Philip Morris International Q1 FY25 earnings call PM

The smoke-free business delivered an exceptional Q1 FY25, with shipment volumes up +14.4% year-on-year, organic net revenue growth of +20%, and organic gross profit growth of +33%. This performance was driven by the rapid growth of ZYN, continued volume momentum and operating leverage of IQOS, and strong VEEV performance. The smoke-free segment now contributes 44% of total gross profit, demonstrating the success of the multi-category strategy across 46 markets, including 16 with all three PMI categories.

ZYN in the U.S. saw shipments increase by an impressive +53% to 202 million cans, exceeding initial expectations. This was enabled by increased production capacity, with the ramp-up of one plant accelerated to late March. While initial distributor replenishment occurred, significant out-of-stock situations persist at retail. The company targets full normalization of the supply situation by Q3 FY25 and has raised its full-year ZYN U.S. shipment forecast to 800 million to 840 million cans. Construction of a second U.S. manufacturing site in Colorado is underway, with production expected to commence in early 2026.

IQOS delivered +9.4% HTU adjusted IMS growth in Q1, with strong performance in both Japan (+9.3%) and Europe (+7.4%), despite the annualization impact of the EU characterizing flavor ban. In Europe, IQOS HTU share of cigarettes and HTUs reached a record 11.4%, with Italy achieving a record 18.4% market share. Japan saw HTU adjusted share increase by 3 percentage points year-on-year to 32.3%. The company expects double-digit IQOS growth for the remainder of the year, supported by continuous innovation and commercial initiatives.

The combustible business performed robustly in Q1, with organic net revenue growth of +3.8% (or closer to +7% excluding the Indonesia technical impact) and organic gross profit growth of +5.3%. This was primarily driven by strong pricing of +8.3%, with notable contributions from Turkey, Poland, and Germany. Cigarette volumes were positive for the fourth consecutive quarter, and category share grew by 0.4 points, despite a 1.3% decline in the overall cigarette industry. Management expects pricing and negative geographic mix to moderate over the rest of the year.

PMI achieved significant margin expansion, with organic gross margin expanding by +240 basis points and adjusted operating income margin expanding by +250 basis points to 40.7%. This was largely driven by the smoke-free business, which saw its organic gross margin expand by +670 basis points to surpass 70%, now 5 points higher than combustibles. Pricing contributed +180 basis points to gross margin, more than offsetting an 80 basis point impact from cost inflation. SG&A costs increased by 140 basis points due to continued investment in smoke-free growth.

The company highlighted positive regulatory developments supporting tobacco harm reduction. Greece introduced dedicated registration for smoke-free products, and Hungary allows fact- and science-based communication to consumers on smoke-free products. In Ukraine, a new excise tax on HTUs versus cigarettes was introduced. ZYN remains the only new nicotine pouch product authorized by the FDA, including all variants, reinforcing its market position.

PMI emphasized its commitment to sustainability, with over 99% of its 2024 adjusted R&D spend allocated to smoke-free products for the fourth consecutive year. The company's annual integrated report provides a comprehensive view of its performance, including efforts in youth access prevention and operational efficiency. This transformation aims to drive continued value creation and enhance the growth of its portfolio.