Philip Morris International Inc (PM) Q2 2025 Earnings Call Transcript

Philip Morris International Inc (NYSE: PM) Q2 2025 Earnings Call dated Jul. 22, 2025

Corporate Participants:

James Bushnell — Vice President, Investor Relations & Financial Communications

Emmanuel Babeau — Chief Financial Officer

Analysts:

Gaurav Jain — Analyst

Eric Serotta — Analyst

Matthew Smith — Analyst

Bonnie Herzog — Analyst

Faham Baig — Analyst

Callum Elliott — Analyst

Gerald Pascarelli — Analyst

Priya Ohri-Gupta — Analyst

Presentation:

Operator

Good day, and thank you for standing-by. Welcome to the Philip Morris International 2025 Second Quarter Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again please be advised that today’s conference is being recorded.

I would now like to hand the conference over to your speaker today, James Buschnell, Vice-President, Investor Relations. Please go-ahead.

James Bushnell — Vice President, Investor Relations & Financial Communications

Welcome and good morning. Thank you for joining us. Earlier today, we issued a press release containing detailed information on our 2025 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 US GAAP measures for non-GAAP financial measures cited in this presentation are available in Exhibit 99.2 to the company’s Form 8-K stated today 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.

I’m joined today by Emmanuel, Chief Financial Officer. Over to you, Emmanuel.

Emmanuel Babeau — Chief Financial Officer

Thank you, James, and welcome, everyone. We delivered an excellent set of H1 results following another very strong performance in the second-quarter of 2025. Top-line dynamism from our smoke-free portfolio, which reached a record $4 billion in net revenues, coupled with margin improvements across our business drove strong double-digit adjusted diluted earnings per share growth in both constant-currency and dollar terms.

The multi-category momentum of our smoke-free business accelerated with the Q2 step-up in offtake growth for IQOS, and. As expected, IQOS delivered another strong performance with heated tobacco unit adjusted in-market sales growth accelerating to plus 11.4% in Q2. This reflects broad-based growth both globally and in Europe as markets such as Italy passed the transitory disruption of the characterizing flavor ban. ZYN confirmed its upward trajectory with a significant acceleration in US consumer offtake growth to plus 26% For Q2 and plus 36% in June as in-store availability improved. Internationally, Q2 nicotine pouch volumes increased plus 65% and almost outside the Nordics. In e-vapor, continued its remarkable trajectory with shipments more than doubling year-on-year, driving further gross margin expansion. For combustibles, despite unexpected return to modest volume declines, our business delivered robust top and bottom-line performance, reflecting its resilient model led by strong pricing. We continue to generate best-in-class growth across the P&L with high single-digit organic H1 top-line growth and mid-teens adjusted OI growth to reach a margin of over 41%. This high-quality performance reflects the increasing profitability of our three smoke-free categories at-scale, operating leverage and efficiencies combined. These results provide an excellent platform for another year of superior growth. We expect strong smoke-free momentum to continue in H2, while we factor-in the exceptional H2 prior year comparison, notably on growing combustible volumes and certain timing factors. With strong business fundamentals and a slightly more favorable expected tax-rate, we are raising our adjusted diluted EPS full-year forecast to plus 13% to plus 15% growth or plus 11.5% to plus 13.5% excluding currency. Now looking at our Q2 financials, we delivered another quarter of shipment volume growth of plus 1.2% and organic top-line growth of plus 6.8% or plus 7.1% in dollar terms to reach over $10 billion in quarterly net revenues for the first time. Excluding the Indonesia technical impact explained last quarter, organic net revenues grew by more than plus 8%. Adjusted OI grew by plus 14.9% organically with growing profitability in all categories, positive smoke-free margin mix and ongoing cost efficiencies. Adjusted diluted EPS of $1.91 reflects growth of plus 20%, including a favorable currency variance of $0.02, $0.04 lower than previously guided, mainly due to intercompany transactional impact from currency volatility at period-end, including on the Swiss franc. This better-than-expected EPS delivery notably reflects strong top-line momentum, positive margin evolution in our smoke-free product business and robust combustible pricing. Combining this excellent Q2 with a strong first-quarter, we achieved one of our strongest ever H1 performances. Total shipment volumes grew by plus 2.5% and organic net revenues by plus 8.4% or approximately plus 10% excluding the Indonesia technical impact. Strong performance from both smoke-free and combustibles drove adjusted operating income growth of circa plus 15% in both organic and USD terms to reach $8 billion in total. H1 adjusted diluted EPS was up by plus 17.7% in constant-currency and by plus 16.1% in dollar terms. Turning to shipment volumes, we delivered Q2 growth of plus 1.2% and plus 2.5% for the first-half, driven by more than plus 13% growth from our smoke-free business. While adjusted in-market sales growth accelerated. Q2 HTU shipment volume grew plus 9.2% to 38.8 billion units, including robust growth in Europe and Japan as well as promising growth from global markets such as Indonesia, South Korea and global travel retail. H1 HTU shipments increased by plus 10.5%, broadly in-line with adjusted in-market sales growth. As mentioned last quarter, our H1 shipments include a Q1 shipment timing benefit of around 1 billion units, which we expect to reverse in the 4th-quarter. Overall and e-vapor shipments again grew significantly. Cigarette volumes declined modestly in Q2 following the exceptional growth of recent quarters. This was primarily due to contraction in Indonesia and in Turkey, where we experienced supply-chain issues following a change in regulatory requirement. This resulted in a temporary loss of volume and share with some associated inventory write-downs. We expect a gradual recovery through the remainder of the year, though H2 year-on-year comparison are still likely to be affected. In Indonesia, despite a good share performance, a growing illicit segment is impacting both the legal industry and our volumes within it, and this is also likely to extend into H2. We expect our cigarette volumes to decline around 2% for the year, more in-line with the historic underlying trend. This includes a forecast decline of 3% to 4% in H2 against the high prior year comparison I mentioned with Turkey accounting for close to half of this decline. This also factored the continuation of decline in Europe and Japan as smoke-free product grow strongly and the dynamic in Indonesia and in Egypt where the recovery of the main local competitor is ongoing after previous supply constraints. As a testament to the resilience of our combustible model, we are still targeting combustible gross profit growth in H2, supported by pricing and cost efficiencies. For smoke-free products, we anticipate continued double-digit volume growth in H2, including the expected reversal of H1 phasing benefit on IQOS. However, given cigarette dynamic, it is possible that H2 may see modest decline for total PMI volumes. Importantly, with the forecast full-year increase of around plus 1%, we continue to target our fifth consecutive year of total volume growth as we do for future years as our smoke-free portfolio continues to drive performance. Breaking the performance down by category, exceptional gross margin and OI growth in Q2 resulted in impressive first-half results powered by our increasingly profitable smoke-free business. H1 smoke-free net revenue grew organically by plus 17.3% to $8.1 billion and gross profit by plus 27% to $5.6 billion with plus 530 basis-points of organic expansion to reach over 70% gross margin. This is around 4.5 points above the gross margin of combustible at the current category and geographic mix. As in 2024, this reflects continued margin expansion for all — all three smoke-free category, notably combined with a positive mix impact of ZYN accretive unit economic and pricing on both HTUs and ZYN. Very strong ICOS gross margin expansion reflect the powerful growth and scale effect of this large and growing business, manufacturing productivities and a comparison benefit from higher device shipment in the prior year when ILUMA I was launched in Japan and other markets. We expect strong margin to continue in H2, albeit without the device year-on-year comparison benefit as we also further expand the presence of ILUMA eye across market and bonds in Indonesia. Combustible net revenues increased by plus 2.9% or more than 5%, excluding the Indonesia technical impact. Gross profit grew by plus 5%, driving plus 140 basis-points of margin expansion despite the financial impact of the Turkey disruption. This includes a robust Q2 with organic net revenue growth of plus 2% and gross profit growth of plus 4.8%. This performance epitomized the resilience of our ongoing combustible business model with low-single-digit volume declines, robust pricing and efficiencies combining to deliver top-line and gross profit growth over-time. We continue to target combustible gross margin expansion organically and In dollar terms for the year despite slower pricing and weaker volume in H2. The combination of sustained smoke-free momentum and combustible resilience led to plus 15.4% H1 organic OI growth at total PMI level, resulting in plus 250 basis-points of operating income margin expansion to surpass 41%. H1 net revenue growth of plus 8.4% was again fueled by the three engines of our top-line growth model with positive volumes, robust pricing and favorable smoke-free mix. Pricing contributed plus 5.2 points, driven by combustible pricing of plus 7.7% and low single-digit smoke-free pricing excluding devices. The positive mix impact of rapid SFP growth drove a further contribution of plus 3.1 points. Combustible geographic mix and other factors had an unfavorable impact of 2.4 points, including the Indonesia technical impact of around 1.5 points. Currency had a negative impact of 1.5 points with a further 0.4 points from acquisition and divestitures, which include the divestment of Victoria. Turning now to gross margins. We delivered H1 organic expansion of plus 300 basis-points and plus 320 basis-points, including currency, acquisition and divestitures. Pricing made a plus 160 basis-point contribution, more than offsetting the 60 basis-point unfavorable impact from cost inflation, net of productivity and other cost items. Smokery growth drove an excellent plus 190 basis-points, reflecting the factors I covered earlier. The impact of combustible was broadly flat excluding pricing, but including the Indonesia impact. Below gross profit, we continue to invest strongly in the future growth of our smoke-free brands, including in the US with SG&A organic growth of plus 10.6% for H1, marginally above net revenue growth, excluding the technical impact of Indonesia. We achieved more than $500 million in gross cost-saving year-to-date through our manufacturing and back-office efficiency initiatives. Now at the midpoint of our target ’24, ’26 period, we have delivered over $1.2 billion, placing us well on-track towards our $2 billion objective. Altogether with gross margin expansion more than compensating for higher year-on-year commercial investments, we delivered plus 290 basis-points of adjusted operating income margin expansion in H1 or plus 250 basis-points organically. Q2 organic OI margin expansion of plus 300 basis-points was even stronger than the plus 200 basis-points in our first-quarter. Focusing now on our smoke-free business, where our multi-category strategy is facilitating the continuous growth of our smoke-free user base. Estimated legal-aged consumer of our SFPs grew by approximately 5 million versus one year-ago, reaching around 41.5 million as of June 30. Our smoke-free products are now available in 97 markets following the Q2 launch of ZYN in Ireland and Cambodia. Almost half of these markets now have a multi-category offer with at least two of IQOS, ZYN and Viv on-sale to legal edge nicotine user. As shown on this slide, we now have all three categories deployed in 20 markets as we continue to broaden our multi-category presence. The regulatory environment is a key enabler of smoke-free growth and I’m pleased to report some more example of positive progress such as legislation providing new market access for one or more SFP category across several Middle-East markets. We also note the recently published proposal to revise the EU tobacco directive, which marks the start of a formal legislative process that will require unanimous approval by all member states and subsequent transposition into national law. Many member states have already adopted risk proportionate regulation and taxation frameworks for smoke-free product, which can serve as a valuable foundation and benchmark for shipping the final directive. While we note the clear differentiation for smoke-free product relative to combustible in the proposed minimum rate, we are also disappointed to observe the lack of a plan to counter the threat of illicit trade, which accounted for 9.2% of total EU cigarette consumption in 2024, with government losing over EUR14 billion in tax revenue at a time when many countries face intense economic pressure. Our multi-category approach is built on the strength of the brand and commercial presence of IQOS, which remains our core smoke-free product growth engine. We continue to be laser-focused on maximizing the growth of IQOS over-time with the deployment of ZYN and under its umbrella, offering complementary opportunities to fully transition legal edge nicotine user from cigarette to SSPs. In this context, I’m especially pleased to confirm the acceleration in ICO’s HTU adjusted in-market sales growth to plus 11.4% in Q2, notably driven by Europe and including excellent progress in its largest market of Italy as the impact of the characterizing flavand recedes and our commercial initiatives be approved. Japan also delivered another robust quarter of growth and other global markets accelerated nicely. While competitive activity is increasing, we see this as positive for category growth over-time and we expect continued strong IQOS progress in H2. We continue to target plus 10% to plus 12% HTU adjusted IMS growth for the year. Continuous IQOS innovation on devices and consumables combined with investments in brand equity are fundamental pillars of our growth. The rollout of the ILUMA I technology now present in over 30 markets remains ongoing. We are expanding the portfolio of Livya tobacco-free consumable with promising initial results from recently launched new test variants and flavor capsules. We also commenced the rollout of a rhythm packed design on our co-premium terrier HTUs as well as the expansion of our mainstream price offer in Delia with excellent results in-markets such as Germany and Poland. In the US, we continue with small-scale pilots, which are generating considerable adult consumer interest. As we progress our commercial pilot in, we also launched a second pilot in Fort Lauderdale during the quarter with further initiatives planned in the coming months as we prepare for the at-scale launch of IQOS ILUMA once authorized by the FDA our second flagship premium smoke-free brand,, leads a category which has the potential to fundamentally reshape the consumption of nicotine for the substantial net benefit of global public health as adult smokers increasingly switched to smoke-free product. Q2 can shipments grew by plus 43% on a global basis and offtake reaccelerated strongly in the US, which I’ll come back to in more detail. Building on the new strength, our global rollout continued to advance with Q2 international can volume up plus 65% year-on-year or a remarkable plus 179% excluding the Nordics. The growth of our international business reflects both market expansion and strong offtake growth, supported by expanding production capacity in new geographies. Notable strong performances include our global travel retail business with close to plus 200% volume, excluding the US as well as the UK, Pakistan, Poland, South Africa and Mexico. As covered in our recent Europe-focus event, our focus is on growing the category by switching legal-aged smokers rather than sourcing from the small existing category. It is also notable that ZYN holds the number-one position in Mexico and South Africa, where we launched our predominantly mini dry portfolio at the same time as competitor brands . Dry pouches already make-up the majority of our pouch volumes in more than 3/4 of market and we believe this format is especially relevant for legal-aged smokers. ZYN is now present in 44 markets globally following additional launches in Q2. Our smoke-free trilogy is completed by. H1 shipment volumes more than doubled to reach almost 1.5 billion equivalent units with increasingly profitable growth driven by Europe where now holds the number-one closed spot position in six markets, including Italy and Greece. Outside Europe, we see significant potential for the brand with nice results in diverse markets such as Indonesia, Canada and Colombia and further rollout plan. Increasing repeat purchase rates and consumer loyalty are especially promising as we seek to leverage our multi-category infrastructure under the IQOS umbrella of quality, premiumness and superior technology. In this vein, we recently launched our latest innovation, Viv in Prime in the Czech Republic, in Prime offers an upgraded premium user experience with higher intensity of flavors, a larger cloud size and higher battery capacity with an optimized put cost profile. The most developed multi-category consumer landscape is in Europe and we now have 30 markets with at least two categories on offer. Of course, IQOS remains the core driver of our performance in the region and I’m delighted to report a meaningful Q2 acceleration of HTU adjusted in-market sales growth to plus 9.1% as-adjusted market-share grew by plus 1.2 points year-on-year to 10.9% in this seasonally higher period for combustibles. As explained at our recent Europe event, IQOS has a very strong brand platform across the region and this performance reflects our innovation and commercial initiatives, including those on, and Delia. This helped drive strong double-digit adjusted IMS growth across markets, including Germany, Spain, Romania, Greece and Bulgaria. A significant Q2 call-out is Italy, Europe’s largest IQOS market by volume, which delivered a very welcome uptick in both sequential and year-on-year growth. With the exception of Poland, Australia, Estonia and Croatia, the impact of the EU characterizing flavor ban is now behind us and our absolute regional growth in HTU adjusted AMS is now getting closer to pre-band levels. While quarterly comparison from 2024 have some volatility from flavor ban dynamics, sequential trends are very positive and we look-forward to the remainder of the year with confidence in further strong IQOS growth. On-top of this IQOS progression, the accretion from our multi-category strategy is evident in our total volume of IQOS ZYN and with shipment growth of plus 13.5% in Q2 compared to HTUs alone at plus 10.5%. ZYN and Viv are still very early in their developments, but are demonstrating exceptional growth. The numbers you see here are for Europe overall. And I would also note that where we are present with all three brands such as Italy, Greece, Poland and Romania, we see several points higher SFP volume growth. In Japan, we achieved a significant milestone of 10 million estimated users and Q2 adjusted HTU shares increased plus 2.3 percentage points year-on-year to 31.7% despite increased competitive intensity. IQOS continues to deliver strong progress with Q2 adjusted IMS growth of plus 7.8% against a prior year period, which included the full launch of ILUMA I. As shown on the slide, IQOS delivered truly exceptional growth in ’23 and ’24, especially considering the size of the category now stands at almost half of total nicotine offtake volume nationally and more than half in certain cities. The high single-digit growth that our business delivered in H1 2025 remains very healthy and is essentially in-line with the trend in the years prior. We expect further strong adjusted IMS growth in the remainder of the year. We are pleased to see our competitors embrace the heat-not-burn category as while our category share was sequentially stable at around 70% in Q2, our biggest focus is on accelerating the size of smoke-free product overall to maximize the growth of our leading proposition and convert more smokers. Switching now to the US, the strong reacceleration in ZYN growth is a clear highlight of our Q2 performance and testament to the strength of the brand as in-store availability improves and legal-edge consumers regain access to the full portfolio offering. The supply constraint of previous quarters had limited the growth in sell-out volumes and meant zin was growing less than the overall category. With manufacturing capacity now in very good shape, the recovery to around plus 36% off-tech volume growth in June as measured by Nielsen and plus 26% in Q2 overall marked the return of zin to its category-driving position in terms of growth and market-share. On a sequential basis, zin offtake volume accelerated to around plus 12% growth versus Q1, in-line with the total category. With a number of commercial program restarting at the end-of-the quarter, this is clearly very promising as we increasingly focus on legal-edge smoker and vapors who have not yet switched to the category. Q2 shipments increased plus 41% year-on-year, reaching 190 million cans. As with any out-of-stock situation, quarterly shipments are subject to volatility. Restocking of the value chain was effectively completed in H1 with the majority of this taking place in the first-quarter. We estimate the total net impact at broadly ZAR14 million for the year, slightly below our initial expectation. This factors in the good news that retail availability is now approaching normalized level with a lower scarcity premium in retail prices narrowing the price gap to competition. Importantly, sales velocity are accelerating and with 36% of the growth in June, this bodes well for the second-half of the year. With shipments now primarily driven by consumer offtake, we expect a broadly similar level of shipment in Q3 as in Q2, factoring in the possibility of a few days adjustment to wholesaler and distributor inventory as the situation fully normalized. We continue to target full-year US shipment of 800 million to 814 million cans, including a sequential step-up in Q4. With our US production capacity increased ahead of plan and now well set for this year and beyond, we are incredibly excited to drive Zen and the overall nicotine pulch category to its full potential over the coming years. Having covered Europe, Japan and the US in some detail, let’s look at the rest of the world. In most markets, both the nicotine porch category and our multi-category presence are nascent. Both Zyn and Viv will leverage on the strength of IQOS where Q2 adjusted in-market sales accelerate — accelerated to plus 19.3% growth with broad-based progress, including Egypt, the Philippine and Indonesia. While pouch and e-vapor volumes are naturally very small across this market at this stage, we can measure their Q2 growth in multiple rather than percentages. This impressive IQOS growth is exemplified by offtake share gains in global key cities. Strong presence in South Korea and Malaysia is more than matched by key city in Mexico, Serbia, the Middle-East and North Africa. Global travel retail, where multi-category is increasingly prominent also continues to grow strongly. The world’s largest cigarette market by volume outside China is Indonesia, Where Jakarta offtake share grew by plus 2.5 points year-on-year to 7.5%. Following promising results from the pilot launch of our full-flavor eat-not-burn technology bonds, which is tailored to local test preferences, we have recently commenced a broader rollout. Bond is also progressing well in Lebanon. Turning to combustible, our business delivered robust organic net revenue growth of 2% in Q2 and plus 2.9% for H1 with Marlboro reaching a category share high of 10.7% in Q2. Strong Q2 pricing of plus 7.2% included notable contribution from Indonesia, Germany and Italy, yielding plus 7.7% in H1 overall. While we continue to expect a moderation in H2 pricing due to timing and comparison dynamic, we now forecast plus 6% to plus 7% for the full-year. Our strategy is to take pricing action to optimize the financial contribution to the business over-time, which can naturally impact volume and share performance on a quarterly basis. Our combustible business is resilient and the combination of pricing, category leadership and ongoing efficiencies drove very good gross profit growth as covered earlier. This performance is in-line with our objective of maximizing value over-time and supporting the growth of our smoke-free business. This brings me to our revised outlook for a remarkable 2025, where we are raising our adjusted diluted EPS forecast for the year in both currency-neutral and dollar terms. As expected, we delivered a strong H1 organic performance compared to our target ranges for the full-year. While combustible volume dynamic and the phasing of comparison and costs are less favorable in H2, our fundamental outlook remains very good. We expect continued strong momentum on both IQOS and alongside robust pricing and meaningful margin improvement. We expect further double-digit HTU adjusted IMS progression with growth skewed to the 4th-quarter given a strong comparison in Q3. We forecast Q3 HTU shipment of 38.5 billion to $39.5 billion and dynamic growth in adjusted diluted EPS to $2.0 to $2.13, including strong investment and a favorable currency variance of $0.05 at prevailing rates. For the full-year, we continue to expect very strong organic net revenue growth in the range of plus 6% to plus 8%. Following excellent H1 top-line and margin progression, we are raising our forecast range for organic operating income growth to plus 11% to plus 12.5%. We are also raising our currency-neutral adjusted diluted EPS growth to plus 11.5% to plus 13.5%. This includes a slightly improved effective corporate tax-rate of approximately 22% to 23% based on the latest assessment of tax dynamic and market mix. We are still reviewing the implication of the OBB Act US tax reform. In dollar terms, we expect adjusted diluted EPS growth of plus 13% to plus 15%. This includes an estimated $0.10 favorable currency impact at prevailing exchange rate with favorable earnings translation from a broadly weaker dollar, partly offset by transactional impact due to currency volatility, which I covered earlier. Given our expectation for a strong full-year profit delivery and cash conversion, we are raising our forecast for operating cash-flow to around $11.5 billion at prevailing exchange rate and subject to year-end working capital requirements. We project capital expenditures slightly above our prior forecast at around $1.6 billion, primarily due to further international zin capacity investment with capex spend almost entirely focused on supporting the growth of smoke-free. With regard to our balance sheet, we continue to target further deleveraging in 2025, placing us on-track for our target ratio of around 2 times by the end of 2026. As mentioned last quarter, we are a global company with broadly diversified production and a worldwide supplier network, including an established US manufacturing base and we believe we are well-positioned to mitigate potential supply-chain challenges. While the situation is volatile, we do not currently anticipate a material impact on our business from recently introduced or discussed tariff. Our financial growth model is driving a continuous improvement in the quality of our business with smoke-free accretion and combustible resilience driving considerable bottom-line growth. We are well on-track to meet or exceed our three-year target targets, demonstrating our ability to deliver what we believe to be best-in-class CPG growth. Adjusted diluted EPS growth in dollar term is a key objective and we are pleased to see this delivered in H1 as well as in our outlook for the year. I will now conclude today’s presentation with some closing remarks. We delivered an exceptional first-half of the year, placing us well on-track for another year of strong performance. Our smoke-free growth is increasingly profitable as IQOS, ZYN and Viv gain scale and drive synergies at the consumer and commercial level. Our best-in-class financial performance is bolstered by underlying strength across all categories, including the resilience of our combustible business, in addition to our proactive measures on pricing and cost efficiencies. This drives our confidence in strong and sustainable adjusted diluted EPS growth in both currency-neutral and dollar terms. Finally, we remain a highly cash-generative business with an unwavering commitment to our progressive dividend policy. We look-forward to further rewarding our shareholders as our transformation delivers continued growth. Thank you, and we are now very happy to answer your questions.

Questions and Answers:

Operator

As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please standby while we compile the Q&A roster.

Our first question comes from Gaurav Jain with Barclays. Your line is open.

Gaurav Jain

Hi, good morning,.. Thank you for taking my question. So a few questions from me. One is on. So you are saying that restock was less than what you had expected. So how should one read it that your expectations for future growth, they were higher earlier and now they are lower and not only yours, but the market expectations were higher and now they are lower and that’s why the need for restock is lower.

And in that context, if I look at your ZIN volume guide, so if I say 3Q is flat versus 2Q and in 4Q, you need to do 219 million to 259 million for that 800 to 840 guide range, which would imply almost 15% to 36% growth on a Q-o-Q basis. And I remember from covering Swedish Match a few years ago that Q4 actually used to have lesser shipping days for them. So they didn’t really used to grow Q4 over Q3. So can you just help me understand all the moving parts from them.

Emmanuel Babeau

Sure, Gaura, with great pleasure. So first of all, on the impact of the restocking. Well, let’s be a bit humble here. We talk about a brand that we’re targeting to deliver for the year, million to million. Can there are several weeks of inventory between wholesaler, distributor and the retailers. I’m not able to tell you a precise number.

It’s probably anywhere between, let’s say, six to seven weeks altogether. And here we are talking when we say it’s a bit lower, I mean, it’s clear that, for instance, at the retailer level, we had no precise idea of the level of inventory. So we are a bit below our expectation. If I was to give a number, it’s probably maybe million, 20 million can below. Frankly, I’m not able to be more specific than that. We are talking about A few days of sales. So it’s really small. So that’s really what we’re talking about. And again, we’ve been facing this significant out-of-stock situation. We had the exercise of reloading, the good news that it’s behind us. We made a few assumptions on what it would mean in term of restocking. Okay, we’ve been probably a bit higher versus what the — what was really needed, but this is it. So I don’t think there is anything else to be read there. And at the end-of-the day, I think we should focus on what is really important, which is the great dynamism that ZYN is facing now that there is full availability. Indeed, June was growing 36% in term of consumer offtake according to Nielsen. If I look at the first two weeks of July, we are north of 37%. I think the market is a bit above 39%. So basically, we are growing now in-line with the market. So it just shows that we have absolutely resumed a strong momentum and that of course bodes very well for the future. As at the same time as I mentioned, we are really restarting promotional advertising commercial activity in a 360 degree matters, I would say. So that’s really what I think is important on the sequence, so in my remark, I noted the fact that there may be some adjustment as people have been maybe buying ZYN in a kind of mindset of shortages and we think there could be some adjustment on the volume here and there in Q3. So that can impact the Q3 performance. And then we say there is a step-up in Q4. At the end-of-the day, we are now in a dynamic where we are quarter-on-quarter growing nicely. And I think the growth in the second-quarter 12% versus Q1 was by far the biggest sequential growth quarter-on-quarter since the first-quarter of 2024. So we are absolutely back to renewed dynamism and we are growing fast year-on-year and that’s what is driving our expectation for volume growth in the next in the next months.

Gaurav Jain

Sure. And my second question is just on UTED, like you referenced a few comments, but could you help us understand in more detail like what exactly are the proposals in terms of different tax rates on NGP products? And if there is any update on EUTPD as well.

Emmanuel Babeau

So, Gaurav, I’m not going to elaborate on the initial proposal. We are at the beginning of a long process. Last-time it was, 2010, 2011, it took two years, I think from the beginning to the end. A lot of discussion will happen. I reminded everybody that each requires a unanimity from the parties.

So I’m not going to comment on things until there is more clarity on what’s going to happen. The process is started and there will be several steps. As I said last-time, it took almost two years. And of course, when we have more clarity onward is really likely to happen, then of course, at that moment, we’ll commence implication. In my remarks, I noted the two points which are important for us for the time-being.

One is the fact that the initial proposal is indeed coming with differentiation between smoke-free and combustible when it comes to minimum taxation. So that’s an important element. And the second that as an element, which we hope will be improved, obviously, there is nothing when it comes to, which is I think a real question for the European Union to tackle. That’s what we can say for the time-being.

Gaurav Jain

Thank you so much.

Emmanuel Babeau

Thank you.

Operator

Thank you. Our next question comes from Eric Serrato with Morgan Stanley. Your line is open.

Eric Serotta

Great. Thanks. Emmanuel. I’m on a question. Good morning. A couple of questions. First, in terms of ICOS ILUMA US approval timing, I think you said, you mentioned approved launch once authorized by the FDA. Are you guys still sticking to your expectation of a second-half authorization, realizing it’s not something you have control over?

And then second, when you look at international ICOs, can you talk a bit about some of the drivers of the reacceleration in IMS and sort of the sustainability for the second-half of the year? Thank you.

Emmanuel Babeau

Sure, Eric. So first on the US, so I mean, we don’t have anything new to report on the potential PMTA for IQOS ILUMA. And I think everybody can see that FDA is resuming activity on PMTA and that’s good news. As far as we are concerned and this is public information, there is now for the renewal of the MRTP on ICO3, there is a tobacco product scientific Advisory Committee that has been scheduled. They have also opened a docket for ZYN MRTP.

So a number of things are happening and — and that’s what we know for the time-being. So I have nothing new to report on the PMTA for IQOS ILUMA. We are still hoping for an approval in H2, but we are also at the same time acknowledging the fact that the agenda and the workload for the FDA is very heavy. And therefore, it is clear that we don’t have uncertainty that we will give — we will get this PMTA in ’25 and that could move, of course to 2026.

On the second question on the reason for the acceleration of IQOS, I mentioned, I think many of them. I think it’s really Europe where you have now the effect of the characterizing flavor ban that are waning and a number of markets reaccelerating. Some markets are doing really very strong performance. I mentioned some of them like Spain, Germany, Romania, Bulgaria.

It’s great to see Italy reaccelerating as well. So I would say momentum is rebuilding. Now there will be some a phasing last year-on the performance in Europe, but I think we are expecting a nice performance overall for H2. And outside Europe, we expect continued very nice performance from Japan and have been elaborating on the trend there where we continue to do very well.

And there are all these new growth markets that are super exciting and of course, global travel retail is one of them. But Indonesia, many countries in the Gulf region, Mexico, Philippines, and I mean these are plenty of markets where we see very nice growth trajectory and growth potential for IQOS. And in this new growth market, the momentum, I would say is progressively building up.

Eric Serotta

Great. And just one follow-up on combustibles. Your volumes down 1.5% or I should say only 1.5% despite the headwinds you called out in Turkey and Indonesia. Was that actually a little bit better than you expected since you guys have been pretty upfront really since last year that you expect our combustibles volumes to resume their declines in 2025.

Emmanuel Babeau

So you’re right globally today when we say that for the year, we are targeting to be around minus 2% in term of shipment, that’s something that I had the opportunity to say in previous instances very clearly the fact that we believe we are going to be back to what we think is a long-term trend for the combustible business, which is a low single-digit decrease. I’m not able to specifically say exactly which kind of low-single digit, but that is a trend for sure that we expect in the future.

Yes, of course, country where there is a ban on smoke-free can have some impact on this low single-digit decline, but nevertheless, that is a trend. That’s what we have seen in Q2, largely in-line with our expectation and that’s what we expect with — for H2. With this impact of Turkey, that is a kind of transitional thing that is going to impact H2 more specifically. But otherwise, I think we are progressively going back to what we describe as a normal long-term trend for Combustible.

Eric Serotta

Great. Thanks so much, Mario. I’ll pass it on.

Emmanuel Babeau

Thank you. Thank you.

Operator

Thank you. Our next question comes from Matt Smith with Stifel. Your line is open.

Matthew Smith

Hi, Emmanuel, I wanted to ask about the increase in the underlying guidance. The constant-currency range is up about a point from the mid from the previous midpoint and that reflects the stronger second-quarter and some favorability on the tax-rate. Is it fair to say the second-half is more or less in-line With your previous expectations? And can you provide a little more detail on the considerations in the second-half? You called out phasing and comparisons and costs and the impact on margins from those and the timing of those when they become lapped in base.

Emmanuel Babeau

Yeah. I think you know, when you look at — there are of course a number of elements that can distort the vision quarter-on-quarter, H2 versus H1. And what we wanted to ensure that everybody understand is that in fact, the momentum in Q2 on smoke-free is in fact even better than Q1 and Q1 was already very good.

But in fact, in Q2, we’ve seen an acceleration of the IQOS in-market sales and we are nice to — back to nice double-digit growth, a very nice and very powerful reacceleration of ZYN in the US. Of course, elsewhere, ZYN and Viv are growing very fast. But Q2 in fact is a very nice acceleration on our smoke-free business and this is absolutely visible in our numbers.

When we look at H2, in fact, we expect a continuation of this very strong momentum that we’ve seen in H2 on smoke-free. So we expect IQOS to continue to grow double-digit in term of adjusted IMS. We expect now that we have availability, which is no longer an issue for ZYN in the US we expect the continuation of this very strong acceleration of ZYN in the US. Again, I reported the 37% growth for the first two weeks of July. So H2 is starting on a good note for ZYN in the US.

So this momentum is unchanged and we expect it to remain very strong. Certainly, what is going to be less favorable is the trend on combustible. We were almost flat, minus 0.3% in volume in H1 and we expect 3% to 4% decline. I’ve been explaining the driver for that. Despite that, we expect a growth on gross profit for combustible, but nevertheless at a lower level, of course, than in H1. So this is one of the reasons for the differentiated performance in H2 versus H1 for what we can expect.

And then you have a number of phasing element on smoke-free, which have nothing to do with performance, but which are due to basis of comparison or a number of one-off events. If I look at IQOS, there was this EUR1 billion stick shipment in Q1 that we’re going to compensate in Q4.

And of course, that is favoring H1 and penalizing H2. We had super favorable comps in H1 because of accelerated sales of device last year that has been growing profit and margin. We’re not going to have that in the second part of the year. So that’s another element. And then you have the restocking that has been benefiting H1 and of course, will not be benefiting H2. But I think it’s really — that’s really what is behind the guidance. And I think if you take all the elements I’ve just been sharing, you have the right understanding of the dynamic. I hope this is a helpful.

Matthew Smith

Very helpful. And as a follow-up, pricing for heated tobacco units was up, I think low-single digits again in the quarter. You’re about a year into realizing a nice contribution from pricing in that business. In the markets where you are taking pricing, how is that impacting volume and new user acquisition relative to your expectations? And has that changed the way you think about the pricing potential in the HTU business over-time? Thank you. And I’ll leave it there.

Emmanuel Babeau

Yeah, sure, Matt. I think we’re really trying to make sure we don’t penalize volume with price increase when it comes to IQOS and zin because we describe how positive the volume growth is because we have higher revenue per unit. We have higher margins. So the name of the game is, of course to absolutely optimize the volume.

But there is obviously as we are growing the franchise of the brand, the strength of the brand, there is a positive to increase price without impacting the volume. And I think that is the right balance we’re looking for, which is we increased volume, but we certainly don’t want to change trajectory on volume because of that. So price, yes, but provided it does not impact in a meaningful manner the volume trajectory. That is the strategy and that is what we will continue to do.

Operator

Thank you. Our next question comes from Bonnie Herzog with Goldman Sachs. Your line is open.

Bonnie Herzog

Thank you. Bye, Emmanuel. Hi, I had a few follow-up questions on. Based on everything you discussed and what you’re seeing in the market, should we assume the lower-end of your full-year shipment guidance range is more realistic. I guess I’m trying to understand if the high-end is even possible in your mind? And then can you update us on your capacity and where it stands today and when it will increase?

Emmanuel Babeau

Sure. So of course, if we give this bracket because we believe that we can finish the year within the bracket at every point of the bracket, we give the EUR800 million to EUR840 million. Clearly, the fact that this EUR10 million to EUR20 million lower restocking than what maybe we thought, I mean that is having an impact. But at the end-of-the day, you can see that the restart of IQOS can be very powerful. I mean, 36%, 37%, we are restarting commercial activity, advertising.

So we don’t know what’s going to be the growth profile for H2. So that’s why we are still comfortable with the 800 million to 840 million can bracket. On the capacity, we can say that today we have been building a comfortable capacity to face all kind of very dynamic growth scenario for the — for the future and therefore, we are comfortable for the coming quarters?

Bonnie Herzog

Okay. And then maybe just another follow-up, because you just touched on something that I also wanted to ask, which is now that you’re, I guess, essentially back-in the stock or you can ship to demand, how does that change your strategy as it relates — for Zen? As it relates to your pricing, promotions, are you going to, I guess, get a little bit more aggressive in an attempt to possibly grow Zen faster and take more market-share? Just how are you thinking about that? Thanks.

Emmanuel Babeau

Yes. Yes, of course, Bernie. So you’re right. As I said, we go for putting all levers to maximize the growth of and all that in a very different environment because now we have full availability. So during many months, many quarters, we’ve been refraining ourselves from acquiring new user because we knew that we were not really able to supply the need for new users.

So that meant a limited activity. I would say across-the-board, so in term of pricing, in term of marketing activities. So we’re going to restart normal activity and that will certainly include more promotion. We have a much lower level of promotion than any other brand and I think it probably will stay like that, but it doesn’t mean that we cannot increase the level of promotion as well. That will be certainly advertising and commercial activity on the point-of-sales where we need to step-up now that the product is available and that will be the continuation of building the brand franchise and all this iconic element of the brand and the Fine Your Zin campaign. So we’re going to pull all levers to make sure that we give the best support to Zyn.

Bonnie Herzog

Okay. Thank you. I’ll pass it on.

Emmanuel Babeau

Thank you.

Operator

Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone. Again, let’s star 1-1 to ask a question. Our next question comes from Faham Big with UBS. Your line is open.

Faham Baig

Hi, Emmanuel. Hello, Fah thank you for taking my questions. To be honest, your answers have been very thorough. So I don’t have many more. But I’ll take two. I noticed in the second-quarter, the gross margin gap between combustibles and smoke-free narrowed and maybe smoke-free even gross margin slightly reduced to Q2 on-Q1. Maybe if you could expand on some of the dynamics around that and maybe what you expect for gross margin — the gross margin gap over the next couple of quarters?

And the second question is, it’s probably simple, but if you could please remind us your FX hedge rates for the year, both euro, Japanese yen and any other currencies that you may hedge? Thank you.

Emmanuel Babeau

Yes, so on the gross margin evolution, so you are really looking after the comma because in fact, we are both in Q1 and Q2 around 70% gross margin rate. So of course, the mix of Zene or the importance of the device can have an impact. But globally in-line with what we said after Q1, we have a smoke-free business that is Around — it doesn’t mean that it can be a bit below, but around 70% gross margin. And I would expect H2 not to be very materially different, okay? So I’m not saying it’s going to be at 70. But I think we are ballpark in this area where there is a very nice a gross margin rate for smoke-free, higher than combustible and you noted that the gap has been narrowing a bit. It’s still significant. I mean, 4.5 for the full H1. And it’s because CC has been improving a bit, which is price and mix of the combustible sales in the quarter. So when I look at the second part of the year, I think I would really insist on the fact that the improvement of margin on the smoke-free business was very important on H1 as we were facing easy comps because of a lot of ILUMA device sales last year as we were launching ILUMA I. Fundamentally, this is not the case again in H2. So we don’t have the same easy comps. And therefore, as I said, expect margin on smoke-free to stay high and expect, of course, the progress year-on-year to be reduced because we are facing higher-margin last year-on the smoke-free business. For combustible, I think we said that we have the ambition to increase the gross margin as well and that is valid for H2. I’m not going to repeat on ForEx, first of all, because I have to admit, I haven’t been looking at exactly the latest position. I’ve been giving it because after — I think it was after Q1, we wanted to illustrate where we were in term of ForEx hedging, but that’s not something I intend to do each time to be clear.

Faham Baig

Okay. Thanks, Emmanuel.

Emmanuel Babeau

Thank you.

Operator

Thank you. Our next question comes from Callum Elliott with Bernstein. Your line is open.

Callum Elliott

Great. Thank you very much for the question, Emmanuel. Thank you. Hi, Emmanuel. So my first question is on V, if that’s okay. As for a number of years, I think as a company, you guys were quite reluctant to expand too much into the e-vapor space citing lower loyalty in that category and sort of the resultant gross margins that came from that lower loyalty.

And we obviously heard a bit at your Europe event a month ago about this increasing emphasis on the three category approach and the sort of the synergies for all three categories when you sort of play in all three areas at the same time. And I guess my question is what’s changed over the past year or two to drive this increasing three category approach?

And in particular, I think you called out in the release the improving gross margin that you’re seeing for in particular. I wonder just anything — I doubt you’re going to quantify for me, but anything sort of qualitative you can share about what that means?

Emmanuel Babeau

Sure, Callum. So, yeah, I guess it has been explained with a great deal of details during our European day. So I’m sure I’m not going to come with the same granularity. But my first comment would be to say, be assured that we know what our priorities are. So our priority is first and foremost to grow IQOS, okay. This is a leading star brand.

This is the one where we see the biggest potential. This is the one where we have the best profitability. Yes, zin could be one day at the same level, but of course, in terms of volume, it’s really small today when it comes to most of the markets. So that’s something for the future. You should see Viv as an ailing brand to our portfolio.

Yes, there is an interest in the multi-category play. I’m not going to repeat everything we presented in Europe, the fact that we — some consumers actually prefer to be only in one category and one brand other and sometime there are also smokers that you want to fully exit from smoking, they will only do that if they move to several smoke-free product and that’s when we want to be able to offer several smoke-free category and Viv is having a role to play in these circumstances.

We are, of course, putting priority on VIVE where we believe we can develop a profitable business and that’s of course, a very, very important condition to develop. I’m not going to exactly quantify the gross margin of Viv, but I can tell you that it improved by more than 10 percentage points on the beginning of 2025.

And so its profitability is improving very rapidly. And we believe that with the right loyalty, the Viv business has the possibility to have a similar profitability as a combustible business. Together, you need to have the right loyalty, but element that we see today on the market where we develop this seem to show that we can generate this level of repurchase and loyalty. So it’s a bit short as a summary, but these are the conditions for us to develop VIV and that’s what is behind our Viva progression?

Callum Elliott

Just as a clarifying question, when you say similar level of profitability to cigarettes, do you mean percentage margin or unit margin?

Emmanuel Babeau

Well, in terms of gross margin on revenue — gross margin as a percentage.

Callum Elliott

Okay, perfect. And then my second question is on Zim, sort of the intersection of Gaurav and Bonnie’s two questions earlier, where obviously, what you’ve spoken about is sort of a cadence of growth and that in Q3 is something like 27% year-on-year growth and — but maybe a little bit impacted by it seems to be you’re suggesting some destocking and then the full-year guide implying a reacceleration again in Q4?

And I guess my question is, I wonder how the commercial activities sort of flow into that reacceleration that you’re forecasting for Q4 and how confident that you are that as you lean-back into those activities and as you have done in the past, right, when you took over this business in Swedish Match that drove an acceleration back then. But as you lean into these activities again that you sort of stepped away from when you had the supply-chain problems and that you have this ability to redrive the acceleration? How confident are you in that? And does the cadence of these activities explain that sort of cadence between Q3 and Q4?

Emmanuel Babeau

Look, I think I’ve been — already giving the answer I could give. So yes, indeed that is pointing to a very dynamic second part of the year. Again, the level of growth in the consumer offtake in June and at the beginning of July is pointing to a direction that is broadly in-line with this growth and it is at a point in time where we haven’t yet, as I said, fully restarted all the commercial/marketing activity. So we are hopeful that this will provide further boost to the growth. But I don’t have much to add at that stage. I think that the data are there on the table public and everybody can understand the objective that we have.

Callum Elliott

Maybe I can just follow-up and like how quickly can you turn these commercial activities back on? Like it seems clear that you were taken a bit by surprised with how quickly you were restocking. So how quickly can you turn it back on?

Emmanuel Babeau

Well, yeah, it does not, of course happen in a few weeks. It’s gradual, it’s not everything at the same time. So the team are very busy in the US today, restarting gradually everything. But you’re right, that is like reshaping an engine and to get to full-speed on the engine, it’s going to take some time. I’m not going to elaborate further, of course, as you will understand, but that’s something that is going to happen gradually in the course of the 3rd-quarter.

Callum Elliott

Okay. Thank you very much.

Emmanuel Babeau

Thank you.

Operator

Thank you. Our next question comes from Gerald Pascarelli with Needham; Company. Your line is open.

Gerald Pascarelli

Great. Thank you very much for the question. Most of them have been answered, but I just — I wanted to go back to currency. If you could just — can you provide some color on exactly what transpired in the quarter. You didn’t get the benefit that you have been guiding for in 2Q and that really is despite the fact that the dollar weakened further over the course of the quarter.

So I think the expectation was that maybe in addition to an underlying EPS raise, we would have seen an even bigger benefit to your adjusted EPS just due to a more favorable outlook on currency. So not looking for detail on your exact hedges or anything like that, but maybe just some color or thoughts on how we should think about on the currency tailwind in the event that we continue to see this dollar weaken over the back-half of the year? Any color there would be great. Thank you.

Emmanuel Babeau

Sure, Joel. In fact, what probably People are not always capturing, I think versus the $0.10 we’re coming up with, we are around $0.04 versus consensus below what the consensus was expecting. I think it’s largely the Swiss franc, both in the negative impact that it has because we have a strong exposure in term of cost to Switzerland, as you all know. But also because the intercompany flows mean that when there is a lot of volatility and there has been a lot of surge in the Swiss franc versus other currency at the end-of-the period, that is generating some transactional losses. So that’s a significant impact. And actually, when I look at what is driving this $0.10 estimated impact at the prevailing rate, and in fact, the Swiss franc is to a large extent offsetting the benefit we have on the euro just for people to understand. So it’s a very significant negative impact.

Gerald Pascarelli

Got it. Thank you very much.

Emmanuel Babeau

Thank you.

Operator

Thank you. And our last question comes from Priya Origupta with Barclays. Your line is open.

Priya Ohri-Gupta

Hi, good morning. Thank you so much for taking the question. Emmanuel, I was just wondering if you could walk us through sort of the working capital piece on free-cash flow. It looks like based on the numbers that might have been seasonally a bit weaker than what we normally see in the second-quarter. Is that largely attributable to the ICOS dynamics or what else is going on there? And then should we expect most of that to reverse as we get through the back-half of the year?

Emmanuel Babeau

Yes, Priya. So really, I think when you look at the end of H1 on the differences versus last year, I mean, indeed, the cash-flow generation is lower. Most of it is the payment of duties that we made in Germany and the final payment of the job Act in the US. I think that the cumulated impact is largely north of $1 billion and that is that is really the biggest impact.

Otherwise, yes, we may have had on a temporary basis, some inventory building. I mean, supply-chain, of course, playing here and there, you may have some regulatory constraints. But I don’t think that for the year in term of working capital, beyond the two elements I mentioned, you should expect anything special?

Priya Ohri-Gupta

Okay, that’s helpful. And just one housekeeping item, what was your capex in the quarter?

Emmanuel Babeau

I’m not sure we’re disclosing it by quarter. So I’m not going to give you the number. I think we said $1.6 billion for the year, but we don’t split that by quarter.

Priya Ohri-Gupta

Okay. Thank you so much.

Emmanuel Babeau

Thank you.

Operator

Thank you. This concludes the question-and-answer session. I would now like to turn it back to James Bushnell for closing remarks.

James Bushnell

Thank you thank you. That concludes — concludes our call today. Thank you all for joining us. If you have any follow-up questions, please contact the Investor Relations team. Thank you again, and have a great day.

Emmanuel Babeau

Thank you. Speak to you soon.

Operator

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