Philip Morris Earnings Call Highlights Smoke-Free Growth

Philip Morris International ((PM)) has held its Q2 earnings call. Read on for the main highlights of the call.

The latest earnings call for Philip Morris International was marked by a generally positive sentiment, underscoring the company’s robust growth in smoke-free products such as IQOS and ZYN. The call highlighted improved profitability metrics, although challenges persist with declining cigarette volumes and regulatory uncertainties in Europe. Additionally, currency impacts have slightly dampened the financial outcomes.

Strong Smoke-Free Product Growth

Philip Morris International reported a remarkable $4 billion in net revenues from their smoke-free portfolio, showcasing double-digit adjusted diluted EPS growth in both constant currency and dollar terms. The company’s smoke-free products, including IQOS, ZYN, and VEEV, demonstrated strong performance, with IQOS in-market sales growth accelerating to 11.4% in Q2 and a 26% increase in US consumer offtake growth during the same period.

Increased Revenue and Earnings

For the first time, Philip Morris achieved over $10 billion in quarterly net revenues, with organic net revenues growing by more than 8% when excluding the impact from Indonesia. The company’s adjusted operating income grew by 14.9% organically, accompanied by a 20% increase in adjusted diluted EPS, reflecting strong financial health.

ZYN’s Strong Performance in the US

ZYN’s US offtake growth reaccelerated to 36% in June after resolving previous supply constraints, marking a return to its category-driving position. Philip Morris plans to continue this growth trajectory by increasing production capacity, further solidifying ZYN’s market presence.

Margin Expansion

The company experienced a 300 basis points organic gross margin expansion in the first half of the year, driven by smoke-free growth contributing 190 basis points. This expansion reflects significant profitability increases within the smoke-free categories, underscoring the strategic shift towards these products.

Combustible Volume Decline

Despite the positive momentum in smoke-free products, cigarette volumes declined modestly in Q2, with a forecasted decline of around 2% for the year. Challenges in markets like Turkey and Indonesia, where supply chain issues and a growing illicit segment are impacting volumes, were noted.

Regulatory Challenges

Philip Morris faces regulatory challenges, particularly with the EU tobacco excise directive proposal, which lacks plans to counter illicit trade. This illicit trade accounted for 9.2% of total EU cigarette consumption in 2024, leading to significant tax revenue loss, posing a challenge for the company.

Currency Impact

Currency volatility, especially with the Swiss franc, led to a transactional loss, affecting the company’s earnings despite a favorable dollar environment. This highlights the complexities of operating in a global market with fluctuating currency values.

Positive Outlook and Updated Guidance

Philip Morris has raised its adjusted diluted EPS forecast for the full year to 13-15% growth in dollar terms, driven by strong smoke-free product momentum and improved tax rates. The company remains confident in its smoke-free momentum, aiming for continued growth with a strong cash flow forecast of $11.5 billion, despite anticipating some challenges in the second half due to timing factors and combustible volume dynamics.

In summary, the earnings call for Philip Morris International reflected a positive sentiment, with strong growth in smoke-free products and improved profitability metrics. Despite facing challenges such as declining cigarette volumes and regulatory uncertainties, the company remains optimistic about its future prospects, driven by its strategic focus on smoke-free products and robust financial performance.