vape, what sort of volumes do you think you can do here for the year. And if I heard you right, you said you'll be profitable already in H2, which would suggest volumes have been really healthy already? And just any kind of commentary on which markets you're seeing the strongest traction so far?
Sure. So on the -- it of course, stays modest versus IQOS and ZYN terms of impact at the group level. And we stick to our strategy, which is we don't want to be big in vaping if it's to lose money. We want to be really going with these in markets where we are having the right commercial impact, VEEV can make a difference and in a profitable manner. Indeed, the year started well in terms of volumes. We have this outlook of moving into positive bottom line for VEEV in the second part of the year. which would be very good news.
And we are prioritizing markets where we have the critical mass, where the -- I would say, the nature of the vaping market is interesting. And we are developing today very nicely, I would say, in markets such as Italy, Czech Republic, France, U.K., developing in Canada. These are markets where we can reach, if you want, the size, the mass and where we have the impact to make our vaping business successful and profitable.
Our next question comes from Faham Baig with UBS.
Emmanuel, thank you for questions. I have a couple as well, both on heated tobacco. Firstly, could I get your view on any implications that you see from the recent EU court ruling on the supplementary excise tax in Germany to any other of the European countries? And when are you expecting a decision from the finance court in Dusseldorf. And the second question, please, is again on heated tobacco. -- clearly, pricing has stepped up over the last couple of quarters. How are you thinking about balance between price and volume growth and could pricing be higher than the original guidance of low single digits.
Thank you for the question. So first of all, on the German situation, it's -- I mean, yes, they've been asking for the view on the -- from the European Court of Justice, but it's a purely German question whether the way they've been implementing their extra tax was according to EU law or no. So there is no consequences for other countries. It's really a German question due to how they implemented this increase in the tax. So that's what it is. On the final decision because at the end of the day, that will be the decision from the German court. I have to say, I don't know when we will know more, I guess, in the coming months, obviously.
But I'm not going to be able to be more specific on the timing of the Dusseldorf, of course, to make their decision. There are a number of steps still to be taken before they get there. So that will be for the coming months. I think given where we are today, I'm not able to tell you when they will make their decision. Regarding your second question on price versus volume. So we said, and I'm going to stick to that. Yes, we believe that we can increase price -- low single digits, so not at the level of combustible and is not burn. Again, I think very clear on the very positive impact coming from the growth in volume from our is not burn business. They're coming with higher per stick revenue they're coming now with a higher gross margin rate, even at the level of just the consumable, it's significantly higher than for combustible as an average for the group.
So that means that's really growing volumes is the name of the game for us. That's where it makes sense. Now on top of it, I mean given the very strong franchise of IQOS and the attractiveness of the brand, we are able to increase price without putting in danger the volume. But that's really the way you should be looking at it. For us, today, it's very much a play on maximizing the volumes.
Our next question comes from Gaurav Jain with Barclays.
Two questions from me. So 1 is just conceptually, so let's take a city like Tokyo, where the heated tobacco category share is now 50% plus. So 1 can argue that by increasing the premium cigarette prices, which haven't increased now in 2 years, you can accelerate the down trading to IQOS, this will accelerate IQOS volume growth. This will also accelerate your dollar EPS growth out of Japan. So why wouldn't you do something like this in cities and countries where heated tobacco and IQOS becomes the dominant form factor?
Thank you for your question, Gaurav. Look, I'm always very cautious, of course, as you can imagine, I'm commenting any kind of price strategy. So don't expect me to enter into any kind of detail. But conceptually, it is clear that as we build leadership in the category as there is a growing addition from the nicotine user to it not burn, there is a capacity for ongoing premiumization and more price increase without any doubt. But as I said and as I explained with the previous question, we believe that today, still, it's very much about maximizing the volumes.
And that's what for us is important, of course, coming with great gross profit per stick and great contribution. So I'm certainly not closing the door to more price in the future, but I think I've been clear on what our priorities are. Having said that, as you know, in Japan, we need to have an agreement from the authority to increase the price. So I think it's something that is also sometimes regulated. So it doesn't mean that we have all the latitude that we would like to enjoy on the topic. So that's on the long term, it is clear that today -- and we've been discussing that already, you have the IQOS consumables that are positioned even at some discount versus Marlboro.
That gives an idea of the kind of increase that we'll be able to reach in the future probably without too much, I would say, issues over time, once again, it doesn't happen in 1 go. But as I explained, for the time being, maximizing volume is the name of the game and is coming with I think what the Q1 is illustrating in a very bright manner, a very, very powerful mix impact on our financial performance.
Sure. And my second question is on Russia. So IQOS volumes in Russia grew, which is surprising given that you do not invest in iQOS there anymore. So how should we -- so first of all, can you just remind us the contribution of Russia on your EPS? And how should we think of Russia IQOS shipments for this year?
Look, on Russia, you have to be a bit cautious on the shipment that you see. And that does not necessarily fully reflect the consumer offtake, you can have some movement from the surrounding countries. So I think we have to be cautious. So Russia is a market that has not been -- if I look at the past, I mentioned that 1 quarter is enabling us to conclude anything. Since the beginning of the war in Ukraine, Russia has been a market that has not shown unfortunately any kind of meaningful growth.
Today, we have no reason to believe that suddenly Russia aiming to become a growth market because nothing has changed fundamentally. And that's a country that has been impacted, of course, by currency depreciation that has been impacting the weight in the EPS. So I think that we were referring to 7% to 8%. I think we'll have to revise. And I don't have the number top of mind for '24 on the outlook. But that was the kind -- it was around 9%, 10%, and I think with the currency, it has been losing a bit of weight in the overall performance of the company.
Our final question comes from Callum Elliott with Barclays.
So my question is a following up on Bonnie's question on dollar growth. And in 2013, I think your dollar EPS, Emmanuel was $5.40 per share. So you've compounded dollar EPS growth of about 1.5% over the subsequent 10, 11 years. So best-in-class organic growth and probably worst in class dollar EPS growth over that 10-year period, which is really striking given that, that 10 years captures the whole of the creation of this IQOS business that has been quite remarkable.
So my question is, you obviously outlined a number of initiatives in answer to Mani's question of how you hope to drive dollar growth. But maybe you could sort of couple back on those explanations, which of those are actually new and that haven't been present over that sort of past 10-year period that could have been helping over the past 10 years because it struck me in those explanations. It sounded like things like pricing, et cetera. Those have all been around for the past 10 years and haven't helped you offset the FX and so is there anything you can tell us that's new that should give investors confidence that if FX headwinds persist, you are able to drive dollar growth for your business?
Thank you for your question. Well, first of all, I guess you are assuming that the ForEx headwind will persist in the coming years, which I think nobody can really say, we know that currency can be facing cycle, and that is true that the last 10 years have been about a strengthening of the dollar. We've been knowing other cycle where the dollar was more weakening versus at least other hard currency. So nobody knows what's going to happen.
I think what we are saying, and thank you for giving me a reason to maybe repeat and clarify that we are today in a position to put together very strong growth before ForEx. And I think you are seeing with the guidance for '24 that we are obviously coming still with a very dynamic top line very much accelerating operating income growth. We are targeting a double-digit before currency impact now in 2024. And on top of that, we are going to price and in an environment that today we see positive for pricing.
Certainly, with the fact that pricing on combustible is something that we can use now very tactically. We know that CCs not our future. So we can certainly use pricing very tactically in order to boost performance. We also are coming with some price increase at the level of HTU. We have some price increase on ZYN as well. So we have globally a pricing environment that looks attractive to us in the future. And then when it comes to our cost. It is true that we've been investing a lot in the past years, and we've been reporting on all the action that we were having on investments across the board in terms of innovation, in terms of science, in terms of R&D, in terms of manufacturing.
Now is a time where, of course, we are reaching critical mass on smoke-free product, there are a number of things that we are doing that we can do more efficiently. A number of things that we've been learning and that we're going to implement in the continuation of our journey so all that, we believe, is also giving us some very good ammunition and capacity to generate efficiency at a very high level in the future.
So that's -- all the -- and they are quite important, quite numerous, all the levers that we own to deliver performance in dollar terms in the future.
That's helpful. And maybe I can just ask a follow-up. So we have a number of U.S. consumer staples companies reporting this morning, and many of them faced similar FX headwinds, sort of incremental FX headwinds over the past 2, 3 months as PMI does. It's striking to me that amongst some of those companies, even a commoditized U.S. toilet paper company has done a better job this quarter of offsetting these incremental emerging market FX headwinds with sort of rapidly responding with incremental price increases to offset those headwinds. So I guess my question here is, is there something structurally business that's making it less agile in responding to these changes in FX relative to some of your other consumer staples peers outside of the tobacco space.
Well, can I answer you that your question is highly speculative because you ask me to compare with other businesses that are obviously very different in, I guess, the way they invest, their outlook, what they have to do. We are building here a business that has a tremendous growth potential. So we're not going to, of course, limit all the initiatives, all the investment that we must do in order to keep growing the business and extract the full potential that we have with our smoke-free portfolio. Maybe that's different versus the paper business you were mentioning. I frankly have no clue because I don't know what you are referring to and the specific situation. But I think it's difficult to probably compare businesses that are facing different -- potential different trajectories. That would be my answer. .
This concludes the question-and-answer session. I would now like to turn it back to management for closing remarks.
Thank you for joining us. That concludes our call today. If you have any follow-up questions, please contact the Investor Relations team. Thank you again, and have a nice day.
Bye-bye. Speak to you soon.
This concludes today's conference call. Thank you for participating. You may now disconnect.