Summary of Philip Morris International (PM) 2025 Conference Call Company Overview - **Company**: Philip Morris International (PM) - **Date**: June 03, 2025 - **Key Speaker**: Emmanuel Babeau, CFO Core Industry Insights - **Industry**: Tobacco and Smoke-Free Products - **Market Trends**: Strong growth in smoke-free product categories, particularly IQOS and ZYN, with expectations for continued expansion in various global markets. Key Points and Arguments Financial Performance - PM is on track for strong growth in revenue, operating income, and adjusted EPS before foreign exchange (Forex) impacts, primarily driven by the smoke-free portfolio [5][18] - In Q1 2025, PM reported nearly 10% adjusted market sales growth in Japan and over 7% in Europe, despite challenges such as flavor bans [6] - The company anticipates a significant impact from the flavor ban in Europe, estimating a loss of approximately 1 billion sticks in 2025 [6] Product Performance - **IQOS**: Continued strong growth, with a focus on expanding market share in various regions, including the Gulf countries, Indonesia, and Mexico [6][10] - **ZYN**: Exceptional performance in Q1 2025, with growth exceeding 50% in the US. The company expects to resolve out-of-stock issues by Q3 2025, leading to further consumer uptake [7][8][49] - **Vive**: The vaping product is being developed more tactically, with a focus on profitability and market presence in key EU markets [12][13] Multi-Category Strategy - PM is adopting a multi-category approach, integrating IQOS, ZYN, and Vive to enhance brand loyalty and consumer experience. This strategy is showing positive results in markets like Poland, Greece, and Romania [14][26] - The company emphasizes that these products do not cannibalize each other but rather strengthen the overall brand portfolio [14] Market Outlook - PM targets organic revenue growth of 6% to 8% and adjusted EPS growth of 10.5% to 12.5% for 2025, with a strong focus on smoke-free products [18][19] - The company aims for two-thirds of its revenue to come from smoke-free products by 2030, supported by ongoing market expansion and product innovation [20][22] Regulatory Environment - PM acknowledges the challenges posed by varying regulations across markets, with some countries still imposing bans on smoke-free products. However, there is optimism regarding tobacco harm reduction policies in the US and several European countries [66][68] - The new head of the FDA's Center for Tobacco Products (CTP) is expected to support tobacco harm reduction initiatives, which could positively impact PM's market strategies [70] Competitive Landscape - The US market for nicotine pouches is becoming increasingly competitive, with many brands aggressively discounting prices. PM maintains a premium positioning for ZYN, which is currently priced higher than many competitors [51][52] - Despite competition, PM remains the only brand with Premarket Tobacco Product Applications (PMTAs) approved for its full range of ZYN products, reinforcing its market leadership [54][55] Consumer Insights - The company notes a shift in consumer perception of nicotine, particularly with ZYN being viewed as a lifestyle product rather than just a nicotine source. This change is expected to facilitate broader acceptance of nicotine pouches in new markets [32][33][57] Additional Important Insights - PM's smoke-free products are associated with superior financial metrics, including higher revenue per unit and gross margin rates compared to combustible products [15][16] - The company is focused on long-term profit growth, with a commitment to progressive dividend policies and potential share buybacks once debt targets are met [63][64] This summary encapsulates the key insights and strategic directions discussed during the conference call, highlighting PM's robust growth trajectory and commitment to innovation in the tobacco industry.

Core Insights - Philip Morris International (PM) has shown significant growth, with shares increasing over 100% since the second quarter of 2024, driven by new nicotine brands replacing traditional cigarettes [1] - The company is well-positioned for dividend growth over the next decade, supported by strong cash flow from its legacy cigarette business and expanding smoke-free product lines [2][8] Group 1: Company Overview - Philip Morris International operates as a leading tobacco company focused on international markets, distinct from Altria Group, which sells domestically [3] - The company benefits from international diversification, with revenue primarily generated outside the U.S., providing a hedge against dollar devaluation [4] Group 2: Product Innovation and Revenue Growth - Major investments in non-cigarette products have led to substantial growth, particularly with the nicotine pouch brand Zyn, which has grown to over 200 million cans sold per quarter in the U.S. [5] - The Iqos heat-not-burn device is a market leader in Europe and Japan, contributing significantly to revenue, with 42% of total revenue now coming from smoke-free products, totaling $38.4 billion over the last 12 months [6] Group 3: Dividend Strategy - Philip Morris pays a dividend of $5.35 per share, supported by free cash flow of $6.55 per share, despite current cash flow being impacted by investments in growth [10] - The company anticipates a rise in free cash flow per share to $10 or higher over the next five years, allowing for a projected 10% annual dividend growth, potentially increasing the payout to $8.61 [11] Group 4: Investment Potential - Despite a 100% increase in stock price over the past year, Philip Morris International remains an attractive investment, with a forward P/E ratio of 24, indicating it is not overly expensive for a consistent earnings grower [13][14] - The company holds a dominant position in the growing nicotine market without tobacco, positioning it favorably against competitors [14][15]

Core Viewpoint - High-yield dividend stocks are highlighted as a reliable source of income for investors, particularly in retirement, with a focus on companies that have a proven track record of consistent dividend payments [1][2]. Group 1: Company Summaries - **Realty Income**: Current yield is 5.6%, known for being one of the largest REITs globally, paying monthly dividends, and has raised dividends for 110 consecutive quarters, with a payout ratio of 75% of anticipated 2025 funds from operations [4][5]. - **Altria Group**: Current yield is 6.7%, recognized as a Dividend King with over 50 years of uninterrupted dividend increases, despite declining cigarette volumes, maintains a payout ratio around 80% of cash flow, and has a significant stake in Anheuser-Busch InBev [6][7][8]. - **British American Tobacco**: Current yield is 6.8%, operates globally with a focus on next-generation nicotine products, has a dividend payout ratio of 66% of cash flow, and has transitioned to a quarterly payment schedule [9][10]. - **Verizon Communications**: Current yield is 6.1%, a leader in the U.S. wireless market with 21 consecutive annual dividend increases, and a payout ratio of only 58% of 2025 earnings estimates [11][12]. - **Enbridge**: Current yield is 5.7%, operates extensive pipelines and utilities, has a strong dividend track record with 28 consecutive annual increases, and maintains a payout ratio of 60% to 70% of distributable cash flow [13][14].

Core Viewpoint - Philip Morris International has achieved a 50% total return in 2025, significantly outperforming the S&P 500 index, which remains flat this year [1]. Group 1: Business Transformation - The company has successfully pivoted from traditional cigarettes to alternative nicotine products, recognizing the global decline in cigarette usage [4]. - Philip Morris holds a dominant position in the heat-not-burn category with its Iqos brand, capturing a 77% volume share in its operating markets [4]. - In the nicotine pouch segment, the company leads with its Zyn brand, exhibiting similar market share characteristics [4]. Group 2: Financial Performance - In the last quarter, 42% of the company's revenue and 44% of gross profit were derived from smoke-free products, indicating a significant shift in its revenue composition [5]. - Overall revenue has increased to $38 billion over the last 12 months, reflecting the successful transition to alternative nicotine products [5]. Group 3: Market Conditions - The depreciation of the U.S. dollar, which has fallen from around 110 to under 100, is expected to enhance revenue in U.S. dollar terms for Philip Morris, as it primarily operates outside the U.S. [6]. - The company is positioned to benefit from this currency trend, which has contributed to the stock price increase at the start of 2025 [6]. Group 4: Traditional Tobacco Outlook - Despite the decline in cigarette usage globally, traditional tobacco products are still expected to generate cash flow for the company, particularly outside of China and the U.S. [9]. - In the last quarter, gross profit from combustibles grew by 5.3% year over year, demonstrating the continued viability of traditional tobacco in international markets [9][10]. Group 5: Valuation and Future Prospects - The stock's forward price-to-earnings (P/E) ratio has increased to 24 from 14 a year ago, and the dividend yield has decreased to 3% from nearly 6% [13]. - This rising valuation suggests that the extraordinary 50% returns may not be sustainable, but the stock remains a viable investment due to its solid dividend yield and growth potential [14]. - The combination of Iqos and Zyn growth, along with pricing power in traditional cigarettes, positions the company for potential double-digit revenue and earnings growth in the coming years [14][15].

Core Insights - Philip Morris International is focusing on creating a smoke-free future while facing challenges such as declining volumes, public resistance, and increasing regulation in the tobacco sector [1] Company Strategy - The company is known for its iconic Marlboro brand and is actively pursuing a strategy to transition towards smoke-free products [1] Market Challenges - The tobacco industry is experiencing significant challenges, including declining sales volumes and heightened regulatory scrutiny [1]

Core Viewpoint - Altria has demonstrated solid price appreciation over the past year, with an increase of 27% [1] Company Summary - Altria is recognized as a strong dividend-paying company, appealing to dividend investors [1]

Core Viewpoint - The tobacco industry is evolving into the nicotine industry, with Altria Group and British American Tobacco being key players, but British American Tobacco is currently better positioned for growth and market share in smokeless products [2][10][12]. Company Comparison - Altria and British American Tobacco both offer high dividend yields around 7% and have similar financial metrics, but their growth prospects differ significantly [2][5]. - Altria primarily operates in the U.S. with its Marlboro brand, while British American Tobacco has a global presence and competes mainly with Philip Morris International [4]. Financial Health - Both companies generate sufficient free cash flow to cover dividends and have significant stakes in other companies, with Altria's stake in Anheuser-Busch InBev valued at approximately $11 billion and British American Tobacco's stake in ITC Limited valued at around $16 billion [7]. Industry Adaptation - The decline in traditional cigarette use has prompted both companies to invest in smokeless nicotine products, with British American Tobacco leading in the electronic vape market with a 40% market share and 13.2% of total revenue from new product categories in 2024 [9][10]. - Altria has struggled with its investments in smokeless products, reporting only $300 million in sales from new categories in 2024, which is just 1.2% of its total revenue [11]. Market Dynamics - The U.S. government’s crackdown on illegal vape products benefits both companies, but British American Tobacco is expected to gain more due to its strong market share in vaping [14]. - Altria faces challenges in maintaining its market leadership in next-generation nicotine products, which could weaken its business as cigarette volumes decline [15].

Financial Data and Key Metrics Changes - For the fourth quarter of fiscal year 2025, sales and other operating revenue were $702.3 million, down from $770.9 million in the same quarter of fiscal year 2024, primarily due to lower tobacco sales volumes [17] - Operating income for the fourth quarter was $42.8 million, compared to $68.2 million in the same quarter of fiscal year 2024, also driven by lower tobacco sales volumes [17] - Net income attributable to Universal Corporation was $9.3 million or $0.37 per share, down from $40.3 million or $1.61 per share in the same quarter of fiscal year 2024 [18] - For the full year of fiscal year 2025, sales and operating revenue increased to $2.95 billion from $2.75 billion in fiscal year 2024, mainly due to higher tobacco sales prices [19] - Net income for fiscal year 2025 was $95 million or $3.78 per share, down from $119.6 million or $4.78 per share in fiscal year 2024 [20] Business Line Data and Key Metrics Changes - Segment operating income for the tobacco operations segment was $240.2 million for fiscal year 2025, up from $222.4 million in fiscal year 2024, driven mainly by higher sales prices [21] - Segment operating income for the Ingredients Operations segment was $12.3 million for fiscal year 2025, compared to $3.9 million in fiscal year 2024, primarily due to higher sales volumes [21] Market Data and Key Metrics Changes - As of March 31, 2025, the estimated unsold flue-cured and burley stock was 22 million kilos, up 11 million from December 31 [48] - The company reported a 20% uncommitted inventory level as of March 31, 2025 [47] Company Strategy and Development Direction - The company's strategy focuses on three pillars: maximizing tobacco operations, growing ingredients operations, and strengthening the organization [10] - The company aims to grow Universal Ingredients through organic growth and measured acquisitions, leveraging its strong reputation for quality and service [12] - Sustainability is a core part of the business, with a commitment to high standards and transparency in the supply chain [25] Management's Comments on Operating Environment and Future Outlook - Management noted strong customer demand in the tobacco segment, with expectations of increased global flue-cured and burley production in the current growing season [23] - The company is optimistic about the ingredients segment, having completed a major expansion project and focusing on organic growth [24] - Management addressed the completion of the Mozambique investigation, stating it did not materially impact financials [25] Other Important Information - The company declared its 55th annual dividend increase, with a quarterly dividend of $0.82 per share, reflecting a commitment to returning value to shareholders [9] - The company completed a pension risk transfer transaction resulting in a one-time pretax pension settlement charge of approximately $14 million [18] Q&A Session Summary Question: How should SG&A be viewed for fiscal 2026? - Management indicated that they cannot provide forward-looking guidance but noted that SG&A for fiscal year 2025 was approximately $305 million, down $5 million from the prior year [32][33] Question: Will there be ongoing legal expenses related to the Mozambique situation? - Management confirmed that the Mozambique investigation has been completed, and there will be no ongoing legal expenses related to it [36] Question: What are the expectations for tobacco margins and growth in fiscal 2026? - Management acknowledged that as the market moves towards a balanced supply, it is difficult to predict customer behavior regarding inventory levels and demand [39][40] Question: What are the current uncommitted inventory levels for tobacco? - The company reported a 20% uncommitted inventory level as of March 31, 2025 [47] Question: How does the company view the growth of nicotine pouches? - Management noted that the demand for leaf tobacco remains strong, and they are participating in next-generation product categories, including nicotine pouches [90] Question: What is the outlook for the ingredients segment's profit? - Management stated that they expect to improve margins in the ingredients segment through increased sales and scale [72][73]

Financial Data and Key Metrics Changes - For the fourth quarter of fiscal year 2025, sales and other operating revenue were $702.3 million, down from $770.9 million in the same quarter of fiscal year 2024, primarily due to lower tobacco sales volumes [16] - Operating income for the quarter was $42.8 million, compared to $68.2 million for the same quarter in fiscal year 2024, also driven by lower tobacco sales volumes [16] - Net income attributable to Universal Corporation was $9.3 million or $0.37 per share, down from $40.3 million or $1.61 per share for the same quarter in fiscal year 2024 [17] - For the full year of fiscal year 2025, sales and operating revenue were $2.95 billion, up from $2.75 billion in fiscal year 2024, mainly due to higher tobacco sales prices [18] - Net income for fiscal year 2025 was $95 million or $3.78 per share, down from $119.6 million or $4.78 per share in fiscal year 2024 [19] Business Line Data and Key Metrics Changes - Segment operating income for the tobacco operations segment was $240.2 million for fiscal year 2025, up from $222.4 million in fiscal year 2024, driven mainly by higher sales prices [20] - Segment operating income for the Ingredients Operations segment was $12.3 million for fiscal year 2025, compared to $3.9 million in fiscal year 2024, primarily due to higher sales volumes [20] Market Data and Key Metrics Changes - As of March 31, 2025, the net debt was $817 million, which is $180 million lower than the previous year [21] - The estimated unsold flue-cured and burley stock was 22 million kilos as of March 31, 2025, up 11 million from December 31, 2024 [47] Company Strategy and Development Direction - The company focuses on three strategic pillars: maximizing tobacco operations, growing ingredients operations, and strengthening the organization [9] - The company aims to grow Universal Ingredients both organically and through measured acquisitions, leveraging its strong reputation for quality and service [11] - Sustainability is a core part of the business strategy, with a commitment to high standards and transparency in supply chain practices [25] Management's Comments on Operating Environment and Future Outlook - Management anticipates strong customer demand in fiscal year 2026, with global flue-cured production expected to increase by about 20% and burley production by about 30% [22] - The company is optimistic about the growth of its ingredients segment, having completed a major expansion project and focusing on organic growth [24] - Management noted that the investigation related to Mozambique has been completed and is not expected to have a material impact on financials [25] Other Important Information - The company declared its 55th annual dividend increase, with a quarterly dividend of $0.82 per share, reflecting a commitment to returning value to shareholders [8] - The company completed a pension risk transfer transaction resulting in a one-time pretax pension settlement charge of approximately $14 million [17] Q&A Session Summary Question: How should SG&A be viewed for fiscal 2026? - Management indicated that they cannot provide forward-looking guidance on SG&A but noted that fiscal year 2025 SG&A was about $305 million, down $5 million from the prior year, with various moving pieces affecting it [32] Question: Will there be ongoing legal expenses related to the Mozambique situation? - Management confirmed that the Mozambique investigation has been completed, and there will be no ongoing legal expenses related to it [35] Question: What are the expectations for tobacco margins and growth in fiscal 2026? - Management acknowledged that as the market moves from undersupply to a balanced state, it is still too early to determine the exact impact on margins and growth, but they expect strong demand to continue [38][40] Question: What is the profit outlook for the Ingredients segment? - Management reiterated their long-term target for the Ingredients segment to achieve 10% to 12% of EBITDA, emphasizing the need to leverage investments made in capabilities and sales [50] Question: What are the plans for the share repurchase program? - Management stated that while the share repurchase program is available, they are currently prioritizing other strategic investments [74] Question: What is the outlook for interest expenses in fiscal 2026? - Management indicated that they aim to bring interest expenses down due to improved working capital management and a more normalized buying season in Brazil [75]

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