The operator introduces the Philip Morris International 2024 First Quarter Results Conference Call and explains the format of the call. James Bushnell, Vice President of Investor Relations, welcomes participants and directs them to the press release and website for more information. He also mentions the availability of a glossary and cautions about forward-looking statements. Emmanuel Babeau, Chief Financial Officer, and Jennifer Motles, Chief Sustainability Officer, are also present and Babeau discusses the company's outstanding performance in Q1.

In the first quarter of the year, the company saw a significant increase in net revenues and gross profit, driven by the success of their smoke-free products IQOS and ZYN. The company also faced currency headwinds, but was able to mitigate them through pricing and cost initiatives. Despite a favorable prior year quarter, the company is expecting strong growth for the rest of the year. Shipment volume and top-line growth were both strong, and operating income and margins also saw improvement.

In the third paragraph, the company explains that they exceeded their Q1 adjusted EPS outlook due to three main factors: better volumes, pricing actions, and cost efficiencies. The majority of the outperformance was driven by underlying business dynamics, and they delivered a 23.2% growth in adjusted diluted earnings per share. They also discuss their Q1 HTU shipments, which exceeded their outlook and had robust underlying growth. They mention a higher-than-expected timing impact in Japan and a potential normalization in the second half of the year. They also note that adjusted in market sales grew by 12.5%, including the expected impact of a flavor ban in Europe.

In the first quarter, IQOS saw strong growth in Japan, Europe, and newer markets like Indonesia. The company is targeting a 14-16% growth for the year, with a 10% growth in Q2 and an acceleration in H2. Smoke-free volume grew by 22%, driven by the expansion of the oral smoke-free portfolio powered by ZYN. Cigarette shipments declined slightly, with a positive contribution from Turkey. Net revenues were boosted by volume growth, pricing, and smoke-free category mix. The VEEV e-vapor business also saw good revenue growth. The positive impact of smoke-free products, overall volume growth, and pricing are the three main drivers of the company's transformation and growth.

In the first quarter, the company saw strong growth in gross profit, particularly in the smoke-free category. This was driven by the success of U.S. ZYN and the growth and scale effects of IQOS, as well as manufacturing efficiencies. Gross margins also expanded significantly for both heat-not-burn and oral nicotine products, and the smoke-free category made up a larger portion of total gross profit. Combustible products also showed improvement in gross profit and margins, despite continued cost pressures. Operating income margin also saw strong expansion due to these factors, as well as productivity savings. SG&A costs also remained low, contributing to overall margin expansion.

The company experienced significant growth in its operating income margins, exceeding expectations and leading to a raise in its full-year outlook. All regions saw strong progress except for South and Southeast Asia, CIS, and Middle East Africa, which were impacted by currency and technical factors. IQOS continues to grow in market share, surpassing 10% in many markets and becoming the second largest nicotine brand in markets where it is present. In Europe, IQOS saw a 0.9 point increase in market share, reaching 10% for the first time.

The availability and uptake of ILUMA is driving growth in many markets, with adjusted IMS volumes reaching a record high. Growth was slower in certain Central European markets due to economic pressures, but the company continues to evolve its portfolio to drive further growth. Excluding Ukraine, adjusted in market sales grew double-digit. The impact of EU characterizing flavor restrictions was in line with expectations, and the company has not seen a shift towards e-vapor or competitor products. The strong fundamental progress in the region is highlighted by expansion in key cities. In Japan, the adjusted total tobacco share for HTU brands increased and adjusted IMS volumes maintained rapid progress.

The impressive growth of IQOS in a market with high category penetration demonstrates its potential for sustainable growth worldwide. The company is focused on innovation in both devices and consumables, with the latest device ILUMA i recently launched and new variants and taste experiences for the premium TEREA brand. This strategy has helped increase market share in Japan. In East Asia and Australia, the region has reached almost two-thirds smoke-free net revenues in Q1, with the goal of becoming substantially smoke-free by 2030. IQOS is also seeing promising growth in low and middle-income markets, such as Indonesia, where the company has expanded commercialization and introduced new variants to cater to local taste preferences.

The paragraph discusses the growth and success of IQOS in various markets, including Jakarta, South Korea, Egypt, Malaysia, Morocco, Lebanon, the Balkans, and Saudi Arabia. It also mentions the launch of ILUMA in Canada and the continued progress of ZYN in the U.S. with a 70% increase in shipments and growth in category volume and retail value share. The company remains focused on responsible marketing and supporting FDA regulations.

The company has implemented a marketing code to ensure responsible use of social media influencers and age-gated digital platforms. They have also partnered with WeCard to ensure retail sales are only made to legal-age adults. In terms of combustibles, the company saw a robust organic net revenue growth of 3.7% in Q1, primarily driven by strong pricing and a modest volume decline. Their global brands gained category share, with Marlboro gaining 0.4 points. The company also launched their most innovative smoke-free offering, IQOS ILUMA i, in Japan and plans to expand it to other markets over time.

The company is focused on expanding its offerings on the ILUMA platform, including launching new products and expanding into new markets. This includes the launch of LEVIA HTUs in the Czech Republic and Romania, as well as the rollout of DELIA in Switzerland, Hungary, and Lithuania. In the U.S., the company is preparing for consumer pilots with the IQOS 3 system, with plans to launch at scale following authorization from the FDA. The company is also focused on expanding its nicotine pouches, with plans to launch in more markets. In e-vapor, the company's strategy for VEEV is showing promising results. The company is raising its growth forecasts for 2024, with a focus on smoke-free volume, pricing, and margins. The company is also increasing its U.S. shipment forecast for ZYN.

The company has accelerated their capacity expansion plans to support their increased forecast for shipments of IQOS and ZYN. They are targeting strong growth in adjusted IMS and shipments of IQOS HTUs, with a goal of reaching $15 billion in smoke-free net revenues by 2024. Due to a strong pricing outlook and increased ZYN shipments, they are raising their organic net revenue growth forecast to 7-8.5%. They also expect accelerated margin expansion, driven by IQOS scale effects, ZYN mix, and manufacturing efficiencies. The company is also focused on delivering SG&A efficiencies while investing in smoke-free growth. As a result, they are raising their forecast for organic operating income and adjusted diluted EPS growth. However, they anticipate an unfavorable currency impact due to the devaluation of the Egyptian pound and weakness in the Japanese Yen. The company expects gross and operating income margin expansion in both organic and dollar terms for the full year, with strong performance in both H1 and H2. They project continued strong volume growth from ZYN in Q2.

In the upcoming year, the company predicts a currency-neutral adjusted diluted EPS of $1.50 to $1.55, with a focus on deleveraging and reaching a net debt to adjusted EBITDA ratio of 0.3x to 0.5x by 2024 and 2x by 2026. The company's sustainability transformation and business strategies are aligned, with a focus on creating long-term value and ending smoking. The company regularly reports on its progress towards its smoke-free purpose through a set of financial and non-financial KPIs.

In 2023, PMI's focus on smoke-free products is reflected in their allocation of resources and expansion into low and middle-income markets. This is outlined in their latest integrated report, which also highlights their progress in sustainability efforts, including responsible marketing, decarbonization, and recognition for their sustainability performance. Despite being a tobacco company, PMI has received recognition from various organizations for their sustainability efforts.

The speaker concludes the presentation by reiterating the company's strong performance and outlook, with a focus on accelerating top-line growth and margin expansion. They also mention measures being taken to mitigate currency headwinds and their commitment to being substantially smoke-free by 2030. The company's growth outlook and cash generation will allow them to deleverage while maintaining a progressive dividend policy. They then open the floor for questions.

In the first quarter, the company had a strong start to the year with better revenue and margin performance, leading to an increase in their outlook for organic revenue and constant currency EPS. The first quarter EPS was $0.20 above their guidance, and they have raised the full year outlook. This was partly due to an additional 1 billion HTU stick from Red Sea, as well as some marginal volume increases on combustible. The company also saw a 1.4% increase in SG&A, but this is expected to reverse later in the year as they focus on growing revenue faster than SG&A.

Bonnie Herzog from Goldman Sachs asked Emmanuel Babeau for more information on how the company plans to mitigate currency headwinds, given their impact on the business. Babeau explained that they are focused on delivering performance in dollar terms and have two main levers to do so: pricing and productivity savings. They are pushing the boundaries on price increases, particularly in the combustible sector, while also considering the economic environment.

The company is constantly reassessing its actions in response to changes in the market, such as depreciation and cost efficiency. They are prioritizing investments that will bring the greatest return and are working to mitigate the impact of ForEx. In regards to ZYN, there have been some out of stock issues due to strong demand, but the company is still growing at a rate of 80%.

The speaker discusses the tensions on the supply chain and the impact on availability of products. They mention that while there may be some out of stock items, overall the company is growing and seeing strong demand. They also mention that they are working to increase production capacity. The speaker then answers a question about the contribution from newer markets, stating that there is potential for upside and mentioning specific markets such as Indonesia and Mexico. They also mention the launch of a new product in Mexico called ILUMA.

The speaker discusses the success of IQOS in new markets and the potential for further growth in the second half of the year. They also mention plans to develop bonds in the Philippines and Colombia and the importance of affordability in these markets. They then address the success of Vape and mention that they expect to be profitable in the second half of the year, with strong volumes and traction in certain markets.

The speaker responds to a question about heated tobacco, stating that they prioritize profitable markets for their vaping business and have seen success in countries such as Italy, Czech Republic, France, UK, and Canada. They also mention that the recent EU court ruling on supplementary excise tax in Germany has no implications for other countries and that they are awaiting a decision from the finance court in Dusseldorf. They also discuss the balance between price and volume growth in heated tobacco, stating that pricing has increased in recent quarters and could potentially exceed their original guidance of low single digits.

The question is about the potential impact of increasing premium cigarette prices in a city like Tokyo where the heated tobacco category share is already over 50%. The idea is that this could potentially accelerate the downgrading to IQOS and lead to increased volume growth for the product.

Babeau is cautious about commenting on price strategies, but believes that as heated tobacco and IQOS become more dominant, there is potential for premiumization and price increases. However, for now, the focus is on maximizing volumes. In Japan, price increases require approval from authorities. In the long-term, there is potential for price increases, but for now, the focus is on volume. The first quarter results demonstrate a positive impact on financial performance due to a strong mix. A question is also asked about Russia.

The speaker discusses the growth of IQOS volumes in Russia and cautions against overly optimistic conclusions. They also mention the impact of currency depreciation on the company's performance and address a question about dollar EPS growth over the past decade, which has been relatively low despite strong organic growth.

The speaker responds to a question about how they plan to drive dollar growth and explains that while currency fluctuations are unpredictable, they have a strong growth forecast and are utilizing pricing tactics to offset any potential negative impact. They also mention upcoming price increases for certain products.

The company has seen some price increases on their products and believes that the current global pricing environment is attractive. They have been investing heavily in innovation, science, R&D, and manufacturing, and now that they have reached critical mass on smoke-free products, they can implement these learnings to generate efficiency in the future. The company believes they have numerous levers to deliver performance in dollar terms. The analyst asks if there is something structural in the business that makes it less agile in responding to emerging market FX headwinds compared to other consumer staples companies.

Emmanuel Babeau responds to a question by saying that it is difficult to compare businesses because they have different growth potential and trajectories. He also mentions that he is not familiar with the specific situation being referred to. The conference call then concludes, with the speakers thanking participants for joining and inviting them to contact the Investor Relations team for any follow-up questions.

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