Philip Morris International Inc
NYSE:PM
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
88.6
132.8
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Philip Morris International Inc
Earnings Call Analysis
Q2-2024 Analysis
Philip Morris International Inc
The company's transition to smoke-free products continues to yield impressive results. In the second quarter alone, the IQOS shipment volume reached 35.5 billion units, surpassing expectations due to strong performance in Japan and Europe, as well as promising growth in new markets like Indonesia. ZYN, their oral smoke-free product, also exhibited impressive growth, particularly in the U.S., where Q2 volumes increased by over 50%. This success boosts the company’s confidence to raise the full-year forecast for total cigarette HTU (heated tobacco units) and oral unit volumes to 1% to 2%【4:0†source】.
The company's financial performance in the first half was stellar. Volumes grew by 3.2% and organic net revenue by 10.2%, marking the highest growth since 2008. This resulted in a 17% increase in operating income and a 230 basis point margin expansion. Consequently, the company has upgraded its full-year forecast for operating income growth to 11% to 13%. Similarly, the forecast for currency-neutral adjusted diluted EPS growth has been raised to a range of $6.33 to $6.45, reflecting 11% to 13% growth【4:1†source】.
Strategic initiatives to enhance cost efficiency have propelled margin expansions. The company reported over $300 million in gross cost efficiencies in the first half of the year, aiming for a $2 billion target by end-2026. Expected savings in manufacturing and commercial activities will bolster bottom-line growth and help in navigating through currency headwinds. These efficiencies prompted a 230 basis point expansion in organic operating income margin【4:6†source】【4:7†source】.
PMI's smoke-free products have now reached 90 markets, contributing to a rapidly growing consumer base estimated at 36.5 million users. Notable progress was observed in Japan, Europe, and emerging markets like Indonesia. In Europe, recovery from the initial shock of the characterizing flavor ban has begun, with markets like Greece, the Czech Republic, Bulgaria, and Romania showing resilience. In the U.S., the ZYN product continues to grow despite supply chain constraints, and production capacity is expected to reach 900 million cans by 2025【4:2†source】【4:5†source】.
The company is optimistic about H2 2024, predicting robust performance driven by solid IQOS growth and the progressive improvements in ZYN volumes. Q3 is expected to achieve a record high quarterly adjusted diluted EPS of $1.77 to $1.82 despite enhanced commercial spending. Full-year operating cash flow is projected to be around $11 billion, at the upper end of previous forecasts, with capital expenditure estimated between $1.3 billion and $1.4 billion【4:16†source】.
The company's strong cash flow generation underpins its commitment to returning cash to shareholders. This is aligned with capital allocation priorities to reinvest in the rapidly transforming business while adhering to a progressive dividend policy. Additionally, the company aims to reconsider share repurchase once the net debt to adjusted EBITDA ratio target of around 2x by the end of 2026 is in sight【4:17†source】.
You don't have any saved screeners yet
Good day, and thank you for standing by. Welcome to the Philip Morris International Inc. 2024 Second Quarter Results Conference Call. [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 Communications. 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 operating income growth, excluding the pandemic recovery year of 2021. The strong underlying momentum of IQOS continued in Q2, with shipments and adjusted in-market sales 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 efficiency and scale benefit, 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 plus 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 spot 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 over delivered with a return to gross margin expansion ahead of plan after 2 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 operating income growth with significant margin expansion. As we have outlined previously, delivering robust growth in dollar terms is a key priority, and we are taking proactive steps on pricing and cost efficiency to mitigate currency headwinds. This is clearly evident in our H1 adjusted diluted earning per share delivery of mid-single-digit growth despite a currency headwind of over 12%, as essentially all of the expected full year impact fell in the first half.
Following this exceptional first half performance, we are increasing our 2024 full year forecast on all organic dimension and for adjusted diluted EPS on both a currency-neutral and U.S. dollar basis. This reflects our strong H2 outlook with accelerating adjusted IMS growth for IQOS, sequentially [ higher ] in volumes and a stepped-up rate of USD EPS growth at prevailing exchange rates.
Looking at our headline financials, strong total achievement volume growth of plus 2.8% drove Q2 organic net revenue growth of plus 9.6% or plus 5.6% in dollar terms. Robust top line growth, positive smoke-free margin mix and ongoing cost efficiencies enable us to deliver adjusted diluted EPS of $1.59. This represents plus 10.6% growth, excluding a larger-than-expected unfavorable currency variance of $0.18, which includes a small transactional impact from exchange rate volatility at quarter end. This better-than-expected ex-currency performance reflect the improving profitability of IQOS, ZYN and combustible, which I will come back to.
Looking now at the first half overall, our volumes grew by plus 3.2% and organic net revenue by plus 10.2%, our highest growth since the 2008 spin. Strong performance from both smoke-free and combustible drove operating income growth of plus 17%, with margin expansion of 230 basis points organically and plus 7.1% growth in dollar terms. We expect continued robust OI growth on both a reported and an organic basis in the second half.
H1 adjusted diluted EPS grew by an impressive plus 16.8% in constant currency and by plus 4% in dollar terms. The $0.38 unfavorable H1 currency variance includes $0.08 of nonrecurring transactional impact from Egypt and Russia. Focusing now on volume, total shipment growth in both the quarter and H1 overall reflect smoke-free share gains in a resilient international industry which grew by more than 1% in both periods, even excluding oral and e-vapor. Q2 HTU shipments of 35.5 billion units exceeded our prior outlook, notably driven by continued strong performance in Japan, robust underlying growth in Europe and promising growth in newer markets such as Indonesia. In addition to underlying momentum, Q2 saw an incremental phasing impact of around 0.5 billion units, primarily related to Red Sea disruption.
Q2 adjusted IMS volume grew by plus 10.2%, in line with our expectation. This includes the impact of the characterizing flavor ban in Europe, most notably in Italy this quarter. Total smoke-free adjusted in-market sales volume grew plus 11.2% in Q2 and plus 13.1% in H1. This includes our oral smoke-free portfolio powered by ZYN, with Q2 pouch [ trading ] volumes up by plus 20%. U.S. ZYN shipment grew by plus 50% to 35.1 million [ can ]. This does not include the promising results of our e-vapor business, where volumes grew strongly to the equivalent of 0.7 billion units on a year-to-date basis.
Cigarette shipments grew by plus 0.4%, with notable positive contribution from Turkey and North Africa. This reflects a stable category share, excluding market mix, despite step-up pricing. With such a positive H1 volume performance, we are raising our full year forecast for total cigarette HTU and oral unit volumes to plus 1% to plus 2%, which would mark our fourth consecutive year of volume growth. The power of our multi-category smoke-free transformation and recovery in combustible are clearly illustrated on this slide, as both areas contributed strongly to double-digit organic OI growth of plus 12.5% for the group in Q2. Smoke-free continued its excellent momentum with plus 18% organic growth in net revenue and plus 22% in gross profit, driving plus 220 basis points organic gross margin expansion. This reflects the strong performance of ZYN and the growth and scale effect of IQOS, including manufacturing productivities and an increasing albeit smaller contribution from VEEV. Expanding smoke-free gross margin continued to widen the gap versus combustible gross margin, enhancing the very positive mix effect of our transformation.
However, combustible gross margin expansion is also a key objective. After 7 quarters of contraction, we are very pleased to report plus 50 basis point expansion and gross profit growth of plus 5.5% on an organic basis, providing a meaningful contribution to total PMI profitability. This reflects resilient volume despite very strong pricing in addition to ongoing efficiencies and reduced headwinds on our COGS, notwithstanding continued tobacco leaf inflation. We also expect compressible gross margin expansion in H2. Combined with a very strong first quarter, the year-to-date picture is even more competing with double-digit organic net revenue, gross profit and OI growth. This is driven by the same dynamic as Q2, with an impressive plus 390 basis point gross margin expansion and plus 29% gross profit growth for our smoke-free business.
Our H1 revenue performance again demonstrates the powerful drivers of our financial model with an unparalleled combination of positive volumes, robust pricing and the very favorable category mix of our smoke-free product. As mentioned, volumes grew by plus 3.2%. Pricing contributed plus 6 points of growth, including plus 8.3 pricing on combustible and around plus 2% on smoke-free. Smoke-free category mix added plus 2.5 points to the top line, reflecting the higher net revenue per unit of IQOS and ZYN. While still small, VEEV also contributed positively to the overall mix. I also note that oral smoke-free products added plus 2 points to organic net revenue progression, underlying the continued accretion from the Swedish Match acquisition.
As in recent quarters, geographic mix was negative. This is primarily due to combustible where volumes increasingly due to lower margin markets where smoke-free alternatives are small or not available, with higher margin markets over-indexed to cannibalization. We expect this dynamic to be less impactful in 2024 than last year.
Now let's focus on the mechanics behind our H1 margin delivery. Gross margin increased organically by 140 basis points and by 80 basis points in dollar terms. This was driven by our higher-margin smoke-free business, pricing and ongoing productivity savings across the value chain. As expected, SG&A cost growth stepped up in Q2, increasing 9.8% organically after a very modest increment in Q1 due to planned phasing of commercial spend. The resulting 5.8% organic increase in H1 was below the rate of top line growth, driving plus 1 percentage point of margin expansion, with our successful back-office cost program able to mitigate some of the investment step-up. With a range of important commercial activities in Q3, we expect SG&A to remain elevated but continue to target an organic increase below the rate of net revenue growth for the year.
I am pleased to report we delivered over $300 million in H1 gross cost efficiency across both COGS and SG&A as we proactively drive bottom line growth. We expect an acceleration in H2 savings, notably from manufacturing, as we progress towards our $2 billion target for '24-'26 period. The combination of these factors drove a plus 230 basis point expansion in our organic operating income margin. Despite a significant H1 skewed currency headwind, adjusted OI margins were stable on a dollar basis.
Moving to our smoke-free business. we estimate there were 36.5 million adult users of PMI smoke-free product as of June 30, reflecting an additional 3.2 million during H1. This includes an estimated 30.8 million IQOS users, 5.2 million oral users and 0.8 million VEEV users. The increase in both total and IQOS user was broad-based, with notable progress in Japan, Europe and newer growth markets such as Indonesia, in addition to the strong traction with legal age nicotine users in the U.S. Our smoke-free products are now present in 90 markets, following recent launches of IQOS ZYN and VEEV.
Focusing now on IQOS in Europe, where fundamental dynamics are developing very well, including the user growth I just mentioned. First, we see robust recoveries in markets where the characterizing flavor ban has passed the initial adjustment phase. Second, there is continued excellent growth in markets where IQOS is already well established, such as Portugal, Hungary and Greece. Last, new growth leader markets are emerging with accelerating momentum in Germany, Spain, Bulgaria and Romania, in addition to recovery in Poland following the launch of DELIA. Our Q2 HTU share increased by 0.8 points year-on-year despite the impact of the flavor ban. Due to the usual seasonal factors and a resilient combustible market, Q2 share was sequentially below Q1. HTU adjusted IMS volume demonstrated robust growth, growing by 0.8 billion units sequentially to reach 12.9 billion on the 4-quarter moving average. As expected, adjusted in-market sales growth of plus 6.8% was lower than in Q1 due to higher comparison and the initial impact of the characterizing flavor ban, notably in Italy. Growth excluding Italy was close to 10%.
The impact of the ban is progressing in line with our prior estimate in the majority of markets, though the implementation in Italy during Q2 was slightly more pronounced than anticipated. This was primarily driven by earlier sell-through of affected SKUs and concurrent pricing. It is important to note this is a transitory dynamic, and I'm pleased to report a recovery in markets such as Greece, Czech Republic, Bulgaria and Romania, where the ban was implemented previously following an initial period of consumer adjustment. Indeed, despite an uncertain outlook in Ukraine, we anticipate an acceleration in Europe adjusted IMS growth in the second half. This is supported by the planned step-up in commercial activity behind IQOS, including the introduction of DELIA and LEVIA HTUs to an increasing number of markets.
Another illustration of our continued progress in Europe is in our key city [ offtake share ]. Strong gains in city with already high IQOS adoption such as Budapest, Bucharest, Bratislava, Lisbon and [ Sofia ] and historically slower growth markets such as Madrid, London and Amsterdam highlight the enduring growth potential in the region. Japan demonstrated impressive IQOS growth in the quarter, with adjusted HTU IMS growth of plus 12.5%, representing the seventh consecutive quarter of double-digit progression. Adjusted IMS volumes continued to grow sequentially, reaching 10.5 billion units on a 4-quarter moving average. Total tobacco share for our HTU brands increased by 3.1 points year-on-year to 29.4%, with national offtake share exceeding the impressive milestone of 30% in June. We also maintained offtake share of over 35% in Tokyo despite seasonal factors, where the overall category continued to track at over 50% of total offtake and grow sequentially, demonstrating the continued potential in this important market. Our continuous innovation is a key driver of this growth, with Q2 seeing a strong step-up in user acquisition following the launch of ILUMA i and further innovative [ tera ] variants such as capsule consumables.
Taking a more global view, we continue to see very promising IQOS growth across a broad range of geographies, including low and middle income market, as highlighted by key city offtake shares. Accelerating growth in Indonesia, the world's largest cigarette market by volume, excluding China, leads the way with increasing geographic reach and [ clove ] HTU innovation. Markets across North Africa and the Middle East are also growing weight and source of growth. We show Saudi Arabia, Lebanon, Morocco and Tunisia here, in addition to Egypt, where performance in Cairo remains robust despite recent pricing and a recovery in the combustible market. I am also pleased to report very good progress in the UAE and Jordan. Following the recent launch of ILUMA, growth in Mexico City is very promising. And the East Asian market of South Korea and Malaysia continue to perform well.
Also worth highlighting is the successful contribution of Duty Free, where we are increasingly leveraging our multi-category portfolio to expand share in a growing market as travel recovers in Asia. Our fundamental HTU growth outlook for the year has not changed. H1 adjusted IMS growth of plus 11.4% reflects the strong dynamic I described across Japan, Europe and global markets, partly offset by the transitory impact of the EU flavor ban. Indeed, growth excluding Europe accelerated compared to the last year, and we expect this to continue. However, we see an incremental headwind of around 2 billion units to our full year adjusted IMS forecast, the majority of which is driven by the ongoing delay in approval for commercialization in Taiwan, which was previously expected around the [ bin ] point of the year. We also factor in an impact of a few hundred million unit for a slower recovery from the characterizing flavor ban in Europe, principally in Italy. I would note that our revised full year forecast for adjusted IMS growth of around 13% represents the same absolute volume increase as 2023 despite the EU headwind. We accordingly forecast full year [ achieve ] shipment volume of around 140 billion units, with shipment, as usual, expected to be a few billion unit higher than adjusted IMS given continued offtake and user growth.
Importantly, we expect a very strong H2 delivery in adjusted IMS on both a sequential and year-on-year basis to between plus 14% and plus 15% growth. This is supported by a notable step-up in commercial activity, continued momentum in Japan and increasingly dynamic global market. This includes the market I just mentioned and the ongoing acceleration in Duty Free. For Europe, a broadening of growth through acceleration in Germany, Spain, the U.K. and Romania adds to the ongoing momentum in geographies such as Portugal and Greece. H2 should also see several markets start to rebound from initial favorable impact, including a gradual recovery in Italy.
Turning now to ZYN, where very good U.S. progress continued in Q2, with close to plus 70% growth in 12 months rolling shipments. As we shared earlier in the year, strong demand dynamics have created short-term supply chain constraints, which has impacted volume growth. As shown on this slide, this has resulted in a temporary slowdown of the category. ZYN's premium positioning and superior brand equity remains strong, with ZYN maintaining very robust category volume and value share despite these availability challenges and the recent price increase. We also remain highly focused on marketing ZYN responsibly to prevent unintended use.
We are making good progress on expanding production and continue to expect a gradual improvement through Q3 with sequentially higher volume and for production volumes to meet expected consumer demand during the course of Q4. We expect the ongoing expansion of the existing facility in Kentucky to provide around 900 million [ cans ] of capacity for 2025. We also recently announced a planned investment in a new plant in Colorado, which is due to begin preliminary operation by the end of next year. Together, these plans support our U.S. ZYN growth ambitions for the coming years.
For 2024, we are now forecasting a U.S. shipment range of 560 million to 580 million cans to reflect strongly increasing demand from adult nicotine users and the progress made on increasing our production capacity. I will now take a moment to update you on the international expansion of our smoke-free business. Our multi-category approach is gaining momentum as we unlock new horizon of growth with the increasing commendation of IQOS, ZYN and VEEV across markets. Our focused strategy for VEEV is showing very good early results. In Europe, closed pods are accelerating within the dynamic e-vapor category. We are seeing strong traction of our VEEV ONE product, achieving a #1 closed [ pod ] position in 5 markets within the first year of launch, including Italy, the Czech Republic and Romania.
We continue to observe good repeat purchase and conversion rate, which is often a challenge for this category. We expect continued volume momentum in H2, supported by ongoing geographic expansion and to reach profitability in Q3. For ZYN, there is a large opportunity outside of the U.S. which we are working to capture. Our international nicotine port volume, including the Nordics, grew by over plus 60% in H1, matching U.S. growth. We see promising results in a number of markets, including Mexico, South Africa, Pakistan and the important U.K. market, where we have seen strong traction with only limited distribution so far.
Our expansion of the IQOS portfolio remains active as we innovate to broaden and enhance our offer for both existing users and switching other smokers. Further market launches are planned in H2, including DELIA and LEVIA HTUs and the new ILUMA i device brand, which is currently only available in Japan. We also continue with our preparation for IQOS ILUMA in the U.S., and we are underway with consumer engagement for our first city pilot in Austin, Texas with the IQOS 3 system, which we expect to start in Q4. As mentioned previously, the conversation will be initially limited in scope and focused on direct activation of select legal age smokers in a few cities, allowing us to experiment with different elements of the commercial model. The main purpose is to fine-tune our approach and readiness in anticipation of the [ ASC ] launch of ILUMA. We continue to assume an authorization from the FDA in the second half of 2025.
Focusing now on combustibles. Our portfolio delivered robust organic net revenue growth and a very positive profit contribution, as I covered earlier. This reflects resilient volume despite very strong Q2 pricing of plus [ 8.7 ], including our proactive action to maximize growth. It is worth noting the large majority of our pricing is derived from regular pricing action unrelated to significant currency devaluation. Factoring a strong H1 and favorable outlook, we now forecast an increased full year combustible price variance of plus 7% to plus 8%. Our cigarette category share was stable in H1 and down 0.2 points in Q2 or stable, excluding market mix impact. Lower share in Egypt and Indonesia was offset by positive contribution from Turkey, India and the Europe region, again despite strong pricing.
Our global brands grew category share in the quarter, with Marlboro gaining plus 0.3 points to 10.1%. On a global basis, our leadership in combustible is a critical enabler to maximize switching to smoke-free products, and we target a stable category share over time. As mentioned previously, we evaluate our strategy on a market-by-market basis and have the flexibility to adapt our approach where smoke-free products have already reached critical mass.
Taking a more holistic view on the business. Our transformation and smoke-free journey are backed by a strategy to embed sustainability in all that we do. We are making strong progress towards our product transformation targets. Our smoke-free products are now available in 90 markets, placing us on track for our aspiration of 100 by 2025. We are also moving nicely towards our objective for low- and middle-income countries to comprise over 50% of smoke-free product markets. The rapid growth of our estimated SFP user base, which now stands at around 36.5 million adult user, as previously described, is further testament to this progress.
With regard to our operation, decarbonization is an important focus area, and we are very pleased to have been awarded the top spot on the Forbes 2024 Net Zero Leader list, which highlights the 100 U.S. public companies best positioned to reduce their greenhouse gas emission. It also follows the announcement earlier this year of CDP awarding us a AAA rating for our disclosure and efforts on climate change, forest and water security. This recognition reflects our continued focus on our sustainability performance and robust reporting as we continue to work towards a smoke-free future.
This brings me to our outlook for 2024. Following an excellent H1 performance and strong business momentum as we start the second half, we are raising our full year currency-neutral and U.S. dollar growth forecast. This is supported by accelerated total volume growth and pricing and reflects the very strong outlook for ZYN despite short-term supply constraint and the increasing profitability of IQOS due to operating leverage, manufacturing efficiencies and pricing. We continue to target close to $15 billion in smoke-free net revenue for the year. Taking these factors into account and a robust combustible performance, we are increasing our organic net revenue growth forecast to a range of plus 7.5% to plus 9%. In addition to strong top line growth, the positive smoke-free mix effect, combustible recovery and further cost efficiency enable healthy margin expansion. We are accordingly raising our organic operating income growth forecast to plus 11% to plus 13% for the year. We continue to target adjusted gross margin expansion for both smoke-free products and combustible and adjusted OI margin expansion for total PMI, all in both organic and dollar terms.
Consequently and also factoring a lower forecast net financing cost, we are raising our forecast for currency-neutral adjusted diluted EPS growth to plus 11% to plus 13%. This translates into a range of $6.33 to $6.45, including an unfavorable currency impact of $0.34 for the year at prevailing rates. The increased currency headwind versus prior guidance is primarily due to the Q2 impact already described. As shown by the increase in our forecast USD EPS growth to plus 5% to plus 7%, the underlying strength of our business and proactive mitigating actions have allowed us to more than compensate for this, and we expect to deliver on our objective of strong growth in dollar terms.
Focusing on the second half in more detail. We expect another strong performance, driven by excellent IQOS adjusted IMS growth, the progressive improvements in ZYN volume and continued positive impact from our actions to drive bottom line growth. For Q3, we forecast a record high quarterly adjusted diluted EPS of $1.77 to $1.82 despite a significant step-up in commercial spending and an unfavorable currency impact of $0.02 at prevailing rates. This is in contrast to a forecast currency tailwind of $0.04 for H2 overall, which enable us to target accelerated U.S. dollar adjusted diluted EPS growth. We include a table of estimated currency impact by quarter in the appendix. This Q3 forecast notably reflects another quarter of dynamic growth with HTU shipment of 34 billion, 35 billion units and an acceleration in HTU adjusted IMS growth.
Given expectation for a strong full year profit delivery, we are forecasting operating cash flow of around $11 billion, which is at the upper end of our previous forecast range at prevailing exchange rate and subject to year-end working capital requirements. We expect this improvement to more than offset an increase in capital expenditure to around $1.3 billion to $1.4 billion as we further accelerate ZYN capacity expansion. Last, we continue to target a 0.3x to 0.5x improvement in our net debt to adjusted EBITDA ratio in 2024, driven by profit growth and strong cash flow generation. As of June 30, we have already improved a ratio of 3x on a 12-month trailing basis as compared to 3.2x at the end of 2023. This represents good progress towards our target of around 2x by the end of 2026. We intend to reconsider share repurchase, subject to board approval, once we are within sight of this goal.
I will now conclude today's presentation with some closing remarks. The powerful combination of strong underlying business momentum and our own proactive steps enable us to generate best-in-class growth across key metrics. Our strategy is delivering on volumes, pricing, cash flow and dollar earnings despite ongoing currency headwinds. The success of our smoke-free transformation is reflected in our remarkable first half performance with excellent underlying IQOS and ZYN growth, very robust pricing, positive category mix and step-up cost efficiencies. This puts us firmly on track for an exceptional 2024, with accelerated top line growth and margin expansion. Our momentum is broadening across the business with exciting multicategory growth opportunity to further support the delivery of our 2024-2026 growth targets. We remain highly focused on delivering performance in dollar. And as shown in H1, we are taking measures to mitigate currency headwinds. Finally, we are steadfastly committed to returning cash to our shareholders. Our growth outlook and strong cash flow generation underpins our capital allocation priorities to reinvest behind our rapidly transforming business alongside our progressive dividend policy. Thank you, and we are now very happy to answer your questions.
[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 tons next year. So does it mean that by Q4 of this year, it will be 225 million tons 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 0 volume in Taiwan. We thought it was a reasonable assumption. Remember the law allowing for [ ita ] 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 sales outside Europe, and we talk about 60% of the business, the adjusted IMS were growing around 14% versus around 13% last year. So we've been growing faster in percentage. So you can imagine in terms of volume, of course, that means a significant acceleration. And indeed, what is beyond this very nice dynamism is Japan. You have other developed markets such as South Korea, but we've been seeing a number of new contributor to this growth.
We mentioned Indonesia. We mentioned a number of markets in Middle East. Mexico is also accelerating, and we enjoy also a nice performance in duty-free. So that's really what we are seeing outside Europe. Then Europe, absolutely as expected. I mean, we are going through what is a significant transition. We are moving away from flavor. It's still growing. Outside Italy, we have adjusted in-market sales growing close to double digits. So very strong in [ amisel ] despite the fact that many of the country are going through this transition. And as we flagged, it is true that it's really great to see, at the same time, our champion market, like we mentioned in Portugal, Hungary that continue to do very well. We have new markets that are really confirming their status of growth driver for the future. We mentioned Germany, Spain, Romania, Bulgaria. So it's important to have this new growth provider, if you want. And then a number of markets exiting, I would say, as expected, the turmoil or the disruption, I would say, of a few weeks that is coming with -- with the implementation of the flavor ban. And here, we can mention Greece, we can mention Romania, we can mention Bulgaria, we can mention Czech Republic. So a number of markets where things are happening absolutely as expected.
And then you have Italy, where we've been, in fact, not evaluating well the level of flavored products available with distributor and with retail, and there was less than what we thought. And therefore, the consumer offtake has been impacted quicker than what we were anticipating by the absence of a flavor product after the implementation of the flavor ban, and that has had some impact on the growth. And at the same time, no doubt that the 2 accumulating have had some impact. We've been increasing price by $0.30 on our consumables. And that has not been followed only very marginally by the competition with some impact on our market share as it happens when we increase price in a meaningful manner, widening the gap with competition and the competition not following. So that is really the picture.
And now when we are looking at the second half, so we expect outside Europe situation to continue to do well. I'm not going to name again all these very great country where we are performing extremely well. We have the launch of LEVIA and DELIA in a number of countries. And we expect Europe to accelerate as we are transitioning out of this phase of adjustment to the flavor ban. And Italy will be part of the market where we expect improvement. But I would say, globally, we expect more acceleration on all the markets that have been going through the flavor ban. So I think this is really the complete picture, Bonnie. I hope it is helpful in answering your question.
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 [ Inotun ] 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 #1 position in 5 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 [ Nielsen ] 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, when 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 MTF. 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 in 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 smoker 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 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 5 markets where we are #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 this 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 prefinancing 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.