Philip Morris International: Centered

“Income growth exceeded our expectations, driving plus 10% adjusted OI growth and plus 16% adjusted diluted earnings per share growth to reach $1.96. International Smoke-Free delivered a striking performance with double-digit volume growth, mid-teens organic top line progression, and high-teens organic gross profit growth, or almost plus 30% in in dollar terms.” - Emmanuel Babeau, PMI CFO, Q1 2026 Remarks

This past week, Philip Morris International reported for Q1’26. Results aligned with my prior views, and, much like the brief update from Imperial Brands, left little in the way of surprise. Perhaps the rest of the reporting over the coming weeks will be rather dull.

Once again, combustibles impressed. Volumes were down by more than 5%, well above the comparable period last year, though set to moderate through the remainder of the year. Yet, pricing proved strong, at 8.5%, delivering gross profit growth of 9.8% (3.9%, organic). Again, we can say with confidence that the cigarette is not dead yet.

New reporting has led to everything ex-U.S., ex-combustibles being lumped into one, International Smoke-Free. Providing further perspective on the stellar performance in combustibles is to consider where the company continues to deploy the majority of its investment.

Q1’26 ISF revenue and gross profit growth measured 24.7% and 28.6%, respectively (15.8% and 19.4%, organic). This was on the back of strong volume growth and modest pricing. During the call, Emmanuel Babeau decided to remind the audience how stellar IQOS remains, driving the performance:

The biggest driver for our performance as combined is IQOS. I mean I don’t think you have any equivalent in the smoke space in the world to IQOS, this multibillion-dollar brand, I mean, much north of $10 billion. This is a unique proposition. This is a brand that has been consistently owning around 75% of the category…

There is some irony here. IQOS remains uniquely positioned, insulated by technological barriers that do not exist in other categories. The product has had its share of challenges and setbacks, but over the years has become a radical engine. In the last few years, PMI management stopped stressing that point to the same degree, instead placing greater emphasis on nicotine pouches, and specifically pouches in the United States. It is no surprise that IQOS is once again centered, given the challenges ZYN faces in the U.S. market.

Quite a lot of chatter followed the unsubstantiated Reuters article suggesting that the FDA was slowing down the pouch PMTA pilot program. I explored what a potentially static competitive environment would look like for each respective company, stating for PMI:

The unmistakable loser is Philip Morris International. This runs counter to common views predicated on the fact that PMI is the only other company with pouches authorized, and its authorized portfolio is broader than on! Plus. I do not believe that is the right angle. In April of last year, I wrote that ZYN was not the best product in the U.S. market, and I have continued to discuss the pressures the brand faces. Let me tell you, those pressures aren’t going away.

ZYN Ultra is a high-grade product, only surpassed overall qualitatively by the European variant of Velo. A slowdown, in which the two products are unlikely to be authorized at or near the same time, avoids a significant escalation in the promotional battles we have witnessed. However, I see PMI as unable to maintain its position in the United States without either 1) the introduction of ZYN Ultra or 2) the denial and subsequent removal of higher-quality, competing products. At some point, management’s messaging must change to more accurately reflect the challenge.

Interestingly, management still continues to tout ZYN as the premium leader, citing brand power. Yet, by trend, the figures show the continued rise in competitive pressures. ZYN’s offtake sales rose 10% in the quarter, though that growth lagged the category as a whole. Shipped volumes, revenues, and associated profits were all down markedly. The company’s prior reporting signaled a more pronounced spread between shipped volumes and offtake, reflecting channel movements occurring in late last year. However, the company’s own release provided foreshadowing (emphasis added in bold):

ZYN offtake volumes, as estimated by Nielsen, grew by 10%, notwithstanding an uneven competitive landscape where we do not yet have access to all of the most dynamic strength and flavor segments. As expected, distributor and trade inventory movements in both the current and prior year periods, and a challenging promotional comparison, led to a decline in volumes, net revenues and profit. Total smoke-free shipment volumes decreased by 21.2%, including a 23.5% decline in ZYN shipments to 2.3 billion pouches or 155 million cans. This reflects the aforementioned offtake growth when compared to our previously communicated estimate of an underlying Q1’25 base of approximately 160 million cans, and the anticipated normalization of channel inventories also flagged last quarter. We continue to invest behind the ZYN brand and in the capabilities that will support the long-term growth of our U.S. business. As we navigate a complex and dynamic regulatory environment, we are preparing to launch innovations in the coming months, including ZYN ULTRA, which remains under active FDA review as part of the nicotine pouch pilot program.

Despite multiple questions seeking a more substantial response, management remained tight-lipped during the call about exactly what the bolded section means. There are several interpretations, although it appears each path heads in the same direction.