Good day, and 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. [Operator Instructions] 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 Communication. Please go ahead.

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 U.S. GAAP measures for non-GAAP financial measures cited in this presentation, are available in Exhibit 99.2 to the company's Form 8-K 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 Babeau, our Chief Financial Officer. Over to you, Emmanuel.

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 OI growth, excluding the pandemic recovery year of 2021. The strong underlying momentum of IQOS continued in Q2, with shipment and adjusted IMS 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 ban. With pricing, manufacturing efficiencies and scale benefits, the expanding profit contribution of IQOS is driving excellent growth for PMI. ZYN continued its impressive growth trajectory, with Q2 U.S. volumes growing by over +50% despite recent supply tensions and increased pricing. In addition to IQOS and U.S. ZYN, I am pleased to report building multicategory momentum. While still early days, VEEV has already become the closed pod leader in 5 European markets and is firmly on the path to profitability, while international nicotine pouch volumes grew over plus 60% in H1, matching U.S. 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 30, and our products now available across 90 markets worldwide. Our combustible business also overdelivered, with a return to gross margin expansion ahead of plan in Q2 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 OI growth, with significant margin expansion. As we have outlined previously, delivering robust growth in dollar terms is a key priority and we are taking pro-active steps on pricing and cost efficiencies to…

[Operator Instructions] And our first question will come from Gaurav Jain of Barclays.

So 2 questions from me. One is just on the cigarette pricing algorithm that you have. So if I look at your market share gains, clearly quite impressive, even excluding modern oral. And if I add that, then you are gaining almost 80 basis points 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 we should be? And that would mean that increased the pricing growth in cigarettes from 7% to 8% to, let's say, to 10%? And then I have a follow-up.

Thank you, Gaurav, for the question. Look, 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% 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 3/4 of that is not coming from inflation in -- sorry, from a price increase in a country with very high inflation. And this 8.7% 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 a 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.

You mentioned that ZYN 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?

Look, 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 a certain point in Q4 versus what the consumer offtake 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 million to 580 million can. That is our goal for 2024. You know that we have this capacity for 900 million cans for next year. Let's be clear, 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.

[Operator Instructions] Our next question will be coming from Bonnie Herzog of Goldman Sachs.

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 attributed 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 IQOS 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?

Sure, Bonnie. Thank you for maybe giving me the opportunity to further clarify the dynamic and the good dynamics that we are seeing behind IQOS. 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, okay? So in fact, it's really the fact that we were expecting Taiwan to start more than 6 months this year. And it's -- at the end of the day, today, we are 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 heated 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 question, 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 in terms of shipments. We are now expecting to be around 140 billion. Again, that's the way you should understand the revision on the guidance. But let me take 2 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 IQOS business outside Europe. So if you look at the adjusted in-market…

That was definitely very helpful. I appreciate you going through all of that. And then if I may, I just wanted to ask a question on ILUMA i in Japan. I guess I was hoping to get 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 essentially how incremental and really what you're seeing or hearing from consumers in terms of acceptance of the new device, impact on your growth, margins, et cetera? And then finally, your plans for further rollout of this device.

Sure, Bonnie. So you're right. ILUMA i, so the latest generation of IQOS ILUMA. So it does not change the fundamental technology, but the -- the device is offering a number of additional functionalities, is, for the time being, only present in Japan. There was 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 IQOS user. We've been seeing consumer sentiment going up with some very good reaction to this product. So I would say we continue to have more ammunition to convert smokers to IQOS, 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 was a positive for the market.

[Operator Instructions] Our next question will be coming from Matt Smith of Stifel.

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 U.S.?

Sure. So as a coincidence, I suppose that it is true that in H1, the growth in nicotine pouch outside the U.S. was very similar to the 1 in the U.S., what chart. It's -- we talk about 10% only of the volume in the U.S. That is included. 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 put 3 buckets of possible growth for this market. You have, of course, first, the Nordic country that have the knowledge, 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 U.K., 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 and the Philippines, where we see potential for these nicotine pouches. You may have some culture already of overall 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 ZYN. So we see that this product maybe because of the U.S. influence, I think in the case of some country like the U.K., it's clear. That's a category that could grow in 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.

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 U.S.?

No, there is no capacity issue that I have to report at that stage.

[Operator Instructions] Our next question will be coming from Faham Baig of UBS.

Hi Emmanuel, thanks for the question. I've got 2 as well. One, the vapor category and 1 on ZYN. I know you're looking to expand with your VEEV product, but how do you see the development of the vapor category, particularly outside of the U.S.? What profile of users is the category attracting? For example, in Europe, I'm just trying to understand whether consumers that use vapor see it as an alternative to heated tobacco? Or are the 2 categories attracting a different profile of consumers, particularly post the flavor ban in Europe?

Sure. And you want to ask a question on ZYN now? Or you want to come back on ZYN after?

Why don't I come back after --

Okay. So on the vaping category, I think what we are seeing is that with what 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 burnt, 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 age and above that want to start consuming nicotine and it's much more difficult to convert smokers. And that's clearly what IQOS and the heat-not-burn category is doing much better. So yes, the vaping can be appealing for some legal age and above nicotine user. More difficult to convert smokers, very clearly. We haven't seen any meaningful report of people moving to vaping and a change of kind of dynamic in the category following the implementation of the flavor ban in Europe. Of course, we are monitoring that. But as I said, there is nothing that we can obviously report on that trend, which probably could confirm that we talk about people that are probably with different profile, but that's something that we will have to keep monitoring, of course. So we've always been saying that 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, what that can trigger unintended usage, and that is a problem for the category. And we are very happy with our growth because we do that 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 VEEV ONE is a great product, and strong partnership with the trade that is giving this very good start as we mentioned, the number 1 position in five countries for close pods. That's really what I can share with you at that stage.

Yes, that's helpful. And then secondly, on ZYN in the U.S. Now according to the scanner data, some of which we received today as well, since momentum from a volume perspective 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 in the back half, when you are expecting an acceleration in volumes, is that implying that you begin to gain market share? Or is that largely driven by further acceleration in the overall category?

Look, on ZYN, I think we mentioned the fact that we are clearly with some restrictions. So I'm not sure that what you read in the Nielsen, which corresponds to the availability is going a 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 can 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 were some competitors move in term of pricing last year that triggered an acceleration in our market share, and that the effect is now behind us. So it is also having some impact on the year-on-year comparison. So that's what we can say on ZYN.

If I could quickly squeeze in 1 more. Is there any update on the review of the ZYN sales post the recent subpoena in the District of Columbia that is ongoing and forced you to close your zyn.com sales and when that might recover?

Yes, 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.

[Operator Instructions] And our next question will be coming from Owen Bennett of Jefferies.

I hope you are well. I just had a couple of questions on the U.S. pouch dynamics. So first -- and I would assume this is due to certain retailers trying to fill the supply gap. I have been seeing some Scandinavian ZYN 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 over more than oral brands appearing, 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 U.S. and to what we're seeing in vape with the legal products?

So you're alluding to product that would come from non-U.S. market, correct? That's what...

In retail, the distributors are buying them online from Scandinavia to try and fill the supply gap. Just wondering how you can get on top of that to make sure that's not happening?

Look, I don't have any information about that. So I cannot make any comment or report. I think we are doing everywhere we can, our utmost to ensure that the flows are appropriate and not going where they should not be going. And we are working very hard with this objective. And I don't have any data and I cannot react on that. But our position is very clear. We are very strict on doing everything we can to make sure that this parallel flows are not happening. On your question on -- if I understand you well, Owen, could -- do we see the same kind of phenomenon on nicotine pouch than the 1 we are seeing on vaping, which is illicit parallel flow that would be entering the U.S. market?

Yes. I'm starting to see brands that I'm assuming do not have the MTS. Just wondering how you see 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 they are starting to implement on vaping.

[Operator Instructions] Our next question will come from Callum Elliott of Bernstein.

Actually a follow-up, quite a similar question to what you just had for a moment, but I want to push you a bit further because we also, like Owen, see pretty widespread evidence now that European moist versions of ZYN that do not have premarket 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 performance suggests that this has become a pretty widespread issue across the U.S. as a whole. So I guess 2 questions. Can you just confirm for us that those products weren't in the market of 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 list of product directly to U.S. retailers yourselves -- and 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 U.S. ZYN business if this illicit product continues entering the U.S. market in this way.

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 we know whether the product 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 have these flows of product. If we knew, we would certainly tackle that, and 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 there is nothing else I can say, really.

Okay. And maybe just a follow-up. I guess, as you think about bringing supply back online in the U.S., also bringing new supply online to meet demand, what gives you this confidence that we're going to see the sort of upward lift in ZYN guidance today? Implies a very significant sort of back half hockey stick in terms of sort of positive inflection in the growth rate. Which, to Faham's earlier question, we see sequential declines in growth now quarter-to-date. So what gives you the confidence that the consumers are switching to on consumers that are switching to rogue, some of the consumer reviews of some of these competitive products are sometimes better than this. So what gives you the confidence that now that consumer awareness for these other brands has grown as a result of your supply chain issues that you're going to immediately win those consumers back when the supply comes online again?

Look, Callum, 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 580 million can shipments. That's the first element. And that's what our senses 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 ZYN production in the U.S. So that's really the combination of the 2.

And our last question will be coming from Priya Ohri-Gupta of Barclays.

Emmanuel, I was wondering if you could give us a little bit more color on the IQOS ILUMA tests that you're planning for the U.S. It sounds like just a few cities. 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 stand-alone stores that were put in place? And then I have a follow-up.

Sure, Priya. Well, that's a very broad question, although a 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 go for a scale launch only once we get the PMTA 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 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 the moment where we go with ILUMA. And it's -- you're asking, okay, what are you going to do differently? Let's -- let's be clear, we don't believe that IQOS has never been launched in a kind of serious, consistent and profound manner. And we believe that what makes IQOS so popular outside the U.S. is going to resonate with a number of smokers among the around 30 million smokers 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 IQOS is about, explaining the experience, why IQOS is a better product than smoking. I think it will be, as always, very important to create the image, the brand territory, but also talk about closely with the smokers, okay, this is a journey to move away from smoking and to go to a better product to IQOS. 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 something that has not been done in the U.S. Because until now, it has been only a very limited launch in a few cities with limited actions. So everything is going to start at that moment for IQOS 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.

That's really helpful. And I guess just a follow-on to that is you talked a lot about the development of IQOS VEEV 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 think about filing PMTAs and then broaden the availability of that in the U.S.?

Look, for the time being, we don't have the plan to file a PMTA on these. We are very much focusing on IQOS. I think that this success is just at the beginning today. It's great to have already five markets where we are number 1 on the closed 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 we will see whether in due course, it may make sense to have some thoughts for VEEV in the U.S., but we are not at that stage today.

Just 1 final, I think, housekeeping item. You talked about your interest expense being at the low end of your prior range, $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 any other refinancing or pre-financing that you might consider?

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 this -- you said it. I mean, we are 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.

I would now like to hand the call back to James Bushnell for closing remarks.

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.

Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.