Philip Morris International Inc. (PM) 2024 Q2 Earnings Call Summary

Optimistic Highlights

• Record H1 Organic Growth: PMI delivered record H1 on organic top-line growth and organic OI growth, excluding the pandemic recovery year of 2021.
• Strong IQOS Momentum: Continued strong performance in Japan and robust fundamentals in Europe, with shipment and adjusted IMS volume growth meeting expectations.
• ZYN's Impressive Growth: Over 50% growth in Q2 U.S. volumes despite supply tensions and increased pricing.
• Multicategory Momentum: Building momentum in VEEV and international nicotine pouch volumes, with significant growth rates.
• Combustible Business Overdelivered: Return to gross margin expansion in Q2, driven by stable volumes, robust pricing, and cost efficiencies.

Pessimistic Highlights

• EU Flavor Ban Impact: The characterizing flavor ban in Europe, most notably in Italy, impacted Q2 HTU adjusted IMS volume growth.
• Supply Chain Constraints for ZYN: Strong demand dynamics have created short-term supply chain constraints, impacting volume growth.
• Incremental Headwind for HTU Shipments: An incremental headwind of around 2 billion units to full-year adjusted IMS forecasts, primarily due to delays in approval for commercialization in Taiwan.

Company Outlook

• Increased Full-Year Forecasts: PMI is increasing its 2024 full-year forecasts on all organic dimensions and for adjusted diluted EPS on both a currency-neutral and US dollar basis, reflecting strong H2 outlook.
• Accelerated Total Volume Growth and Pricing: Supported by the strong outlook for ZYN and increasing profitability of IQOS.
• Expectation of Continued Robust OI Growth: On both a reported and an organic basis in the second half.

Q & A Highlights

• Q: On the cigarette pricing algorithm and market share gains (Gaurav Jain, Barclays)

  A: PMI is optimizing price increase potential, with 8.7% price increase for combustibles in H1. The majority of pricing is driven by markets where PMI is proactively maximizing growth, not just inflation adjustments. (Emmanuel Babeau)

• Q: On ZYN capacity reaching 900 million cans next year (Gaurav Jain, Barclays)

  A: PMI is gradually improving capacity each quarter, with the goal of meeting expected consumer demand by Q4. The focus is on the 560 million to 580 million cans shipment goal for 2024. (Emmanuel Babeau)

• Q: On guidance, HTU shipment volume outlook, and impact from the EU flavor ban (Bonnie Herzog, Goldman Sachs)

  A: The slight revision in HTU shipment volume outlook is primarily due to delays in Taiwan and a few hundred million units impact from Europe, particularly Italy. PMI expects an acceleration in Europe adjusted IMS growth in the second half. (Emmanuel Babeau)

• Q: On ILUMA i in Japan and plans for further rollout (Bonnie Herzog, Goldman Sachs)

  A: ILUMA i has shown positive consumer acceptance in Japan, contributing to user acquisition and satisfaction. Further market launches are planned in H2. (Emmanuel Babeau)

• Q: On growth in oral pouches in international markets and capacity constraints (Matt Smith, Stifel)

  A: International nicotine pouch volume grew over 60% in H1, with no capacity issues reported. PMI sees a large opportunity outside the U.S. and is working to capture it. (Emmanuel Babeau)

• Q: On the development of the vapor category outside the U.S. and profile of users (Faham Baig, UBS)

  A: The vaping category is growing, attracting legal-age nicotine users more than converting smokers. PMI has not seen a significant shift to vaping post the EU flavor ban. (Emmanuel Babeau)

• Q: On U.S. pouch dynamics and Scandinavian ZYN availability in the U.S. (Owen Bennett, Jefferies)

  A: PMI is focused on controlling product flows and ensuring compliance with regulations. There is no significant material impact from illicit or parallel flows of nicotine pouches in the U.S. market. (Emmanuel Babeau)

• Q: On widespread availability of European moist versions of ZYN in the U.S. (Callum Elliott, Bernstein)

  A: PMI is committed to compliance and controlling product flows, with no specific data on illicit flows of ZYN from Europe to the U.S. (Emmanuel Babeau)

• Q: On IQOS ILUMA tests in the U.S. and plans for expansion (Priya Ohri-Gupta, Barclays)

  A: PMI plans to use successful strategies from other markets for IQOS ILUMA in the U.S., focusing on smoker conversion and brand development. A scale launch is planned only after receiving PMTA for ILUMA. (Emmanuel Babeau)