March 2026: Fitch Affirms Philip Morris International at “A”. Outlook Stable
Fitch Ratings has affirmed Philip Morris International (PMI) Long-Term Issuer Default Rating (IDR) and senior unsecured long-term rating at “A”. The Outlook on the IDR is Stable. PMI’s “A” IDR is underpinned by its leading position in the global tobacco sector, as well as its relative size, strong product, brand and geographical diversification, complemented by leading smoke-free operations and supporting above-industry average growth. The rating also reflects PMI’s commitment to achieving further deleveraging towards 2.0x by 2026. Fitch-calculated 2025 EBITDA net leverage decreased to 2.6x in 2025 from a high of 3.3x in 2023 following the acquisition of Swedish Match.
Key Rating Drivers
– Strong Business Risk Profile: PMI’s ratings are anchored by its market-and-price leadership in the global tobacco industry (excluding the U.S. and China), supported by a diverse portfolio of leading tobacco and smoke-free products (SFP) brands in the countries in which it operates. PMI is implementing its SFP strategy and is the leading manufacturer in the heated tobacco segment complemented by a fast-growing nicotine pouch segment with a leading US market share. The IQOS launch in the U.S. should help PMI make progress towards its ambition of achieving two-thirds of net revenue from SFP by 2030.
– Above-Industry Growth: PMI’s operating performance for 2025 remained above the industry average, with organic revenue growth of 6.5% and adjusted operating income up 10.6% in constant currency terms, driven by strong SFP performance. 6%-8% organic revenue growth in 2026-2028, with a gradual improvement in the EBITDA margin to around 45% (2025: 42.6%) should translate into sustained healthy free cash flow (FCF) margins and deleveraging further toward 2x by end-2026. Fitch expects FCF margins between 5%-9% over 2026-2028, following 2.8% in 2025 due to a USD0.8 billion one-off German tax surcharge case payment and other extraordinary tax-related payments.
– Deleveraging Strengthens Credit Profile: PMI’s EBITDA net leverage of 2.6x is aligned with the median for “A” rating’s financial structure. It is notably lower than 2023’s 3.3x, following strong operating performance in US dollar terms. Fitch projects sustained robust operating performance to reduce leverage further to 2.0x by end-2027 and under 2x in 2028, indicating positive momentum for the rating. However, Fitch sees some risk that this deleveraging may take longer, due to the evolving foreign exchange impact in the current geopolitical climate, and possible effects from unforeseen regulatory changes in the tobacco industry.
– Financial Policy Key: PMI’s commitment to its stated financial policy is key to reducing leverage. Once PMI achieves its target of reaching near 2.0x net leverage, it could further strengthen its balance sheet by further reducing leverage to its pre-Swedish Match acquisition leverage range of 1.5-2.0x. Fitch believes PMI is likely to resume share buybacks from 2028, having paused them in 2022, while keeping leverage below 2x.
– US IQOS Launch Timing Uncertain: In 2025, PMI tested its older IQOS generation product in a small number of cities in the US. The company is still waiting for FDA approval for the new generation IQOS ILUMA device, which would enable a potential larger-scale launch. PMI has significant capability for a rapid sales ramp-up in the US, supported by Swedish Match’s existing platform, and it has a strong record of IQOS launches in other markets. Once launched, Fitch expects US revenue may help sustain IQOS low-teen volume sales growth. However, any significant contribution to profitability as unlikely before 2028, given the timescale needed to reach break-even.
– Regulatory Adaptation and Strength: The growth of PMI’s heated tobacco operations has been steady despite disruptions from the EU flavour ban. Its record of FDA authorisations underscores its capacity to adapt to regulations, providing a competitive advantage and a credit strength. The older generation IQOS device is the only inhalable SF nicotine product in the US to have received a Modified Risk Tobacco Product order from the FDA. PMI’s ZYN brand was also the first nicotine pouch authorised by the FDA in the US, underscoring PMI’s strong market position in the country.
Peer Analysis
PMI is the highest Fitch-rated issuer in the tobacco sector, supported by an industry-leading business risk profile that reflects its global scale, diversified brand portfolio, and leading position in SFP, in addition to its substantial geographical reach. PMI (A/Stable) has a higher rating than British American Tobacco (BAT; A-/Stable) – its closest peer in size, market position and brand portfolio – due to its more diversified net revenue. PMI’s SFP revenue portfolio contribution to net sales reached 42% in 2025, much higher than BAT’s 18%. The company had similar leverage at about 2.6x in 2025, although we anticipate PMI’s leverage to return to 2x from 2027 while BAT’s deleveraging is likely to be more modest and reach 2.5x, further supporting the difference in ratings.
Compared with Imperial Brands (BBB/Stable), PMI benefits from larger scale and greater geographic and product diversification, including greater exposure to SFP. Fitch rates PMI two notches higher than Altria Group (BBB+/Stable), which is mainly due to the latter’s narrower business risk profile and sole concentration on the US.
Fitch’s Key Rating-Case Assumptions
– Revenue growth (at constant currecy): 6% in 2026 and around 7% over 2027-2028; Russian operations not deconsolidated
– FX: 1% tailwind on revenue and operating income in 2026 and a modest 0.5% headwind in 2027
– EBITDA margin: gradually trending to 45% by 2028, supported by an anticipated increase in profitability amid growing SFP contribution to sales and profit
– Moderate net working capital outflows in 2026-2028
– CAPEX: $1.5 billion in 2026, normalising at USD1.3 billion in 2027-2028
– Annual dividend growth: 8%-9% in 2026-2028
– Share buybacks: $1 billion in 2028 subject to the net leverage target of around 2.0x
– No adjustments made to the Standalone Credit Profile (SCP) as a result of Corporate Rating Tool (CRT) assessment, resulting in an IDR of “A”
Rating Sensitivities
– Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade: Sluggish organic growth and worse-than-expected progress in SFP revenue and profitability, preventing operating EBITDA from growing in low single digits; Net EBITDA leverage sustained above 2.5x; Cash flow from operations less capex below 20% of total debt on a sustained basis; FCF margin consistently below 3%
– Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade: SFPs maintaining good momentum and supporting mid-to high single-digit organic annual revenue and operating income growth; Net EBITDA leverage sustainably below 2.0x supported by restated longer-term financial policy; FCF margin above 5% on a sustained basis
Liquidity and Debt Structure
PMI had $4.9 billion of cash at end-2025, $2.5 billion and $2 billion currently available under multi-year revolving credit facilities due in 2028 and 2031, respectively, and €1.5 billion available revolving credit facility extended to 2029. Fitch projects positive FCF margins in the mid-single digits for 2026. Fitch views this as a comfortable buffer for PMI’s 2026 bond maturities, which were around $3.7 billion at end-2025 and around $1.3 billion in March 2026.
April 2025: S&P Global revises up Philip Morris International’s Outlook to Positive
S&P Global Ratings revised Philip Morris International (PMI)’s outlook to Positive from Stable, while affirming its “A-/A-2” long/short-term issuer credit ratings and “A-” long-term issue level ratings on PMI’s senior unsecured debt instruments. The positive outlook reflects the possibility that S&P could upgrade PMI within the next 12-24 months if credit metrics continue to improve, such as adjusted debt to EBITDA close to 2.0x, and if the positive business momentum is sustained, with a consistent financial policy.
Key Points Noted:
– PMI outperformed S&P’s FY24 base case, with discretionary cash flow (DCF) reaching $3.5 billion ($1.3 billion expected) and S&P-adjusted net debt to EBITDA of 2.8x (3.0x expected). Cash flow growth was notably supported by a broad-based growth and EBITDA margin expansion of 220 basis points led by the highly profitable smoke-free product portfolio boosted by the successful integration of Swedish Match acquisition.
– S&P forecasts PMI to generate positive DCF annually at about $1 billion in 2025 and ~$3 billion in 2026, which together with a supportive financial policy should enable PMI to reach adjusted debt to EBITDA of about 2.5x in 2025 and close to 2.0x by 2026.
– S&P’s base-case forecasts for 2025 and 2026 indicate continued adjusted EBITDA growth to $17 billion in 2025 and $19 billion in 2026, underpinned by the strong business momentum in smoke-free products combined with resilient combustible cigarette product portfolio. Strong momentum is driven by the ongoing capacity expansion and category-led growth for ZYN nicotine pouches in the U.S. and the IQOS franchise-led growth outside the U.S.
Rating Summary:
The rating action reflects PMI’s stronger-than-expected performance in fiscal 2024 with material improvement in profitability with strong positive DCF, translating into adjusted debt to EBITDA of 2.8x, with strong momentum into 2025-2026. PMI reported overall revenue growth of about 8% in 2024, in line with S&P’s base case. Organic revenue growth stood close to 10%, marking an acceleration from 7.5% average over 2021-2023. This was led by very strong growth of 16.7% in the smoke-free product portfolio that reached about 39.0% of total revenues in 2024, led by the ZYN nicotine pouch brand and the IQOS franchise in the heat-not-burn category. ZYN growth is gathering momentum in the increasing nicotine pouch category in the U.S. where market share (66.0% volume and 72.4% value share at end-2024) has stabilized and improved sequentially over the course of 2024 as production capacity increased, with ongoing international rollouts in select countries (up to 37 global markets at end-2024, from 28 in 2023).
In the heated tobacco units (HTU) category, IQOS’ estimated total number of users increased to 32.2 million, an increase of 3.4 million, many of which quit smoking. In Japan, IQOS’ largest end market, smoke-free products that make up the HTU category reached 47% of the total tobacco industry. The company is also increasing its price-point coverage in the HTU category through rollout of licensed lil smoke-free tobacco units from South Korea-based Korea Tobacco & Ginseng Corp. (KT&G), which became available in 30 markets as of year-end 2024.
Outside the smoke-free product portfolio, the combustibles cigarette portfolio (about 61.0% of total revenues) reported about 6.0% organic revenue growth with volumes growing about 0.6%, mainly in emerging markets (Turkiye, India, Brazil, and Vietnam), with further contribution from pricing. As a result of these developments, and notably the very strong revenue growth from the highly profitable smoke-free product portfolio, the S&P-adjusted EBITDA margin continued to improve and reached 42.1% (from 39.9% in 2023). Strong margin improvement and reversal of working capital outflows from 2023 helped generate record high free operating cash flow (FOCF) of $11.7 billion which translated into $3.5 billion DCF (after dividends) that helped reduce debt leverage strongly (from 3.5x in 2023 to 2.8x in 2024).
S&P forecasts that PMI will maintain strong revenue growth of 8%-9% annually in 2025-2026 thanks to further growth in the smoke-free product portfolio, with increasing production capacity for ZYN in the U.S., supporting debt reduction prospects toward 2.5x in 2025 and close to 2.0x by the end of 2026. From a regional perspective, S&P assumes the Americas region (the U.S., Canada, and Latin America; together 12% of total 2024 revenues) will continue to drive the strong growth, aided by increasing production capacities for ZYN in the U.S. (-from the 581 million cans shipment in 2024 to expected 780 million-820 million in 2025). Overall category growth rates boosted ZYN growth prospects in the U.S., as smokers continue to switch from combustible cigarettes. ZYN growth prospects should also receive boost from the recent U.S. FDA decision to authorize 20 varieties of the product. PMI is investing in capital expenditure (CAPEX), which S&P projects to remain relatively high for historical standards at about $1.5 billion in 2025 and $1.4 billion in 2026, with the new greenfield site in Aurora (Colorado) coming online in early 2026.
Outside the U.S., ZYN’s rollout in additional markets should supplement the IQOS franchise’s ongoing growth with the continued conversion of smokers. To a lesser extent, growth is further supported by the increasing, but still very nascent for PMI, VEEV vaping franchise (mainly in select European countries). Within the combustible cigarettes, S&P assumes performance to remain resilient, underpinned by the top-selling global brand Marlboro with broad price-point coverage from other brands, with overall revenue growth remaining in the 5%-6% range. This assumes stable-to-slight decline in volumes owing to structural declining trend in developed markets offset by pricing, mainly driven by excise duty increases.
These dynamics, alongside ongoing cost efficiency measures through which PMI hopes to achieve $2 billion in savings over 2024-2026 ($750 million achieved in 2024), should help support ongoing margin improvement toward the 43% threshold in the next 12-24 months. S&P forecasts weaker FOCF in 2025 of about $9.5 billion, driven in part by the one-off effect of a Germany surcharge tax settlement of about $800 million, before rebounding toward $11.5 billion-$12 billion in 2026. That said, these levels still provide comfortable coverage of dividends, such that S&P projects DCF to remain strongly positive at close to $1 billion in 2025 and about $3 billion in 2026. S&P therefore expects adjusted debt to EBITDA reducing to 2.5x-2.6x in 2025 and close to 2.0x in 2026.
S&P believed that PMI will pursue a consistent financial policy to reach its publicly stated target of reported net debt to EBITDA of 2.0x (company-reported) by 2026, translating into S&P-adjusted debt leverage of close to 2.0x. This is about four years since the completion of its historical debt-funded acquisition of Swedish Match for about $16 billion in late 2022. PMI’s stated target debt-to-EBITDA metric of 2.0x (about 2.7x at end-2024) translates into about 2.1x-2.2x in S&P adjusted terms. At the time of Swedish Match’s acquisition, the company has paused its three-year target spending share buyback program of $5 billion-$7 billion (about $1 billion completed in 2021-2022). The company has also stated a target of reducing its dividend payout ratio over time toward 75% of adjusted diluted earnings per share, from as high as 90%+ historically. In 2025-26 forecasts, S&P factors in overall dividends of about $8.5 billion in 2025 (from $8.2 billion in 2024), rising toward $9 billion in 2026, with no share buybacks and acquisitions. Based on current trends, S&P anticipates that the company will hit its target net leverage by 2026. S&P sees limited acquisition risk in the near to medium term, given there is no further obvious targets, such as Swedish Match, to help accelerate the company’s aspiration for over two-thirds of its revenue generation from smoke-free products by 2030. Therefore, S&P anticipates the company to focus on organic growth investments, and hope for positive regulatory developments across end markets, which vary in terms of attitudes toward smoke-free products compared with combustible cigarettes.
S&P does not currently include upside potential to its forecasts from 2026 onward from possible pre-marketing authorization of IQOS ILUMA in the U.S., which the company still hopes to achieve in the second half of 2025. The approval would mark a strong acceleration of growth opportunity for PMI in the U.S., which is a market that has historically been dominated by vaping products in the smoke-free category. PMI has conducted pilot tests in select cities, including Austin (Texas), with positive feedback from key opinion leaders and adult smokers. S&P thinks the company will deploy similar tactics like with other markets in the past and will target large urban areas, which provides easier access to prospective consumers, targeting existing adult smokers and helping accelerate switching to smoke-free products. Additional growth could come over time from cannibalizing on other categories, notably vaping, leveraging on poly usage options. In addition, PMI could also pursue a multi-tier price system to capture value-share opportunities over time like it did in Japan and Europe. In the event of IQOS ILUMA’s approval in the U.S., S&P sees potential for considerable acceleration of topline and profit growth over time from 2026 onward. S&P is yet to incorporate this in its forecasts given uncertainty on approval and delays in such decisions observed, as the overall tobacco sector is heavily regulated across end markets.
The recent agreed tobacco settlement case in Canada is overall credit-neutral for PMI, but importantly it removed potential downside risk to base case due to litigation. On March 6, 2025, the Ontario Superior Court of Justice announced its decision to approve a comprehensive settlement plan covering all pending tobacco-related claims, including all smoking and health lawsuits in Canada brought against codefendants Rothmans, Benson & Hedges (RBH, a subsidiary of PMI); Imperial Tobacco Canada (ITCAN, a subsidiary of BAT); and JTI-Macdonald (a subsidiary of JT). Under the approved plans, the three defendants will pay a total of Canadian dollar (C$) 32.5 billion in aggregate over the course of the settlement period to the claimants to settle all pending claims. Settlement payments (of which the allocation was agreed between the three codefendants) would be funded firstly by cash on hand at the local subsidiaries’ levels, with the court allowing codefendants to retain C$750 million of cash balances for general corporate purposes, which will solely be at RBH. Secondly, the settlements will be funded by future annual cash payments calculated as a percentage (initially 85% to gradually decline to 70%) of each companies’ annual net after-tax income from the sale of cigarettes in Canada until the total amount reaches C$32.5 billion in aggregate across the three companies. The future profits generated from alternative products (such as vaping, heat-not-burn, and nicotine pouches) are excluded from the settlement. S&P’s credit metrics for PMI have already incorporated the financial effect of the approved legal settlement, as the company fully deconsolidated its Canada-based subsidiary in the first quarter 2019, while anticipating it may be keeping it deconsolidated under U.S. generally accepted accounting principles. S&P does not adjust its debt metrics given the liabilities from the settlement charges will be fully funded by the Canadian combustible cigarettes portfolio and notes that the Canadian operations as a whole are relatively modest to PMI total business (about 2% of total revenues with associated liabilities representing less than 10% of total adjusted debt by S&P’s estimates).
The positive outlook reflects the possibility that S&P could upgrade PMI’s ratings within the next 12-24 months if the current positive business momentum in the large smoke-free product portfolio, its ability to maintain high cash conversion in the cigarettes business enables it together with a consistent financial policy to a steady debt deleveraging by end of 2026.
S&P could revise the outlook to stable, if, contrary to the current base case, PMI is not able to deleverage further from current levels, such that adjusted debt to EBITDA remains comfortably in the 2.0x-3.0x range, with no prospect for further improvement over the next 12-24 months. This would most likely stem from a lost growth momentum in the smoke-free product portfolio, for example due to regulatory setbacks or increased competition across key categories (nicotine pouches or heat-not-burn) and markets (the U.S. or Europe) as well as strong decline in the cigarettes business not fully offset by price hikes, that would derail the company’s ability to sustain strong positive DCF. This is because PMI has limited flexibility on its large dividend distributions. Alternatively, this could also occur from an unexpected shift in the company’s financial policy, and particularly the prominent rise in discretionary spending, such as a material step-up in shareholder remuneration or a very large debt-funded acquisition.
S&P could raise the rating within the next 12-24 months if the company sustains strong positive DCF in line with the base case, supporting meaningful debt reduction with adjusted debt to EBITDA of close to 2.0x, in line with its financial policy targets. This would materialize if the company sustained the current strong profitable growth of the smoke-free product portfolio and a stable combustible portfolio business. In addition, under such a scenario the company would also keep a consistent approach to shareholder remuneration with limited acquisition spending.
March 2025: Fitch Ratings upgrades Philip Morris International’s outlook from Negative to Stable
Fitch Ratings revised Philip Morris International (PMI)’s outlook to Stable from Negative, while affirming its long-term issuer default rating (IDR) and senior unsecured long-term rating at “A”. In November 2023, Fitch lowered PMI’s outlook from Stable to Negative.
Fitch notes that the revision of outlook reflects meaningful progress in deleveraging towards its target of 2x net debt/ EBITDA by 2026 and cash flow generation recovery in 2024. Fitch anticipates PMI’s net EBITDA leverage to fall to 2.5x by end-2025 from 2.8x in 2024 and strong positive free cash flow (FCF) margins over 2025-2028. PMI’s “”A” rating is underpinned by its leading size in the global tobacco sector, as well as its strong product, brand and geographical diversification. The rating also reflects PMI’s commitment to achieving its 2026 net leverage target which was affected by the Swedish Match (SM) acquisition.
Key rating drivers:
– Deleveraging supports Stable outlook: PMI’s Fitch-calculated 2024 EBITDA net leverage of 2.8x, although still outside the ‘”A” rating category, is notably lower than 2023’s 3.3x and below the anticipated 3x, following strong operating performance in US$ terms. Fitch projects sustained robust operating performance as the scale of smoke-free products (SFP) expands and additional cost efficiencies are realised, reducing leverage further to 2.5x by end-2025 and 2.0x by end-2026, aligning with PMI’s “‘A”‘ rating category.
– Financial Policy is key: PMI’s commitment to its stated financial policy remains key to reducing leverage under 2x. Progress in deleveraging is supported by further profitability recovery in 2025 and partly aided by the announced $2 billion cost-efficiency plan for 2024-2026, of which $750 million was achieved in 2024. However, PMI’s focus on large progressive dividend distributions materially limits available cash flow to reduce debt. Fitch believes PMI is likely to resume share buyback from 2027, while keeping leverage below 2x.
– Above-industry growth: PMI’s 2024 operating performance was strong, with organic revenue growth of 9.8% and adjusted operating income of 14.9% in constant FX, driven by strong SFP performance. 7%-8% organic revenue growth in 2025-2028, with a gradual improvement in EBITDA margin to above 45% (2024: 41%) should translate into sustained healthy FCF margins and deleveraging toward 2x by end-2026. FCF margins of over 7% from 2026, following low single digits anticipated in 2025 due to a $0.8 billion one-off German tax surcharge case payment and other extraordinary tax-related payments.
– US IQOS ILUMA launch in the US is uncertain: PMI is underway with a limited city test of IQOS3 in the US. FDA approval is expected in 2H25 for the new generation IQOS ILUMA device for a potential larger-scale launch. PMI has significant capability for a rapid sales ramp-up in the US, supported by SM’s existing platform, while it has a strong record of IQOS launches in other markets and leading SFP market shares in most countries. However, Fitch does not include any upside in its forecast as any significant contribution to profitability is unlikely before 2027.
– Regulatory adaptation and strength: The growth of PMI’s heated tobacco segment has been resilient despite disruptions from the EU flavour ban. Its record of FDA authorisations underscores its capacity to adapt to regulations, providing a competitive advantage and serving as a credit strength. The older generation IQOS device is the only inhalable SF nicotine product in the US to have received a modified risk tobacco product order from the FDA. The recent FDA authorisation of all ZYN nicotine pouch products positions the brand as the first authorised nicotine pouch in the US, underscoring PMI’s strong market position.
– Strong business risk profile: PMI’s ratings are anchored in its market-and-price leadership in the global tobacco industry (excluding the US and China), supported by a diverse portfolio of leading tobacco and SF brands in the countries in which it operates. PMI is also implementing its SFP strategy and is the leading manufacturer in the heated tobacco segment. Its acquisition of SM (ZYN brand) and the IQOS launch in the US will help PMI make progress towards its new target of achieving two-thirds of net revenue from SF products by 2030.
Peer Analysis
PMI is the highest Fitch-rated issuer in the tobacco sector, supported by an industry-leading business risk profile that reflects its global scale, diversified brand portfolio, and leading position in SFP, in addition to its substantial geographical reach. Financial leverage, which was previously a key differentiator between European peer British American Tobacco (BAT; BBB+/Stable) – its closest peer in size, market position and brand portfolio – and PMI was at a similar level for 2024 at around 2.8x. However, Fitch anticipates PMI’s leverage to be significantly lower than that of BAT by end-2025. PMI’s more diversified net revenues also support a higher rating at equivalent leverage. BAT’s SFP portfolio contribution to net sales was at 13% in 2024 versus 39% for PMI.
Compared with Imperial Brands (BBB/Stable), PMI benefits from larger scale and greater geographic and product diversification, including a greater exposure to SFP products. Fitch rates PMI three notches higher than Altria Group (BBB/Stable), which is mainly explained by the latter’s narrower business risk profile and sole concentration on the US.
Key Assumptions
– Revenue in constant FX to grow 7% in 2025 and 8% on average over the 2026-2027 period (no deconsolidation of Russian operations)
– FX fluctuations to erode revenue and operating income by 2.5% and 3% in 2025, respectively
– EBITDA margin gradually trending above 45% by 2028, supported by an anticipated increase in profitability amid growing SFP contribution to sales and profit, as well as the remaining 2024-2026 efficiency programme targeting $1.2 billion of savings and efficiency gains
– Moderate net working capital outflows in 2025, and turning to moderate inflows from 2026
– CAPEX of $1.5 billion in 2025, before gradually declining to $1.1 billion by 2028
– Annual dividend growth of 4%-4.5% in 2026-2028
– Annual share buybacks of USD1 billion in 2027 and USD1.5 billion in 2028, subject to the net leverage target of around 2.0x
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
– Lack of visibility over commitment to net EBITDA leverage target of around 2x by end-2026
– Cash flow from operations less capex below 18% of total debt on a sustained basis
– Sluggish organic growth and worse-than-expected progress in SFP revenue and profitability, preventing operating EBITDA from growing in low single digits
– FCF margin consistently below 2%
– EBITDA interest coverage below 10x.
Fitch does not foresee an upgrade in PMI’s rating over the four-year rating horizon. An upgrade would require a change in the financial policy leading to: net leverage falling below 1.5x EBITDA on a sustained basis, FCF margin above 4% on a sustained basis, SFPs maintaining good momentum and supporting single-digit organic annual revenue growth for PMI.
Liquidity and Debt Structure
PMI had $4.2 billion cash (at end-2024), $4.5 billion credit under the multi-year Revolving Credit Facilities (RCF; due in 2027-2028) and €1.5 billion credit under the 3+1+1 year RCF. Fitch projects positive FCF margins in the low single digits for 2025 – which provides a comfortable buffer for PMI’s bond maturities of around $3.5 billion in 2025.
October 2024: Fitch sees neutral impact for PMI and BAT from the Canadian Settlement
Fitch states that the proposed resolution of tobacco product-related claims and litigation in Canada will be rating neutral for Philip Morris International (PMI, rating: A/Negative) and British American Tobacco (BAT, rating: BBB+/Stable) as the Credit Agency already assumes no value remaining in the Canadian operations of either companies and considers both companies without the assets and cashflows of Canadian subsidiaries1. To read more about the Canadian settlement proposal: Tobacco: Canadian Settlement
November 2023: Fitch Ratings lowers Philip Morris International’s outlook from Stable to Negative
Fitch Ratings revises the outlook on Philip Morris International’s (PMI) long-term Issuer Default Rating (IDR) from Stable to Negative while affirming the IDR and senior unsecured long-term rating at “A”2. The Negative outlook reflects the deleveraging (post-Swedish Match acquisition) taking longer than previously expected and uncertainty around the timing and contribution of the launch of IQOS ILUMA in the US, pending FDA approval. Moreover, a temporary reduction in free cash flow (FCF) in 2023-2024, coupled with a progressive dividend policy, limits deleveraging to 2.5x by end-2025 (vs. the previous estimate of under 2.0x). Fitch states that PMI’s publicly stated financial policy leaves no headroom for operating underperformance as the Company aims to return to around 2x leverage in 2026.
Key rating drivers are:
– Heightened leverage until 2026: Fitch-calculated 2023 net EBITDA leverage is at 3.1x after ~US$16 billion debt-funded acquisition of Swedish Match. This is outside the “A” rating category, and Fitch projects PMI’s net leverage will only fall to the pre-acquisition level of below 2.0x after 2026. PMI’s ability to reduce debt is hampered by weak 2023/24 FCF generation (- driven by inflationary pressures, currency headwinds, increased interest payments) and the uncertain outcome of the German heated tobacco tax surcharge.
– Financial policy key to deleveraging: Large progressive dividend distributions, coupled with moderate operational execution risks (e.g. increasing the contribution from Reduced Risk Products and recovering profitability margins aided by the announced US$2 billion cost-efficiency plan in 2024-2026), could materially limit cash flow available to reduce debt. The absence of clear deleveraging toward 2.5x in the next 12-18 months will lead to a downgrade.
– Weak FCF in 2023-2024: Fitch estimates neutral to negative FCF generation in 2023-2024, which will significantly constrain the deleveraging prospects. Due to a combination of large progressive dividend distributions, FX volatility and expected negative working capital, Fitch expects PMI’s debt to remain above US$46 billion at the end of 2024. Fitch only expects a meaningful deleveraging from 2025, with Fitch-calculated FCF margins projected to return to healthy 5%-7% levels. Inability to restore FCF to the projected levels, which in turn will impact the deleveraging pace, will lead to a downgrade.
– US IQOS ILUMA launch uncertain: Timing on the IQOS ILUMA PMTA (prerequisite for at-scale IQOS launch in the US) is uncertain and Fitch views a significant contribution to profitability (from IQOS launch in the US) as unlikely before 2027.
PMI is the highest Fitch-rated issuer in the tobacco sector, supported by an industry-leading business risk profile that reflects its global scale, diversified brand portfolio, and leading position in RRPs, in addition to its substantial geographical reach. Financial leverage, which was previously a key differentiator between European peer British American Tobacco plc (BAT; BBB/Positive) and PMI, its closest peer in size, market position and brand portfolio, is now projected at a similar level for 2023 at around 3x. However, Fitch anticipates PMI’s leverage will be significantly lower than that of BAT by end-2025. PMI’s more diversified net revenues also support a higher rating at equivalent leverage. BAT’s RPP portfolio contribution to net sales is anticipated at 13% in FY23 vs. above 36% for PMI. Compared with Imperial Brands PLC (BBB/Stable), PMI benefits from larger scale and greater geographic and product diversification, including greater exposure to RRP products. Fitch rates PMI three notches higher than Altria Group, Inc (BBB/Stable), which is mainly explained by the latter’s narrower business risk profile and sole concentration on the US.
Key Assumptions:
– Constant currency revenue growth of 14.7% in 2023; average of 7.7% over 2024-2026
– EBITDA margin gradually trending towards 44% by 2026, supported by an anticipated increase in profitability amid growing RRP contribution to sales and profit, as well as its 2024-2026 efficiency programme targeting US$2 billion of savings and efficiency gains
– Average 1.5% of net working capital to net sales over 2023-2026
– Capex of US$1.3 billion in 2023, and 2024 declining to US$1.1 billion by 2026
– Annual dividend growth of 2.5%
– No further share buybacks in 2023-2026
Factors that could, individually or collectively, lead to positive rating action/upgrade (- no upgrade foreseen over the 4-year rating horizon):
– Net leverage falling below 1.5x EBITDA (2022: 3.1x) on a sustained basis
– FCF margin above 4% (2022: 3.1%)
– RRPs maintaining good momentum and supporting annual single-digit organic growth for PMI
– Outlook could be revised to Stable on clear demonstration of financial policy commitment supporting net EBITDA deleveraging toward 2.5x in the next 12-18 months and a positive FCF margin by end-2024
Factors that could, individually or collectively, lead to negative rating action/downgrade:
– Lack of visibility to financial policy commitment with net EBITDA leverage less then 2x after 2025
– Cash flow from operations less capex sustainably below 18% of total debt
– Sluggish organic growth and worse-than-expected progress in RRP revenue and profitability, preventing operating EBITDA from growing at least in low single digits
– FCF margin consistently below 2%
– EBITDA interest coverage below 10x.
At end-September 2023, PMI reported US$3.2 billion of cash with US$4.5 billion available under multi-year revolving credit facilities due 2027-2028 and US$1.8 billion available under the 364-day revolving credit facility. Fitch views this as an appropriate buffer compared with PMI’s around US$4.5 billion of bonds due 2024. From 2025, Fitch expects liquidity to be supported by projected positive FCF.
Moody’s: November 2023
Moody’s affirms Philip Morris International’s A2 long-term issuer and senior unsecured debt ratings3. The outlook remains Stable.
Moody’s notes that
– PMI is making good strategic progress in smoke-free products (now more than 35% of revenues)
– Strong pricing power is more than offsetting the long-term systemic volume decline in combustibles
– Growth is particularly strong for ZYN nicotine pouches (providing a strong platform for IQOS ILUMA launch in the US)
– Top- & bottom-line growth momentum is to be maintained in 2024/25 (on FX-neutral basis).
Due the notable strength of the US$, PMI’s EBITDA will be lower and debt will be somewhat higher than the expectations set a year ago. Moody’s now expects the adjusted gross leverage to return to around 2.5x at the end of 2025 – a year later than previously expected. High dividend pay-out leaves limited scope for debt reduction (i.e. slower deleveraging) and means that PMI is weakly positioned in the A2 rating category.
In light of the relatively elevated leverage arising from the Swedish Match acquisition, an upgrade is unlikely in the foreseeable future:
– Debt/EBITDA below 1.5x, FFO/Net Debt above 30% (or RCF/Net Debt in the mid-teens) and EBITDA margins above 40% are the prerequisites for an upgrade
– Lack of improvements in credit metrics over the course of the next two years (Debt/EBITDA to around 2.5x and RCF/Net Debt to around 10%) could lead to a downgrade.
Fitch: September 2023
Fitch Ratings issued a Credit Analysis report for the Global Tobacco companies4: PMI (A/Stable), BAT (BBB/Positive), Altria (BBB/Stable) and Imperial Brands (BBB/Stable). The ratings remain underpinned by strong operational cash flow generation across the industry.
Fitch states that US/UK tobacco companies show solid performance supported by continued good pricing power, along with resilient demand with only moderate volume pressure from weakening consumer purchasing power in some markets. In the medium term. Fitch believes most global tobacco companies to maintain their ability to implement price increases and develop product mixes that compensate for continuous volume declines in the core combustible segment.
Fitch expects smoke-free products – an increasingly material share of revenue for many – to gradually support sector revenue and profit. However, Fitch views the business risk profiles for rated tobacco companies as increasingly differentiated by the development of smoke-free products and notes that the smoke-free products require careful strategic execution to reflect differing and developing consumer tastes and preferences, as well as growing regulatory pressure on non-combustible products in many markets.
Fitch notes that credit rating headroom has improved for PMI with deleveraging on track after its significant Swedish Match acquisition in 2022 and BAT’s deleveraging supports the Positive outlook on the rating.
References:
- https://www.fitchratings.com/research/corporate-finance/fitch-ratings-neutral-impact-for-pmi-bat-from-canadian-lawsuit-proposed-settlement-24-10-2024 ↩︎
- https://www.fitchratings.com/research/corporate-finance/fitch-revises-outlook-on-philip-morris-international-to-negative-affirms-at-a-23-11-2023 ↩︎
- https://ratings.moodys.com/ratings-news/411498 ↩︎
- https://www.fitchratings.com/research/corporate-finance/global-tobacco-ratings-gain-headroom-on-solid-profits-capital-allocation-19-09-2023 ↩︎
