PM Q1 Earnings Call: Smoke-Free Products Drive Revenue Beat and Raised Guidance

Tobacco company Philip Morris International (NYSE:PM) reported Q1 CY2025 results exceeding the market’s revenue expectations, with sales up 5.8% year on year to $9.3 billion. Its non-GAAP profit of $1.70 per share was 5.1% above analysts’ consensus estimates. 

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StockStory’s Take

Philip Morris’s first quarter results were shaped by continued expansion in its smoke-free portfolio, with management highlighting strong growth in ZYN nicotine pouches and IQOS heated tobacco units as key contributors. CFO Emmanuel Babeau noted that shipment volumes for smoke-free products rose by over 14%, outpacing expectations and benefiting from increased U.S. production capacity and new market launches for ZYN. The company also reported robust pricing in its traditional cigarette segment, although performance was tempered by negative geographic mix effects in certain markets like Turkey and Egypt.

Looking ahead, management raised its full-year adjusted EPS guidance, citing confidence in sustained double-digit growth for smoke-free volumes and further margin expansion. Babeau discussed ongoing investments in manufacturing and marketing to support the roll-out of smoke-free products, particularly as constraints on ZYN availability ease through the year. "We remain excited about the growth prospects of this dynamic category...and we plan to engage actively beyond our existing consumer base," he said, emphasizing the company’s focus on scaling up both production and commercial efforts for its high-margin, reduced-risk products.

Key Insights from Management’s Remarks

Philip Morris’s leadership attributed the quarter’s performance primarily to accelerating smoke-free product adoption and improvements in operational efficiency. Several business developments and product trends stood out during management’s remarks:

• ZYN Production Ramp-Up: ZYN shipments in the U.S. increased by 53%, driven by expanded manufacturing capacity and ongoing efforts to rebuild retailer inventories. Management expects supply constraints to ease by the third quarter, potentially unlocking further consumer demand.
• IQOS Innovation Pipeline: The company continues to invest in new device launches and consumable variants for IQOS, advancing its brand in key regions like Europe and Japan. These efforts, including the ILUMA i roll-out and new flavor introductions, were cited as drivers of sustained double-digit growth in heated tobacco units (HTUs).
• E-Vapor Category Progress: VEEV, Philip Morris’s e-vapor product, more than doubled shipments year-on-year, with significant growth in Europe. Management described the e-vapor segment as an expanding part of its multi-category strategy.
• Margin Expansion Drivers: The shift toward smoke-free products, particularly ZYN, contributed to gross margin gains. Management noted that gross margins for smoke-free products now exceed those of combustibles by five percentage points, with ZYN providing the highest margin profile.
• Cost Savings Initiatives: Over $180 million in gross cost savings were delivered in the quarter through manufacturing and back-office efficiencies. The company remains on track to achieve its $2 billion multi-year cost savings target, supporting investments in new product growth.

Drivers of Future Performance

Management’s outlook for 2025 centers on further growth in smoke-free products, operational discipline, and targeted investments to support market expansion. The main themes for the upcoming quarters focus on scaling high-margin offerings and navigating external uncertainties.

• Smoke-Free Portfolio Expansion: Continued growth in ZYN and IQOS volumes is expected to be the primary driver, supported by new market entries and increased production capacity.
• Margin Accretion from Mix Shift: The growing share of high-margin smoke-free products, especially ZYN, is anticipated to drive further adjusted operating income margin expansion.
• External Risks and Investments: Management flagged ongoing macroeconomic and regulatory uncertainties, particularly in tariffs and U.S. regulatory approvals, as potential risks. Investments in marketing and manufacturing may pressure SG&A costs in the near term but are seen as necessary for long-term growth.

Top Analyst Questions

• Bonnie Herzog (Goldman Sachs): Asked about the timeline for resolving ZYN stock shortages and the factors behind the revised shipment guidance; management stated normalization is expected by Q3, with growth driven by both replenishment and increasing consumer offtake.
• Bonnie Herzog (Goldman Sachs): Inquired about the sustainability of margin expansion given higher SG&A and investments; management emphasized that margin gains are primarily from smoke-free mix and scale, with ZYN being a major contributor.
• Matt Smith (Stifel): Queried about the implied second-half EPS growth moderation; management attributed the outlook to shipment phasing, investment timing, and expected volume trends in combustibles.
• Matt Smith (Stifel): Asked for details on the drivers of IQOS IMS (in-market sales) growth acceleration in the second half; management pointed to easing impacts from the EU flavor ban and ongoing commercial initiatives.
• Eric Serotta (Morgan Stanley): Pushed for clarification on why increased ZYN shipments did not further raise EPS guidance; management cited prudence given macro uncertainty and the limited incremental profit impact from the volume increase.

Catalysts in Upcoming Quarters

Looking forward, the StockStory team will be monitoring (1) the pace at which ZYN supply constraints are resolved and its subsequent impact on category share and retail offtake, (2) the rollout and consumer adoption of new IQOS devices and consumables in key regions, and (3) the evolution of regulatory environments, especially in the U.S. and Europe for both smoke-free and combustible products. Execution on cost savings targets and further progress in international expansion will also be key indicators of management’s strategy effectiveness.

Philip Morris currently trades at a forward P/E ratio of 22.4×. At this valuation, is it a buy or sell post earnings? Find out in our free research report.

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