Philip Morris International Inc. Q2 FY2025 earnings call

• Delivered excellent H1 results with strong second quarter performance. Smoke-Free business showed multi-category momentum with IQOS, ZYN, and VEEV showing growth. IQOS HTU adjusted in-market sales accelerated in Q2. ZYN global can shipments grew 43%, and VEEV shipments more than doubled. - Combustibles had robust top and bottom line performance despite modest volume declines, driven by strong pricing. - Achieved strong H1 organic net revenue growth of 8.4%, with pricing, mix, and volume contributing. - Gross margins saw organic expansion, with smoke-free growth driving significant margin improvement. - Continued investment in Smokri brand and manufacturing efficiencies, with over $1.2 billion in cost savings year to date towards $2 billion objective. - Smoke-free user base grew, with IQOS having estimated 41.5 million legal edge consumers, and presence in 97 markets.

Philip Morris International delivered strong H1 2025 results. The Smoke portfolio had net revenues of $4 billion. The Smoke-Free business showed strong momentum: IQOS HTU adjusted in-market sales grew 11.4% in Q2, with broad-based growth globally and Europe; ZYN volumes increased 65% internationally, with Q2 can shipments up 43% globally; VEEV shipments more than doubled. Combustibles had modest volume declines but robust pricing and margins. In terms of revenue contribution, Smoke-Free net revenue H1 organic grew 17.3% to $8.1 billion, contributing significantly. Combustibles had net revenue Q2 +2% and H1 +2.9%. Smoke-Free gross profit H1 was +27% to $5.6 billion with over 70% gross margin, while combustibles aimed for margin expansion despite slower pricing and weaker volume in H2.

• Raised adjusted diluted EPS full-year forecast to +13% to +15% growth in dollar terms, and +11.5% to +13.5% excluding currency. - Expected strong smoke-free momentum to continue in H2, with IQOS targeting 10%-12% HTU adjusted IMS growth. - Forecast organic net revenue growth for full year in range of +6% to +8%, operating income growth +11% to +12.5%. - Operating cash flow expected around $11.5 billion, CapEx ~$1.66 billion primarily for smoke-free capacity investment. - Target further deleveraging in 2025 towards target ratio of ~2 times by end of 2026.

• Supply chain issues in Turkey and Indonesia leading to temporary volume declines and inventory write-downs. - Impact of illicit trade on combustibles, particularly in Indonesia affecting volumes. - Uncertainties around EU tobacco excise directive process, requiring unanimity and potential tax rate impacts. - Currency volatility impacting intercompany transactions and earnings translation.

Q: On ZYN restock being less than expected, how to read future growth expectations?

A: Restock was slightly below expectation but ZYN has strong momentum with June growth 36% and Q2 26%, and commercial activities restarting.

Q: Update on EU TPD?

A: EU TPD process has started, requires unanimity, initial proposal has differentiation on taxation but lacks illicit trade plan clarity.

Q: IQOS Illuma US approval timing?

A: Hoping for H2 approval but FDA workload is heavy.

Q: Combustibles volume down less than expected?

A: Combustibles volume down ~1.5% in H1, in line with long-term trend expectation.

Q: ZYN shipment guidance and capacity?

A: Still comfortable with 800-840 million can guidance, capacity built to handle growth.

Q: Gross margin gap between combustibles and smoke-free?

A: Smoke-free gross margin around 70%, gap narrowing but still significant, with smoke-free margin expected to stay high in H2.

Q: FX hedge rates?

A: Details not provided each time, but Swiss franc had significant negative impact.

Q: Working capital and free cash flow?

A: Lower cash generation due to duty payments in Germany and US job act final payment, otherwise no special working capital impacts.

Q: Capex in quarter?

A: Not disclosed by quarter, full year capex ~$1.66 billion for smoke-free investment