The paragraph is a transcript from the Philip Morris International 2025 First Quarter Results Conference Call. The call begins with the operator introducing the conference and noting it is recorded. James Bushnell, Vice President of Investor Relations, then welcomes attendees and mentions that a press release detailing the first quarter results is available on the company's website. He highlights that the remarks include forward-looking statements and advises caution in interpreting them. Emmanuel Babeau, the Chief Financial Officer, continues by stating that the company had a strong first quarter with significant increases in organic net revenue, operating income, and adjusted diluted EPS.

The smoke-free segment of the business experienced remarkable growth, with significant increases in shipment volumes, organic net revenue, and gross profit, mainly driven by ZYN and IQOS. Smoke-free products now represent 44% of the company's total gross profit. IQOS saw close to 10% growth, despite the EU flavor ban, while ZYN's US shipments surged by 53%, surpassing expectations due to strong demand and increased production capacity. International nicotine pouch sales also grew significantly. The e-vapor brand VEEV more than doubled its shipments, contributing to the company's multi-category strategy. In the combustible segment, volume growth, strong pricing, and cost initiatives resulted in a solid performance despite challenges from increasing volumes in lower-margin markets.

The paragraph highlights the strong performance of a company's smoke-free business, leading to significant organic operating income growth of 16% and an adjusted operating income margin expansion to 40.7%, resulting in robust double-digit growth in adjusted diluted EPS, both in constant currency and dollar terms. Despite currency challenges, the company anticipates continued growth, forecasting double-digit EPS growth at current exchange rates. Volume growth of 3.9% was driven by the smoke-free segment, leading to a 10.2% increase in organic net revenue, reaching $9.3 billion. Excluding the technical impact of a change in their commercial model in Indonesia, organic net revenues grew by about 12%. The smoke-free business was pivotal in driving a 16% growth in organic adjusted operating income. Q1 adjusted diluted EPS grew by 17.3% in constant currency and 12.7% in dollar terms, despite a $0.07 negative currency impact due to transactional losses linked to currency volatility.

The paragraph discusses the strong performance of the company's smoke-free business, driven by increased net revenue and gross profit, notably from products like ZYN and IQOS. The smoke-free segment achieved impressive gross margin expansion, surpassing that of combustible products. This performance was supported by manufacturing improvements and favorable shipment timing. The combustible business also saw revenue and profit growth despite challenges like unfavorable geographic mix. The company anticipates moderation in pricing and geographic mix impacts and expects further improvements in input costs by 2026.

The paragraph discusses the company's strong performance driven by its smoke-free products, particularly the brands IQOS, ZYN, and VEEV, which have contributed to a 3.9% overall shipment growth and a 14.4% increase in smoke-free volumes, exceeding annual targets. However, there was a slight decline in US Moist Snuff and Scandinavian Snus. Cigarette volumes remained stable, supported by markets like Turkey and India where smoke-free products aren't allowed. The company's multi-category strategy leverages IQOS's brand strength to boost growth from ZYN and VEEV internationally, with visible success across multiple regions and markets. This approach has led to double-digit Q1 organic net revenue growth driven by volumes, pricing, and a smoke-free product mix.

The paragraph discusses the factors influencing pricing and gross margins. Pricing improvements contributed positively, with a notable increase from smoke-free products, while unfavorable impacts came from geographic mix and currency issues. Gross margin expanded significantly, primarily due to pricing and smoke-free product growth, despite cost inflation and increased SG&A expenses from investments in smoke-free growth and future planning. The strong gross margin supported an adjusted operating income margin expansion, with the company aiming to align SG&A growth with net revenue growth.

In Q1, the company achieved over $180 million in cost savings and is on track for a $2 billion target by 2026. The IQOS business demonstrated strong growth, with a 9.4% increase despite challenges, and is expected to achieve 10-12% growth for the year. The company is focused on brand building and innovation, especially for the IQOS line, with the introduction of new devices and consumables. Over 99% of their 2024 R&D budget is allocated to smoke-free products. In Europe, they are strengthening their IQOS business, with a 17.5% increase in shipments and a focus on switching consumers to smoke-free alternatives. Investments include a partnership with SELETTI in their brand development efforts. Overall, IQOS showed significant growth in its market share.

The paragraph discusses the growth and success of IQOS and other tobacco-free products in various European markets despite challenges such as flavor bans. It mentions strong market performance in countries like Spain, Germany, Bulgaria, and Greece, with Italy showing particularly promising results in terms of market share. The company remains optimistic about future growth and impact, especially with new product variants like Levia, which have shown promising uptake in Hungary. The consistent growth in key city markets highlights the effectiveness of their strategies. The paragraph also touches on the regulatory landscape, noting the importance of policy development in advancing tobacco harm reduction.

The paragraph discusses the global progress and growth of smoke-free products, particularly the IQOS brand, in various markets. It highlights legislative support in Greece and Hungary, tax changes in Ukraine, and significant market expansion in Japan, where IQOS has experienced strong growth. The paragraph also notes the growing smoke-free category in several Japanese cities and prefectures. It mentions impressive market share gains for IQOS in Indonesia, Mexico, the Middle East, North Africa, Belgrade, and South Korea. Additionally, it addresses the challenges in Cairo's market due to combustible product competition and highlights the success of the global travel retail business in promoting multi-category offerings.

The paragraph discusses the strong growth of heated tobacco units (HTUs) and the expansion of the IQOS product line. IQOS 3 devices and HTUs were launched in Austin, Texas, with promising interest for future expansions. There is no significant expectation for U.S. HTU volume in the yearly projections. The focus shifts to ZYN, a product with strong demand and brand equity, achieving a 63% shipment volume increase, reaching over 200 million cans for the quarter. This growth is partially attributed to replenishing retail and distributor stock levels. Production at the Owensboro plant will help normalize supply by Q3. Despite heavy competitor discounting, ZYN maintained strong retail performance with a 15% increase in offtake volume and over 70% category value share according to Nielsen data.

The paragraph discusses the current market performance and future prospects of ZYN, a nicotine product approved by the FDA, in the US. Despite a slight drop in market share due to supply constraints, the company expects growth as availability improves and marketing initiatives resume. Strong demand has led to an increased shipment forecast of up to 840 million cans per year, with plans for capacity expansion, including a new manufacturing site in Colorado set to begin production in 2026. The company is committed to investing in US manufacturing, contributing to job creation and economic growth, while also expanding ZYN's presence internationally.

The international nicotine category remains relatively new and is about half the size of the U.S. market in volume. The company is expanding globally, now in 38 markets, with recent launches in the UAE and Colombia and growth in Europe, including Austria, Switzerland, and the UK. Emerging markets like Pakistan, Mexico, and South Africa show strong progress. PMI's global travel retail segment is increasing visibility and awareness of ZYN. The smoke-free segment, particularly e-vapor, is growing significantly, with a year-on-year shipment volume doubling, driven by strong European performance. The pod segment is outpacing disposables due to increased bans. ZYN's premium product is seeing high adoption and low abandonment rates. The combustibles business reported 3.8% organic net revenue growth in Q1, or around 7% excluding technical factors, driven by strong pricing in countries like Turkey, Poland, and Germany, though the outlook for the latter half of the year is moderated to 5%-6% price growth.

In the first quarter, the cigarette industry experienced a 1.3% decline, largely due to the growth in areas where smoke-free products (SFPs) are limited or absent. This trend, especially in countries like Turkey and India, is expected to persist, though an overall low decline in the cigarette industry is anticipated for the year. Category market share increased by 0.4 points, with Marlboro and the global brand portfolio achieving first-quarter highs. The focus remains on maximizing value and promoting SFP growth, with combustible organic gross profits growing by 5.3%. The company is confident in achieving superior growth for 2025, reaffirming its currency-neutral growth outlook despite global economic uncertainties. With a diversified global network, the company expects to manage supply chain challenges and is not anticipating significant impacts from new tariffs. Strong momentum from smoke-free products continues, with increased forecasts for U.S. shipments supporting a 12% to 14% growth projection for SFPs, driven by IQOS.

The paragraph outlines the company's financial expectations and strategies, including anticipated growth in net revenue, operating income, and EPS, with notable positive impacts from currency fluctuations. For 2025, an adjusted diluted EPS forecast is raised, reflecting strong currency impacts and growth rates. The paragraph highlights specific shipment volume expectations for HTU and U.S. ZYN products, and forecasts for Q2 EPS. The company is focused on maintaining a strong balance sheet and achieving a targeted debt ratio by 2026. It also emphasizes its efforts in managing currency volatility and the transformation towards becoming a smoke-free business. Overall, it positions the company's growth profile as leading in its industry, and stresses the importance of strategic actions to sustain this growth.

The paragraph discusses the publication of the company's sixth annual integrated report, highlighting the company's efforts in youth access prevention, operational efficiency, and innovation to future-proof the business. It emphasizes a business-driven approach to sustainability aimed at sustaining and enhancing growth. The company is on track for strong performance in 2025, with a focus on pricing power, growth in smoke-free categories, and investment in smoke-free brands like IQOS, ZYN, and VEEV. These efforts are expected to drive profit and EPS growth, supporting a progressive dividend policy and rewarding shareholders. The speaker concludes by inviting questions, starting with Bonnie Herzog from Goldman Sachs.

The paragraph discusses the current challenges and future outlook for ZYN in the U.S. market. Emmanuel Babeau addresses questions about ongoing out-of-stock issues and inventory rebuilding for retailers. He notes that despite raising shipment guidance, growth is expected to decelerate to around 35% year-over-year for the remainder of the year, compared to 53% in the recent quarter. This is partly due to a strong consumer offtake that outpaced shipments in the previous year. While strong growth in consumer demand is expected to continue, the replenishment of stock is already underway, starting with shipments to wholesalers and distributors before reaching retailers. The process is gradual, and the out-of-stock situation remains significant.

In the article, the company anticipates reaching a normalized stock situation by the third quarter of 2025, with accelerated shipment growth driven by increasing consumer offtake and diminishing replenishment requirements. Bonnie Herzog asks about future margin expansion, given the company's robust margin growth in the current quarter, despite rising SG&A expenses and investments. Emmanuel Babeau expresses confidence in continued margin expansion through 2025, highlighting the strong performance of smoke-free products as a key driver of this growth.

In the first quarter, the company experienced a significant 670 basis point organic expansion in its smoke-free business, achieving a gross margin rate above 70%, which surpasses that of combustible products by five percentage points. The company expects to maintain a substantial margin difference between smoke-free and combustible products through 2025, largely due to factors like the fast-growing ZYN with its high gross profit margin in the US, scale impact and improved performance of IQOS, and strategic pricing increases. While device sales were fewer this quarter, particularly in Japan, which benefited margins, the consistent margin improvements are attributed to productivity and scale benefits. ZYN margins are also improving, contributing positively. Overall, the smoke-free business serves as the primary driver for the company's margin enhancements.

In response to Matt Smith's question about the financial guidance outlook, Emmanuel Babeau explained that while the first half EPS growth on a constant currency basis is above the full-year outlook, this is due to typical variations between the first and second halves of the year. Factors like comparison bases, SG&A phasing, and shipment timing can affect the growth outlook. Despite this, the company expects strong overall revenue growth and performance throughout the year. Babeau mentioned an expected acceleration in IQOS in the second half and predicted low single-digit declines in combustible volumes, indicating seasonal variations rather than changes in the underlying business.

In the paragraph, a follow-up question is addressed to Emmanuel Babeau regarding the IMS growth for IQOS, noting a growth of 9.4% in the first quarter compared to 13% in the fourth quarter of the previous year. Babeau explains that the 9.4% was expected, with turbulence noted in Europe due to a flavor ban, which is anticipated to have a lesser impact in the second half of the year, leading to an acceleration of IMS growth. They project an overall 10%-12% adjusted IMS growth throughout the year, expecting strong double-digit growth in Europe and Japan, and promising growth in other markets after some weaker quarters. Additionally, Eric Serotta from Morgan Stanley inquires about the full-year guidance, noting the increased ZYN shipment volume, a high-margin product. Despite robust margin expansion in the first half, the constant currency EPS guidance remains unchanged, with the decision attributed to early-year positioning and existing macro and geopolitical uncertainties.

In the article paragraph, Emmanuel Babeau discusses the strong growth expectations for PMI following a successful Q1, with particular emphasis on the ZYN brand in the US. PMI is raising its volume guidance for ZYN by 20 million cans, marking it as a profitable brand, but not significantly altering the overall annual outlook. Babeau stresses caution due to the uncertainty of the environment despite promising early results. When asked about the potential unconstrained growth of ZYN, Babeau admits they can't precisely estimate it due to current demand constraints but expects consumer offtake to accelerate as these constraints are eased.

The paragraph discusses the anticipated growth and market dynamics for the nicotine product ZYN. The company has observed strong consumer interest and demand in the category, though their marketing activities have been limited due to supply constraints. They expect consumer acquisition to drive growth as commercial activities resume. While citing Nielsen data, the company acknowledges that this data only covers a fraction of sales points and may not fully capture the market due to stock limitations. Despite this, they have observed strong demand and positive sales trends, particularly towards the end of March.

In the paragraph, Faham Baig from UBS asks Emmanuel Babeau about the growth rates and market data for ZYN in comparison to the 30-35% growth in the category, as well as the impact of recent developments at the CTP on the timing of the IQOS ILUMA launch in the U.S. Emmanuel responds that ZYN showed a significant growth rate with a market share close to 66% as of March, roughly around 30% growth, though the data is not precise. Regarding the CTP and IQOS, he indicates that it is too early to determine the impact on the launch timing and expresses hope for an efficient process and compliance from the FDA within its six-month decision mandate. Additionally, Faham asks about net interest cost guidance for the year, but Emmanuel doesn't provide specific details on that point.

The paragraph discusses the net interest performance for the year, noting a positive start in Q1 but providing no specific full-year guidance or additional data. Some positive impacts were noted from mark-to-market adjustments. The operator thanks participants and the call ends with James Bushnell inviting follow-up questions to the investor relations team. Emmanuel Babeau also extends thanks, concluding the call officially.

This summary was generated with AI and may contain some inaccuracies.