Philip Morris International Inc

Good day and thank you for standing by. Welcome to the Philip Morris International 2025 First Quarter Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, James Bushnell, Vice President of Investor Relations and Financial Communications. Please go ahead.

Welcome. Thank you for joining us. Earlier today, we issued a press release containing detailed information on our 2025 first quarter results. The press release is available on our website at pmi.com. A glossary of terms, including the definition for smoke-free products, as well as adjustments, other calculations, and reconciliations to the most directly comparable U.S. GAAP measures for non-GAAP financial measures cited in this presentation, are available in Exhibit 99.2 to the company's Form 8K, dated April 23, 2025, and on our Investor Relations website. Today's remarks contain forward-looking statements and projections of future results. I direct your attention to the forward-looking and cautionary statements disclosure in today's presentation and press release for a review of the various factors that could cause actual results to differ materially from projections or forward-looking statements. I'm joined today by Emmanuel Barbot, Chief Financial Officer. Over to you, Emmanuel.

Thank you, James, and welcome, everyone. In Q1, we delivered a very strong start to the year with all key elements of the business contributing strongly to deliver double-digit increases in organic net revenue, operating income, and adjusted deleted EPS in both constant currency and dollar terms. Our smoke-free business performed exceptionally well across all areas with shipment volumes up plus 14.4% year-on-year, organic net revenue growth of plus 20%, and outstanding organic growth profit growth of plus 33%, as all three smoke-free categories expanded gross margin. This was especially fueled by the rapid growth of ZIN and the continued volume momentum, operating leverage, and scale benefit of ICOS. Our smoke-free business now accounts for 44% of total gross profit as we continue to deploy our multi-category strategy across markets and broaden our growth opportunities. ICOS delivered close to plus 10% HTU-adjusted IMS growth with continued strong performance both in Japan and Europe. despite the annualization impact of the EU characterizing flavor ban. We expect double-digit growth for the rest of the year. Zin, once again, delivered strong growth in the US with shipments increasing by an impressive plus 53% to reach 202 million cans, exceeding our initial expectations as demand remains strong and production capacity increase ahead of schedule in the latter part of March, enabling some initial replenishment of trade inventories. International nicotine pouch count volumes also grew by plus 53% or by plus 182%, excluding the Nordics, demonstrating the global dynamism of this emerging category. In eVapor, the Q1 performance was impressive. demonstrating its increasing contribution within our multi-category offering. Shipments more than doubled year on year and gross margin further expanded, driven by strong pot growth in Europe as we increase our distribution and commercial activities. Within combustible, overall volume growth, coupled with strong pricing and ongoing cost initiatives, drove a robust performance despite notably negative geographic mix from increased volumes in lower margin markets. Overall, the very strong and increasingly profitable underlying growth of our smoke-free business was coupled with very solid combustible results and the added benefit of favorable shipment timing. This allowed us to deliver plus 16% organic operating income growth and plus 250 basis point of expansion in adjusted OI margin to reach 40.7% and resulted in strong double-digit adjusted diluted EPS growth in both currency neutral and dollar terms, despite currency headwinds. While it is early in the year and there are a number of uncertainty in the global economic outlook, we remain confident that we will achieve another year of super growth. As such, We now forecast double-digit adjusted diluted EPS growth at prevailing exchange rates. Turning to the headline numbers, we delivered volume growth of plus 3.9%, reflecting the very strong dynamism of our smoke-free business. Combined with strong pricing and despite unfavorable combustible mix, we delivered double-digit organic net revenue growth of plus 10.2%, reaching $9.3 billion in total. There was also a technical impact from the change in commercial model for the Indonesia below tier one cigarette segment, where we now act as a handling agent. This results in lower net revenue and cost of goods sold, but has no meaningful impact on gross profit or operating income. Excluding this effect, which will notably affect the first three quarters of the year, organic net revenues grew by around plus 12%. And as I mentioned, our smoke-free business was the primary driver behind our organic adjusted OI growth of plus 16% or plus 12.8% in dollar terms. Q1 adjusted deleted EPS grew by plus 17.3% in constant currency, and by plus 12.7% in dollar terms to $1.69. This includes a $0.07 unfavorable currency variance, notably due to non-recurring transactional losses in the quarter linked to currency volatility. This stronger than expected performance was primarily driven by the top line and gross margin result of our smoke-free business. ZIN performance was further enhanced by the great work of our manufacturing team in accelerating capacity initiative. Strong high-cost HTU shipment growth includes a robust performance in Europe and around 1 billion units in favorable shipment timing, which we expect to reverse in H2. This was complemented by the resilience of our combustible business. Looking at category performance in more detail, our smoke-free business grew net revenue by plus 20.4% and gross profit by plus 33.1%. This led to an impressive plus 670 basis point of organic gross margin expansion to surpass 70%, more than five points above the gross margin of combustible at the current category and geographic mix of SFPs. As I mentioned, this reflects an acceleration in gross margin expansion for all three smoke-free categories, notably combined with the positive mixed impact of ZIN's accretive unit economics and pricing on both HTUs and ZIN. Very strong high-cost gross margin expansion reflects the powerful growth and scale effect of this large and growing business, manufacturing productivities, and a comparison benefit from higher device shipment in the prior year when IllumaEye was launched in Japan. On an organic basis, combustible net revenues and gross profit grew by plus 3.8 and plus 5.3% respectively. While pricing was strong and volume were positive, there was a notably negative geographic mix this quarter due to growth in markets such as Turkey and Egypt, in addition to the technical impact from Indonesia. We expect both pricing and negative geographic mix to moderate over the rest of the year and target combustible gross margin expansion organically and in dollar terms. As expected, input cost headwinds eased compared to recent years, and based on current assumption, we expect this to further improve in 2026. Taking a closer look at our volumes, shipment growth of plus 3.9% was primarily driven by our smoke-free business, with all categories contributing positively and placing us on track for a fifth consecutive year of total volume growth. Smoke-free volumes grew by plus 14.4%, above our full-year target range of plus 12% to plus 14%. reflecting very positive contribution from Icos, Zin, and Viv. In addition to the growth of these three brands, which I covered earlier, I would also note that our all-smoke-free business includes U.S. Moist Snuff and Scandinavian Snooze, which declined modestly in the quarter. Despite this, all-smoke-free product shipment growth accelerated versus the prior quarter to plus 27%. Cigarette volumes were positive for the fourth consecutive quarter as we grew share in a modestly declining industry with continued growth in markets where smoke-free products are not permitted, such as Turkey and India. You have heard us talk recently about our multi-category strategy for smoke-free products. as we leverage on the strengths of the ICO's brand and commercial infrastructure in international markets to accelerate incremental growth from ZIN and VIVE. This is evidenced by our strong smoke-free portfolio results in Q1, with visible accretion across regions and markets. We have 46 markets with multiple smoke-free offerings, including 16 with all three PMI categories on offer. The execution of this three-pronged strategy is generating positive results in markets such as the Czech Republic, Romania, Switzerland, and our global travel retail business, in addition to promising starts in the UK and Italy. It is also helping to bolster our position as a global smoke-free champion. Double-digit Q1 organic net revenue growth was again driven by all three key elements of our structural growth model, namely volumes, pricing, and smoke-free mix. Pricing contributed plus 6 points, reflecting over plus 8% combustible pricing and around plus 3% for smoke-free excluding devices. The positive mix impact of the shift to smoke-free product, including US smoke-free mix, drove a further positive contribution of plus 3.1 points. Overall, combustible geographic mix and other factors had an unfavorable impact of 2.7 points. This was more negative than in prior quarters, reflecting the technical Indonesia impact and combustible market mix dynamics I explained earlier. Currency had a negative impact of 3.9 points with a further 0.5 points from acquisition and divestiture, which include the divestment of Vectura. Turning now to gross margin, we delivered very strong expansion of 340 basis points on an organic basis and plus 360 basis points, including currency acquisition and divestitures. This comprised plus 180 basis points from pricing, more than offsetting an 80 basis point unfavorable impact from cost inflation, net of productivities, and other cost items. Smoke-free growth delivered an excellent plus 230 basis point with a flat contribution from combustible excluding pricing, but including the Indonesia impact. This excellent gross margin performance supported a strong adjusted operating income margin expansion of 250 basis points or plus 200 basis points organically after accounting for the currency mix of our costs, the divestiture of Victoria and other scope effects. This impressive margin expansion was delivered despite a 140 basis point impact of higher SG&A costs driven by continued investment in our small pre-growth including US investments, a low-cost comparison in the prior year, and the impact of 2025 investment phases. As we continue to invest in top-line growth, we target organic SG&A growth broadly in line with net revenue growth for the year. We continue to drive manufacturing and back-office efficiency. and delivered over $180 million in gross cost savings in Q1 across both cost of goods sold and SG&A. After more than $750 million of savings in 2024, this places us nicely on track to achieve our $2 billion target over 2024-2026. Focusing now on our high-cost business. As expected, calendar effects and EU flavour ban annualisation impacted Q1-adjusted IMS. However, the delivery of plus 9.4% growth despite these factors marks continued strong underlying momentum. We expect double-digit progress in the balance of the year, in line with our target of plus 10% to plus 12% growth. Supporting this are commercial initiatives around brand building and continuous innovation on devices and consumables as we progressively roll out Illuma Eye and new consumable variants of Terria, Livia, and Delia. Over the longer term, we have a rich high-cost innovation pipeline to further enhance the breadth and quality of the user experience with the iconic brand. As disclosed in our latest integrated report, Over 99% of our 2024 adjusted R&D spend was on smoke-free products, consistent with the last four years, as we continue to drive consumer-centered product development. Turning to Europe, where we are building on the strengths of our high-cost business to create an integrated multi-category portfolio to accelerate consumer switching and value creation. Total shipments of our flagship smoke-free brand advanced by plus 17.5% into one, with an increasing contribution from both Zin and Vive. ICO's HTU shipments grew more than 15%, including a positive comparison impact from the prior year. Our investment in brand building initiatives are exemplified by the recent partnership with renowned Italian designer Celletti, at Milan Design Week as part of the IQOS Curious X campaign. For IQOS, Q1 HTU adjusted IMS grew by plus 7.4% as we further accelerated our share of cigarettes and HTUs to a record 11.4%. Many markets in the region grew adjusted IMS by double digits, including ITIN growth or more in Spain, Germany, Bulgaria, and Greece.