PM Q2 Deep Dive: Smoke-Free Product Momentum Offsets Combustible Headwinds

Tobacco company Philip Morris International (NYSE:PM) missed Wall Street’s revenue expectations in Q2 CY2025, but sales rose 7.1% year on year to $10.14 billion. Its non-GAAP profit of $1.91 per share was 2.8% above analysts’ consensus estimates.

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StockStory’s Take

Philip Morris' second quarter results for 2025 met non-GAAP earnings expectations but fell short of Wall Street’s revenue consensus, with the market reacting negatively. Management attributed quarterly performance to continued robust growth in smoke-free products, especially IQOS heated tobacco and ZYN nicotine pouches, which together offset challenges in the traditional cigarette business. CFO Emmanuel Babeau highlighted that, “multi-category momentum of our Smoke-Free business accelerated with a Q2 step up in offtake growth for IQOS, ZYN, and VEEV.” The company acknowledged modest declines in cigarette volumes, particularly in Indonesia and Turkey, but emphasized that strong pricing and operational efficiencies supported margins.

Looking forward, Philip Morris’ guidance is anchored by expectations for sustained double-digit volume growth in smoke-free products, ongoing expansion of IQOS and ZYN, and incremental gross margin improvements. Management is focused on scaling new product launches and broadening market access, especially for smoke-free offerings in Europe and the U.S., while closely monitoring headwinds from regulatory developments and illicit trade. Babeau noted, “We expect strong smoke-free momentum to continue...while we factor in the exceptional H2 prior comparison notably on growing combustible volumes, and certain timing factors.” The company plans to leverage increased U.S. production capacity and renewed commercial activity for ZYN to bolster growth in the second half of the year.

Key Insights from Management’s Remarks

Management attributed second quarter results to rapid growth in smoke-free products, resilience in combustibles through pricing, and operational efficiencies, while acknowledging external headwinds in select markets.

• Smoke-free acceleration: IQOS, ZYN, and VEEV all recorded significant volume and revenue gains. IQOS heated tobacco sales grew over 11% in the quarter, driven by broad-based growth in Europe and recovery in Italy following regulatory disruption. ZYN’s U.S. consumer offtake growth rebounded to 26% in Q2 as in-store availability normalized, with international pouch volumes up 65% and strong market entry in countries such as Mexico and South Africa.
• Resilient combustibles performance: Despite modest declines in cigarette volumes, driven by market-specific issues in Indonesia and Turkey, the company achieved top and bottom line growth in combustibles. This was enabled by robust pricing actions, especially in Indonesia, Germany, and Italy, which supported gross profit expansion.
• Margin improvement through mix: The rising proportion of smoke-free products, which have higher gross margins than combustibles, contributed to overall margin stability. Smoke-free gross margin reached approximately 70%, outpacing combustibles by over four percentage points, aided by scale efficiencies and favorable mix.
• Operational efficiencies and cost control: Over $500 million in gross cost savings were delivered year-to-date, with ongoing manufacturing and back-office initiatives supporting profitability. The company remains on track toward its $2 billion efficiency target through 2026.
• Regulatory and supply chain developments: Management cited new market access for smoke-free products in the Middle East and early positive signals from the EU’s proposed tobacco excise directive, but flagged ongoing risks from illicit trade and evolving regulatory frameworks. Supply chain disruptions affected volumes in Turkey, but gradual recovery is expected.

Drivers of Future Performance

Philip Morris’ outlook is shaped by continued smoke-free product growth, expansion in core markets, and ongoing cost discipline, with attention to regulatory and competitive risks.

• Expansion of smoke-free portfolio: The company expects double-digit volume growth in IQOS and ZYN, supported by increased U.S. production capacity and broader international rollouts. Management emphasized the importance of resuming full commercial activity for ZYN, including targeted promotions and advertising, as a lever to accelerate consumer adoption and market share.
• Combustible volume decline offset by pricing: While cigarette volumes are anticipated to decline in line with historical trends (around 2% for the year), robust pricing in key markets and operational efficiencies are expected to sustain gross profit in the combustible segment. This approach aims to maximize value during the shift toward smoke-free alternatives.
• Regulatory landscape and competition: Management is monitoring regulatory developments, such as EU excise proposals and U.S. FDA product authorizations, which could influence the pace of new product launches and market expansion. Competitive intensity in smoke-free categories is increasing, but is seen as supporting overall category growth.

Catalysts in Upcoming Quarters

In the coming quarters, our analysts will watch (1) the pace of smoke-free product adoption, particularly IQOS and ZYN, in both established and new markets; (2) the impact of resumed commercial activity and increased capacity for ZYN in the U.S.; and (3) ongoing regulatory developments, especially EU excise proposals and U.S. FDA authorizations for new products. Margin progression and the company’s ability to manage combustible declines while scaling smoke-free categories will also be key focus areas.

Philip Morris currently trades at $165.85, down from $180.76 just before the earnings. Is there an opportunity in the stock?The answer lies in our full research report (it’s free).

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