The Philip Morris International Second Quarter 2023 Earnings Conference Call has begun with the Vice President of Investor Relations and Financial Communications, James Bushnell, welcoming everyone and providing an overview of the press release containing the company's financial results. He then introduced Emmanuel Babeau, the Chief Financial Officer, who reported that the company had exceeded expectations and achieved a record quarterly adjusted diluted EPS of $1.60.

Philip Morris International reported a strong quarter with 3.3% growth in cigarette and HTU shipment volume, double-digit organic topline growth, and high-teens currency-neutral adjusted diluted EPS growth. This was driven by impressive growth in IQOS and ZYN, with US ZYN volumes growing by over 50%, and combustible business delivering over 7% organic net revenue growth. The total reported currency-neutral net revenues grew by plus 19%.

In Q2, the Philip Morris International business saw organic net revenue growth of 7.0%, driven by increasing IQOS HTUs and combustible pricing. This, along with favorable timing of costs, allowed for adjusted diluted EPS of $1.60 and organic net revenue growth of 6.8% in the first half of the year. Swedish Match's excellent profit performance and contribution to adjusted OI margins was also a factor in the strong performance.

In Q2, Swedish Match's smoke-free volumes grew by 15%, contributing to the reported shipment volume growth of 3.3%. Combustible and HTU pricing contributed plus 6 points of growth, mainly due to combustible strength and the increasing proportion of HTUs in the business. Gross margins improved from the first quarter due to strong growth fundamentals, cost phasing, and the geographic mix of inventory movements.

Philip Morris International is expecting positive growth in their IQOS business, as well as their ZYN business, in the second half of 2021. They are also raising their currency-neutral top and bottom-line growth forecasts for 2023, expecting total volumes to grow for the third year in a row and a cigarette volume decline of 1.5% to 2.5%. They are aiming to achieve their 2021-23 $2 billion target ahead of plan, and are expecting strong organic operating income growth in the remainder of the year to support H2 margin expansion.

The company is expecting a 40 basis point impact on its adjusted OI margin due to increased third-party manufacturing in certain markets, and an additional 50 basis points of accretion from Swedish Match. This is expected to result in currency-neutral adjusted diluted EPS growth of 8-9.5%, with a revised range of $6.13 to $6.22. In Q3, the company forecasts high single-digit organic topline growth, with HTU shipments of 31-33 billion units, and adjusted diluted EPS of $1.60 to $1.65, including $0.06 of unfavorable currency. In Q4, they expect strong reported and organic OI growth, as well as a contribution from Swedish Match.

In Q2, ZYN's total shipment volumes increased by 3.3%, and HTU shipment volumes grew by 26.6%. H1 shipment volumes grew by 18.5%. Smoke-free products, including IQOS and ZYN, made up 35% of adjusted net revenues in H1, and IQOS devices accounted for 4.5%. Additionally, combustibles delivered strong organic net revenue growth of 7.4% in Q2 and 5.2% in H1.

PMI's cigarette category share grew by 0.7 points in Q2 and 0.1 points in H1, resulting in only modest volume declines. PMI captured 1.1 points of international cigarette and HTU share in Q2 and 0.5 points in H1, with notable contributions from Turkey and Japan. Despite increasing competition in many markets, their volume share of the growing heat-not-burn category remains stable at around 75%. PMI's HTUs have become the second largest nicotine brand in markets where IQOS is present, with a record 9.2% share. As of June 30th, there were 27.2 million IQOS users, with 1.4 million adult users added in Q2, particularly in Japan and Europe. PMI is approaching a milestone of 12 million users in Europe.

IQOS is now available to 70% of users in the region and has seen 1.6 points of year-over-year increase in HTU share. In-market sales volumes have grown 20% year-over-year and shipments have grown 11%. Many EU member states have passed multi-year excise tax plans and are transposing the flavor ban withdrawal from heated tobacco products into national legislation. IQOS has seen success across multiple geographies, including markets with and without ILUMA.

In Q2, IQOS ILUMA has driven impressive growth momentum in Japan, and TEREA and SENTIA remain the clear number one and two heat-not-burn brands despite intense price competition. Adjusted in-market sales volumes have reached a record high of 9.3 billion units, and offtake shares have increased in Cairo and Sofia. Swedish Match is also significantly accelerating smoke-free growth.

Swedish Match reported strong currency-neutral net revenue growth of 19% in Q2 and 17% in H1. In the US, ZYN had an impressive quarter with volume growth of over 50%. The cigar business also performed well with 16% organic net revenue growth. ZYN had 2.2 points of category volume share growth and 76.8% retail value share. Swedish Match is continuing to integrate their activities and expand their smoke-free transformation.

IQOS ILUMA has been rolled out in six markets and is expected to be in around 50 markets by the end of the year, with the US being a significant opportunity for accelerated growth. ZYN is being prepared for launch in several markets, and VEEV ONE and VEEV NOW have been introduced in four and six markets respectively. The first clinical trial results for the inhalable aspirin product showed a rapid onset of effect, but there was significant variability in inhaled dose, so product design improvements are needed before it can be filed with the FDA later this year.

The company has faced slower-than-anticipated development in their CDMO business and has recorded a non-cash goodwill impairment as a result. Despite this, they remain committed to developing their Wellness and Healthcare business, exploring potential partnerships, and accelerating Vectura's growth. The company also aims to address the product health impact of combustible products by switching adult smokers to smoke-free products like IQOS and ZYN. In addition, they plan to discuss all of these topics at their Investor Day in September and remain committed to delivering best-in-class progress in other key sustainability areas.

PMI has released a report on their commitment to human rights and have included their performance on human rights in their Sustainability Index, which is part of executive long-term equity compensation. They are aiming to complete comprehensive human rights impact assessments in their 10 highest risk markets by 2025 and have already made progress with seven completed to date. They were also included in Forbes' first ever Net Zero Leaders List, ranking seventh overall for all US public companies. They have delivered a strong first-half and are confident in a strong full year performance with excellent operating income growth. They are committed to rewarding their shareholders and will share more at their Investor Day on September 28.

Emmanuel Babeau explains that the company's better than expected Q2 performance can be attributed to three factors: an outperformance of ZYN, cost that has been moved to H2, and better news on financial costs and taxes. However, Babeau cautions that they must be more cautious in their full year predictions due to the uncertainty of the second half of the year.

Emmanuel Babeau explains that they expected to see an improvement in their margin trajectory after Q1, due to the abating of headwinds such as disruption on the supply chain and the cost of launching ILUMA. The positive drivers for their margin such as the growth of IQOS, and the accretive element of ZYN in the US, are expected to have a positive impact on their margin in the second half of the year.

Emmanuel Babeau discussed the positive elements of Q2 and how they are reflected in the margin development for the year. He also mentioned the development of businesses that are coming with lower margin, such as the reduced excise duty in Indonesia, and how this is not reflecting the positive contribution for ZYN. He then spoke of the opportunity to offer some incremental investment for the ZYN business unit to expand the sales force, improve distribution, and drive velocity.

Swedish Match's acquisition of ZYN has been a great success, as the brand has seen a lot of poly usage and a growing awareness of the nicotine pouch category. There is also a positive lifestyle element that is gathering momentum in the US. ZYN has taken the lion's share of growth in the US and has had a positive impact on the group's financial performance. In order to further develop IQOS in the US, the company is gradually increasing its sales force.

Emmanuel Babeau of Swedish Match discussed the company's focus on deleveraging the balance sheet and extracting the potential of their smoke-free business, particularly IQOS and ZYN. He noted that the focus is not on M&A at the moment, and that the US cigarette volumes have remained weak despite easy comps. Gaurav Jain asked a question about ZYN in the US, noting that the volumes are coming in much higher than expected.

Emmanuel Babeau does not have hard data on the cannibalization rate of ZYN on US cigarettes, but believes it to be marginal. He does not think ZYN will be a meaningful competitor to IQOS, as it does not mimic the pleasure of combustible cigarettes in the same manner. Gaurav Jain then asks about the EU heated tobacco flavor ban, and Babeau mentions that there could be some volatility, referencing the experience in California with the menthol cigarette ban, where only 70% of menthol smokers were retained in the cigarette market.

Emmanuel Babeau provides two examples of the minimal impact of flavored heated tobacco bans, one in Europe in May 2020 and one in California that impacted ZYN at the end of 2022. He states that both bans had a minimal impact on the combustible business and that in California, the momentum of the non-flavored product even increased after the ban. He also states that his full-year guidance implies a stronger business in the fourth quarter and that they are investing in the business to position it for greater growth in the future.

Philip Morris International is confident that they are set for a strong second half of the year in terms of performance. This is due to the increase in sales, the launch of ILUMA, and the continued momentum of ZYN. The growth drivers for 2024 are expected to be the same, with the launch of IQOS in the US and the continued success of ILUMA in countries like Japan.

Emmanuel Babeau discusses the success of ZYN's ILUMA product in Japan, noting that its market share has increased to 26% one year after its launch. The two-tier strategy of offering premium and lower-priced options has allowed them to reach a wide range of users. Shipments have also increased, and competition is attempting to fight back.

Emmanuel Babeau discussed the rollout of ILUMA to 50 markets from the 23 markets it is currently available in. He expects the rollout to be spread out across the second half of the year and believes that it will have a positive impact on operating and gross margins, as well as productivity and weight reduction.

Emmanuel Babeau discussed the factors allowing consumers to hold up elasticity better than the expectations, such as demographic in certain markets and a ban on smoke-free products. He mentioned countries such as India, Egypt, Turkey, and Vietnam as having increased combustible business. He also noted that all three of the major tobacco competitors have improved their product offerings and are investing more money into the industry.

IQOS has maintained a 75% market share in the heated tobacco market despite increased competition. IQOS has created a unique brand that is appealing and recognized for its superior quality. They hope that the whole industry will embrace heat-not-burn technology, and they will continue to innovate to stay ahead of the competition.

In Q2, IQOS was able to use sea freight to supply Japan, and is no longer capacity-constrained on the TEREA sticks. In Europe, there was a negative inventory move in H1 due to uncertainty on product availability and energy supply, but this is expected to reverse in H2.

At the end of the call, Jared Dinges asked Emmanuel Babeau for an update on the situation in Russia, to which Babeau replied that they were fully compliant with all regulations and sanctions and had nothing new to report. James Bushnell then concluded the call, inviting any additional questions to be directed to the Investor Relations team.

This summary was generated with AI and may contain some inaccuracies.