Philip Morris International: Conquest

“Our financial results epitomize the strength of our strategy and the success of our transformation with underlying momentum across categories, bolstered by our proactive measures on pricing and cost additions” - Jacek Olczak, PMI CEO, Q4 2024 Call

2024 started with the Billy Idol-inspired chant of “More, more, more.” Philip Morris International was touting more volumes, more brand loyalists, and more market share. The company also faced more FX headwinds, the ailing Wellness & Healthcare segment, and numerous other pressures. Coverage throughout the year harmoniously covered the company’s product position (Q1), facilitating follow-through (Q2) on all fronts (Q3). Pressures did not entirely dissipate in Q4. Nor were they anticipated to. However, despite such pressures, the expectation for the company to deliver strong growth in real terms was met, leaving it primed to continue its conquest.

Walking the walk

PMI’s Oral business is not just talking the talk but walking the walk. But perhaps, given the rapid growth of nicotine pouches, it is more appropriate to refer to the segment’s pace as a sprint. That growth is all the more impressive since while certain volumes, such as snus in Sweden, are cannibalized by pouches, on a global level, moist snuff, snus, and other oral have remained roughly stable in the aggregate—while down 3.2% in Q4, non-pouch volumes only declined by .13% for the full year.

I jokingly said last quarter that if you had your head in the sand, you wouldn’t have noticed any of the fearmongering surrounding ZYN’s capacity constraints in the United States. You would have assumed everything was business as usual. Guidance on U.S. ZYN volumes for the entire year increased twice, from an initial 520 million to 560-580 million. The company delivered right above the top of the range at 581.

The caveat surrounding ZYN's delivery despite capacity constraints is the group’s noticeable loss of category value and volume share. I still believe it is worth questioning how well (or even if) the group will recoup ceded ground. This is especially true since, when asked about newly launched synthetic competitors during the Q4’24 Q&A, PMI’s CEO, Jacek Olczak, answered:

When it comes to your questions about the synthetic versus dry, so just to take it from a perspective, the way we look at the data in the U.S., for example, this whole new things which are coming into the market, there is quite a long list of different SKUs and the moist or others and the whole market -- that part of the market, why I'm not mistaking move year-on-year by barely 20 basis points. So in a scheme of these things, there's presumably a lot of dynamics on the weekly basis, but doesn't seem that it has any major tractions, et cetera. The insights which will have when we talk with the consumers, we see -- and obviously, when you read the consumer insight, it's not a pure mathematical accuracy and the exact number. But I think that moist product -- moist pouch products is more appealing to the moist snuff type of users, right, like Snus et cetera. While what we see in the marketplace that the dry product has more appeal towards the smokers and e-vapor or e-vapes. What is what I can tell you at this stage.

It is fair to assume that this references Imperial Brand’s zone and BAT’s Velo Plus. While Olczak dismisses ‘major traction,’ both products are gaining, and consumer reviews are overwhelmingly positive. Also, keep in mind that both of these brands are relatively nascent, and further considerations must be taken. Yes, zone faces a preliminary injunction, but as concluded in Altria’s full-year note, the obvious, low-risk route is rebadging the product to skirt the issue entirely. Velo Plus has been on the market for only several months and only a small fraction of 2024. More importantly, BAT has significantly greater resources to grow awareness of the brand relative to Imperial—Imperial’s playbook is not to take a significant share.

Many consumers have reviewed these products as superior to ZYN. But how much does that matter for Philip Morris International? As concluded in Q3’s note, fully recapturing share should not be the focus, nor is it necessary. The category is growing rapidly in the U.S.. ZYN is positioned at a far higher price—especially considering each can contains 15 pouches versus the competitor’s 20. The brand has built itself as somewhat of a cognitive referent to the category in the country. There are the levers of balancing pricing and volumes to deliver financial results, and with ZYN now being the first FDA-authorized product in the category (for all ZYN SKUs that exist in the market, mind you), there will be no lack of willingness on behalf of the parent to devote the resources necessary to achieve that balance. Considering the deceleration of category growth in the U.S. in prior quarters due to ZYN capacity constraints, it can even be argued that renormalization is a net benefit for all participants. This is not a winner-takes-all situation.

Philip Morris International expects 780-820 million can volumes in the U.S. in 2025. Using the midpoint, this would be a 37.6% jump from 2024 and, in nominal terms, 219 million extra cans—11.4% more than the nominal increase experienced in 2024 over 2023. While we often ‘ooh’ and ‘aah’ over charts depicting the growth rate in the United States, I wonder how long it will take for the same to occur for the group’s nicotine pouch growth outside of the United States. Year over year, nicotine pouch growth outside of the United States for the 2024 quarters measured 91.4%, 53.9%, 61.7%, and 93.8%, respectively—73.9% for the full year. Mind you, this is a total of 62.8 million cans, roughly the volumes generated in the United States on a trailing twelve-month basis somewhere between Q4’19 and Q1’20. But large things start small, and the number of new markets the product is launched in increases by the quarter—done so with the immense resources of PMI rather than a standalone Swedish Match.

The crown

BAT previously conceded its prior attempts could not match the premium value proposition of IQOS. Q3’s note declared that the heated tobacco category remained PMI’s hill to stand on top of. The remainder of the year provided solid progression despite headwinds such as the flavor ban in the EU, and now, while nascent and only made of a few second-hand and third-hand accounts, Altria’s SWIC piloting in the UK may be falling under what the company had hoped (while this may very well be disproven over time, the capsule design indeed defies the ritualistic familiarity of stick consumables). There is a natural discomfort in lacking the creativity to explain how and why the crown could be seized. So, as IQOS continues its ascent in existing markets, let’s revisit its foray into the United States.

Over time, management has reduced its chatter on the U.S. IQOS launch, matching previously curbed expectations. Citing several thousand signups on the waitlist and poking around in Austin, Texas, there is little traction, not that traction was the goal. Naturally, the company is (correctly) waiting to make a push until the Iluma variant receives a positive marketing determination from the FDA—an expectation set by the company for sometime halfway through 2025. Although a favorable outcome is more likely than not, what if that doesn’t occur? Expect an undetermined pause.

Assuming Iluma receives a positive determination, can PMI reach its ambitious goals of taking a sizable chunk of the U.S. market by 2030? I remain doubtful, despite the product’s virtuous qualities and would-be advantaged position. Rae Maile shared a similar view last year during our discussion on the Preferred Shares Podcast:

It's going to vary by market. It's going to vary by history. It's going to vary by income. And that will all apply as well. I mean, take the US and the idea of, you know, IQOS getting a 10 market share over time across the US market. Well, I can see it's going to work in Manhattan, and I'm sure it's going to be big in Atlanta, and I'm sure it'll be fine in California. Alabama? Maybe not. Maybe a slightly different demographic there. Might not be the brands that people necessarily want. And that's important. But I guess, I mean, part of it, you know, cigarettes have only been the dominant form of tobacco usage for, what, 130 years. Prior to that, it was pipes. These things do change, but the point about the cigarette was that it was cheap, it was easy to use without instruction, it was easy to light, easy to dispose of afterwards. And I guess this is on why is vaping taken off with disposable so much? Because disposable vapes are probably the closest thing to a cigarette we've ever had.

Considering that PMI’s management has continually touted their apprehensiveness toward vaping, instead prioritizing heat not burn and modern oral, due to the myriad of challenges spurred by illicit vapor, and lagging enforcement measures, there is no doubt that they are cognizant that IQOS will not only be contesting market share of combustible products. Pushing into a new market with a good product, though largely unknown to the consumers of that market, all while illicit vapor continues to boom, will be an uphill battle. But like discussions about ZYN share, aspirational goals do not need to be met to produce stellar results. It is right to point out that as PMI has no cigarette or vapor presence in the United States, converted users of those categories would prove purely incremental. The most lucrative market, by far, can provide a meaningful contribution for the group even if it only captures a fragment of the affluent.

Let’s not forget

While IQOS and ZYN get all the headlines, let’s not forget to appreciate the old, boring, oft-forgotten cigarette business. I will keep this portion short—not because the segment is uninteresting or unimportant, but because it is so spectacularly straightforward and rigid relative to the new categories.

In 2024, PMI’s cigarette volumes were slightly up year over year. In isolation, volume metrics are incomplete. They are also less relevant when considering volume declines in more lucrative markets and gains in less lucrative geographies. But it is the delivery, despite aggressive pricing, that has remained so impressive throughout the year, equating to a significant uplift in gross profit for the segment.

Further, as pointed out previously, this is remarkable because there is an innate assumption that as IQOS and other new products continue to grow, legacy products will be cannibalized faster. However, switching should not be assumed to be 1:1. And new products are not the only threat—growing black markets for cigarettes also weigh on would-be-reported industry volumes. 

Conquest

Toward the end of Philip Morris International’s Q4’24 presentation, the group asserted it was delivering best-in-class CPG performance. I see no counterargument. Over the last several years, numerous consumer product companies have taken pricing at rates significantly over the historical norms of their respective categories, and many have begun to face volume declines—a dynamic familiar to the tobacco industry but deeply unsettling elsewhere. In time, such actions will prove correct for some, while others must recalibrate sharply. But here? PMI delivers on every metric, translating scale advantage to margin improvement all while sustaining reinvestment in new categories that continue to win over consumers.

While its leverage ratios remain above many of the other nicotine basket constituents, PMI’s ability to grow its denominator of profits has begun to reduce its ratios meaningfully. For 2025, FX pressures will persist, although at a subdued rate courtesy of the hedging efforts and USD-derived revenues. Net revenue, adj. operating income, and adj. EPS have been guided to increase by 6-8%, 10.5-12.5%, and 7-9%, respectively. How demanding are such results? Below is a crude illustration using tamed net revenue growth rates, including a tepid rate for smoke-free in the Americas, a meaningless reduction in the underperforming Wellness and Healthcare segment, reflecting the sale of its Vectura subsidiary, sustained margin development, and the midpoint of the anticipated effective tax rate. Without much effort, this reaches exactly the lower bound of the provided adj. EPS range. Concerning recent events, the greatest disappointment has been the appreciation in share price. The market souring on the name before the resumption of material share repurchases would be a gift.

Thanks for reading. Enjoy this piece? Hit “♡ like” on the site and share it.

---

---

Questions or thoughts to add? Comment on the site or message me on Twitter.

Ownership Disclaimer

I own positions in Philip Morris International and other tobacco companies such as Altria, British American Tobacco, Scandinavian Tobacco Group, and Imperial Brands. I also own positions in Haypp Group, a major online retailer of reduced-risk nicotine products.

Disclaimer

This publication’s content is for entertainment and educational purposes only. I am not a licensed investment professional. Nothing produced under the Invariant brand should be thought of as investment advice. Do your own research. All content is subject to interpretation.

---

Tags: PM 0.00%↑ BTI 0.00%↑ MO 0.00%↑