Philip Morris International: Steadfast

“Our financial growth model is driving a continuous improvement in the quality of our business with smoke-free accretion and combustible resilience driving considerable bottom-line growth. We are well on track to meet or exceed our 3-year CAGR target, demonstrating our ability to deliver what we believe to be best-in-class CPG growth.” - Emmanuel Babeau, PMI CFO, Q2 2025 Remarks

Death, taxes, and investor panic after focus has been narrowed to a single quarterly metric. These are the three certainties of life. There is no escape.

If a company has been executing strongly, there is a tendency for onlookers to extend their expectations, eventually to a point beyond reach. When performance inevitably falls short, it can throw the entire narrative into question. For many, this is what happened following Philip Morris International’s Q2’25 release.

There is just one issue with such a perspective. The results, in total, were excellent, and full-year adjusted EPS guidance has been raised. It is fair to point out that part of the raise was due to an improvement in tax, but operations also contributed. Within those is the unmistakable strength of the combustibles portfolio, which still receives too little spotlight.

I have previously expressed doubt regarding Philip Morris International’s goals of deriving a majority of its net revenues from smoke-free products. It has never been a matter of doubting the smoke-free portfolio, but rather all to do with respecting the robustness of combustibles. While combustible pricing and gross profit growth in Q2’25 and H1’25 were moderately lower compared to the full-year performance seen in 2024, and management continues to provide reminders not to extrapolate such execution, each remains firmly above historical levels.

PMI’s shipped cigarette volumes declined by 1.5% in Q2’25. However, IQOS has continued to prove itself as well, with shipped volumes growing by 9.19% and 10.51% in Q2’25 and H1’25, respectively, resulting in aggregate shipped volumes increasing by 1.74% for the first half of 2025. We could contrast the finer points, such as differentials between shipped volumes and in-market sales, share movements within submarkets, and add in the astronomical growth rate of Veev, but none change the conclusion that the core engines of profits are humming.

Perhaps it’s the growth rate of the nicotine pouch category, perhaps it’s the vast untapped markets across the world, maybe it’s because ‘zyn’ is fun to say. No matter the reason, despite being far smaller than PMI’s two primary profit drivers, ZYN continues to receive the majority of focus. As far as Q2’25 results go, it was also the primary point of contention for many.

ZYN’s Q2’25 shipped volumes in the U.S. totalled 190 million cans. This was a sequential decrease from Q1’25, in which 202 million cans were shipped. While this was the first sequential drop occurring since Philip Morris acquired Swedish Match, it is not the first time such a drop has occurred. In Q4’20, US ZYN volumes measured 30.9 million, down from 32.3 million in the prior quarter. Swedish Match’s management explained the phenomenon clearly in its 2020 annual report:

The growth for ZYN was attributable to broader distribution as well as increased store velocities in both the initial launch markets in the West and the expansion markets in the rest of the US. On a sequential basis, relative to the third quarter, shipment volumes contracted somewhat, principally as a result of fewer delivery days and inventory adjustments at a larger distributor.

To alleviate additional concerns, management further stated:

Competition in the US nicotine pouch category is intensifying, but Swedish Match remains the clear leader and, to date, ZYN has demonstrated market share resilience in this rapidly growing sector.

Sure enough, that sequential volume decline proved to be a blip on the radar and was quickly forgotten as ZYN continued its march higher. When illustrated as a 12-month rolling figure, shipped volume growth appears unimpeded. Below, in red, you can barely see what the prior commotion was about. Today’s trailing 12-month volumes are up more than 500% from those of Q4’20.

Will Q2’25 prove to be another blip? Several points suggest so. Shipped volumes in Q1 were elevated as the company, with its increased production capacity, rushed to replenish stock. ZYN’s in-market sales have accelerated following the alleviation of production constraints and an increased flow through distribution. The nicotine pouch category continues to grow at a rapid pace in the United States. Yet, there remains more to consider. Last quarter, I stated:

But first, there are concerns affecting ZYN’s U.S. presence worth addressing immediately. I will apply the same disproportionate focus that the market generally provides, but there is a good chance you will feel inclined to label what I have to say as blasphemy.

ZYN isn’t it

ZYN isn’t it. It’s not the best product. That’s been the case for a very long time in European markets. It’s been true for a shorter time in the U.S., but that truth has recently been reinforced. Yet, when it comes to the U.S., there appears to be a widespread belief that ZYN is the best product on the market, and that newly forming trends, such as ZYN losing market share, are all to do with production capacity constraints that began last year, and that once channels fully normalize, ZYN’s complete dominance will resume.

While any given metric can be noisy on a quarter-by-quarter basis, I believe there are longer-term implications facing the trajectory of not just ZYN, but the nicotine pouch category as a whole, in the United States.