A ban on its heated tobacco IQOS electronic cigarette in the U.S. and the war in Ukraine has not deterred Philip Morris International's (PM -0.30%) march toward a smoke-free future. The global tobacco giant said it still added over 1 million new users to its roster of IQOS devotees over the last three months, giving it almost 18 million now.

Because of Russia's invasion, Philip Morris has halted sales in both countries. With an additional 4.8 million IQOS users in Ukraine and Russia at the end of last year, sales would have been demonstrably higher had hostilities not broken out.

It all led Philip Morris International to handily beat Wall Street's forecast for revenue and earnings, though the war swiped $0.03 per share from profits and caused the tobacco stock to slash its full-year outlook.

Smiling friends with IQOS heated tobacco devices.

Image source: Philip Morris International.

An import-ban workaround in the works

The owner of the Marlboro brand began selling the IQOS in the U.S. last year after having previously winning Food & Drug Administration approval to sell the device with a modified-risk (MRTP) label. 

Altria was preparing for a national rollout of the heated tobacco device when British American Tobacco sued Philip Morris for infringing on its patents. The International Trade Commission agreed and banned their importation into the U.S., halting their sales

Philip Morris now plans to manufacture them in the U.S. to get around the import ban and has won FDA approval for its IQOS 3 device, which relies upon different technology than prior devices, including longer battery life and quicker recharge times between usages.  

The IQOS remains the only e-cigs with MRTP labels, though other devices from British American have been given marketing approval. Philip Morris says it hopes to resume shipments to restock U.S. inventory by the first half of 2023. 

Heated tobacco device shipments grew 14% in the first quarter to 24.8 billion units and now account for 14% of total shipments.

Russia fallout still looms large

That means traditional cigarettes are still Philip Morris' bread and butter, and it saw a near-2% uptick in shipments for them for the period, helping to lift revenue 2.2% to $7.7 billion.

Despite a number of strong headwinds it faced, including inflation, higher energy costs, and the war in Ukraine, adjusted earnings dipped a penny per share to $1.56 per share. If the earnings attributable to Ukraine and Russia are sussed out, profits were actually up year over year.

Yet that just shows how big a role Eastern Europe plays in Philip Morris's business. Last year Russia made up almost 10% of total shipment volumes and around 6% of net revenues, and the region is now its second-biggest market for IQOS sales, with 8.6 billion units shipping in the quarter, just behind the 9.3 billion shipped to East Asia and Australia. Halting business in Ukraine and Russia is why it cut its outlook.

Philip Morris expects adjusted EPS will be in the range of $5.45 to $5.56 per share for 2022, down from its prior guidance of $6.12 per share to $6.30 per share. Analysts had been expecting profits of $5.89 per share.

Even so, it still shows the power nicotine has, as Philip Morris was able to drive sales and profits higher on a combination of price increases and the strong adoption of IQOS. Investors should expect to see further growth from the tobacco powerhouse, especially next year as the IQOS is reintroduced into the U.S.