Philip Morris International Inc

Q2 2024 Earnings Conference Call

7/23/2024

spk08: Thank you for standing by. Welcome to the Philip Morris International, Inc. 2024 Second Quarter Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 1-1 again. 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 and Financial Communications. Please go ahead.
spk06: Welcome. Thank you for joining us. Earlier today, we issued a press release containing detailed information on our 2024 Second Quarter Results. The press release is available on our website at PMI.com. A glossary of terms including the definition for smoke-free products, as well as adjustments, other calculations and reconciliations to the most directly comparable US GAAP measures for non-GAAP financial measures cited in this presentation are available in Exhibit 99.2 to the company's Form 8K dated July 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. It is now my pleasure to introduce Emmanuel Babot, our Chief Financial Officer. Over to you, Emmanuel.
spk01: Thank you, James, and welcome everyone. Our business delivered another outstanding performance in the second quarter of 2024. Our categories were strong across the board to deliver a record H1 on organic top-line growth and on organic operating income growth, excluding the pandemic recovery year of 2021. The strong underlying momentum of ICOs continued in Q2 with shipment and adjusted in-market cell volume growth above or in line with our expectations. This reflects another quarter of strong progress in Japan and robust fundamentals in Europe despite the volatility of the characterizing flavor band. With pricing, manufacturing efficiency, and scale benefit, the expanding profit contribution of ICOs is driving excellent growth for PMI. Zin continued its impressive growth trajectory with Q2 US volumes growing by over plus 50 percent despite recent supply tensions and increased pricing. In addition to ICOs and US Zin, I am pleased to report building multi-category momentum. While still early days, VIV has already become the close pod leader in five European markets and is firmly on the path to profitability, while international nicotine pouch volumes grew over plus 60 percent in H1, matching US growth rates. This progress of smoke-free product is reflected in a rapidly growing consumer base with around 36.5 million estimated adult users as of June 30th, and our products now available across 90 markets worldwide. Our combustible business also over-delivered with a return to gross margin expansion ahead of plan EQ2 after two years of significant inflationary headwinds. This was driven by stable H1 volumes and category share despite robust pricing in addition to cost efficiencies. This broad-based delivery translated into double-digit organic operating income growth with significant margin expansion. As we have outlined previously, delivering robust growth in dollar term is a key priority and we are taking proactive steps on pricing and cost efficiency to mitigate currency headwinds. This is clearly evident in our H1 adjusted diluted earning per share delivery of mid-single digit growth despite a currency headwind of over 12 percent, as essentially all of the expected full year impact fell in the first half. Following this exceptional first half performance, we are increasing our 2024 full year forecast on all organic dimensions and for adjusted diluted EPS on both a currency neutral and US dollar basis. This reflects our strong H2 outlook with accelerating adjusted IMS growth for high costs, sequentially high USD in volumes and a stepped up rate of USD EPS growth at prevailing exchange rate. Looking at our headline financials, strong total shipment volume growth of plus 2.8 percent drove Q2 organic net revenue growth of plus 9.6 percent or plus 5.6 percent in dollar terms. Robust top line growth, positive smoke-free margin mix and ongoing cost efficiencies enable us to deliver adjusted diluted EPS of $1.59. This represents plus 10.6 percent growth excluding a larger than expected unfavorable currency variance of 18 cents, which includes a small transactional impact from exchange rate volatility at quarter end. This better than expected ex-currency performance reflects the improving profitability of high costs, ZIN and combustible, which I will come back to. Looking now at the first half overall, our volumes grew by plus 3.2 percent and organic net revenue by plus 10.2 percent, our highest growth since the 2008 spin. Strong performance from both smoke-free and combustible drove operating income growth of plus 17 percent with margin expansion of 230 basis points organically and plus 8.6 percent, 7.1 percent growth in dollar terms. We expect continued robust OI growth on both a reported and an organic basis in the second half. H1 adjusted diluted EPS grew by an impressive plus 16.8 percent in constant currency and by plus 4 percent in dollar terms. The 38 cents unfavorable H1 currency variance includes 8 cents of non-recurring transactional impact from Egypt and Russia. Focusing now on volume, total shipment growth in both the quarter and H1 overall reflect smoke-free share gains in a resilient international industry, which grew by more than 1 percent in previous periods, even excluding overall and evapour. Q2 HTU shipments of 35.5 billion units exceeded our prior outlook, notably driven by continued strong performance in Japan, robust underlying growth in Europe, and promising growth in newer markets such as Indonesia. In addition to underlying momentum, Q2 saw an incremental phasing impact of around 0.5 billion units, primarily related to Red Sea disruption. Q2 HTU adjusted IMS volume grew by plus 10.2 percent in line with our expectation. This includes the impact of the characterizing flavor ban in Europe, most notably in Italy this quarter. Total smoke-free adjusted in-market sales volume grew plus 11.2 percent in Q2 and plus 13.1 percent in H1. This includes our overall smoke-free portfolio powered by Zin, with Q2 pouch unit volumes up by plus 20 percent. U.S. Zin shipment grew by plus 50 percent to 35.1 million can. This does not include the promising result of our evapour business, where volume grew strongly to the equivalent of 0.7 billion units on a -to-date basis. Cigarette shipments grew by plus 0.4 percent, with notable positive contribution from Turkey and North Africa. This reflects a stable category share excluding market mix, despite step-up pricing. With such a positive H1 volume performance, we are raising our full year forecast for total cigarette HTU and oral unit volumes to plus 1, to plus 2 percent, which would mark our fourth consecutive year of volume growth. The power of our multi-category smoke-free transformation and recovery in combustible are clearly illustrated on this slide, as both areas contributed strongly to double-jeet organic oil growth of plus 12.5 percent for the group in Q2. Smoke-free continued its excellent momentum with plus 18 percent organic growth in net revenue and plus 22 percent in growth profit, driving plus 220 basis points organic growth margin expansion. This reflects the strong performance of Zin and the growth and scale effect of ICOS, including manufacturing productivities, and an increasing or by smaller contribution from VIV. Expanding smoke-free growth margin continues to widen the gap versus combustible growth margin, enhancing the very positive mix effect of our transformation. However, combustible growth margin expansion is also a key objective. After seven quarters of contraction, we are very pleased to report plus 50 basis point expansion and growth profit growth of plus 5.5 percent on an organic basis, providing a meaningful contribution to total PMI profitability. This reflects resilient volume despite very strong pricing, in addition to ongoing efficiencies and reduced headwinds on our cogs, notwithstanding continued tobacco leaf inflation. We also expect combustible growth margin expansion in H2. Combined with a very strong first quarter, the -to-date picture is even more compelling with double-jeet organic net revenue, growth profit, and OI growth. This is driven by the same dynamic as Q2, with an impressive plus 390 basis point growth margin expansion and plus 29 percent growth profit growth for our smoke-free business. Our H1 revenue performance again demonstrates the powerful drivers of our financial model with an unparalleled combination of positive volumes, robust pricing, and the very favorable category mix of our smoke-free product. As mentioned, volumes grew by plus 3.2 percent, pricing contributed plus six points of growth, including plus 8.3 pricing on combustible, and around plus 2 percent on smoke-free. The smoke-free category mix added plus 2.5 points to the top line, reflecting the higher net revenue per unit of Icos and Zin. While still small, Ziv also contributed positively to the overall mix. I also note that our old smoke-free product added plus two points to organic net revenue progression, underlying the continued accretion from the Swedish match acquisition. As in recent quarters, geographic mix was negative. This is primarily due to combustible where volumes increasingly skew to lower margin markets, where smoke-free alternatives are small or not available, with higher margin markets overindexed to cannibalization. We expect this dynamic to be less impactful in 2024 than last year. Now, let's focus on the mechanics behind our H1 margin delivery. Growth margins increased organically by 140 basis points and by 80 basis points in dollar terms. This was driven by our higher margin smoke-free business, pricing, and ongoing productivity saving across the value chain. As expected, SG&A cost growth stepped up in Q2, increasing .8% organically after a very modest increment in Q1 due to planned phasing of commercial spend. The resulting .8% organic increase in H1 was below the rate of top line growth, driving plus one percentage point of margin expansion, with our successful -of-feed cost program able to mitigate some of the investment step-up. With a range of important commercial activities in Q3, we expect SG&A to remain elevated, but continue to target an organic increase below the rate of net revenue growth for the year. I am pleased to report we delivered over $300 million in H1 growth cost efficiency across both COGS and SG&A as we proactively drive bottom line growth. We expect an acceleration in H2 savings, notably from manufacturing, as we progress towards our $2 billion target for the 2024-26 period. The combination of these factors drove a plus 230 basis point expansion in our organic operating income margin. Despite a significant H1-screwed currency headwind, adjusted OI margin were stable on a dollar basis. Moving to our smoke-free business. We estimate there were 36.5 million adult users of PMI smoke-free products as of June 30, reflecting an additional 3.2 million during H1. This includes an estimated 30.8 million ICOs users, 5.2 million oral users, and 0.8 million ZEE users. The increase in both total and ICOs users was born-based, with notable progress in Japan, Europe, and newer growth markets such as Indonesia, in addition to Zene's strong traction with legal age nicotine users in the US. Our smoke-free products are now present in 90 markets, following recent launches of ICOs, Zene, and Veev. Focusing now on ICOs in Europe, where fundamental dynamics are developing very well, including the user growth I just mentioned. First, we see robust recoveries in markets where the characterizing flavor ban has passed the initial adjustment phase. Second, there is continued excellent growth in markets where ICOs is already well established, such as Portugal, Hungary, and Greece. Last, new growth leader markets are emerging with accelerating momentum in Germany, Spain, Bulgaria, and Romania, in addition to a recovery in Poland following the launch of DELIA. Our Q2 HTU share increased by 0.8 point year on year, despite the impact of the flavor ban. Due to the usual seasonal factors and a resilient combustible market, Q2 share was sequentially below Q1. HTU adjusted IMS volume demonstrated robust growth, growing by 0.8 billion units sequentially to reach 12.9 billion on the four-quarter moving average. As expected, adjusted in-market sales growth of plus 6.8 percent was slower than in Q1 due to higher comparison and the initial impact of the characterizing flavor ban, notably in Italy. Growth excluding Italy was close to 10 percent. The impact of the ban is progressing in line with our prior estimate in the majority of markets, though the implementation in Italy during Q2 was slightly more pronounced than anticipated. This was primarily driven by earlier sales through of affected SKUs and concurrent pricing. It is important to note this is a transitory dynamic and I'm pleased to report a recovery in markets such as Greece, Czech Republic, Bulgaria, and Romania, where the ban was implemented previously following an initial period of consumer adjustment. Indeed, despite an uncertain outlook in Ukraine, we anticipate an acceleration in Europe adjusted IMS growth in the second half. This is supported by the planned step-up in commercial activity behind ICOS, including the introduction of DELIA and Livia HTUs to an increasing number of markets. Another illustration of our continued progress in Europe is in our key city of tech share. Strong gains in city with already high ICOS adoption, such as Budapest, Bucharest, Bratislava, Lisbon, and Sofia, and historically slower growth markets such as Madrid, London, and Amsterdam, highlight the enduring growth potential in the region. Japan demonstrated impressive ICOs growth in the quarter with adjusted HTU IMS growth of plus 12.5 representing the seventh consecutive quarter of double-digit progression. Adjusted IMS volumes continue to grow sequentially reaching 10.5 billion units on a four-quarter moving average. Total tobacco share for our HTU brands increased by plus 3.1 points year on year to 29.4 percent with national off-tech share exceeding the impressive milestone of 30 percent in June. We also maintain off-tech share of over 35 percent in Tokyo despite seasonal factors, where the overall category continues to track at over 50 percent of total off-tech and grow sequentially, demonstrating the continued potential in this important market. Our continuous innovation is a key driver of this growth, with Q2 seeing a strong step-up in user acquisition following the launch of Illuma Eye and further innovative stereo variants such as capsule consumables. Taking a more global view, we continue to see very promising ICOs growth across a broad range of geographies including low and middle income market as highlighted by key city of tech shares. Accelerating growth in Indonesia, the world's cigarette market by volume excluding China leads the way with increasing geographic reach and close HTU innovation. Markets across North Africa and the Middle East are also a growing weight and source of growth. We show Saudi Arabia, Lebanon, Morocco and Tunisia here in addition to Egypt where performance in Cairo remains robust despite recent pricing and a recovery in the market. I am also pleased to report very good progress in the UAE and Jordan. Following the recent launch of Illuma, growth in Mexico City is very promising and the East Asian market of South Korea and Malaysia continue to perform well. Also worth highlighting is a successful contribution of Duty Free where we are increasingly leveraging our multi-category portfolio to expand share in a growing market as travel recovers in Asia. Our fundamental HTU growth outlook for the year has not changed. H1 adjusted IMS growth of plus 11.4 percent reflect the strong dynamic I described across Japan, Europe and global markets partly offset by the transitory impact of the EU flavor ban. Indeed growth excluding Europe accelerated compared to the last year and we expect this to continue. However we see an incremental lead win of around 2 billion units to our full year adjusted IMS forecast. The majority of which is driven by the ongoing delay in approval for commercialization in Taiwan which was previously expected around the midpoint of the year. We also factor in an impact of a few hundred million units for a slower recovery from the characterizing flavor ban in Europe principally in Italy. I would note that our revised full year forecast for adjusted IMS growth of around 13 percent represents the same absolute volume increase as 2023 despite the EU headwind. We accordingly forecast full year at the shipment volume of around 140 billion unit with shipment as usual expected to be a few billion unit higher than adjusted IMS given continued off-take and user growth. Importantly we expect very strong H2 delivery in adjusted IMS on both a sequential and -on-year basis to between plus 14 and plus 15 percent growth. This is supported by a notable step up in commercial activity, continued momentum in Japan and increasingly dynamic global markets. This includes the market I just mentioned and the ongoing acceleration in duty free. For Europe a broadening of growth through acceleration in Germany, Spain, the UK and Romania adds to the ongoing momentum in geographies such as Portugal and Greece. H2 should also see several markets start to rebound from initial flavor ban impact including a gradual recovery in Italy. Turning now to Zin where very good US progress continued in Q2 with close to plus 70 percent growth in 12 months rolling shipments. As we shared earlier in the year strong demand dynamics have created short-term supply chain constraint which has impacted volume growth. As shown on slide this has resulted in a temporary slowdown of the category. Zin's premium positioning and superior brand equity remain strong within maintaining very robust category volume and value share despite these availability challenges and a recent price increase. We also remain highly focused on marketing Zin responsibly to prevent unintended use. We are making good progress on expanding production and continue to expect a gradual improvement through Q3 with sequentially higher volume and for production volumes to meet expected consumer demand during the course of Q4. We expect the ongoing expansion of the existing facility in Kentucky to provide around 900 million cans of capacity for 2025. We also recently announced a plan investment in a new plant in Colorado which is due to begin preliminary operation by the end of next year. Together these plans support our US growth ambitions for the coming year. For 2024 we are now forecasting a US shipment range of 560 to 580 million cans to reflect strongly increasing demand from adult nicotine user and the progress made on increasing our production capacity. I will now take a moment to update you on the international expansion of our smoke-free business. Our multi-category approach is gaining momentum as we unlock new horizons of growth with the increasing commercialization of Icos, Zin and Viv across markets. Our focus strategy for Viv is showing very good early results. In Europe, close pods are accelerating within the dynamic e-vapor category. We are seeing strong traction of our VivOne product achieving a number one close pod position in five markets within the first year of launch including Italy, the Czech Republic and Romania. We continue to observe good repeat purchase and conversion rate which is often a challenge for this category. We expect continued volume momentum in H2 supported by ongoing geographic expansion and to reach profitability in Q3. For Zin, there is a large opportunity outside of the US which we are working to capture. Our international nicotine pod volume including the Nordics grew by over plus 60 percent in H1 matching US in growth. We see promising results in a number of markets including Mexico, South Africa, Pakistan and the important UK market where we have seen strong traction with only limited distribution so far. Our expansion of the Icos portfolio remains active as we innovate to broaden and enhance our offer for both existing users and switching other smokers. Further market launches are planned in H2 including Delia and Livia HTUs and the new Illuma i device range which is currently only available in Japan. We also continue with our preparation for Icos Illuma in US and we are underway with consumer engagement for our first city pilot in Austin, Texas with the Icos 3 system which we expect to start in Q4. As mentioned previously the commercialization will be initially limited in scope and focused on direct activation of select legal edge smokers in a few cities allowing us to experiment with different elements of the commercial model. The main purpose is to fine-tune our approach and readiness in anticipation of the at-scale launch of Illuma. We continue to assume an authorization from the FDA in the second half of 2025. Focusing now on combustibles our portfolio delivered robust organic net revenue growth and a very positive profit contribution as I covered earlier. This reflects resilient volume despite very strong Q2 pricing of plus 8.7 percent including our proactive action to maximize growth. It is worth noting the large majority of our pricing is derived from regular pricing action unrelated to significant currency devaluation. Factoring a strong H1 and favorable outlook we now forecast an increased fully combustible price variance of plus 7 to plus 8 percent. Our cigarette category share was stable in H1 and down 0.2 points in Q2 or stable excluding market mix impact. Lower share in Egypt and Indonesia was offset by positive contribution from Turkey, India and the Europe region again despite strong pricing. Our global brand grew category share in Q2 with Marlboro gaining plus 0.3 points to 10.1 percent. On the global basis our leadership in combustible is a critical enabler to maximize switching to smoke-free product and we target a stable category share over time. As mentioned previously we evaluate our strategy on a market by market basis and have the flexibility to adapt our approach where smoke-free products have already reached critical mass. Taking a more holistic view on the business our transformation and smoke-free journey are backed by a strategy that seeks to embed sustainability in all that we do. We are making strong progress towards our product transformation targets. Our smoke-free products are now available in 90 markets placing us on track for our aspiration of 100 by 2025. We are also moving nicely towards our objective for low and middle income countries to comprise over 50 percent of smoke-free product market. The rapid growth of our estimated SFP user base which now stand at around 36.5 million adult users as previously described is further testament to this progress. With regard to our operation decarbonization is an important focus area and we are very pleased to have been awarded the top spot on the Forbes 2024 net zero leader list which highlights the 100 US public company best position to reduce their greenhouse gas emissions. It also follows the announcement earlier this year of CDP awarding us a triple a rating for our disclosure and efforts on climate change, forest and water security. This recognition reflects our continued focus on our sustainability performance and robust reporting as we continue to work towards a smoke-free future. This brings me to our outlook for 2024. Following an excellent H1 performance and strong business momentum as we start the second half we are raising our full year currency neutral and US dollar growth forecast. This is supported by accelerated total volume growth and pricing and reflect the very strong outlook for Zin despite short-term supply constraints and the increasing profitability of ICOs due to operating leverage, manufacturing efficiencies and pricing. We continue to target close to 15 billion dollars in smoke-free net revenue for the year. Taking these factors into account and a robust combustible performance we are increasing our organic net revenue growth forecast to a range of plus 7.5 to plus 9 percent. In addition to strong top line growth the positive smoke-free mix effect, combustible recovery and further cost efficiency enable LC margin expansion. We are accordingly raising our organic operating income growth forecast to plus 11 to plus 13 percent for the year. We continue to target adjusted growth margin expansion for both smoke-free product and combustible and adjusted OI margin expansion for total PMI all in both organic and dollar terms. Consequently and also factoring a lower forecast net financing cost we are raising our forecast for currency neutral adjusted diluted EPS growth to plus 11 to plus 13 percent. This translates into a range of six dollar 33 to six dollar 45 including an unfearable currency impact of 34 cents for the year at prevailing rate. The increased currency Edwin versus prior guidance is primarily due to the Q2 impact already described. As shown by the increase in our forecast USD EPS growth to plus 5 to plus 7 percent the underlying strengths of our business and proactive mitigating actions have allowed us to more than compensate for this and we expect to deliver on our objective of strong growth in dollar terms. Focusing on the second half in more detail we expect another strong performance driven by excellent high cost adjusted IMS growth, the progressive improvement in Zinn volume and continued positive impact from our actions to drive bottom line growth. For Q3 we forecast a record high quarterly adjusted diluted EPS of one dollar 77 to one dollar 82 despite a significant step up in commercial spending and an unfavorable currency impact of two cents at prevailing rates. This is in contrast to a forecast currency tailwind of four cents for H2 overall which enabled us to target accelerated US dollar adjusted diluted EPS growth. We include a table of estimated currency impact by quarter in the appendix. This Q3 forecast notably reflects another quarter of dynamic growth with HTU shipment of 34-35 billion units and an acceleration in HTU adjusted IMS growth. Given expectation for a strong full year profit delivery we are forecasting operating cash flow of around 11 billion dollars which is at the upper end of our previous forecast range at prevailing exchange rate and subject to year-end working capital requirement. We expect this improvement to more than offset an increase in capital expenditure to around 1.3 to 1.4 billion dollars as we further accelerate the incapacity expansion. Last we continue to target a 0.3 to 0.5 time improvement in our net debt to adjusted ABDA ratio in 2024 driven by profit growth and strong cash flow generation. As of June the 30th we have already improved to a ratio of three times on a 12 month trading basis as compared to 3.2 times at the end of 2023. This represents good progress towards our target of around two times by the end of 2026. We intend to reconsider share repurchase subject to board approval once we are within sight of this goal. I will now conclude today's presentation with some closing remarks. The powerful combination of strong underlying business momentum and our own proactive steps enable us to generate best in class growth across key metrics. Our strategy is delivering on volumes pricing cash flow and dollar earnings despite ongoing currency headwinds. The success of our smoke free transformation is reflected in our remarkable first half performance with excellent underlying icons and in growth very robust pricing positive category mix and step up cost efficiencies. This puts us firmly on track for an exceptional 2024 with accelerated top line growth and margin expansion. Our momentum is broadening across the business with exciting multi-category growth opportunity to further support the delivery of our 2024-2026 growth targets. We remain highly focused on delivering performance in dollar and as shown in H1 we are taking measures to mitigate currency headwinds. Finally we are steadfastly committed to returning cash to our shareholders. Our growth outlook and strong cash flow generation underpins our capital allocation priorities to reinvest behind our rapidly transforming business alongside our progressive dividend policy. Thank you and we are now very happy to answer your questions.
spk08: Ladies and gentlemen if you'd like to ask a question please press star 1 1 on your telephone. To withdraw your question please press star 1 1 again. Please stand by while we compile the Q&A roster. And one moment for our first question. And our first question will come from Eurab Jane of Barclays. Your line is open.
spk04: Hi good morning Emmanuel. Two questions from me. One is just on the cigarette pricing algorithm that you have. So if I look at your market share gains you know clearly quite impressive even excluding modern oral and if I add that then you are gaining almost 80 basis point share right now per annum. So isn't that level of market share gain excessive and suggest that you are not monetizing your cigarette business as much as you should be and that would mean that increase the pricing growth and sub-grids from 7 to 8 to let's say 8 to 10 percent. Then I have a follow up.
spk01: Thank you Gura for the question. Luke let's be clear we can always challenge us on whether we could do even better in terms of price increase. The fact is that we are doing better than what we thought initially. We have this very strong performance 8.7 percent price increase for combustible for H1. I think we all know that the inflationary environment is no longer what it was last year. So obviously this is a very strong performance. Please bear in mind I said it in my preliminary remarks but around three fourths of that is not coming from inflation in oh sorry from a price increase in a country with very high inflation. And this 8.7 percent in Q2 is largely driven by the markets where we are really driving price on a kind of opportunistic basis building on the strength of our portfolio and making sure that we are ever optimizing the potential for price increase. So you can be absolutely sure that this is very granular work market by market each time as we signal we take into account what is our position on smoke free product on this market. What is the impact of increasing price. And I think we can demonstrate that we have a very successful approach on this price increase. So I would tend to believe that we are optimizing this price increase potential in the current environment. Thank you.
spk04: You mentioned that Zinc capacity will increase to 900 million cans next year. So does it mean that by Q4 of this year it will be 225 million cans per quarter? Thank you.
spk01: I'm confirming that we have the objective to be around 900 million can of production capacity for next year. That's for the full year 2025. We are gradually improving our capacity and there is a number of steps that we are taking. I'm not going to elaborate on them but there are several levers that we are pulling to increase this capacity. So I would say every quarter versus the previous one we are improving the capacity. I'm not going to give a prediction on where we're going to be at the end of the year. We believe given what we see from the potential consumer demand today that in terms of what we produce at the start point in Q4 versus what the consumer of tech could be without restriction we're going to be good. And then we'll see exactly how we finish in terms of capacity at the end of the year. But I think what is more relevant and frankly more important is you have the picture of this 560 to 580 million can that is our goal for 2024. You know that we have this capacity for 900 million cans for next year. That's because it's not a guidance on the volume for next year. We're just here giving the capacity on which we are working and I think with that you have what is important. Thank you so much. Thank you.
spk08: And one moment for our next question. Our next question will be coming from Bonnie Herzog of Goldman Sachs. Your line is open.
spk02: Thank you. Hi, Emmanuel. Morning, Bonnie. Good morning. I had a question on your guidance. You raised your top and bottom line growth expectations but you lowered your HTU shipment volume outlook slightly and you triggered this to slightly greater than expected impact from the EU flavor ban and you did touch on this but maybe hoping for a little more color on that and any other impact on HTU volume that you're expecting in the back half. Are you expecting EICO's growth to remain robust in Japan in the second half for instance? And then finally you mentioned your HTU guide assumes no volumes in Taiwan. So maybe an update there in terms of timing?
spk01: Sure, Bonnie. And thank you for maybe giving me the opportunity to further clarify the dynamic and the good dynamic that we are seeing behind EICO's. So we are indeed revising first of all our objective of adjusted in market sales by around 2 billion. I've been clarifying that the majority of that is coming from Taiwan. So in fact it's really the fact that we were expecting Taiwan to start more than six months this year and it's at the end of the day today we're making here the assumption that at the end of the day it's going to be zero volume in Taiwan. We thought it was a reasonable assumption. Remember the law allowing for an ETA tobacco product was passed now 15 months ago. So we thought that during this period of time there was this capacity to get the approval from the regulator and there is an administrative process asking questions. You have Q&A. It's just taking much more time than what we thought. But first and foremost the reason for this 2 billion revision on adjusted IMS is Taiwan. Then in addition to that we have this a few hundred million that is coming from Europe. So that's really all you should understand the 2 billion. And because of Taiwan we are indeed saying when we were expecting to be above 140 billion sick in terms of shipment we are now expecting to be around 140 billion sick. Again that's the way you should understand the revision on the guidance. But let me take two minutes to explain the dynamic because I want to make sure that things are very clear. What we've been seeing in H1 is in fact an acceleration of the ICOs business outside Europe. So if you look at the adjusted in market sales outside Europe and we're talking about 60% of the business the adjusted IMS were growing around 14% versus around 13% last year. So we've been growing faster in percentage. So you can imagine in terms of volume of course that means a significant acceleration. And indeed what is behind this very nice dynamism is Japan. You have other developed markets such as South Korea. But we've been seeing a number of new contributors to this growth. We mentioned Indonesia. We mentioned a number of markets in the Middle East. Mexico is also accelerating and we enjoy also nice performance in duty free. So that's really what we are seeing outside Europe. Then Europe absolutely as expected. I mean we're going through what is a significant transition. You know we're moving away from flavor. It's still growing outside Italy. We have adjusted in market sales growing close to double digit. So very strong dynamism despite the fact that many of the countries are going through this transition. And as we flagged it is true that it's really great to see at the same time our champion market you know like we mentioned in Portugal, Greece, Hungary that continue to do very well. We have new markets that are really confirming their status of growth driver for the future. We mentioned Germany, Spain, Romania, Bulgaria. So it's important to have this new growth provider if you want. And then a number of markets exiting I would say as expected the turmoil or the disruption I would say of a few weeks that is coming with implementation of the flavor ban. And here we can mention Greece. We can mention Romania. We can mention Bulgaria. We can mention Czech Republic. So a number of markets where things are happening absolutely as expected. And then you have Italy where we've been in fact not evaluating where the level of flavored product available with distributor and with the retail. And there was less than what we thought and therefore the consumer of tech has been impacted quicker than what we were anticipating by the absence of a flavor product after the implementation of the flavor ban. And that has some impact on the growth and at the same time and no doubt that the two accumulating have had some impact. We've been increasing price by 30 cents on our consumables and that has not been followed or only very marginally by the competition with some impact on our market share as it happens you know when we increase price in a meaningful manner widening the gap with competition and the following. So that is really the picture and now when we are looking at the second half. So we expect outside Europe situation to continue to do well and we're going to you know name again all this very great country where we are performing extremely well. We have the launch of Livia and Delia in a number of countries and we expect Europe to accelerate as we are transitioning out of this phase of adjustment to the flavor ban. And Italy will be part of the market where we expect improvement but I would say globally we expect more acceleration on all the markets that have been going through the flavor ban. So I think this is really the complete picture Bonnie I hope it is helpful in answering your question.
spk02: That was definitely very helpful I appreciate you going through all of that. And then if I may I just wanted to ask question on Luma-i in Japan. I guess I was you know hoping to hear a little more color on this device which I believe is only available in Japan right now. And curious to hear how big of a lift it's been or you know essentially how incremental and you know really what you're seeing or hearing from consumers in terms of acceptance of the new device you know impact on your growth margins etc. And then finally your plans for the rollout of this device. Thank you.
spk01: Sure Bonnie so you're right. Luma-i so the latest generation of Icos Luma so it's not changed the fundamental technology but the device is offering a number of additional functionalities. It's for the time being only present in Japan. There is the launch in a few other countries that is planned for H2. And it's always difficult to say what this new product is triggering but we've been seeing clearly a new acquisition of Icos user. We've been seeing a consumer sentiment going up with a some very good reaction to this product. So I would say we continue to have more ammunition to convert smokers to Icos to improve the experience to improve customer satisfaction that is triggering of course more loyalty that can have some impact on the average daily consumption so a number of positive effects. That's what we have seen in Japan. Difficult for me to tell you exactly by how much this has been further accelerating the growth in Japan but now that this was a positive for the market.
spk02: All right thank you. I'll pass it on.
spk01: Thank you. Thank you.
spk08: And one moment for our next question. Our next question will be coming from Matt Smith of CIFU. Your line is open Matt.
spk05: Hi Emanuel. Morning Matt. Good morning. Could you provide a little more detail on the growth in oral pouches in international markets? You highlighted some early success in several markets. Are you continuing to expand distribution there? Are there any capacity constraints for those international markets outside of the US?
spk01: Sure. So as a coincidence I suppose but it is true that in H1 the growth in nicotine pouch outside the US was very similar to the one in the US. No you know watch out. It's you know we talk about 10 percent only of the volume in the US. That is including it's not totally nothing because that is including the Nordics and what we are clearly seeing is that there is from the nicotine user some interest and attraction in many countries and I tend to really you know put three buckets of possible growth for for this market. You have of course first the Nordic country that has the understanding the culture of this product and where the nicotine pouch category is dynamic and here we want to take our fair share of the growth. Then you have Europe where the category is not relevant in all markets but we can already flag a number of countries such as Austria, the UK, Switzerland where we believe that there is potential and we see the growth. And then you have I would say global market international market. We can name Pakistan. We can name South Africa. We could talk about Indonesia maybe Philippines where we see potential for these nicotine pouches. You may have some culture already of oral product and we see some development of the product. I could add Mexico to the list by the way where we are starting nicely the development of Zin. So we see that this product maybe because of the US influence I think you know in the case of some country like the UK that's a category that could grow is awareness I would say interestingly and rapidly and we want absolutely to make sure that we're going to capture our fair share of this opportunity.
spk05: Thank you for that and just a quick follow-up. Is there any capacity limitation on that international business or is that capacity not constrained like what you're seeing in the US?
spk01: No there is there is no capacity issue that I have to report at that stage.
spk05: Thank you Manuel I'll leave it there.
spk01: Thank you
spk10: Matt.
spk08: And one moment for our next question. Our next question will be coming from Faham Bay of UBS. Your line is open.
spk07: Hi Manuel thanks for the question. I've got two as well one on the VEPA category and one on Zin. I know you're looking to expand with your VEEP product but how do you see the development of the VEPA category particularly outside of the US? What profile of users is the category attracting? For example in Europe I'm just trying to understand whether consumers that use VEPA see it as an alternative to heated tobacco or are the two categories attracting a different profile of consumers particularly post the flavor ban in Europe?
spk01: Sure and you want to ask a question on Zin now or you want to come back on Zin after?
spk07: Why don't I come back after? Okay
spk01: so on the vaping category I think what we are seeing is that we've always been saying the vaping category is a legitimate category to be an alternative to people who would otherwise smoke and therefore that is a category that is growing not necessarily faster than eat not burn not faster than nicotine pouch for sure but of course the basis for nicotine pouch is smaller and we know that the vaping category is more appealing for people legal edged and above that want to start consuming nicotine and it's much more difficult to convert smokers and that's clearly what I caused and the eat not burn category is doing much better. So yes vaping can be appealing for some legal edged and above nicotine user more difficult to smoke very clearly we haven't seen any meaningful report of people moving to vaping and the change of kind of you know dynamic in the category following the implementation of the flavor ban in Europe of course we are monitoring that but that is nothing that we can obviously report on that trend which probably could confirm that we talk about people that are probably with different profiles but that's something that we will have to keep monitoring of course. So we've always been saying that you know the concern with the vaping category is that if the products are not properly developed and marketed if there is an unreasonable appeal to flavor well that can trigger unintended usage and that is a problem for the category and we are very happy with our growth because we do in a very responsible manner both in terms of development of our product development of our marketing activity and we are developing this responsible approach very much based on our commercial strength and a great product I think v1 is a is a great product and strong partnership with the trade that is giving this very good start as we mentioned you know the number one position five countries for close pods that's really what I can share with you at that stage.
spk07: Yeah that's helpful and then secondly on Zin in the US now according to the scanner data some of which we we received today as well Zin's momentum from a volume perspective is is sequentially falling albeit very very low single digits would you have an estimate of if you did not have the capacity constraint what volumes could potentially look like and and in the back half when you are expecting an acceleration in in volumes is that is that implying that you begin to gain market share or is that largely driven by further acceleration in the overall category?
spk01: Look on Zin I think we've we mentioned the fact that we are clearly with some restrictions so I'm sure that what you read in the Nielsen which corresponds to the availability is going to view on the trend and the consumer demand we are gradually improving and we expect to see that in the coming months the availability today we clarify that we are working with a target of around 900 million capacity for next year so we are creating very nice headroom for growth for the coming quarters and we think it's really important I'm not going to be able to tell you because frankly it's impossible to say what would have been the growth rate without the limitation please bear in mind that there was some competitors move in terms of pricing last year that trigger an acceleration in our market share and that no no the effect is now behind us so they it is also having some impact on the year on year comparison so that's what we can we can say on Zin.
spk07: If I could quickly squeeze in one more is there any update on the review of the Zin sales post a recent sub-bina in the District of Columbia that that is ongoing and force you to close your Zin.com sales and when that may recover yes
spk01: I know there is nothing new we keep working and fully cooperating of course with the attorney general and at that stage it's impossible to say how long the work will take or what will be the conclusion and there is nothing new today
spk07: thanks
spk08: Emmanuel thank
spk01: you
spk08: and one moment for our next question and our next question will be coming from Owen Bennett of Jeffery's your line is open
spk09: morning Emmanuel hope you're well and hi I just had a couple of questions on the the US pouch dynamic so first and I would assume this is due to certain retailers trying to fill the supply gaps I have been seeing some Scandinavians in available in certain stores so I was wondering how you can get on top of this to make sure that's not happening and then second I'm also now seeing other more than all brands appearing that I assume do not have a PMTA submitted so how do you see the risk we could see a similar scenario developing in pouches in the US and to what we're seeing in vape illegal products thank you
spk01: so you're alluding to product that would come from non-us market correct that's what yeah
spk09: details of distributors are buying from scandinavia to try and fill the supply gap so I have been just wondering how you can get on top of that to make sure that's not happening
spk01: look I don't have any information about that so I I cannot make any comment or report I think we are doing everywhere we can our utmost to ensure that you know the flows are appropriate and not you know going where they should not be going and we are working very hard with this objective and you know I I don't have any data and I cannot you know react on on on that our position is very clear we are very strict on doing everything we can to make sure that these parallel flows are not happening on your question on if I understand you well when could we see the same kind of phenomenon on nicotine pouches the one we are seeing on vaping which is illicit parallel flow that would be entering the US market yeah
spk09: I'm trying to see brands that I am assuming do not have the mts just wondering how you see
spk01: the risk around that today from what we can monitor in the market we are not having the feeling that there is anything material at that stage but of course we are monitoring that very carefully if it was to become material I think what we are clearly seeing today is that the authorities take that seriously and they are starting to have much more action and be much more alert on the topic so I would expect them to have the same behavior when it comes to nicotine pouches so to summarize I don't think we're seeing anything meaningful today to be certainly watched and if it was to become the case we would expect the authority to have the same I would say proactive behavior that they I think as they are starting to implement on vaping
spk09: okay thank you sir appreciate it
spk01: thank
spk08: you and one moment for our next question our next question will come from Callum Elliott of Bernstein your line is open
spk11: hi thank you very much for the question um it's actually a follow-up quite similar question to what you just had from from Owen but I want to push you a bit further because we also like ONC pretty widespread evidence now that European moist versions of Zin that do not have pre-market approval as far as I'm aware and weren't in the market as of August 2016 are available for sale on a widespread basis across New York City but also the online form suggests that this has become a pretty widespread issue across the US as a whole so I guess two questions can you just confirm for those products weren't in the market at 8 August 2016 and that they are being sold in breach of FDA regulations and then I guess secondly building upon what Owen asked presuming that you're not selling a listed product directly to US retailers yourselves and you know what can you do and what are you doing to stop European e-commerce retailers selling this product because it strikes me that this presents a pretty meaningful potential risk to your US in business if this illicit product continues entering the US market in this way
spk01: thank you Callum look again I don't have any data on what you're saying so it's very difficult for me to report I think you know we know what are the products that benefit from the situation and the positioning in 2016 in the market and that therefore are legally being commercialized as you can imagine I'm going to repeat only what I said we are doing everything we can to control the flows I don't have information today saying that you know you have these flows of product if we knew we would certainly tackle that and you know we would try to understand where it's coming from and what I can certainly repeat is that our objective is to do our utmost everything we can to be compliant with the regulation and
spk11: there is about and bringing supply back online in the US also bringing new supply online to meet demand what gives you this confidence that we're going to see that the sort of upwards lifters in guidance today implies a very significant sort of back half hockey stick in terms of positive inflection and which defines earlier question we see sequential declines in now quarter today so what gives you the confidence that the consumers are switching to on consumers are switching to rogue yeah some of the consumer views for reviews for some of these competitive products are and sometimes better than for zin so what gives you the confidence that now that consumer awareness for these other brands has grown as a result of your your supply chain issues that you're going to immediately win those consumers back once supply comes online again
spk01: look alam this is obviously coming from a mix of consumer demand perception that we have and we believe that if we can produce them there is a space to get to 518 million can shipment that's the first element and that's you know what our sensors are telling us about what consumer would be happy to buy if it was available and at the same time of course our measures to increase production capacity where as i said i'm not going to elaborate on the various levers but we're pulling a number of levers to progressively increase the capacity for zin production in in the u.s so that's really the combination of the two okay thank you thank you
spk08: thank you and our last question will be coming from prior or a gupta a barkley's your line is open
spk03: okay thank you so much for taking the question um immanuel i was wondering if you could give us a little bit more um color on the eiko saluma test that you're planning for the u.s it sounds like just a few cities um will those be sort of diverse geographically across the u.s and what are some of the learnings that you're hoping to i think unlock and how could this be different than what we saw initially several years ago with some of the standalone stores that were put in place and then i have a follow-up thanks
spk01: sure priya well that's a very broad question and although very important one of course so given where we are i'm going to make a short answer on that one first of all we clarify the fact that we'll go for a scale launch only once we get the pnta for iluma and as i said in my preliminary remarks we are still today targeting to get this approval in the second half of 2025 once we are there then we have the right product to really go broader in in the u.s and at that stage we will have been learning with a number of things that we're going to do between q4 and and the moment where we go with iluma and it's you know you're asking okay what are you going to do differently let's let's be clear we don't believe that i course has never been launched in a kind of serious consistent and profound manner and we believe that what makes ico so popular outside the u.s is going to resonate with a number of smokers you know among the around 30 million smoker in in the u.s so we're going to develop what has been working elsewhere it will be about of course going to the smokers explaining what icos is about explaining the experience why iqos is a better product than smoking and i think it would be as always very important to create the image the brand territory but also you know talk about closely with the smokers okay this is a journey to move away from smoking and to to go to a better product to to icos we will have the same commercial i would say a machine that has been successful in so many markets with developing our own retail sales point we will have a strong partnership with a number of independent and third-party retailers so we're going to pull all the levers and some things that have not been done in the u.s because until now it has been only a very limited launch in a few cities with with limited action so everything is going to start at that moment for icos and there won't be any magic we're going to use what has been working so well elsewhere of course adapting it to the u.s market
spk03: that's really helpful and i guess just a follow-on to that is you talked a lot about the development of icos fees outside the u.s maybe broad strokes how do you think that product could play out in the u.s and at what point would you think about filing pmtas and then the availability of that in the u.s
spk01: thanks look for the time being we don't have the plan to file a pmta on on viv we are very much focusing on on on icos i think that viv success is just at the beginning today it's great to have already five markets where we are number one on the on the close pods system but it's just the beginning we're going to keep learning developing how we can develop a successful profitable business on vaping and then you know we will see whether in due course it may make sense to have some thoughts for viv in the u.s but we are not at that stage today
spk03: thank you just one final i think housekeeping item you talked about your interest expense being at the low end of your prior rate 1.3 billion does that reflect i guess the issuance you've done to date and should we anticipate that there wouldn't be any incremental interest expense headwinds i.e. potential scope for for any other refinancing or pre-financing that you might consider
spk01: thanks no i think the improvement in the estimated financial cost for the year is reflecting a better situation on first of all the level of the debt with the cash flow generation second with how we are financing the group and that is coming with you said it i mean we are in the in the low end of the initial bracket and i don't think you should expect some kind of revolution in the way we are financing the company nothing on the agenda
spk08: thank you appreciate that
spk01: thank you
spk08: i would now like to hand the call back to james bushnell for closing remarks
spk06: that concludes our call today thank you for joining us if you have any follow up questions please contact the pmi investor relations team thank you again and have a great day
spk10: thank
spk08: you this concludes today's conference call thank you for participating you may now disconnect
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Q2PM 2024

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