The operator introduces the Philip Morris International Inc. 2024 Second Quarter Results Conference Call and hands it over to James Bushnell, Vice President of Investor Relations and Financial Communication. Bushnell welcomes participants and directs them to the press release and glossary of terms on the company's website. He also mentions that the presentation contains forward-looking statements and introduces Emmanuel Babeau, the Chief Financial Officer, who discusses the company's strong performance in the second quarter of 2024.

In the second quarter, the growth of IQOS and ZYN continued to be strong, exceeding expectations. The profitability of IQOS is contributing to the overall growth of PMI. Other smoke-free products, such as VEEV and international nicotine pouches, are also seeing significant growth. The company's combustible business also performed well, with a return to gross margin expansion. Despite currency headwinds, the company delivered double-digit organic operating income growth and mid-single digit adjusted diluted EPS growth in the first half of the year.

The company has had an exceptional first half performance and is increasing their 2024 full year forecasts. They have seen strong top-line growth, positive smoke-free margin mix, and cost efficiencies. Their volumes and net revenues have increased, leading to growth in operating income and adjusted diluted EPS. They expect continued growth in the second half. The company's strong performance is due to smoke-free share gains and a resilient international industry.

In the second quarter, shipments of heated tobacco units exceeded expectations due to strong performance in Japan, Europe, and newer markets. The adjusted volume for heated tobacco units grew by 10.2%, including the impact of a flavor ban in Europe. Sales volume for smoke-free products, including oral tobacco powered by ZYN, grew by 11.2% in Q2 and 13.1% in the first half of the year. The company also saw strong growth in their e-vapor business. Cigarette shipments grew by 0.4%, with positive contributions from Turkey and North Africa. As a result, the company has raised their full-year forecast for total cigarette and oral tobacco unit volumes. The success of their smoke-free transformation and recovery in combustible products has led to double-digit organic operating income growth. Smoke-free products saw 18% organic revenue growth and 22% growth in gross profit, leading to a 220 basis point expansion in organic gross margin.

In the fifth paragraph, the company discusses their continued success in expanding their smoke-free gross margin, which has helped to offset the contraction of their combustible gross margin. They also report a 50 basis point expansion and 5.5% growth in gross profit on an organic basis. This is due to resilient volume, strong pricing, and efficiencies, despite ongoing tobacco leaf inflation. The company expects continued gross margin expansion in the second half of the year. Overall, their first half revenue performance has been strong, with double-digit growth in net revenue, gross profit, and operating income. This is driven by positive volumes, robust pricing, and favorable category mix for their smoke-free products. The company also notes that their oral smoke-free products have contributed positively to their revenue growth, thanks to the acquisition of Swedish Match. However, geographic mix has been negative in recent quarters.

In the first half of the year, PMI's gross margin increased due to their higher margin smoke-free business, pricing, and productivity savings. SG&A costs also increased, but the company expects them to remain below the rate of revenue growth for the year. PMI also achieved over $300 million in cost efficiencies and expects an acceleration in savings in the second half of the year. Despite currency headwinds, the company's operating income margin remained stable. PMI estimates that there were 36.5 million adult users of their smoke-free products as of June 30th, with 3.2 million added in the first half of the year. This includes 30.8 million IQOS users, 5.2 million oral users, and 0.8 million VEEV users.

The company has seen an increase in both total and IQOS users, with strong growth in Japan, Europe, and newer markets like Indonesia. IQOS is now available in 90 markets. In Europe, there has been a recovery in markets where the flavor ban has passed, continued growth in established markets, and emerging growth in countries like Germany, Spain, Bulgaria, and Romania. Despite the impact of the flavor ban, the company's share of HTU increased by 0.8 points year-on-year. However, Q2 share was lower than Q1 due to seasonal factors and the resilient combustible market. Adjusted IMS volume and in-market sales also showed strong growth, though the impact of the ban was more pronounced in Italy. This is a temporary situation and markets like Greece, Czech Republic, Bulgaria, and Romania have shown recovery after an initial period of adjustment.

In the second half of the year, there is expected to be an increase in Europe adjusted IMS growth due to the introduction of new products and strong adoption of IQOS in key cities. In Japan, there has been consistent double-digit growth in IQOS, with a high market share and continuous innovation driving this growth. Globally, there is promising growth in low and middle-income markets, particularly in Indonesia and North Africa and the Middle East.

The company is seeing strong growth in various markets, including Saudi Arabia, Lebanon, Morocco, Tunisia, Egypt, UAE, Jordan, Mexico City, South Korea, and Malaysia. However, there is a delay in approval for commercialization in Taiwan and a slower recovery from the characterizing flavor ban in Europe, which will impact their full year adjusted IMS growth by around 2 billion units. Despite this, they still expect a strong H2 delivery and a full year adjusted IMS growth of around 13%. They also forecast a full year HTU shipment volume of around 140 billion units.

The company has seen increased commercial activity and momentum in various global markets, including Japan and Duty Free. Europe is also experiencing growth in countries like Germany, Spain, and the UK, while markets like Italy are expected to rebound from initial flavor ban impact. In the US, ZYN has seen strong progress with a 70% growth in shipments, but supply chain constraints have temporarily slowed down the category. The company is expanding production to meet expected demand and has plans for a new plant in Colorado to support growth in the coming years. The company is now forecasting a U.S. shipment range of 560 million to 580 million cans for 2024.

The company is seeing success with their multicategory approach to their smoke-free business, with increasing commercialization of IQOS, ZYN, and VEEV. VEEV ONE has achieved a number one closed pod position in five markets within the first year of launch. ZYN is also seeing growth outside of the U.S., with a 60% increase in international nicotine pot volume. The company plans to continue expanding their IQOS portfolio with new products and market launches, including in the U.S. with the IQOS ILUMA. They are also preparing for a city pilot in Austin, Texas with the IQOS 3 system.

The commercialization of the ILUMA product will initially be limited in scope and focused on select cities to fine tune the commercial model. The company expects an FDA authorization in the second half of 2025. Despite strong pricing in Q2, the company saw resilient volume and a positive profit contribution in the combustibles category. The company's global brand, Marlboro, gained share in the category. The company's overall strategy is focused on sustainability and making progress towards product transformation targets.

Philip Morris International's smoke-free products are now available in 90 markets, with a goal of reaching 100 by 2025. They are also making progress towards having over 50% of their smoke-free product market in low and middle income countries. The company has received recognition for their efforts towards decarbonization and sustainability, and they have raised their growth forecast for the year due to strong business momentum and increased profitability of their smoke-free products. They are targeting close to $15 billion in smoke-free net revenue and expect healthy margin expansion.

PMI is targeting adjusted gross margin expansion for both smoke-free and combustible products, as well as adjusted OI margin expansion for total PMI. They have raised their forecast for currency-neutral adjusted diluted EPS growth to 11% to 13%, with a range of $6.33 to $6.45 for the year. The increased currency headwind is due to the impact of Q2. Despite this, they expect to deliver strong growth in dollar terms. They forecast a record high quarterly adjusted diluted EPS of $1.77 to $1.82 for Q3, with a significant step-up in commercial spending and an unfavorable currency impact of $0.02. They also expect accelerated U.S. dollar adjusted diluted EPS growth for the second half of the year. They forecast operating cash flow of around $11 billion for the year.

The company expects to see significant improvement in their financial performance due to increased investment in ZYN capacity expansion and a targeted improvement in their net debt to adjusted EBITDA ratio. They also plan to reconsider share repurchases once they reach their goal of a 2x ratio by 2026. The company's strategy is delivering strong growth in volumes, pricing, cash flow, and earnings despite currency headwinds. They are focused on delivering performance in dollars and have a multi-category growth opportunity to support their 2024-2026 targets. They remain committed to returning cash to shareholders through reinvestment and a progressive dividend policy.

The operator introduces Gaurav Jain's question about the company's cigarette pricing algorithm. Jain asks if the company's high market share gains suggest that they are not monetizing their cigarette business enough and if they should increase pricing from 7% to 10%. Emmanuel Babeau responds by saying that the company is performing better than expected with an 8.7% price increase in the first half of the year, with 3/4 of it coming from markets where they are driving price opportunistically. He assures that the company has a successful approach to price increase and is optimizing their potential in the current environment.

Babeau confirms that ZYN production capacity will increase to 900 million cans in 2025 and that they are gradually improving their capacity through various measures. He does not give a prediction for the end of this year but states that they are on track to meet their goal of 560-580 million cans in 2024. He clarifies that the 900 million can capacity is not a guidance for volume next year. In regards to the lowered HTU shipment volume outlook, Babeau attributes it to a slightly greater-than-expected impact from the EU flavor ban and does not mention any other potential impacts on HTU volume in the back half.

Philip Morris International is revising their objective for adjusted in-market sales by around 2 billion, with the majority of that coming from Taiwan. This is due to the delay in approval for heated tobacco products in Taiwan, which was initially expected to start in the first half of the year. This revision will result in a lower shipment volume, but the company is seeing strong growth for IQOS outside of Europe in the first half of the year.

The adjusted in-market sales outside of Europe for the company have been growing at a rate of 14%, with Japan being a major contributor to this growth. Other markets such as South Korea, Indonesia, Middle East, Mexico, and duty-free have also been performing well. In Europe, the company is transitioning away from flavor products, but still seeing strong growth outside of Italy. Champion markets like Portugal and Hungary continue to do well, while new markets like Germany, Spain, Romania, and Bulgaria are also driving growth. Some markets are experiencing disruption due to the implementation of flavor bans, but this was expected. In Italy, the company underestimated the availability of flavored products with distributors and retailers.

The absence of a flavor product due to the flavor ban has impacted consumer offtake and slowed growth. The company has increased prices, which has had a marginal impact on market share. However, they expect improvement in Europe as the market adjusts to the flavor ban. ILUMA i, a new device only available in Japan, has had a positive impact on growth and margins, and the company plans to further roll it out.

The growth of oral pouches in international markets has been similar to that in the U.S. at 10% of the volume. This includes the Nordics, where there is a strong market for this product. There are three potential areas for growth in this market: the Nordic countries, where it is already popular; other countries with interest and attraction; and countries with a dynamic nicotine pouch category.

The speaker discusses the potential for growth in the nicotine pouch category in various markets, including Europe, Pakistan, South Africa, Indonesia, the Philippines, and Mexico. They believe that the category could grow rapidly and they want to ensure they capture their fair share of the opportunity. There are no capacity limitations for this international business. The speaker also addresses the development of the vapor category outside of the U.S. and whether it is seen as an alternative to heated tobacco.

The speakers discuss the growth of the vaping category as a legitimate alternative to smoking for legal age nicotine users. However, they note that it is more difficult to convert smokers to vaping. They also mention the potential concerns with the vaping category, such as unreasonable appeal to flavor and unintended usage, and emphasize the importance of responsible development and marketing.

The speaker expresses satisfaction with the success of VEEV ONE and their strong partnership with the trade. They mention being the number one brand in five countries for close pods. The speaker then discusses the current state of ZYN in the U.S., stating that the volume is sequentially falling due to capacity constraints. They clarify that the Nielsen data may not accurately reflect consumer demand and that they are working to increase capacity for the coming quarters. The speaker also mentions that some competitors' pricing moves last year may have affected their market share.

The company is still under review by the Attorney General for their ZYN sales and there is no new information at this time. The company is working to prevent parallel flows of their products and ensure that they are not being sold in unauthorized locations. The speaker cannot comment on specific incidents of this happening.

A question was asked about the potential for illicit parallel flow of nicotine pouches into the US market, similar to what has been seen with vaping products. The speaker stated that they have not seen any significant evidence of this at the moment, but they are closely monitoring the situation. If it were to become a problem, they expect the authorities to take similar action as they have with vaping. However, the speaker was pushed further on the issue and was asked to confirm that certain European moist versions of ZYN, which do not have premarket approval, are being sold in the US in violation of FDA regulations. The speaker could not confirm this, but acknowledged that there is evidence of these products being sold online and in New York City.

During a Q&A session, a representative from a financial firm asked about the potential risk to the company's U.S. ZYN business due to illicit product entering the market. The company's response was that they are doing everything they can to control the flows and comply with regulations, but they do not have any data on the situation. The representative then asked about the company's confidence in meeting demand and the potential impact of competition, to which the company did not provide a clear answer.

Emmanuel Babeau discusses the company's confidence in regaining consumer trust and increasing production capacity for ZYN products. He also mentions the planned IQOS ILUMA tests in a few cities in the U.S. once they receive PMTA approval. They hope to learn from these tests and launch on a larger scale in the second half of 2025.

In this paragraph, the speaker discusses the upcoming launch of IQOS in the U.S. and explains that they will be using strategies that have been successful in other markets. They also mention their plans for developing IQOS VEEV in the U.S. but do not currently have a plan to file for PMTA approval.

The speaker discusses the success of IQOS and plans to continue developing the vaping business. They mention potential plans for VEEV in the U.S. but state that they are not currently considering it. The speaker also mentions a lower interest expense for the year, which reflects improved financing for the company. They do not anticipate any major changes in financing in the near future. The call is then concluded.

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