Philip Morris International NYSE: PM reported what management described as a “very strong” second quarter, with growth led by its international smoke-free products business and a better-than-expected performance in combustibles.
Emmanuel Babeau, the company’s group chief financial officer, said Philip Morris generated 8% organic net revenue growth and 11% organic operating income growth in the quarter. Adjusted diluted earnings per share rose 15% in dollar terms to $2.20, including a $0.03 favorable currency impact.
Quarterly net revenue exceeded $11 billion for the first time, Babeau said. Adjusted gross profit rose 8.7% organically, while adjusted operating income increased nearly 11% organically to $4.8 billion.
For the first half, Philip Morris reported total shipment volume growth of 0.4%, organic net revenue growth of 5.3% and adjusted operating income growth of 6.1% organically. Adjusted diluted EPS for the first half reached $4.16, up 15.6% in dollar terms.
Smoke-Free Products Remain Key Growth Driver
Babeau said the company’s international smoke-free business delivered “outstanding” first-half results, with organic net revenue growth of 13.7% and gross profit growth of 16.9%. Gross margin for the segment expanded 190 basis points to 70%.
IQOS adjusted in-market sales volume rose 5% in the second quarter, including what management called expected transitory headwinds from an April excise increase in Japan and a characterizing flavor ban in Poland. Excluding Japan and Poland, IQOS growth was 10.2% in the quarter and more than 11% in the first half.
Babeau cited strong performance in established IQOS markets such as Italy, Greece and Romania, as well as momentum in newer markets including Saudi Arabia, the Philippines, Mexico and Taiwan. He said IQOS maintained an approximately 76% global share of the heat-not-burn category in the first half.
VEEV also continued to grow, with e-vapor shipments rising 55% in the second quarter and 72% in the first half. Babeau said VEEV is now the leading brand in Europe within closed pod and combined pods and disposables.
International ZYN shipment volume rose 6% in the first half, or 32% excluding the Nordics. Babeau said the brand continued to gain share in small but fast-growing international nicotine pouch markets, including the U.K., Pakistan, Poland, Greece and the Philippines.
U.S. ZYN Business Improves Sequentially
In the U.S., Philip Morris reported a significant sequential improvement from a difficult first quarter. Babeau said U.S. net revenue rose 38% sequentially and adjusted gross profit increased 46%, largely reflecting a 25% sequential increase in ZYN shipments and reduced sales promotion ahead of new product launches.
Year over year, U.S. segment net revenue declined nearly 1%, driven by cigar declines and unfavorable phasing in the wellness business, while ZYN net revenue was broadly flat. ZYN shipments rose 2% to 2.9 billion pouches, despite an inventory restocking tailwind in the prior-year period.
Babeau said ZYN remains the “clear premium leader” in the U.S. nicotine pouch category, with a retail value share of around 57%. He said recent category share performance has been affected by competitive gaps in higher-strength and flavor segments, as well as an elevated price premium.
The company has begun addressing those gaps with new products, including ZYN Ultra in nine- and 11-milligram moist variants, which contain 20 pouches per can. Philip Morris also plans to introduce 1.5-milligram and eight-milligram dry formats in the third quarter.
During the question-and-answer session, Babeau told Goldman Sachs analyst Bonnie Herzog that the first two weeks of ZYN Ultra sales were encouraging but cautioned against drawing conclusions too early. He said the 1.5-milligram offering is intended to help smokers try the category “in the most favorable possible condition.”
The company also plans to increase U.S. investment in the second half, including marketing, distribution, in-store execution and preparation for a potential IQOS ILUMA launch, subject to FDA action. Babeau said the new “When it Clicks” ZYN campaign is designed to build brand engagement and consumer relevance.
Combustibles Outperform Expectations
Philip Morris’ combustible business exceeded management’s expectations in the quarter. Cigarette shipments rose 1.1% in the second quarter, supported by category share performance, timing factors and more favorable industry dynamics in certain large markets where smoke-free products are banned or limited.
Babeau named Indonesia, Turkey and Egypt as notable contributors, while also citing relative resilience in India and Mexico. For the first half, cigarette volumes declined 1.9%.
The company now expects full-year cigarette volumes to decline around 2% to 3%, compared with its prior expectation of about 3%. Babeau said this remains consistent with the structural evolution of the category.
Combustible pricing added 9.2% in the first half and nearly 10% in the second quarter, with contributions from markets including Turkey, Indonesia, the Philippines and Mexico. Philip Morris now forecasts full-year combustible pricing variance of more than 7%, though Babeau said the benefit is expected to be largely offset by more adverse geographic mix.
Guidance Maintained as U.S. Investment Rises
Philip Morris maintained its full-year underlying growth targets. The company continues to expect organic net revenue growth of 5% to 7%, organic operating income growth of 7% to 9% and currency-neutral adjusted diluted EPS growth of 7.5% to 9.5%.
In dollar terms, the company now forecasts a currency tailwind of about $0.15 at prevailing rates, translating to adjusted diluted EPS of $8.26 to $8.41, or growth of 9.5% to 11.5%.
Babeau said the company expects total shipment volume to be stable to slightly positive for the full year, with high single-digit smoke-free product growth broadly offsetting cigarette declines. He said Philip Morris is aiming for its sixth consecutive year of total volume growth.
Asked by Herzog why guidance was not raised after two strong quarters, Babeau said the company is choosing to accelerate U.S. investment in the second half because of the expanded ZYN portfolio, the new marketing campaign and regulatory developments.
For the third quarter, Philip Morris expects HTU shipment volume of around 41 billion units, mid-single-digit organic top-line growth and modest organic margin expansion. The company targets adjusted diluted EPS of $2.20 to $2.25, including an unfavorable currency impact of $0.08.
CFO Transition Announced
The call also marked Babeau’s final earnings call as group CFO. He thanked shareholders and analysts for their engagement over the past six years and said he believes Philip Morris will continue to be a standout performer within consumer packaged goods.
Massimo Andolina, currently regional president for Europe, will succeed Babeau as group CFO in August. Andolina said he looks forward to continuing the company’s focus on “delivering superior shareholder returns over the long term.”
About Philip Morris International (NYSE:PM)
Philip Morris International Inc NYSE: PM is a global tobacco company that manufactures and sells cigarettes, other nicotine-containing products and a growing portfolio of smoke-free alternatives for adult smokers. The firm traces its corporate roots to the 19th century Philip Morris enterprise and was established as an independent, publicly traded company following a 2008 separation from what is now Altria. Since the spin-off, the company has focused on serving international markets outside the United States.
PMI's product mix includes traditional combustible cigarettes as well as smoke-free offerings such as heated tobacco systems and other reduced-risk products.
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