Participants

James Bushnell; Vice President, Investor Relations and Financial Communications; Philip Morris International Inc

Emmanuel Babeau; Chief Financial Officer; Philip Morris International Inc

Bonnie Herzog; Analyst; Goldman Sachs Research

Matt Smith; Analyst; Stifel Financial Corp.

Eric Serotta; Analyst; Morgan Stanley

Faham Baig; Analyst; UBS Equities

Presentation

Operator

Good day, and thank you for standing by. Welcome to the Philip Morris International 2025 first-quarter results conference call. (Operator Instructions) 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.

James Bushnell

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 US GAAP measures for non-GAAP financial measures cited in this presentation, are available in Exhibit 99.2 to the company's Form 8-K 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 Babeau, Chief Financial Officer. Over to you, Emmanuel.

Emmanuel Babeau

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 diluted 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 gross profit growth of plus 33% as all three smoke-free categories expanded gross margins. This was especially fueled by the rapid growth of ZYN and the continued volume momentum, operating leverage, and scale benefits of IQOS.
Our smoke-free business now accounts for 44% of total gross profit, as we continue to deploy our multicategory strategy across markets and broaden our growth opportunities.
IQOS 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.
ZYN 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 remained strong and production capacity increased ahead of schedule in the latter part of March, enabling some initial replenishment of trade inventories. International nicotine pouch can volumes also grew by plus 53%, or by plus 182% excluding the Nordics, demonstrating the global dynamism of this emerging category.
In e-vapor, VEEV Q1 performance was impressive, demonstrating its increasing contribution within our multicategory offering. Shipments more than doubled year on year and gross margins further expanded, driven by strong pod growth in Europe as we increased our distribution and commercial activities.
Within combustibles, 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 points of expansion in adjusted OI margins 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 uncertainties in the global economic outlook, we remain confident that we will achieve another year of superior 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 revenues and COGS 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 diluted 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 results of our smoke-free business. Excellent ZYN performance was further enhanced by the great work of our manufacturing team in accelerating capacity initiatives.
Strong IQOS 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 revenues by plus 20.4%, and gross profit by plus 33.1%. This led to an impressive plus 670 basis points of organic gross margin expansion to surpass 70%, more than 5 points above the gross margin of combustibles 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 mix impact of ZYN’s accretive unit economics and pricing on both HTUs and ZYN. Very strong IQOS gross margin expansion reflects the powerful growth and scale effects of this large and growing business, manufacturing productivities, and a comparison benefit from higher device shipments in the prior year when ILUMA i 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 volumes 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 assumptions, 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 contributions from IQOS, ZYN, and VEEV.
In addition to the growth of these three brands, which I covered earlier, I would also note that our oral smoke-free business includes US moist snuff and Scandinavian snus, which declined modestly in the quarter. Despite this, oral 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 multicategory strategy for smoke-free products as we leverage on the strength of the IQOS brand and commercial infrastructure in international markets to accelerate incremental growth from ZYN and VEEV. This is evidenced by our strong smoke-free product 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 the 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 products, 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 acquisitions and divestitures, which includes the divestment of Vectura.
Turning now to gross margins, we delivered very strong expansion of plus 340 basis points on an organic basis and plus 360 basis points including currency, acquisitions, 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 points, with a flat contribution from combustibles excluding pricing but including the Indonesia impact. This excellent gross margin performance supported strong adjusted operating income margin expansion of plus 250 basis points or plus 200 basis points organically after accounting for the currency mix of our costs, the divestiture of Vectura, 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 smoke-free growth, including US investments, a low cost comparison in the prior year, and the impact of 2025 investment phasing. 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 efficiencies 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 IQOS business. As expected, calendar effects and EU flavor ban annualization 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 ILUMA i and new consumable variants of TEREA, LEVIA, and DELIA. Over the longer term, we have a rich IQOS innovation pipeline to further enhance the breadth and quality of the user experience with this 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 strength of our IQOS business to create an integrated multicategory portfolio to accelerate consumer switching and value creation. Total shipments of our flagship smoke-free brands advanced by plus 17.5% in Q1, with an increasing contribution from both ZYN and VEEV.
IQOS 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, Seletti, 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 high-teens growth or more in Spain, Germany, Bulgaria, and Greece.
This dynamism more than compensated for flavor ban annualization which, as flagged last quarter, was especially pronounced in Q1 and most notably in Italy. I am particularly pleased to report that sequential market share in Italy is trending well with a record high of 18.4% for Q1 and progressive increases through the quarter.
Overall, regional Q1 adjusted IMS growth was in line with our expectations, and we expect another robust quarter in Q2 followed by an acceleration in the second half. Our experience of the flavor ban impact remains unchanged, with a broadly consistent pattern of recovery across markets following implementation.
We continue to expect an impact of around 1 billion units in 2025, primarily due to annualization with only Hungary and Slovakia implementing the ban so far this year. The most notable remaining market is Poland where the clean-shelf date will be in early 2026.
We also continue to roll out new and improved variants of our tobacco-free consumable, LEVIA, which is driving promising results. This is well-illustrated by Hungary, where LEVIA reached a double-digit share of PMI HTUs less than three months from launch.
Our fundamental progress in the region is highlighted by the consistent growth in key city offtake shares. This also includes Hungary, where Budapest share reached almost 42%, over 4 points higher than Tokyo. Impressively, 24 of the 34 markets where IQOS is present in Europe have crossed the 10% key city share mark, with six above 30%. Notable call-outs across the region include London, Vienna, Zurich, Lisbon, and Athens.
The regulatory landscape is an important determinant of smoke-free progress, and we are encouraged by recent positive developments in a number of markets which recognize the role of tobacco harm reduction in policy measures. This includes Greece, which introduced dedicated legislation supporting science-based claims on smoke-free products; and Hungary, where factual and science-based communications to consumers on smoke-free products is allowed versus a total advertising ban for combustibles.
In Ukraine, an excise tax differential on HTUs versus cigarettes was reintroduced following a period of equal treatment. In Japan, we delivered HTU adjusted IMS growth of plus 9.3%, effectively marking the 10th quarter of double-digit growth after accounting for the leap year. HTU-adjusted share increased by 3 percentage points year on year and plus 1.6 points sequentially to reach 32.2%, further highlighting the dynamism of the innovative IQOS brand and product portfolio in this key market.
IQOS HTUs captured more than three-quarters of category growth in Q1. And combined with our cigarette business, PMI is now the market leader by volumes, of which approximately 75% are HTUs. The overall smoke-free category continues to progress, reaching almost 48% on a national offtake basis in March, with 13 cities and eight prefectures now crossing the 50% threshold.
Globally, we continue to see very strong IQOS performance as illustrated by key city offtake shares. Highlights include impressive year-on-year growth in the capitals of Indonesia and Mexico to surpass 5% share, robust progress in the Middle East and North Africa, and strong growth in Belgrade to 17.7% share despite increased competitive activity.
IQOS reached a new high in South Korea, with a 14.1% share in Seoul supported by the launch of ILUMA i in a highly competitive market. Offtake share performance in Cairo continues to be optically impacted by the growth of the combustible market, where competitor supply has normalized.
Also worth highlighting is the excellent growth of our Global Travel Retail business, which is a leading space for our multicategory offering. We recorded strong HTU growth across all regions to reach share of over 18% in airports where IQOS is present.
In the US, as planned, we commenced direct sales of IQOS 3 devices and HTUs in Austin, Texas, at the end of March, following targeted engagement with legal-age nicotine consumers over recent months. While intentionally small-scale, we have received strong interest with further IQOS 3 pilots planned in the coming months as we prepare for the at-scale launch of IQOS ILUMA. As a reminder, we are not assuming any significant HTU volumes from the US in our full-year forecast.
Switching to ZYN, which continues to resonate strongly with adult nicotine users as a superior product with premium brand equity and deliver excellent results.
Continued strong demand and increased production capacity enabled shipment volume growth of plus 53% to reach over 200 million cans for the quarter. This plus 70 million year-on-year increase is impressive, though we should note the prior year first quarter featured notable depletion of retailer and distributor stock levels and therefore a sellout volume higher than shipments; and this quarter included the beginning of a replenishment.
As we continue to expand production at our Owensboro plant, we accelerated one planned step in this process to the latter part of March. This enabled increased shipments at quarter-end and a pull-forward of initial distributor restocking.
With very limited flow-through of these additional shipments to retail in the quarter, this did not yet have a meaningful impact on in-store availability. We target full normalization of the supply situation in Q3 this year.
ZYN continues to perform very robustly at retail given the circumstances, with strong double-digit offtake growth. According to Nielsen, Q1 offtake volumes grew by around plus 15% year on year, with category value share remaining strong at over 70% despite heavy competitor discounting.
While Nielsen data is based on only a small sample of stores, it also shows our offtake volume share has been held back by availability and declined by 1.5 points sequentially to 61.5%. We already observe our share on MSA data, which measures shipments from distributors to retail, recover to almost 66% in March on the limited flow-through I just mentioned.
With category offtake growing at around plus 30% to 35% while the leading brand is supply constrained, we expect ZYN offtake to gradually accelerate in the coming months as in-store availability improves and we reactivate commercial and marketing initiatives. We remain excited about the growth prospects of this dynamic category and its potential to switch legal-age consumers from cigarettes and other traditional forms of tobacco.
ZYN remains the only nicotine pouch product authorized by the FDA, and this includes all variants in both 3- and 6-milligram strengths currently commercialized in the US. As outlined at CAGNY, there is a large addressable market in the millions of legal-age nicotine users in the US, and we plan to engage more actively beyond our existing consumer base to other legal-age nicotine users.
Indeed, with strong latent demand and capacity expansion ahead of target, we now raise our shipment forecast to 800 million to 840 million cans for the year. With the outstanding efforts of our team on the ground, we continue to work on increasing capacity in our Kentucky facility.
Construction of our second US manufacturing site in Colorado is well underway, with production due to commence in early 2026. We remain, as we have been since entering the US, committed to investing in US manufacturing. The substantial investments we have made in the US are expected to continue to result in significant job creation and economic contribution to the country.
Outside the US, we continue to roll-out ZYN, leveraging our presence with IQOS and VEEV to drive awareness and trial with legal-age nicotine users. The total international nicotine pouch category is nascent in almost all geographies and stands at around half the size of the US in volume terms.
We are now in 38 markets globally following Q1 launches in the UAE and Colombia, and ultimately see all addressable markets as meaningful opportunities given the unique characteristics of the category. Within the plus 53% growth of our international pouch can volumes, shipments almost [trebled] outside of the Nordics, including promising momentum in European markets such as Austria, Switzerland, and the UK where we commenced a national key account roll-out.
In emerging markets, strong progress continues in Pakistan, Mexico, and South Africa. PMI Global Travel Retail is a notable standout, as it also increases global visibility and awareness of ZYN within our multicategory offering.
Finally, closing our smoke-free performance with e-vapor. VEEV plays an increasingly important role within our multicategory universe, with growing volumes and gross margins. Shipment volumes doubled year-on-year to 0.6 billion on an equivalent unit basis, driven by very good performance in Europe where the pod segment continued to grow strongly, partially at the expense of disposables given increased bans and restrictions for this format.
We observe increasing VEEV ONE adoption rates and low abandonment across key markets, which is testament to the quality and presentation of this premium product to legal-age consumers.
Turning to combustibles. Our business performed robustly in Q1 with organic net revenue growth of plus 3.8%, or closer to plus 7% excluding the Indonesia technical impact. This was driven by strong pricing of plus 8.3%, with notable contributions from Turkey, Poland, and Germany. With less favorable timing dynamics in H2, we continue to expect full-year combustible pricing of plus 5% to plus 6%.
The cigarette industry declined by 1.3% in Q1 due to growth in geographies where SFPs are nascent or not present, more than offset by accelerated cigarette declines elsewhere. Where SFPs are not permitted, such as in Turkey or India, we expect this divergence to continue, supported in some cases by demographic trends. Nonetheless, we continue to expect a low-single digit cigarette industry decline for the year.
Category share was strong, growing 0.4 points in Q1 partly due to positive market mix. Both Marlboro and our global brands portfolio reached all-time first quarter highs.
We continue to target broadly stable category share over time, with our main priorities being maximizing value and supporting the growth of smoke-free products. Most importantly, combustible organic gross profit continued to grow robustly at plus 5.3% following the recovery of 2024.
This brings me to our outlook for 2025. We delivered a very strong first quarter, including better-than-expected margins; and we remain confident we will achieve another year of superior growth. As such, we are reconfirming the currency-neutral growth outlook we provided in February despite a backdrop of increased uncertainty in the global macro-economic environment.
As a global company with broadly diversified production and a worldwide supplier network, including an established US manufacturing base, we believe we are well-positioned to mitigate potential supply chain challenges. While the situation is volatile, we do not currently anticipate a material impact on our business from recently introduced or discussed tariffs.
We expect a continuation of strong momentum from our smoke-free business, including the benefits of further multicategory deployment. As I explained, we are raising our forecast for US ZYN shipments to 800 million to 840 million cans. This further supports our forecast of plus 12% to plus 14% SFP shipment growth which incorporates unchanged strong growth assumptions for IQOS.
We also continue to expect total PMI organic net revenue growth in the range of plus 6% to plus 8%, organic operating income growth of plus 10.5% to plus 12.5%, and currency-neutral adjusted diluted EPS growth of plus 10.5% to plus 12.5%.
As announced in this morning’s press release, we are raising our 2025 adjusted diluted EPS forecast to $7.36 to $7.49. This now reflects plus 12% to plus 14% growth in dollar terms and includes a favorable estimated currency impact of $0.10 at prevailing exchange rates. This reflects recent strength in the euro, Japanese yen, and Russian ruble, partly offset by a stronger Swiss franc.
For Q2, we assume HTU shipment volumes of 37.5 billion to 38.5 billion, with another strong quarter of HTU-adjusted IMS growth of around plus 10%. For US ZYN, we expect shipments to be at a similar level to Q1, as trade restocking continues and offtake gradually accelerates.
We forecast adjusted diluted EPS of $1.80 to $1.85, including a favorable currency variance of $0.06 at prevailing rates. We expect a strong H1 overall, with organic net revenue growth around the high end of our target range for the full year, and organic OI growth slightly above.
With regard to our balance sheet, deleveraging remains a key priority. And we continue to target further reduction in 2025, placing us on track for our target ratio of around 2 times by the end of 2026.
We believe our growth profile is best in class within large-cap consumer goods, as shown by our three-year CAGR targets which we are well on track to meet or exceed. Adjusted diluted EPS growth in dollar terms is a key priority and, as demonstrated in 2024, we are committed to taking proactive steps to manage potential currency volatility, including through our hedging activities.
Behind the delivery of our growth lie the enormous efforts we have made to transform our business over the last 10 years and the continued drive towards our ambition to become substantially smoke-free. This quarter coincides with the publication of the sixth edition of our annual integrated report, which provides a comprehensive view of our company’s performance across both financial and non-financial dimensions.
Highlights include the important efforts and actions we are taking with regards to youth access prevention, as well as the progress we have made on our operational efficiency, strengthening our resilience, driving innovation, and ultimately future-proofing our business.
As explained in the report, our approach to sustainability is fundamentally business driven, with the objective of both sustaining and enhancing the growth of our smoke-free transformation to drive continued value creation. I would encourage anyone with an interest in how and why we are transforming to read it.
I will now conclude today’s presentation with some key messages. Following an excellent start to the year, we are on track for another year of strong performance in 2025. While no company is immune to macro-economic volatility, we believe we are well positioned to navigate external dynamics.
We have three powerful growth drivers, with pricing power and positive smoke-free category mix on top of volume growth, where we target our fifth consecutive year of expansion led by IQOS, ZYN, and VEEV. As we continue to invest strongly behind our smoke-free brands, these drivers are also profit-accretive. And combined with our proactive measures on pricing and cost, we have great confidence in sustainable adjusted diluted EPS growth in both currency-neutral and dollar terms.
Finally, we remain a highly cash-generative business with an unwavering commitment to our progressive dividend policy. We look forward to further rewarding our shareholders as our transformation delivers sustainable growth.
Thank you. We are now very happy to answer your questions.

Question and Answer Session

Emmanuel Babeau

(Operator Instructions) Bonnie Herzog, Goldman Sachs.

Bonnie Herzog

I had a few questions on ZYN. Could you maybe give us more color on the out-of-stock issues you might still be experiencing in the US? I know you touched on this, but then just curious how long you think it will take for retailers to rebuild their inventories.
And I know you raised your shipment guidance for ZYN for the year, but it does still imply that growth will decelerate year over year to around, I think, 35% for the rest of the year. This is at the low end of your range versus, I guess, the 53% you reported this quarter. So just hoping you could talk through the thinking behind this, maybe just the phasing.

Emmanuel Babeau

Sure, Bonnie. Happy to do that. So of course, we are facing a particular year in 2025 with ZYN in the US because it's going to be a mix of continuation of strong growth and strong consumer offtake growth.
Of course, when you look at the shipment, be careful. And I flagged that in my remarks because last year, we had clearly consumer offtake in Q1, which was much, much stronger than our shipment. That was the time when the consumer started to empty the shelves.
So we need to be cautious when we look at the shipment if they are now reflecting the consumer offtake and take that into account. And next to the strong growth that we expect from consumer offtake -- and we have a very dynamic category, 30% to 35% growth, despite the fact that the leader ZYN was constrained. We're going to add on top of that this replenishment, this restocking.
I'm not going to speculate on exactly what it is, but it's certainly a few tens of million can. And we have started because of this good performance on production that I explained to send more product to, first of all, wholesalers, distributors. And themselves, they're going to start to ship to retailers. So it's going to be a very gradual process.
There are still, of course, very, I would say, material situation of out of stock. We're going to continue the replenishment in the second quarter, maybe part of the third quarter as well. And we've been explaining that we explained -- we are expecting to be back to a normalized situation, if I may. Therefore, no more material out-of-stock situation in the third quarter of '25.
So in terms of shipment, that's going to be this profile through the year of and accelerating growth for our shipments. That's what we expect, which is going to reflect, first, the consumer effect that is going to accelerate.
And then, of course, replenishment impact, that is going to decrease as we fulfill this replenishment, if you want. So it's a particular profile, and the replenishment, if you want, to some extent, is going to hide the fact that there is a growth in the consumer offtake that we're going to experience through the year.

Bonnie Herzog

That's helpful. I appreciate it. And then just maybe a second question from me on margins.
You delivered robust margin expansion in the quarter. So how should we think about the drivers of continued margin expansion for the remaining of the year, I guess especially in the context of what you mentioned as it relates to continued SG&A growth and the investments, et cetera?
And then on the back of that, I know we've talked about this before. But how should we also think about the margin gap you're seeing between your combustible business and then smoke-free products today and then possibly key drivers of further expansion of that gap over the next couple of years?

Emmanuel Babeau

Look, Bonnie, obviously, we are very pleased with our margin expansion. That's something we are targeting for '25, and we are very positive about our expectation. We have a clear illustration in Q1 of the strong performance in terms of margin expansion.
Clearly, our smoke-free products are here driving this, first and foremost, margin expansion. You have an impressive 670 basis points organic expansion in Q1 for our smoke-free business. Don't take that as a reference for the full year, but that means that we are now above 70% gross margin rate for the smoke-free business.
It's 5 percentage points higher than combustible. So as we are growing, of course, very fast our smoke-free business and faster than combustible, that means that we are benefiting at the margin level of a very positive mix evolution. And we believe that the difference to '25 should stay between smoke-free and combustible.
I'm not saying it's going to stay exactly at the same level, but we're going to keep a very material difference between the two. And we're going to continue to benefit from this positive mix effect.
I think for the future, there are a number of drivers that will continue to play on the margin for our smoke-free portfolio. There is, of course, mix coming from ZYN. ZYN in the US is the best-in-class gross profit margin. So when we grow ZYN fast in the US, that has a positive impact.
You have all the scale impact that we are generating on IQOS. And if you look at the last two to three years, you've seen on a very consistent basis a gradual improvement of margin on IQOS. This is certainly magnified in the first quarter because we have a less sale of device.
Last year, we had big device sale in Japan as we were launching ILUMA i. So that is helping the margin. But fundamentally, we are benefiting from scale impact, productivity, and a better performance on device.
And then we have some pricing that we have seen 3% on consumable for our smoke-free business. So we are increasing price as well.
And last element, which is more marginal today, but we are also improving the margin on VEEV. So that it's also helping. So as you can see, we have many positive drivers behind our smoke-free business, and smoke-free business is the driver for -- or the first driver for margin improvement.

Operator

Matt Smith, Stifel.

Matt Smith

If we could first talk about the guidance outlook. With the strong first quarter and now the second quarter guidance, the first half EPS growth on a constant currency basis is a few points above the high end for your year outlook, can you talk about the factors in the second half that we should take consideration with the constant currency EPS growth outlook implied to be a couple of points below the full-year average by my math, just the shape of the year there?

Emmanuel Babeau

Sure, Matt. Happy to take that one. So yes, we are saying that we expect to be well positioned versus the overall bracket for the year in terms of revenue growth. We expect to be a bit above on OI. Now, these are the traditional difference that you can see during the year between H1 and H2.
You may have some comparison basis that can play. There is potentially some phasing on how we're going to position SG&A. So there is, here, nothing to be read, I think, in terms of change in the underlying business between H1 and H2.
These are more how a number of things are positioned in terms of shipment through the year in terms of investments. But I would say we expect a strong year through the -- as we go through the quarters.
And we've been flagging the fact, for instance, that we expect in some area an acceleration for IQOS in the second half in terms of IMS. But that's not going to necessarily translate into shipment as the phasing for shipment can be a bit different.
So again, I think we expect strong momentum through the year for our smoke-free portfolio. We've been flagging the fact that on combustible, we are positive in volume in Q1. But for the year, we expect a low single-digit decline. So that could mean that the second part of the year will have more negative volume for our combustible. But clearly, we expect strength through the year.

Matt Smith

As a follow-up, I wanted to talk about the IMS growth you referenced for IQOS. You had nice growth in the first quarter. I think it was above 9%. But if we look back to the fourth quarter, it was around 13%. Now, you're expecting a reacceleration to IMS in -- IQOS IMS growth across the remainder of 2025. So can you talk about some of the underlying benefits to IMS growth reaccelerating across the rest of 2025?

Emmanuel Babeau

Yeah. So indeed, 9.4% was in line with our expectations. They are -- and Europe was below the average. So there are always a turbulence coming from the flavor ban implementation in Europe. We believe that the impact will be lower in H2 as we go through annualization.
And therefore, we expect in H2 an acceleration, as I mentioned, in the IMS growth in the second half in Europe. But otherwise, we are expecting this 10% to 12% adjusted IMS growth through the year. So we expect overall a continuation of a nice double-digit growth.
Q4 was very strong after a few quarters that had been weaker last year, so we can have some phasing through the year. But after this Q1, which was in line with expectation, we expect continuation of growth in Europe, in Japan. And I took some time in my remarks to talk about the other market where we see also some very promising growth in several markets.

Operator

Eric Serotta, Morgan Stanley.

Eric Serotta

In terms of the full-year guidance, you did raise the ZYN shipment volumes. And obviously, that's a very high-margin product. You kept the constant currency EPS the same. You delivered some very, very robust margin expansion in the first half.
Are there any specific offsets that you could point to that caused you to reiterate the guidance rather than flow some more through to the full year? Or is it more of a factor that we're early in the year and there's obviously a lot of macro and geopolitical uncertainty?

Emmanuel Babeau

Thank you, Eric, for the question. So indeed, we were targeting a year of very strong growth and performance. And I think Q1 is flagging the fact that we are well on track to deliver a year of strong growth. So we are confirming that we expect a year of very strong growth across the board for PMI.
What we've seen in Q1 is indeed very assuring on the fact that we're going to deliver this strong year. We are raising the guidance volume for ZYN in the US by, an average, 20 million cans. So yes, it is a very profitable brand, but not to the extent to dramatically change the outlook for the year.
So I would say that goes into a scenario in which we are playing to give the guidance for the year. And obviously, after only one quarter and in this uncertain volatile environment, we need to, of course, be cautious and say this is the beginning of the year.
And we are happy to confirm the guidance. Again, I think Q1 is showing that we are well on track to deliver a very good 2025.

Eric Serotta

Great. And then a quick follow-up. How are you guys thinking about what the unconstrained growth -- for what the unconstrained offtake growth for ZYN theoretically looks like? Obviously, you can't observe it. You could estimate it.
But how are you thinking about how that evolves, where it is today and how it evolves as you get into the second half and next year where the business is obviously a lot larger than when you bought it? So really, you can't give a precise answer, but any color there would be helpful.

Emmanuel Babeau

Eric, frankly, we don't know, of course, what is the unconstrained demand because the demand is still constrained. So I'm not able to provide an answer.
What I can say is that certainly, as we are removing the limitation and the out-of-stock situation, we expect an acceleration in the consumer offtake. And we are very much encouraged by the very nice dynamism of the category, which show the appeal that we have for the consumer and all these legal-age nicotine users that are discovering the category and understand the benefits.
So we expect the acceleration. We're going to be gradually back to normal life because it's true. We've been mentioning that we had very limited commercial marketing activities. So we were trying to service the existing ZYN consumer, and we knew that it was not reasonable to try to acquire new consumers at that time that we could not serve and supply.
So obviously, there's also another leg of the growth in the coming quarter. And I guess that's certainly something you include in unconstrained them. But frankly, I don't want to speculate on what this unconstrained demand is going to be. We are expecting a gradual acceleration of the consumer uptake for ZYN in the coming months.

Eric Serotta

Fair enough. And then just one quick last one. You did cite the Nielsen data in terms of ZYN. Are you seeing different trends or diverging trends when you look at some of the non-track channels that you would have a better read on than we would?

Emmanuel Babeau

Well, I mean, I certainly don't want to say that Nielsen is not an interesting data point. But of course, it's 3,000 sales points. And in the universe, that probably is close to 200,000. And when you are an out of stock situation, you can create some distortion on the perception of the consumer offtake.
So I'm not able to say whether the 15% -- I mean, we know it's an estimate. What I was reporting is the MSA -- so the very nice acceleration towards the end of March of the sales from wholesaler and distributor to retailers, that's the other point that we have. But we don't have any other, I would say, reliable data we could share with you.
We can send in the market, the very strong underlying demand for ZYN. That's very clear. And I also flagged the fact that the consumer offtake -- so what Nielsen measured last year for first quarter than probably significantly higher than the 130 million can that we reported for the quarter -- the first quarter of 2024. So that was the basis on which you should apply the 15% if the 15% is accurate to have an idea of the consumer offtake today.

Operator

(Operator Instructions) Faham Baig, UBS.

Faham Baig

A couple of questions from me as well. Just coming back to the growth adds and the offtake, are you in a position to potentially share what the MSA data highlights is the growth rate for ZYN and how it really compares to this 30% to 35% growth you highlight for the category?
The second question, sticking with the US and IQOS. I just wanted to get your views on the recent movements at the CTP and how that impacts the timing of ILUMA's launch in the market or whether it does impact the timing of the launch would be helpful.
And the final question is really housekeeping. Net interest guidance for the year would be helpful.

Emmanuel Babeau

Sorry, I missed the last question, Faham..

Faham Baig

The net interest cost guidance for the year would be helpful, please.

Emmanuel Babeau

Yeah. So taking your question in the order, growth of the -- I think we said that the share was close to 66% on MSA in March. It's probably a growth close to 30%, but take that with a pinch of salt. I'm not sure I have a very precise data. But clearly, the MSA was showing the deceleration as more products was coming. So that's one thing.
On the new situation at the CTP and what it means for IQOS, no, it's too early to say. So we have nothing to report. And I don't know what is going to happen. I think we are still hoping for an efficient process to be put in place and for the FDA to comply with the mandate, which was to give answer after six months. But I have nothing at that stage new to report on this situation.
And on the net interest for the year, I think you have a performance in Q1. I don't have at that stage, nothing specific to tell you for the full year. We're not providing any additional data for the full year. But of course, we started well the year, nevertheless, with some positive incoming from mark-to-market on some of our hedging.

Operator

Thank you. I'm showing no further questions at this time. I'd like to turn it back to James Bushnell for closing remarks.

James Bushnell

Thank you. That concludes our call today. Please be aware that the script from the call is posted on our website for any of you that may have had some sound issues partway through the webcast broadcast.
Thank you very much for joining us. If you have any follow-up questions, please do contact the investor relations team. Thank you again and have a nice day.

Emmanuel Babeau

Thank you all and speak to you soon. Thank you.

Operator

This concludes today's conference call. Thank you for participating and you may now disconnect.