Philip Morris CFO talks earnings, potential nicotine regulations

Emmanuel Babeau, Philip Morris CFO, joins Yahoo Finance Live to discuss the company's latest financial results and break down the outlook for tobacco companies as Biden considers limiting nicotine in cigarettes.

Video transcript

JULIE HYMAN: Well, the tobacco industry continues to try to work towards a post cigarette future. The latest example of that, Philip Morris International earnings coming out yesterday and showing the strength of its IQOS heated tobacco product. The CFO, Emmanuel Babeau, is joining us now to speak about that, as well as to some potential changes to regulation here in the United States.

But first, I do want to ask about IQOS and how you are planning for the product going forward into the future, what proportion you think it will be of your business around the globe.

EMMANUEL BABEAU: Good morning, Julie. Very happy to be with you. And thank you for having me.

Q1 was, of course, you know, for us a very important quarter, first of all, from a symbolic standpoint. Because it was a record high in terms of adjusted EPS for a quarter in Philip Morris history. And of course, that is coming from the success of IQOS that is growing very fast. It was already 28% of our revenue in the first quarter. And we signaled two months ago that we are targeting to be as early as 2025 a predominantly smoke-free company, i.e. our combustible business will represent less than half of our business.

So that means that we plan to grow IQOS very strongly. Volumes were growing 30% in Q1. And we expect the continuation of a very strong growth in the coming quarters.

BRIAN SOZZI: Emmanuel, I think some folks on the Street were surprised to see your operating profit margins adjusted up close to about 600 basis points year-over-year, just considering you are still seeing pressure on that key travel side of the business. Is a gain like that that you saw in the first quarter, are those gains sustainable into the back half of this year?

EMMANUEL BABEAU: Well, fundamentally we have a number of very good driver that are boosting the margin. And first and foremost, we start to harvest all the dividends of the investment that we made in the past, and we signaled that we made more than $8 billion of investment to build this IQOS business, this IQOS proposal to switch smoker to a better alternative.

And we made this investment that has been, of course, representing an impact on the performance of the company during many years, and now we're getting traction in IQOS. I said it, we're growing fast, and we are delivering a very nice return on all the investment that we made. So IQOS is a business that is coming with good growth, of course, in terms of revenue, but also good margin, because it's paying for all the investment that we've made. And that's why fundamentally, we are on a very strong trajectory in terms of margin evolution.

On top of that, there was a couple of [INAUDIBLE] that helped with Q1, but fundamentally we are on a very good trajectory when it comes to margin evolution.

BRIAN SOZZI: Do you do you anticipate, Emmanuel, a shortage in IQOS devices this year, just because of what we're seeing with the chip industry shortage?

EMMANUEL BABEAU: That's certainly something that we are monitoring very closely. We see everybody using electronic components facing some risk of shortages. We are monitoring the situation. So far, we believe that we are in a situation that is manageable. We're limiting the impact. But of course, that is a situation that remains extremely fluid. And we have to keep monitoring what is happening in the coming months to see whether there will be potentially more impact than what we see today.

MYLES UDLAND: Emmanuel, it's Myles here. You know, you guys mentioned in your guidance that you're expecting that most of your key markets will have largely emerged from pandemic-related lockdowns and such in the second half of this year. How carefully are you watching the data today? And are you concerned that the fluidity of that situation poses considerable risks to that outlook today? Or are you still confident in Q3, Q4 will look materially better in those parts of the world?

EMMANUEL BABEAU: Well, sure, you know, we certainly don't pretend that we have a clear vision of what's going to happen in the coming months and quarters. Everybody understands that there is still a significant level of uncertainty and it's a situation that is still evolving fast in a number of countries. Nevertheless, we have the feeling that the progress of vaccination in many geographies mean that more freedom and being progressively back to some normalcy is the most likely scenario in the coming months. And that's the assumption that we make at that stage, with of course, you know, still a range of scenarios that can happen in the coming quarter that we are accounting for that in our guidance.

JULIE HYMAN: Emmanuel, there have been reports that were happened to coincide with your earnings release about the Biden administration considering new limits for the amount of nicotine in cigarettes. Now, I don't know if you have any insight as to how that could affect IQOS, which also, of course, has nicotine in it, and whether-- and I know that you all focus more globally. So I don't know if there is a threat in other countries as well. But how are you all thinking about that as a potential risk factor?

EMMANUEL BABEAU: Well, look, first of all, it's not news. It's a press article that is referring to something that I think emerged already back in 2017. First, I have to say that we certainly support and we welcome the policy of the FDA going for harm reduction when it comes to tobacco consumption. It is certainly unclear at that stage, what would be the impact of decreasing nicotine in cigarettes and what would be the possible unintended consequences, such as people smoking more to get the same level of nicotine, or illicit trade.

So I guess any move in that direction would require a lot of study, work. But in addition to that, it's quite clear that it has to come, if it was to be implemented, with a very, very strong awareness and availability on better alternative, and notably, of course, on [INAUDIBLE] product, to make sure that people have alternative to move away from combustible cigarettes to better solution, if they don't want to quit.

So I think we view that as coming in any case, if it was to be followed, and I mentioned, you know, the still high level of uncertainty on that, with a lot of work on building awareness and availability for reduced risk product as an alternative.

JULIE HYMAN: Well, we'll continue to monitor that situation. In the meantime, the numbers looking strong. Emmanuel Babeau, the CFO of Philip Morris International. Thank you.