Philip Morris (PM) Poised Well on Pricing, Smoke-Free Strength
Philip Morris International Inc. PM has demonstrated solid resilience amid challenges on its path due to its robust pricing power. A focus on smoke-free alternatives as a response to consumers’ growing health consciousness has been helping the company stay aligned with the evolving trends.
Strength in Smoke-Free Products
PM has been making significant strides in transforming its business, acknowledging the change in consumer preferences toward reduced-risk products. Smoke-free products accounted for 36.2% of the company's total revenues in the third quarter of 2023. The company is well-placed to become a majority smoke-free company by 2025.
Toward this end, PM’s IQOS, a heat-not-burn device, counts among one of the leading RRPs in the industry. These next-generation devices are backed by substantial scientific insights and research. The company expects such advanced and high-quality products to aid adult smokers in switching from traditional cigarettes to smoke-free options.
Among other initiatives, Philip Morris became the majority owner of Swedish Match on Nov 11, 2022. The company witnessed impressive results from the Swedish Match business in the third quarter, driven by ZYN in the United States.
Revenues from smoke-free products (excluding Wellness and Healthcare) jumped 35.7% to $3,234 million (up 16.2% organically) in the third quarter of 2023. Total IQOS users at the end of the third quarter were estimated at roughly 27.4 million (including nearly 19.7 million who switched to IQOS and stopped smoking).
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Speaking of the Wellness and Healthcare category, revenues grew 26.3% to $75 million in the third quarter. In February 2021, Philip Morris revealed plans to generate at least $1 billion in annual net revenues from "Beyond Nicotine" products by 2025. The initiative leverages the company’s expertise in life sciences, inhalation technology and natural ingredients, among others. As part of the strategy, PM made three meaningful buyouts in the third quarter of 2021, including Vectura Group plc, Fertin Pharma A/S and OtiTopic. It consolidated these businesses to form the Wellness and Healthcare category on Mar 31, 2022.
Pricing Helps Counter Challenges
Philip Morris' ability to leverage robust pricing power has been providing some cushion against soft cigarette shipment volumes. The addictive nature of cigarettes allows the company to pass on higher prices to consumers, supporting revenues. Pricing is likely to remain a driver in the forthcoming periods as well.
Incidentally, Philip Morris has been witnessing low cigarette volumes. Cigarette volumes, in general, have been affected by consumers’ rising health consciousness and a shift to low-risk tobacco alternatives. Additionally, the impact of macroeconomic headwinds like inflation on Adult Tobacco Consumers’ disposable income has been affecting cigarette industry volumes. In the third quarter of 2023, Philip Morris’ cigarette shipment volumes dropped 0.5% to 161.1 billion units.
Apart from this, high costs are a concern. On its third-quarter earnings call, Philip Morris stated that it expects to make additional growth-oriented investments in 2023, including the commercialization of ILUMA. Though beneficial in the long run, these investments are likely to weigh on margins in the near term.
However, strong pricing and transformation toward a smoke-free future pave a solid path for PM’s growth. Shares of this Zacks Rank #3 (Hold) company have risen 2% in the past three months against the industry’s decline of 0.4%
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