PM Q3 Deep Dive: Smoke-Free Momentum and U.S. Investment Shape Outlook

Tobacco company Philip Morris International (NYSE:PM) reported Q3 CY2025 results exceeding the market’s revenue expectations, with sales up 9.4% year on year to $10.85 billion. Its GAAP profit of $2.23 per share was 12.5% above analysts’ consensus estimates.

Is now the time to buy PM? Find out in our full research report (it’s free for active Edge members).

StockStory’s Take

Philip Morris’ third quarter results outpaced Wall Street’s expectations for both revenue and profit, but the market responded negatively, reflecting concerns over the company’s evolving cost structure and investment intensity. Management cited the robust expansion of its smoke-free portfolio—led by IQOS, ZYN, and VEEV—as a key driver of growth, with the brands collectively surpassing industry growth rates. Chief Financial Officer Emmanuel Babeau attributed strong performance to “outstanding volume growth for all three of our flagship brands,” noting that these gains offset declining cigarette volumes and supported margin expansion. However, higher commercial spending—especially related to aggressive promotional activities in the U.S. for ZYN—contributed to investor caution.

Looking ahead, Philip Morris’ guidance is shaped by continued investment in its smoke-free business, particularly in the U.S., as well as ongoing innovation and geographic expansion. Management expects further growth in IQOS and ZYN, highlighting the potential for nicotine pouches to become a major category. Babeau emphasized, “We are investing significantly in the country [U.S.] to support ZYN’s potential and the growth of our portfolio.” The company is also preparing for potential regulatory changes, including FDA decisions on nicotine pouches, which could influence the timing and scale of new product launches. Persistent investment in marketing and operational capabilities is expected to continue, supporting the transformation toward a broader smoke-free offering.

Key Insights from Management’s Remarks

Management credited the quarter’s performance to accelerating smoke-free product adoption and a marketing push in the U.S., while addressing the margin impact of elevated promotional spend and category competition.

• Smoke-free category acceleration: IQOS, ZYN, and VEEV experienced double-digit growth, outpacing the global smoke-free industry. This was attributed to geographic expansion and successful launches, such as IQOS entering Taiwan and ZYN’s rollout in new international markets.
• U.S. promotional investments: The company undertook a major promotional campaign for ZYN’s full return to market, resulting in a notable $100 million one-time cost. Management described this as a “blast effect” to signal full availability and capture growth in a fast-evolving nicotine pouch segment.
• Heated tobacco momentum: IQOS saw strong growth in both developed and emerging markets, with robust adoption in Europe and Japan despite increased competition, and a stable market share above 75% in Japan. The introduction of limited edition devices and multi-category strategies further supported brand engagement.
• Combustible business resilience: While cigarette volumes continued their structural decline, better-than-expected results in Turkey and Egypt, along with strong pricing, helped maintain profitability in combustibles. Marlboro’s market share reached a historical high despite geographic mix headwinds.
• Margin expansion and cost discipline: The quarter featured expansion in both smoke-free and combustible gross margins, driven by product mix and cost efficiencies. However, this was partially offset by increased marketing spend, particularly in the U.S., as part of a deliberate strategy to support future growth.

Drivers of Future Performance

Philip Morris’ outlook is driven by sustained investment in its smoke-free portfolio, ongoing regulatory developments, and the need to balance growth with profitability.

• Continued smoke-free investment: Management plans to maintain elevated levels of commercial and marketing spend, especially in the U.S., to strengthen ZYN’s market presence and prepare for further IQOS expansion. This approach is seen as essential for capturing long-term growth, even as it puts near-term pressure on margins.
• Regulatory and inventory risks: The company is closely monitoring FDA actions related to nicotine pouch approvals and expects inventory normalization for both ZYN and IQOS in the coming quarter. Any delays or changes in the regulatory process could impact the timing of product launches and category growth.
• Competitive landscape evolution: Intensified competition, particularly in Japan’s heated tobacco segment, is prompting Philip Morris to accelerate device innovation and marketing. Management views this increased industry activity as positive for category awareness and long-term growth, but acknowledges the need to defend market share and price premium.

Catalysts in Upcoming Quarters

In the coming quarters, the StockStory team will focus on (1) the pace of smoke-free product adoption and the effectiveness of new marketing campaigns, (2) regulatory developments—particularly FDA decisions on nicotine pouches and IQOS product approvals, and (3) how well Philip Morris manages inventory normalization and margin pressures amid continued investment. Execution against these priorities will signal the company’s progress in transforming its business model.

Philip Morris currently trades at $152.09, down from $158.07 just before the earnings. In the wake of this quarter, is it a buy or sell? See for yourself in our full research report (it’s free for active Edge members).

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