Executive Summary / Key Takeaways

• Philip Morris International is successfully executing a strategic pivot from traditional combustible tobacco to a portfolio of innovative smoke-free products (SFPs), driving robust organic growth and significant margin expansion.
• The multi-category SFP strategy, led by the dominant IQOS heat-not-burn platform and the rapidly growing ZYN oral nicotine pouches, is the primary engine of growth, contributing significantly to revenue and profitability and widening the margin gap over combustibles.
• Strong financial performance in Q1 2025, with double-digit organic growth in net revenue and operating income, underscores the momentum of the smoke-free business and effective cost management, positioning the company for another year of strong results.
• Management's raised 2025 guidance, including double-digit adjusted diluted EPS growth in dollar terms and increased US ZYN volume forecasts, reflects confidence in continued SFP momentum, easing cost pressures, and proactive measures to mitigate currency headwinds.
• While regulatory challenges, litigation risks, and geopolitical uncertainties persist, PMI's technological leadership, brand strength, and expanding global SFP footprint provide a compelling investment thesis centered on sustainable, profitable growth and strong cash generation supporting shareholder returns.

The Phoenix Rises: A Global Tobacco Leader's Smoke-Free Transformation

Philip Morris International Inc. (PMI) stands at a pivotal juncture in its history, having strategically embarked on a profound transformation since its 2008 spin-off from Altria Group (MO). Recognizing the secular decline in combustible cigarette consumption driven by health concerns, regulatory pressures, and shifting societal norms, PMI has committed over $14 billion since 2008 to develop and commercialize innovative smoke-free products (SFPs). This strategic pivot aims to move away from cigarettes entirely, offering adult smokers who would otherwise continue to smoke scientifically substantiated, potentially less harmful alternatives.

The global tobacco industry landscape is dominated by a few major players, including British American Tobacco (BTI), Japan Tobacco International (JAPAY), and Imperial Brands (IMBBY). While these competitors also pursue smoke-free alternatives, PMI has established itself as a leader in this transition, particularly through its multi-category approach encompassing heat-not-burn, oral nicotine, and e-vapor products. PMI's strategy is not merely about offering new products; it's about leveraging its extensive global infrastructure, deep market understanding, and scientific capabilities to drive a fundamental shift in consumer behavior and the industry itself. This involves not only developing compelling products but also advocating for science-based regulatory frameworks that differentiate SFPs from cigarettes based on their reduced harm potential.

At the heart of PMI's transformation lies its differentiated technology, most notably the IQOS heat-not-burn platform. Utilizing proprietary HeatControl technology, IQOS heats specially designed tobacco units to generate an aerosol, avoiding combustion. This technology offers tangible benefits over traditional smoking by significantly reducing the levels of harmful and potentially harmful constituents (HPHCs. PMI has invested heavily in R&D, with over 99% of its 2024 adjusted R&D spend dedicated to smoke-free products, focusing on enhancing existing platforms (like the newer IQOS ILUMA induction technology and the ILUMA i device with additional functionalities) and developing new consumables (like DELIA and LEVIA HTUs). The goal is to continuously improve the user experience, increase conversion rates from cigarettes, and expand the product portfolio to meet diverse adult consumer preferences.

Beyond heat-not-burn, PMI's acquisition of Swedish Match in 2022 significantly bolstered its position in the oral nicotine space with the market-leading ZYN brand. ZYN nicotine pouches offer a discreet, smoke-free nicotine delivery method. PMI is also expanding its presence in the e-vapor category with its VEEV brand, particularly focusing on closed pod systems. This multi-category strategy is a key competitive advantage, allowing PMI to address a broader range of adult nicotine user preferences and leverage the strengths of each brand and distribution network. For instance, the success of IQOS infrastructure in international markets is now being used to accelerate the rollout and growth of ZYN and VEEV.

Performance Reflecting Strategic Momentum

PMI's financial performance in the first quarter of 2025 provides compelling evidence of the success of its smoke-free transformation. Net revenues increased by 5.8% year-over-year, but excluding the impact of currency fluctuations and acquisitions/divestitures, organic net revenue growth was a robust 10.2%. This strong organic growth was primarily fueled by favorable pricing, particularly in the combustible tobacco segment, and a positive volume/mix effect driven by the significant growth in smoke-free product volumes.

Operating income saw an even more impressive increase of 16.4% in Q1 2025, translating to 18.7% organic growth. This expansion was driven by the same top-line factors as net revenue, amplified by the increasing profitability of the smoke-free business. The organic gross profit margin for the smoke-free business expanded by an outstanding 670 basis points in Q1 2025, surpassing 70%. This is more than five percentage points higher than the gross margin for combustible products, highlighting the accretive nature of the smoke-free portfolio. The margin expansion in SFPs is a result of the rapid growth of ZYN (with its accretive unit economics), pricing on HTUs and ZYN, and the benefits of scale and manufacturing productivity for IQOS.

While the strategic focus is on smoke-free, the combustible business continues to play a vital role, providing significant cash flow and supporting the transition. In Q1 2025, combustible tobacco net revenues were stable, and organic gross profit grew robustly by 5.3%, driven by strong pricing and ongoing cost initiatives. This performance occurred despite a negative geographic mix impact from increased volumes in lower margin markets. PMI is strategically managing its combustible portfolio to maximize value through pricing and cost efficiencies, which also contributes to overall margin improvement.

PMI's liquidity position remains solid, supported by strong cash flow generation. While Q1 2025 saw net cash used in operating activities ($350 million) compared to cash provided in the prior year, this was primarily due to higher working capital requirements related to excise tax timing, including a provisional payment for the German HTP supplemental tax surcharge. For the full year 2024, the company generated record operating cash flow of $12.2 billion. PMI utilizes a mix of long-term and short-term debt, including a commercial paper program, and actively manages its debt levels, targeting a reduction in the net debt to adjusted EBITDA ratio to around two times by the end of 2026. Capital expenditures, projected at around $1.5 billion in 2025, are focused on supporting the growth of the smoke-free business, particularly expanding ZYN production capacity in the U.S.

Competitive Landscape and Technological Edge

In the competitive arena, PMI leverages its technological leadership and brand strength to differentiate itself. The IQOS platform, with its advanced heating technology, provides a significant edge in the heat-not-burn segment compared to rivals like BAT's Glo or JTI's Ploom. PMI's continuous innovation, including the rollout of the ILUMA i device and new consumable variants, aims to maintain this technological lead and enhance user satisfaction, driving market share gains. In Q1 2025, IQOS HTU adjusted in-market sales grew by 9.4% globally, with notable strength in key markets like Japan (32.2% adjusted share) and Europe (11.4% adjusted share in the total market). PMI's multi-category approach allows it to compete across different SFP segments, offering a broader appeal than competitors focused on a single technology.

The acquisition of Swedish Match and the subsequent growth of ZYN in the U.S. have been transformative. ZYN's impressive 53% year-on-year shipment growth in Q1 2025 underscores its strong consumer demand and market position. ZYN's status as the only nicotine pouch product authorized by the FDA provides a significant regulatory advantage and validates its scientific profile compared to many competitors. PMI is investing heavily in expanding ZYN production capacity in the U.S., targeting 800 million to 840 million cans in 2025, to meet this surging demand and capture further market share in the dynamic oral nicotine category.

While PMI faces competition across all its product categories, its integrated approach, strong global brands (like Marlboro, which achieved all-time first quarter highs for category share in Q1 2025, supporting the SFP transition), and commitment to scientific substantiation position it favorably. The company's ability to command strong pricing, even in the combustible segment, reflects the enduring strength of its brands relative to competitors. However, competitive pressures, including from illicit trade and new market entrants, remain a constant challenge.

Outlook and Risks

PMI's outlook for 2025 is optimistic, reflecting confidence in the continued momentum of its smoke-free transformation. The company forecasts total cigarette and smoke-free product shipment volume growth of up to 2% for the full year, driven by smoke-free product volume growth of 12% to 14%. Organic net revenue growth is expected to be in the range of 6% to 8%, while organic operating income growth is projected at 10.5% to 12.5%.

Crucially, PMI is raising its 2025 adjusted diluted EPS forecast to $7.36 to $7.49, representing 12% to 14% growth in dollar terms at prevailing exchange rates. This includes an estimated favorable currency impact of $0.10. The Q2 2025 forecast anticipates HTU shipment volume of 37.5 billion to 38.5 billion units and HTU adjusted IMS growth of around 10%, with adjusted diluted EPS of $1.80 to $1.85. Management's guidance is underpinned by the expectation of continued strong SFP performance, easing input cost headwinds, and the benefits of cost efficiency programs.

Despite the positive outlook, PMI faces several key risks. Regulatory risks are significant and evolving, including potential flavor bans (like the EU HTP flavor ban, which caused some initial disruption), plain packaging laws, generation bans, and the complex FDA authorization processes for SFPs in the U.S. Litigation remains a concern, with ongoing tobacco-related cases and new litigation related to oral nicotine products in the U.S. Geopolitical risks, particularly related to the war in Ukraine and its impact on operations in Russia and Ukraine, pose uncertainties regarding asset values, operational continuity, and supply chains. Inflationary pressures and volatile tariff environments could impact costs and consumer demand. The company also faces risks related to protecting its intellectual property and combating illicit trade, which can undermine legitimate sales and brand reputation.

Conclusion

Philip Morris International is successfully navigating a complex and evolving industry landscape by aggressively pursuing its vision of a smoke-free future. The company's strategic pivot, underpinned by significant investment in technological innovation and a multi-category SFP portfolio led by IQOS and ZYN, is delivering tangible results in the form of robust organic growth, expanding margins, and strong cash flow generation. The Q1 2025 performance and the raised full-year guidance underscore the momentum of this transformation and management's confidence in its ability to deliver superior growth in both currency-neutral and dollar terms.

While regulatory hurdles, litigation, and geopolitical factors present ongoing challenges, PMI's established market leadership, powerful brands, and commitment to science-based product development and commercialization provide a solid foundation. The company's focus on expanding its SFP footprint globally, particularly in the U.S. and emerging markets, and its continuous investment in enhancing its technology and manufacturing capacity, position it well for sustainable, profitable growth. For investors, PMI offers a compelling thesis centered on a transforming business with strong underlying momentum, a clear strategic direction, and a commitment to returning value to shareholders through its progressive dividend policy, making it a notable consideration in the consumer staples sector.