Philip Morris International Inc

Good day and thank you for standing by. Welcome to the Philip Morris International 2025 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 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 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, Investor Relations. Please go ahead.

Welcome and good morning. Thank you for joining us. Earlier today, we issued a press release containing detailed information on our 2025 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 U.S. gap measures for non-gap financial measures cited in this presentation, are available in Exhibit 99.2 to the company's Form 8K, dated today 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. I'm joined today by Emmanuel Barbot, Chief Financial Officer. Over to you, Emmanuel.

Thank you, James, and welcome, everyone. We delivered an excellent set of H1 results following another very strong performance in the second quarter of 2025. Top-line dynamism from our smoke-free portfolio, which reached a record $4 billion in net revenues, coupled with margin improvements across our business, drove strong double-digit adjusted diluted earning per share growth in both constant currency and dollar terms. The multi-category momentum of our smoke-free business accelerated with a Q2 step-up in off-tech growth for Icos, Zin and Viv. As expected, Icos delivered another strong performance with heated tobacco unit adjusted in-market sales growth accelerating to plus 11.4% in Q2. This reflects broad-based growth both globally and in Europe, as markets such as Italy pass the transitory disruption of the characterizing flavor ban. VIN confirms its upward trajectory with a significant acceleration in U.S. consumer of tech growth to plus 26% for Q2 and plus 36% in June, as in-store availability improved. Internationally, Q2 nicotine pouch volumes increased plus 65% and almost trebled outside the Nordics. In eVapor, Veve continued its remarkable trajectory with shipments more than doubling year on year, driving further gross margin expansion. For combustibles, despite unexpected return to modest volume declines, our business delivered robust top and bottom line performance reflecting its resilient model led by strong pricing. We continue to generate base-in-class growth across the P&L with high single-digit organic H1 top-line growth and mid-teens adjusted OI growth to reach a margin of over 41%. This high-quality performance reflects the increasing profitability of our three smoke-free categories as scale, operating leverage, and efficiencies combined. These results provide an excellent platform for another year of superior growth. We expect strong smoke-free momentum to continue in H2, while we factor in the exceptional H2 prior comparison, notably on growing combustible volumes and certain timing factors. With strong business fundamentals and a slightly more favorable expected tax rate, we are raising our adjusted deleted EPS full year forecast to plus 13 to plus 15% growth or plus 11.5 to plus 13.5% excluding currency. Looking at our Q2 financials, we delivered another quarter of shipment volume growth of plus 1.2%. and organic top-line growth of plus 6.8% or plus 7.1% in dollar terms to reach over $10 billion in quarterly net revenues for the first time. Excluding the Indonesia technical impact explained last quarter, organic net revenues grew by more than plus 8%. Adjusted OI grew by plus 14.9% organically, with growing profitability in all categories, positive smoke-free margin mix, and ongoing cost efficiencies. Adjusted deleted EPS of $1.91 reflects growth of plus 20%, including a favorable currency variance of $0.02, 4 cents lower than previously guided, mainly due to intercompany transactional impact from currency volatility at the end, including on the Swiss franc. This better than expected EPS delivery notably reflect strong top line momentum, positive margin evolution in our smoke-free product business, and robust combustible pricing. Combining this excellent Q2 with a strong first quarter, we achieved one of our strongest ever H1 performances. Total shipment volumes grew by plus 2.5% and organic net revenues by plus 8.4% or approximately plus 10% excluding the Indonesia technical impact. Strong performance from both smoke-free and combustibles. drove adjusted operating income growth of circa plus 15% in both organic and USD terms to reach $8 billion in total. H1 adjusted deleted EPS was up by plus 17.7% in constant currency and by plus 16.1% in dollar terms. Turning to shipment volumes. We delivered Q2 growth of plus 1.2% and plus 2.5% for the first half, driven by more than plus 13% growth from our smoke-free business. While adjusted in-market sales growth accelerated, Q2 HTU shipment volume grew plus 9.2% to 38.8 billion units, including robust growth in Europe and Japan, as well as promising growth from global markets such as Indonesia, South Korea, and global travel retail. H1 HTU shipments increased by plus 10.5%, broadly in line with adjusted in-market sales growth. As mentioned last quarter, our H1 shipments include a Q1 shipment timing benefit of around 1 billion units, which we expect to reverse in the fourth quarter. Oral and evapor shipments, again, grew significantly. Cigarette volumes declined modestly in Q2 following the exceptional growth of recent quarters. This was primarily due to contraction in Indonesia and in Turkey, where we experienced supply chain issues following a change in regulatory requirements. This resulted in a temporary loss of volume and share, with some associated inventory write downs. We expect a gradual recovery through the remainder of the year, though H2 year-on-year comparison are still likely to be affected. In Indonesia, despite a good share performance, a growing illicit segment is impacting both the legal industry and our volumes within it, and this is also likely to extend into H2. We expect our cigarette volumes to decline around 2% for the year, more in line with the historic underlying trend. This includes a forecast decline of 3% to 4% in H2 against the high prior year comparison I mentioned, with Turkey accounting for close to half of this decline. This also factors the continuation of decline in Europe and Japan as smoke-free products grow strongly and the dynamic in Indonesia and in Egypt where the recovery of the main local competitor is ongoing after previous supply constraints. As a testament to the resilience of our combustible model, we are still targeting combustible growth, profit growth in H2, supported by pricing and cost efficiency. For smoke-free products, we anticipate continued double-digit volume growth in H2, including the expected reversal of H1 phasing benefits on ICOS. However, given cigarette dynamics, it is possible that H2 may see modest decline for total PMI volumes. Importantly, with the forecast full year increase of around plus 1%, we continue to target our fifth consecutive year of total volume growth, as we do for future years as our smoke-free portfolio continues to drive performance. Breaking the performance down by category, Exceptional growth margin and OI growth in Q2 resulted in impressive first-half results powered by our increasingly profitable smoke-free business. H1 smoke-free net revenue grew organically by plus 17.3% to $8.1 billion and gross profit by plus 27% to $5.6 billion with plus 530 basis points of organic expansion to reach over 70% gross margin. This is around 4.5 points above the gross margin of combustible at the current category and geographic mix. As in 2024, this reflects continued margin expansion for all three smoke-free categories, notably combined with the positive mix impact of the accretive unit economic and pricing on both HTUs and ZIN. Very strong high-cost growth margin expansion reflect the powerful growth and scale effect of this large and growing business, manufacturing productivities, and a comparison benefit from higher device shipment in the prior year when Illuma-i was launched in Japan and other markets. We expect strong margin to continue in H2, albeit without the device year-on-year comparison benefit, as we also further expand the presence of ILUMA-I across markets and bonds in Indonesia. Combustible net revenues increased by plus 2.9% or more than 5%, excluding the Indonesia technical impact. Gross profit grew by plus 5%, driving plus 140 basis points of margin expansion, despite the financial impact of the Turkey disruption. This includes a robust Q2 with organic net revenue growth of plus 2% and gross profit growth of plus 4.8%. This performance epitomized the resilience of our ongoing combustible business model with low single-digit volume declines, robust pricing, and efficiencies, combining to deliver top-line and gross profit growth over time. We continue to target combustible growth margin expansion organically and in dollar term for the year despite slower pricing and weaker volume in H2. The combination of sustained smoke-free momentum and combustible resilience led to plus 15.4% H1 organic OI growth at total PMI level, resulting in plus 250 basis points of operating income margin expansion to surpass H1 net revenue growth of plus 8.4% was again fueled by the three engines of our top line growth model with positive volumes, robust pricing and favorable smoke remix. Pricing contributed plus 5.2 points driven by combustible pricing of plus 7.7% and low single-digit smoke-free pricing excluding devices. The positive mix impact of rapid SFP growth drove a further contribution of plus 3.1 points. Combustible geographic mix and other factors had an unfavorable impact of 2.4 points, including the Indonesia technical impact of around 1.5 points. Currency had a negative impact of 1.5 points, with a further 0.4 points from acquisition and divestitures, which include the divestment of Victoria. Turning now to gross margins. we delivered H1 organic expansion of plus 300 basis points and plus 320 basis points, including currency, acquisition, and divestitures. Pricing made a plus 160 basis point contribution, more than offsetting the 60 basis point unfavorable impact from cost inflation, net of productivity, and other cost items. Smoke-free growth drove an excellent plus 190 basis points, reflecting the factors I covered earlier. The impact of combustible was broadly flat, excluding pricing, but including the Indonesia impact. Below gross profit, we continue to invest strongly in the future growth of our smoke-free brands, including in the US, with SG&A organic growth of plus 10.6% for H1, marginally above net revenue growth excluding the technical impact of indonesia we achieve more than 500 million dollar in growth cost saving year to date through our manufacturing and back office efficiency initiative now at the midpoint of our target 24 26 period we have delivered over 1.2 billion dollar placing us well on track towards our 2 billion dollar objective all together we growth margin expansion more than compensating for higher year-on-year commercial investments, we delivered plus 290 basis points of adjusted operating income margin expansion in H1, or plus 250 basis points organically. Q2 organic OI margin expansion of plus 300 basis points was even stronger than the plus 200 basis points in our first quarter. Focusing now on our smoke-free business where our multi-category strategy is facilitating the continuous growth of our smoke-free user base. Estimated legal edge consumer of our SFPs grew by approximately 5 million versus one year ago, reaching around 41.5 million as of June the 30th. Our smoke-free products are now available in 97 markets following the Q2 launch of Zyn in Ireland and Cambodia. Almost half of these markets now have a multi-category offer with at least two of IKO's Zyn and Viv on sale to legal-edge nicotine users. As shown on this slide, we now have all three categories deployed in 20 markets as we continue to broaden our multi-category presence. The regulatory environment is a key enabler of smoke-free growth, and I'm pleased to report some more examples of positive progress, such as legislation providing new market access for one or more SFP categories across several Middle East markets. We also note the recently published proposal to revise the EU Tobacco Excise Directive, which marks the start of a formal legislative process that will require unanimous approval by all member states and subsequent transposition into national law. Many member states have already adopted risk proportionate regulation and taxation frameworks for smoke-free products, which can serve as a valuable foundation and benchmark for shaping the final directive. While we know the clear differentiation for smoke-free products relative to combustible in the proposed minimum rate, We are also disappointed to observe the lack of a plan to counter the threat of illicit trade, which accounted for 9.2% of total EU cigarette consumption in 2024, with governments losing over 14 billion euros in tax revenue at a time when many countries face intense economic pressure. Our multi-category approach is built on the strength of the brand and commercial presence of ICOS, which remains our core smoke-free product growth engine. We continue to be laser-focused on maximizing the growth of ICOS over time, with the deployment of Zin and Viv under its umbrella, offering complementary opportunities to fully transition legal-edge nicotine users from cigarettes to SFPs. In this context, I'm especially pleased to confirm the acceleration in high-cost HTU adjusted in-market sales growth to plus 11.4% in Q2, notably driven by Europe and including excellent progress in its largest market of Italy as the impact of the characterizing flavor band recedes and our commercial initiatives be afloat. Japan also delivered another robust quarter of growth and other global markets accelerated nicely. While competitive activity is increasing, we see this as positive for category growth over time, and we expect continuous strong high-cost progress in H2. We continue to target plus 10% to plus 12% HTU-adjusted IMS growth for the year. Continuous high-cost innovation on devices and consumables, combined with investment in brand equity, are fundamental pillars of our growth. The rollout of the Illuma Eye technology, now present in over 30 markets, remains ongoing. We are expanding the portfolio of Livia tobacco-free consumables with promising initial results from recently launched new test variants and flavor capsules. We also commence the rollout of a Rivenpack design on our core premium Terria HTUs, as well as the expansion of our mainstream price offering Delia, with excellent results in markets such as Germany and Poland. In the US, we continue with small-scale ICO3 pilots, which are generating considerable adult consumer interest. As we progress our commercial pilot in Austin, we also launch a second pilot in Fort Lauderdale during the quarter with further initiative plan in the coming months as we prepare for the at-scale launch of ICO's ILUMA, once authorized by the FDA. Our second flagship premium smoke-free brand, Zyn, leads a category which has the potential to fundamentally reshape the consumption of nicotine for the substantial net benefit of global public health as adult smokers increasingly switch to smoke-free products. Q2 can shipments grew by plus 43% on a global basis, and off-tech re-accelerated strongly in the U.S., which I'll come back to in more detail. Building on Zin US strengths, our global rollout continues to advance with Q2 international count volume up plus 65% year on year, or a remarkable plus 179% excluding the Nordics. The growth of our international business reflects both market expansion and strong off-tech growth, supported by expanding production capacity in new geography. Notable strong performances include our global travel retail business with close to plus 200% volume excluding the US, as well as the UK, Pakistan, Poland, South Africa, and Mexico. As covered in our recent Europe focus event, our focus is on growing the category by switching legal-edged smokers rather than sourcing from the small existing category. It is also notable that Zyn holds the number one position in Mexico and South Africa, where we launch our predominantly mini dry portfolio at the same time as competitor brands. Dry pouches already make up the majority of our pouch volumes in more than three quarters of Zyn market, and we believe this format is especially relevant for legal-edge smokers. Zyn is now present in 44 markets globally, following additional launches in Q2. Our smoke-free trilogy is completed by VIVE. H1 shipment volumes more than doubled to reach almost 1.5 billion equivalent units, with increasingly profitable growth driven by Europe, where VIVE now holds the number one close pod position in six markets, including Italy and Greece. Outside Europe, we see significant potential for the brand with nice results in diverse markets such as Indonesia, Canada and Colombia and further rollout plans. Increasing repeat purchase rates and consumer loyalty are especially promising as we seek to leverage our multi-category infrastructure under the ICOS umbrella of quality, premiumness and superior technology. In this vein, we recently launched our latest innovation, Vive InPrime, in the Czech Republic. InPrime offers an upgraded premium user experience with higher intensity of flavors, a larger cloud size, and higher battery capacity with an optimized podcast profile. The most developed multi-category consumer landscape is in Europe. and we now have 30 markets with at least two categories on offer. Of course, ICOS remains the core driver of our performance in the region, and I'm delighted to report a meaningful Q2 acceleration of HTU adjusted in-market sales growth to plus 9.1%, as adjusted market share grew by plus 1.2 points year-on-year to 10.9%, in this seasonally higher period for combustibles. As explained at our recent Europe event, ICOS has a very strong brand platform across the region, and this performance reflects our innovation and commercial initiatives, including those on Illumai, Livia, and Delia. This helps drive strong double-digit adjusted IMS growth across markets, including Germany, Spain, Romania, Greece, and Bulgaria. A significant Q2 call-out is Italy, Europe's largest high-cost market by volume, which delivered a very welcome uptick in both sequential and year-on-year growth. With the exception of Poland, Austria, Estonia, and Croatia, the impact of the EU characterizing flavor ban is now behind us, and our absolute regional growth in HTU-adjusted AMS is now getting closer to pre-band levels. While quarterly comparison from 2024 have some volatility from flavor band dynamics, sequential trends are very positive, and we look forward to the remainder of the year with confidence in further strong high-cost growth. On top of this high-cost progression, The accretion from our multi-category strategy is evident in our total volume of ICOs Zin and Viv with shipment growth of plus 13.5% in Q2 compared to HTUs alone at plus 10.5%. Zin and Viv are still very early in their development but are demonstrating exceptional growth. The number you see here are for Europe overall. And I would also note that where we are present with all three brands, such as Italy, Greece, Poland, and Romania, we see several points higher SFP volume growth. In Japan, we achieved a significant milestone of 10 million estimated users and Q2 adjusted HTU shares increased plus 2.3 percentage points year-on-year to 31.7% despite increased competitive intensity. iCost continues to deliver strong progress with Q2 adjusted IMS growth of plus 7.8% against the prior year period which included the full launch of Illuma High. As shown on the slide, IQOS delivered truly exceptional growth in 23 and 24, especially considering the size of the category now stands at almost half of total nicotine of tech volume nationally and more than half in certain cities. The high single digit growth that our business delivered in H1 2025 remains very healthy and is essentially in line with the trend in the years prior. We expect further strong adjusted IMS growth in the remainder of the year. We are pleased to see our competitors embrace the heat-not-burn category, as while our category share was sequentially stable at around 70% in Q2, our biggest focus is on accelerating the size of smoke-free products overall to maximize the growth of our leading proposition and convert more smokers. Switching now to the US, the strong reacceleration in Zin off-tech growth is a clear highlight of our Q2 performance and testament to the strength of the brand as in-store availability improves and legal-edge consumers regain access to the full Zin portfolio offering. The supply constraint of previous quarters had limited the growth in sell-out volumes and meant Zin was growing less than the overall category. with manufacturing capacity now in very good shape, the recovery to around plus 36% off-tech volume growth in June, as measured by Nielsen, and plus 26% in Q2 overall, marked the return of Zin to its category driving position in terms of growth and market share. On a sequential basis, Zin off-tech volume accelerated to around plus 12% growth versus Q1 in line with the total category. With the number of commercial programs restarting at the end of the quarter, this is clearly very promising as we increasingly focus on legal-edge smokers and vapers who have not yet switched to the category. Q2 shipments increased plus 41% year-on-year, reaching 190 million cans. As with any out-of-stock situation, Quarterly shipments are subject to volatility. Restocking of the value chain was effectively completed in H1 with the majority of this taking place in the first quarter. We estimate the total net impact at broadly 14 million cans for the year, slightly below our initial expectation. This factors in the good news that retail availability is now approaching normalized level with a lower scarcity premium in retail prices narrowing the price gap to competition. Importantly, sales velocity are accelerating, and with 36% of tech growth in June, this bodes well for the second half of the year. With shipments now primarily driven by consumer of tech, We expect a broadly similar level of shipment in Q3 as in Q2, factoring in the possibility of a few days' adjustment to wholesaler and distributor inventory as the situation fully normalizes. We continue to target full-year U.S. shipment of 800 to 840 million cans, including a sequential step-up in Q4. With our U.S. production capacity increased ahead of plan and now well set for this year and beyond, we are incredibly excited to drive Zin and the overall nicotine pouch category to its full potential over the coming years. Having covered Europe, Japan, and the U.S. in some detail, let's look at the rest of the world. In most markets, both the nicotine pouch category and our multi-category presence are nascent. Both Zyn and Viv will leverage on the strength of IQOS, where Q2 adjusted in-market sales accelerated to plus 19.3% growth with broad-based progress, including Egypt, the Philippines, and Indonesia. While pouch and evapor volumes are naturally very small across this market at this stage, we can measure their Q2 growth in multiple rather than percentages. This impressive high-cost growth is exemplified by off-tech share gains in global key cities. Strong presence in South Korea and Malaysia is more than matched by key cities in Mexico, Serbia, the Middle East, and North Africa. Global travel retail, where multi-category is increasingly prominent, also continues to grow strongly. The world's largest cigarette market by volume outside China is Indonesia, where Jakarta off-tech share grew by plus 2.5 points year-on-year to 7.5%. Following promising results from the pilot launch of our full-flavor heat-not-burn technology, Bonds, which is tailored to local Cretec test preferences, we have recently commenced a broader rollout. Bonds is also progressing well in Lebanon. Turning to combustible, our business delivered robust organic net revenue growth of 2% in Q2 and plus 2.9% for H1, with Marlboro reaching a post-pin category share high of 10.7% in Q2. Strong Q2 pricing of plus 7.2%. included notable contributions from Indonesia, Germany, and Italy, yielding plus 7.7% in H1 overall. While we continue to expect a moderation in H2 pricing due to timing and comparison dynamics, we now forecast plus 6% to plus 7% for the full year. Our strategy is to take pricing action to optimize the financial contribution to the business over time, which can naturally impact volume and share performance on a quarterly basis. Our combustible business is resilient and the combination of pricing, category leadership and ongoing efficiencies drove very good growth profit growth as covered earlier. This performance is in line with our objective of maximizing value over time and supporting the growth of our smoke-free business. This brings me to our revised outlook for a remarkable 2025, where we are raising our adjusted deleted EPS forecast for the year in both currency neutral and dollar terms. As expected, we delivered a strong H1 organic performance compared to our target ranges for the full year. While combustible volume dynamic and the phasing of comparison and cost are less favorable in H2, our fundamental outlook remains very good. We expect continued strong momentum on both high-cost and ZIN, alongside robust pricing and meaningful margin improvement. We expect further double-digit HTU adjusted IMS progression with growth skewed to the fourth quarter given a strong comparison in Q3. We forecast Q3 HTU shipment of 38.5 to 39.5 billion and dynamic growth in adjusted deleted EPS to $2.08 to $2.13, including strong investment and a favorable currency variance of $0.05 at prevailing rates. For the full year, We continue to expect very strong organic net revenue growth in the range of plus 6 to plus 8%. Following excellent H1 top line dynamism and margin progression, we are raising our forecast range for organic operating income growth to plus 11% to plus 12.5%. We are also raising our currency neutral adjusted diluted EPS growth to plus 11.5% to plus 13.5%. This includes a slightly improved effective corporate tax rate of approximately 22% to 23% based on the latest assessment of tax dynamic and market mix. We are still reviewing the implication of the OBB Act US tax reform. In dollar terms, we expect adjusted diluted EPS growth of plus 13 to plus 15%. This includes an estimated 10 cent favorable currency impact at prevailing exchange rate with favorable earning translation from a broadly weaker dollar, partly offset by transactional impact due to currency volatility, which I covered earlier. Given our expectation for a strong full-year profit delivery and cash conversion, we are raising our forecast for operating cash flow to around $11.5 billion at prevailing action rate and subject to year-end working capital requirements. We project capital expenditures slightly above our prior forecast at around $1.6 billion, primarily due to further international ZIN capacity investment, with capex spend almost entirely focused on supporting the growth of smoke-free. With regard to our balance sheet, we continue to target further deleveraging in 2025, placing us on track for our target ratio of around two times by the end of 2026. As mentioned last quarter, we are a global company with broadly diversified production and a worldwide supplier network including an established US manufacturing base, and we believe we are well positioned to mitigate potential supply chain challenges. While the situation is volatile, we do not currently anticipate a material impact on our business from recently introduced or discussed tariffs. Our financial growth model is driving a continuous improvement in the quality of our business, with smoke-free accretion and combustible resilience driving considerable bottom-line growth. We are well on track to meet or exceed our three-year cargo targets, demonstrating our ability to deliver what we believe to be best-in-class CPG growth. Adjusted diluted EPS growth in dollar term is a key objective, and we are pleased to see this delivered in H1 as well as in our outlook for the year. I will now conclude today's presentation with some closing remarks. We delivered an exceptional first half of the year, placing us well on track for another year of strong performance. Our small pre-growth is increasingly profitable as ICOS, Zin and Viv gain scale and drive synergies at the consumer and commercial level. Our best-in-class financial performance is bolstered by underlying strengths across all categories, including the resilience of our combustible business in addition to our proactive measures on pricing and cost efficiency. This drives our confidence in strong and sustainable adjusted diluted EPS growth in both currency neutral and dollar terms. Finally, we remain a highly cash-generative business with an unwavering commitment to our progressive dividend policy. We look forward to further rewarding our shareholders as our transformation delivers continued growth. Thank you, and we are now very happy to answer your questions.