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Philip Morris Shrugs Off U.S. IQOS Import Ban as Sales Soar Elsewhere

The global tobacco giant still has contingency plans, including moving manufacturing to the U.S.

Philip Morris International ( PM 1.17% ) suffered no ill effect from the import ban on its heated tobacco device IQOS into the U.S., as the cigarette giant's fourth-quarter results showed revenue and profits both beating expectations.

IQOS sales hit record levels elsewhere around the world, and traditional cigarette sales stabilized on easing of COVID-19 restrictions, leading Philip Morris to offer guidance well ahead of Wall Street forecasts.

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The cigarette company continues to maintain its commitment to a smoke-free future where electronic cigarettes like IQOS are the primary source for nicotine delivery. And despite not knowing whether it will be able to overcome the high hurdle the IQOS import ban set, CEO Jacek Olczak said: "We enter 2022 with strong fundamentals, underpinned by IQOS, and exciting innovation to come across our broader smoke-free product portfolio."

Stubbing out a big market opportunity

Fourth-quarter revenue of $8.1 billion was up 8.9% from last year, or 8.4% on an adjusted basis, as IQOS shipment volumes surged 17% to 25.4 billion units and combustible cigarette shipments rose 2.4% from the year-ago period (Corporate Event Data provided by Wall Street Horizon).

Even without the benefit of the U.S. market, IQOS market share rose one percentage point to 7.1%.

The heated tobacco device was banned from being imported into the U.S. after British American Tobacco ( BTI -0.14% ) sued Philip Morris before the U.S. International Trade Commission, which agreed that IQOS infringed on British American patents.

Philip Morris had an agreement with Altria ( MO 0.63% ) to market and sell IQOS in the U.S. after the device gained U.S. Food & Drug Administration approval, but as Altria was planning for a national rollout of the device, the ITC delivered the fatal blow to those plans. Although appeals of the decision are under way, it will be years before the matter is resolved.

British American Tobacco says the IQOS violated two patents it acquired when it bought Reynolds American. It charged that the device was using an earlier version of the current technology it developed for the heating blade of its glo device. The heating blade is a ceramic piece that heats the tobacco stick and monitors the temperature to keep it from burning. The ITC agreed and banned their import, leading Philip Morris to consider moving their manufacture to the U.S.

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Cigarettes are still a cash cow

Because the U.S. is considered the biggest market for reduced-risk products like IQOS, it's a severe blow to both Philip Morris and Altria that they're not able to be sold here. Altria, in particular, has no e-cigs of its own to sell, as it shut down their production in anticipation of selling the IQOS.

Fortunately, sales are taking off elsewhere. European Union jumped 35% to 7.8 billion units, while eastern Europe and east Asia and Australia were up more modestly at 8% and 7%, respectively.

Still, although IQOS is Philip Morris' future, combustible cigarettes are still its biggest cash generator. Where it had a total of 25.4 billion IQOS units shipped in the quarter, cigarettes were six times larger at 158 billion units.

Marlboro remains its biggest brand as well, shipping three times more than the next biggest, L&M. At over 62 billion units, Marlboro itself is 2.5 times bigger than the entire heated tobacco segment.

Still smoking

Philip Morris benefits from the addictive nature of cigarettes, which keeps its customers coming back for more despite routine price hikes several times a year. The overall number of smokers slowly dwindles, but the remainder are its core and they keep the tobacco company deeply profitable.

Still, Philip Morris continues to grow its smoke-free business and notes that total IQOS users at the end of the fourth quarter stood at approximately 21.2 million, of which about 15.3 million have switched to IQOS and completely stopped smoking.

That is a notable achievement, and as more governments realize the benefit of the reduced harm from e-cigs, Philip Morris still has a smoke-free world of opportunity open to it.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Rich Duprey owns Altria Group. The Motley Fool recommends British American Tobacco. The Motley Fool has a disclosure policy.

Post time: Apr-29-2022