Your father lost his first wife. He remarries, and you come into existence, born into a small, relatively poor community. Your half-brother dies. Your mother dies. The family is devastated; so much lost in so little time.

The Civil War pulls father and your eldest sibling away. You have no idea when, or even if, they will return. You are a mere child, not even eight years old.

This was the start given to James Buchanan ‘Buck’ Duke. He was shaped by the events of his early life, but he never allowed them to weigh him down. There was no time to dwell, wallow, or accept pity. There was work to be done. Even from that young age, Buck Duke had a vision. As he grew and learned about the world, his ambitions grew larger too.

On the Preferred Shares Podcast, we have released a two-part series on the Duke Family, with a specific focus on Buck Duke and the American Tobacco Company. The 109 minutes explore the family’s hardships, tobacco business, formation of ATC, industry dominance, and subsequent litigation. Buck redefined the tobacco industry. Revolutionized it. Every single major tobacco company of today either traces its lineage back to the American Tobacco Company or the influence it had on the world. There are even subtle parallels to what is unfolding within the industry today.

That is only half the story. Buck Duke wasn’t just determined to create one of the greatest businesses ever witnessed. He relentlessly pursued building an enduring legacy. He succeeded. Through Duke Power and the philanthropic efforts of the Duke Endowment, Buck Duke left a mark that can never be erased because it has been so deeply pressed into the fabric of our world.

Preferred Shares

Duke Dynasty: The Legacy of the American Tobacco Monopoly

Welcome to Episode 34 of the Preferred Shares Podcast…

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Preferred Shares

Duke Dynasty: The Legacy of the American Tobacco Monopoly, Part Two

Welcome to Episode 35 of the Preferred Shares Podcast…

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3 days ago · 2 likes · Preferred Shares Podcast

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Ownership Disclaimer

I own positions in tobacco companies such as Altria, Philip Morris International, 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.

I recently joked that, for the nicotine industry, this reporting period may remain rather dull, if not uneventful. As surprises are not necessary and often unwelcome in this space, such would be just fine. While British American Tobacco’s Pre-close statements do not provide hard numbers, the 2026 First Half Trading update delivered exactly that. The associated 51-minute presentation, although dreadfully long for a pre-close update, pleasantly affirmed the group’s strategy. Even more pleasant was how those points were communicated. Management did not stray from discussing triumphs and challenges alike.

The most prominent difficulty concerns BAT’s heat-not-burn business. New iterations of glo continue to be scaled across markets, but the promise of improved financial contribution has again been kicked down the road. Market share has not been easy to gain, and has proven equally hard to defend. The group has signaled greater focus in how it is growing the franchise, but make no mistake: this is no IQOS.

The group’s vapor line, Vuse, is a mixed bag, depending on the geography you look at. Weakness in AME is no surprise, following the regulatory changes in the UK. Conversely, Vuse in the U.S. appears quite strong, as more states enact product registries and federal actions continue to curb the availability of illicit products.

BAT’s standout success in NGP categories remains firmly in modern oral. Although it is still only a small component of revenues, the trajectory of the category and the group’s portfolio warrant attention. The very same regulatory changes in the UK that are a headwind for vapor are a tailwind for pouches. Outside the U.S., Velo continues to demonstrate its leadership position. In the U.S., Velo (and let’s not forget Grizzly, too) has unrelentingly captured disproportionate gains. Not even two years in, and both its volume and value share are sights to behold.

Excitement surrounds Velo Max, set to appear in the U.S. around August or September. However, there is a caveat for the U.S. market: the FDA’s recent Guidance for Industry. It is true that BAT holds influence and remarkable distribution, but the competitive landscape is set to transform.

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STG’s Q1’26 report was refreshing. But perhaps that refreshing feeling is only because of remembering we no longer have to deal with the bad pun of “Rolling Towards 2025”, which, execution, in hindsight, was more akin to rolling, nay stumbling, down a hill. Replacing it is Focus2030. Has the company found its footing?

As nice as it would be to have definitive conclusions, Q1, a light quarter every year, offers little in the way of concreteness. However, there are positives beginning to emerge. The group is closer to market stabilization in key markets, secular decline rates have been sustained at expected levels, and new efforts, such as the still-nascent nicotine pouch business, offer genuine avenues for absolute growth.

Unfortunately, many figures need to be taken with a grain of salt. Issues arising from the start of the SAP/ERP rollout caused significant pain, as demonstrated by the EUB segment. Such muddied waters include marked improvements in MRC and tobacco gross margin despite negative net sales growth for those products. Likewise, footprint rationalization of Ace and GRITT, and the prioritization of XQS, led to even more pronounced moves in NGP metrics: gross margin climbed from 23% in Q1’25 to 35.2% in the period, despite organic category sales dropping by 23%.

Handmade cigars were a surprising standout category for the quarter. Organic net sales grew by 8%, supported by strong sales in group-owned superstores and the online channel. Margins remain under pressure, as expected, due to industry-wide responses to the impact of tariffs. Could this provide unexpected upside sometime in the coming quarters? In February, the U.S. Supreme Court ruled that certain tariffs were unlawful. Establishing that previously paid tariffs could be subject to refund points to the potential of STG receiving a non-trivial reimbursement. The U.S. Customs and Border Protection opened a formal refund process, which the STG is actively assessing.

For the full year, special items will be lofty, higher than FY’25 and guided to a level closely matching FY’24. OneProcess remains a key contributor, and new costs associated with the Focus2030 initiatives have been introduced. As we move through this year and the next, costs associated with integrations will taper off, providing a critical read-through for the evolution of underlying earnings.

Of course, there is always more to look at. Recently, a number of readers have reached out, seeking perspective on the implications of potential U.S. actions against Cuba and the theoretical subsequent elimination of the embargo. Let’s have at it.

What if?

I find most of the time spent pondering “what ifs?” surrounding geopolitics to be a waste. The variables are often innumerable, and, even if you have accounted for those that will move the needle, specific outcomes can rarely, if ever, be guaranteed. With that said, in this instance, there are several interesting implications for Scandinavian Tobacco Group.

The current U.S. administration has created a cloud of uncertainty with grand geopolitical actions. Following the strikes in Iran, what might come next? It should come as no surprise that the administration has been exploring pursuing actions against Cuba. In recent weeks, those ideas have transitioned from merely passing thoughts to more significant considerations. Let us rewind to gain context.

On September 15, 1960, Fidel Castro nationalized the Cuban cigar industry by having his revolutionary army seize factories, warehouses, and other related real estate. Two years later, President John F. Kennedy signed an embargo against Cuba, Proclamation 3447. This severing produced dire consequences. Many U.S. domestic manufacturers that were reliant on Cuban leaf were forced to close their doors for good. Others pivoted, producing impressive fortunes. Cuban families who lost their livelihoods when their cigar operations were seized fled, establishing new operations in Nicaragua, Honduras, the Dominican Republic, and Mexico. Ever since, the prestigious Habanos have been absent from the most lucrative cigar market in the world, the United States. What happens if that changes?

Let us suspend consideration of how that change happens. As mentioned, factors specific to a given scenario can be endless, and estimating such a timeline can prove similarly problematic. Mind you, in January of this year, President Donald Trump signed Executive Order 14380, declaring a national emergency, marking Cuba an extraordinary threat, and authorizing new tariffs on goods from any country that directly or indirectly sells or provides Cuba with oil. In May, Executive Order 14404 was signed, imposing additional sanctions “on Those Responsible for Repression in Cuba and for Threats to United States National Security and Foreign Policy.” The current administration seems to favor the embargo and related measures, and support for additional actions may be limited following what has unfolded in Iran. We can ignore those factors. For our purposes, let us pretend that significant actions against Cuba are immediate and conclude just as quickly. Let us assume that the Cuban cigar industry faces no new imposition from those actions and, whatever the resulting state, the embargo has evaporated into thin air.

Would this not be catastrophic for Scandinavian Tobacco Group? As if overnight, Cuba would flood the U.S. market with its premium cigars, taking a massive chunk of the market and providing STG no time to react. STG’s volumes, margins, and profits would all collapse in short order. I believe this is the most common narrative. It is worth questioning.

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The odds of any surprises in Imperial’s H1’26 results were low, as the company’s Trading Update was released just a month prior and its distribution arm, Logista, already reported its H1’26 results. The report once again affirmed the year’s trajectory. Met with a doubtful tone during the Q&A, that confidence was reiterated, yet again. The required delivery in H2 to meet the expressed targets is higher than in past years, but that is due to several notable one-offs recognized in the first half. The underlying strategy remains sensible and differentiated, communicated candidly and concisely. Driving all decisions is a solemn vow to deliver for shareholders.

Imperial Brands continues to carefully grow its NGP business, albeit at a much slower pace than others. Pulze has caught modest traction in select markets, while modern oral continues its laudable ascent. Skruf has become a leader in Norway. Zone has launched in the UK while it continues to grow volumes in the U.S., though heavier promotion has played a hand.

Regarding the U.S., considerable uncertainty has been introduced by the FDA’s new Guidance for Industry, which opens the doors for many competing products. Subsequent launches will drive next-gen category volumes. However, given heavy promotions, the value generated in the near term may be questioned. Imperial has a few cards up its sleeve in this regard, but will play them cautiously. In light of the FDA’s announcement, the company has chosen to sunset its vapor product in the U.S. market. While others may see this as yet another mistake in the NGP realm, I applaud the discipline to know when to fold ‘em. Lukas Paravicini again reminded listeners of the group’s conservative approach when it comes to new, less defined categories and markets:

As much as I understand the excitement in many markets about pouches, when you look at data, and remember, we are a consumer first and data-driven company, the data is showing that the markets are very small. And hence, as the fourth largest in the industry and a responsible player also in regards to our shareholders, we will double down on those markets where we have a business or where the market has been created, and we have a route to market.

Although the NGP story continues to be the focus for many, Imperial’s is very much one predicated on the belief that cigarettes may linger far longer than most expect. On that front, there has been concern about market share losses in key countries.

I’ve often reiterated the dangers of focusing on market share. While Imperial itself has stressed its market share performance over the last several years, Paravicini delivered perhaps the most concise and honest views on the dynamics at hand:

Our share discussion and your focus on segment is really an evolution. I just want to reiterate how important share is for any company. But share is one of the metrics we look at next to net revenue, operating profit and many other metrics we have. And it’s really about this careful triangulation of price, volume and share in an environment where your gross margin has evolved significantly from the top to the bottom. We will play in all segments because we start with the consumer. Wherever the consumer is, we will be there. But while we double down on the top, we’ll also make sure that we are pricing responsibly at the bottom.

Supporting this notion are figures from the company showing wide gross margin disparities between products at the high and low ends of price within any given market, including a 2.5x differential in Spain, a 3x differential in Germany, and a staggering 7x differential in the United States. Volumes, often treated as equal, are nothing but. Tobacco profit was a bit soft in H1; however, the power of pricing and mix benefits supports a stronger second half of the year, and since there is increasing uncertainty facing NGP categories, there is comfort provided in Imperial’s preoccupation, which will likely prove more rigid.

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We need a jungle

I regularly talk with my friend Artem Fokin, founder and portfolio manager of Caro-Kann Capital LLC. At some point in our discussions over the past few years, he provided an excellent analogy for Haypp’s business in the United States: the United States market is like a savannah. It is flat, with few trees. There are pockets of tall grasses, but largely, there is exceptional visibility in every direction. The flora and fauna (competing nicotine pouch brands) exist in a defined equilibrium, with only slight observable change. This environment was shaped by the FDA, which roadblocked innovation.

This has been a fine environment for Haypp to operate in, but, as Artem has said, we need a jungle. A jungle, in this sense, represents overwhelming growth in competing brands, with owners who are willing to aggressively seed consumer awareness, trial, and adoption. There would be fierce territorial battles, and the rapidly changing conditions would act as dense foliage, sprawling vines, and a thick canopy, obscuring visibility. Traversing the terrain would be perilous for brand owners, necessitating the right tools to navigate.

The U.S. is not there yet. When I first wrote on Haypp Group in early 2024, I shared a range of trajectories for the U.S. market, concluding with one that shares a heart with Artem’s jungle:

“Counterintuitively, legal escalations do pose a separate threat from a competitive standpoint. ZYN, dominant in the United States, is largely so because it is the best of the first generation of dry pouches currently on the market. If the FDA concedes translating scientific substantiation of the product class’s reduced-risk profile into future modifications of its application process, it stands to reason that the door could potentially open wider for the hundreds of innovative products competing in Scandinavia. Although PMI has a pending PMTA for its moist pouch variant, heightened competition would challenge both the ability to retain market share as well as exercise price take.”

Undoubtedly concerning for incumbents, such a future is ideal for Haypp. The rapid growth rate of nicotine pouches in the US has occurred despite all available brands being ‘version 1s’ of what exists elsewhere. What if the door not only opens wider but is entirely blown off of its hinges? Perhaps it is a far less likely scenario, but it would be one that creates a Cambrian explosion-like event. Category growth would accelerate, and demand for Haypp’s services from adult consumers and brand owners alike would follow.

Since then, we have seen a handful of high-quality nicotine pouches enter the market. Competition has increased, with brand owners investing more heavily behind their products, challenging margins and market share. ZYN has steadily grown, but has also steadily lost ground.

The U.S. market has become increasingly fragmented, but rather than a savannah or jungle, it currently looks more like an ecotone, a boundary between the two biomes. Most ecotones are gradient-like, with greater total diversity, but edge cases can arise from human activities, such as construction, or, in this case, regulation. Mind you, ecotones are not immutable. They can disappear or collapse. When the right conditions are met, a jungle can easily creep outwards and take over surrounding areas.

The new environment

Ever since the FDA announced its pilot program to expedite pouch PMTA reviews in September 2025, there has been considerable discussion about its implications. In my Q4’25 note on Haypp, I stressed a key detail that I believe has received too little attention elsewhere (emphasis added in bold):

However, critically, it is not just the scope of new products that Haypp can benefit from. The potential of additional authorizations timed closely together would dramatically increase brand owners’ appetite to aggressively promote products, including purchasing more media at higher prices on Haypp’s websites. Coinciding with the wielding of Kevel, this could drive Haypp’s M&I significantly higher over the coming year(s).

On May 7, 2026, just hours after Haypp Group reported its Q1’26 results, the FDA published a CTP Acting Director Statement. It outlined ways the CTP intends to make its processes more efficient, including accelerating Filing Review, streamlining Scientific Review, and so on. It also touched on the pouch pilot program:

Applying the pilot’s lessons learned: No additional products will be added to the nicotine pouch pilot. Instead, because the pilot has realized significant success in accelerating review of nicotine pouch PMTAs, CTP intends to incorporate lessons learned from the pilot into the review for all nicotine pouch PMTAs.

As the release concluded with that statement and offered no timeline for when any meaningful changes would be made, readers were left wondering. However, the very next day, May 8, 2026, the FDA published Guidance on Enforcement Priorities for Unauthorized ENDS and Nicotine Pouch Products. I recommend reading the press release and the Guidance for Industry document in their entirety, as they are deeply consequential.

In short, the FDA is admitting that it lacks the resources to fulfill its duties. The Guidance for Industry clearly outlines what type of products will be prioritized for enforcement. This, alongside industry efforts such as those outlined in Philip Morris International’s PMI Value Report 2025, will help curb the small but growing illicit nicotine pouch market, reducing the likelihood that it evolves into the burgeoning illicit vapor market. PMI’s report stated (emphasis added in bold):

PMI is uniquely positioned to lead. In 2026, we are rolling out track-and-trace solutions across our entire portfolio—including the nicotine pouch category by year-end— strengthening our forensic capabilities, and investing in the intelligence infrastructure needed to stay ahead of increasingly sophisticated illicit networks. But technology alone won’t solve the problem. Effective enforcement depends on genuine partnership: it requires strong cooperation with law-enforcement agencies, with governments, and with industry peers who share our commitment to legitimate, regulated markets.

If a product appeals to underage individuals by depicting cartoon-like fictional characters, hides its identity by looking like a toy or phone, or lacks child-resistant packaging, it will be prioritized for enforcement. Likewise, if using a product causes a bunch of people to get sick and end up in the hospital, or if a product poses a fire hazard, you can bet the FDA will enforce. Critically, just as the FDA’s guidance outlines what types of products will be prioritized for enforcement, it also outlines which qualifications will lead to deprioritization of enforcement. If the above types of concerns do not apply to a product, and its PMTA is received, accepted, and filed, then that product will be deprioritized for enforcement. Additionally, to promote transparency, the FDA plans to create and update a whitelist of products it does not intend to prioritize for enforcement.

Does this sound like a big deal? It is. Haypp Group addressed it with its own press release, published on May 11, 2026 (emphasis added in bold):

FDA’s updated Enforcement Guidance issued on May 8 marks an important step toward improved regulatory oversight and continued maturation of the U.S. nicotine product market. The updated guidance is expected to significantly increase product availability across both online and offline channels.

As the global leader in online nicotine pouch sales, Haypp Group believes the evolving regulatory framework will favour established, compliance-driven operators with strong operational and regulatory capabilities.

“With our leading market position, strong consumer reach and experience operating across complex regulatory environments, we believe Haypp Group is well positioned to meet growing consumer demand as product availability and innovation continue to expand across the U.S. market”, says Gabriel De Prado, President US business.

Haypp Group expects to selectively onboard new products based on consumer insights, supported by the Group’s technology-driven age verification systems and high product standards, while continuing to adapt its offering to evolving state-level regulatory requirements across the U. S. market.

The title of Haypp’s press release states that the company is “well positioned” for these developments. This comes across as reasonable and is perhaps what you’d expect from a company with a responsibility to avoid making grandiose claims. I, on the other hand, have no issue sharing why I think “well positioned” is an understatement.

To be clear, the new guidance does not mean that products deprioritized for enforcement have been authorized. Authorization still requires successful completion of the PMTA pathway. But that doesn’t lessen the implications. When I previously mentioned that Haypp would benefit not just from additional product authorizations but also from those authorizations timed closely together, it was within the context of the pilot program. However, theoretically, the number of new products that could be introduced into the U.S. market following the FDA’s Guidance for Industry could be substantially larger. Specifically, footnote 7 of the Guidance for Industry states:

This means the application has successfully completed acceptance and filing review, threshold determinations indicating the application contains sufficient information to support scientific/substantive review, and the acceptance and filing reviews were for an application submitted on or after November 4, 2021, and subject to 21 CFR 1114.27(a) and (b).

Many of these product portfolios exist but have never been marketed in the United States. Some were shelved because their owners lacked, or were reluctant to use, the considerable resources needed to build distribution, raise awareness, and spur trial, so long as the threat of enforcement lingered. Others were shelved because earlier market research showed product qualities weren’t yet a fit for the U.S. market. With enforcement de-risked and the market having grown rapidly over the last few years, the value and viability of these portfolios have increased. Their owners now have the choice to wait, launch, or sell to motivated buyers who can launch more effectively.

It’s hard to imagine that major manufacturers won’t be moving forward with new products. Might we see launches from smaller, private firms? Almost assuredly. Could we also witness established manufacturers bidding on some of these other portfolios? Oh, yes. Despite already having products on the market, they would be interested in extending their portfolios to appeal to a broader set of consumers. Not to mention, some are likely exploring purchasing select portfolios simply so their competitors can not.

How many launches should we expect over the next twelve months or eighteen months? I can not say, other than I believe it will be a number much larger than the previously anticipated two remaining products listed in the pilot program that weren’t already marketed in the United States.

Keep in mind that Haypp Group is unlikely to work with every launch. Haypp explicitly stated it would be selective about which brands it would onboard. I am confident that the company already has extensive knowledge of the many brands that meet the FDA’s requirements for deprioritized enforcement. Like all other brands prior, it will vet brand owners to ensure responsible practices and require those owners to pay for independent lab testing of their products. Haypp will also rely on its vast insights data to gauge market fit.

If things play out in this direction, even with a lower share of overall launches, Haypp would benefit greatly. What provides confidence that many (if not all?) of these brand owners would desire to partner with Haypp in the first place? Gaining meaningful physical distribution is not cheap and is certainly more expensive. Even assuming a brand owner has the relationships and sales force, is willing to pay the higher costs to get its product into a number of physical stores, and pay the slotting fees to stock, it takes far more time. Time is a rather important factor as competitors weigh their options as we speak. Then there is a practical matter. If you look past all those considerations, there is ultimately only so much space available at physical retailers. Even if a brand owner has the means and interest, they may still be out of luck.

For some brand owners, online may be the only viable route. For the vast majority, going online remains the logical first step anyway. It is faster and more economical, and within the online channel, partnering with Haypp provides the most value. It has a scale of consumers and media & insights that can help brand owners of all sizes refine their messaging and positioning before deploying resources elsewhere. Sure, some will move quickly and work with other online retailers. But serious brand owners must prioritize compliance, and Haypp has an exceptional reputation within the industry.

There remains considerable uncertainty. Dr. Marty Makary recently resigned as FDA Commissioner. Replacing him is Kyle Diamantas. No one can know exactly how the market will take shape over the next few years, and the FDA’s new guidance also introduces a potential push-pull between vapor and pouches. There are many paths forward, and quite a few take us closer to the jungle.

Up for interpretation

In Q1’26, Haypp provided new disclosures on several metrics that help outsiders understand the business.

These include:

1. Group and segment total volume and share of NP

2. Gross margin by segment

3. Group sales by revenue stream (product vs Media & Insights)

4. Group overhead cost breakdown by Marketing, Fulfillment, and General & Administrative

In addition, as of Q1’26, the Emerging segment was integrated into the Core and Growth segments, with Sweden EM placed in Core and UK and Germany EM placed in Growth. When a company changes its reporting structure, questions begin to stir. Why? Is this obscuring anything important? Fortunately, last month, when Haypp Group announced this change in reporting, such thinking concluded without worry. HnB and Vapor sales have never been part of the central thesis, and since halting UK vapor sales was already known, the change in segment reporting appeared logical. This is a business driven by nicotine pouches, and the Q1’26 report shows Haypp Group’s unrelenting focus is paying off.

This isn’t to say that this change in reporting should be entirely dismissed. In a way, it rewrites history.

Prior to the integration of the Emerging segment, the Growth segment officially inflected to positive EBITDA in Q1’24. The Growth segment then experienced meaningful margin expansion through Q1’25. This was despite the ZYN shortage extending to the online channel, as M&I demand rapidly grew, and alternative products in the United States sported more attractive margin dynamics at the time. The Growth segment remained profitable in Q2’25 before turning back negative in Q3’25, and then carried deeper EBITDA losses in Q4’25 as the company expanded its investment efforts, primarily in the United States and the UK.

That entire arc is meaningful. Some had questioned whether the business model, proven to work in established Core Markets, would be viable in Growth Markets. For those investors, the inflection to profitable Growth Markets was a necessary check mark. Not to mention that, now that segment gross profits are disclosed, there is a concrete demonstration that Growth Markets are structurally capable of being more profitable than Core Markets. This is another check mark, although not a surprise, as the structural elements explaining this differential have already been well-explored.

It is interesting to contemplate how someone entirely new to analyzing Haypp Group might view the business, now that Emerging has been split and tucked back in. Through this new lens, the Growth segment shows a -2.4% EBITDA margin in Q1’24, rather than an inflection to profitability. In fact, looking through its recast history, there is no quarter in which Growth sports a positive EBITDA margin. Over the last few quarters, increased investments in the central Growth operations (pouches) have led to meaningful margin decline. Q1’26 Growth EBITDA margin was -7.7%, more deeply negative than all periods back through Q2’23. Despite the implications of new disclosures at the gross level, might Growth EBITDA cause new observers to miss key context about what has been happening under the hood of the segment? I think so.

There is an even more meaningful implication due to the change in reporting. It could easily be missed and requires further context.

Q1’26 shows Growth segment volumes increasing by 71% year-over-year, with nicotine pouches growing by 83%. These are, by all measures, large figures and the fastest growth rates in recent history. The company’s presentation specifically highlighted the US and UK, where nicotine pouch volumes grew by over 100% in Q1’26.

These growth rates were partly driven by existing active consumers purchasing more. A larger driver was the increase in Active Consumers. Regaining a direct supply of ZYN aided this, but it is also evidence that Haypp’s increased marketing and enhancements to deliver outstanding value to consumers are bearing fruit. Q1’26 shows Active Consumers in the Growth segment increasing by 66.4% year-over-year, and by 6.2% sequentially, reaching 192.1 thousand.

These are the reported figures. However, ignoring the nuances of the ZYN shortage across offline and online channels, there is reason to believe that the true underlying growth rate of Active Consumers in Growth Markets is not captured.

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Logista’s H1’26 headline figures show revenues up, yet economic sales, adjusted EBIT, and net profit all lower. Naturally, there is a bit more to it than that. Transport remains a central focus. Alongside the challenges cited in Q1, geopolitical uncertainty and rising fuel prices have applied further pressure. Headway has been made, with efforts to improve El Mosca evident in year-over-year margin improvements in Q2, as in Q1, courtesy of cost and customer rationalization, partly offset by Carbó’s restructuring.

While transport remains challenged, pharmaceutical distribution remains the clear standout in terms of structural growth. Economic Sales has maintained high single-digit growth, underpinned by expanded offerings to existing customers and a steady pace of new relationships. With an increase in pharma sites and a new logistics hub, the company appears well-positioned to expand into other select parts of Europe. Although Transports requires the near-term focus, pharma continues to be a prime hunting ground for bolt-on acquisitions, supported by a response given by Pedro Agustín Losada Hernández during the Q&A:

Yes. Well, we work a lot to execute our strategic inorganic growth plan. We are working in several opportunities as we have done in the past. So the point is that in this particular sector, there are plenty of opportunities all around our geographies and subsectors of the logistics, and we have plenty of opportunities to analyze.

At this point, we look at opportunities in sectors like pharma, like temperature control. As we mentioned several times, maybe if we have the chance to go for opportunities on the tobacco business, we analyze also as well. But we keep on analyzing the appropriate one that provides the levels of return that Logista is aiming to reach in each of the M&A opportunities that we have on the table and having the synergies that we are expecting in each of the transactions. But probably it’s difficult to see in this fiscal year.

Like pharma, courier services continued to prove strong. High single-digit growth and a gradual branching into the Netherlands show an unwillingness to sit idle. Further expansion in the Netherlands’ TRP business demonstrates the same. Although each of these is a relatively small contributor to the overall business, their paths forward appear far straighter and less turbulent.

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Altria’s Q1 revenues were up by 3.2%, and net of excise were up by more than 5%. Adjusted EPS rose 7.3% from last year’s period. Cash continues to stream as dividends and repurchases to shareholders. The company continues to move forward, with 2026 guidance reaffirmed.

I have continued to share my fascination and beliefs concerning nicotine pouches in great detail, with specific focus given to the United States. Across the country, pouches continue to be swiftly adopted, while shifts in competition and the regulatory landscape bring twists and turns. For Altria, it has not always been easy to hold on. But it has.

There remain plenty of metrics that can be used to show the company losing its grip. In Q1’26, Altria’s total oral market share declined by 5.5pp to 29%. Shipped volumes of smokeless products were down by about 3%. Each quarter, I’ve taken the liberty of contrasting such trends. This time, let us zoom out and look further back.

Long before the United States Tobacco Company was acquired by Altria, it held a near-monopoly on moist snuff in the United States. In 1980, the company’s Copenhagen and Skoal were truly dominant. Changes came, as they do. Various forms of excise taxes were applied and increased. Broadcast advertising was banned. New warning labels came into play. The company was undeterred and continued to print hefty profits.

Competitors such as Conwood, Swisher, and Swedish Match introduced compelling products. In Moist Snuff, UST’s share eroded to about 85%. Then there was the Smokeless Tobacco Master Settlement Agreement and Conwood’s Antitrust suit against UST. UST had to pony up over $1 billion to Conwood for damages. Ouch. When that conclusion was reached in 2000, UST’s share of the moist snuff market was down to near 75%. Half a decade later, value brands had taken a further bite, dropping UST’s share to 63%. Then, Reynolds bought Conwood, and its Grizzly brand promised to keep clawing away at the market that UST once held in its entirety.

By the time Altria acquired UST in 2009, UST’s total oral tobacco share was 58%. Fast-forward another half-decade, and ZYN was only just taking its first baby steps in the United States. When Altria decided to enter the nicotine pouch space by investing in Burger Söhne (on!) in 2019, the company’s total share of oral tobacco was down to 53%. Altria’s share, including pouches, has done nothing but decline since, accelerating recently.

There is good reason to revisit this bit of history. It is not a dire warning, nor is it a story of a company that faded away due to complacency. The above is a tale of an exceptional company, led exceptionally, that produced exceptional results without end. The catch is that the above omits key details.

At various points, UST has produced wine, cigars, pipe tobaccos, pipes, pet food, and even writing instruments (pens). Some lines were acquired rather than built. While each had a varying level of success, its oral tobacco products proved to be the enduring cash cow. Throughout UST’s history, up until only very recently, total industry (legacy) oral tobacco volumes steadily grew. During much of the period described above, the company recognized outsized volume growth in moist snuff as it displaced other categories, such as loose-leaf chew and plug & twist chew. To focus strictly on market share misses both the trend in category and total volumes.

The volume dynamic played a meaningful role in driving UST’s profits higher. However, zeroing in on volumes overlooks the highly potent driver of pricing power. Rather than rehashing the whole history with these figures attached, let us instead look at more recent periods to weigh these points.

While it may feel like ancient history, UST’s 2002 Annual Report raises considerations still echoing today in its “Smokeless Tobacco is Distinctly Different - The Evolving Debate” segment:

2002 was a landmark year with growing recognition - and acceptance - that smokeless tobacco is distinctly different from cigarettes.

The debate regarding tobacco harm reduction and the role of smokeless tobacco as part of a public health strategy to reduce cigarette smoking - as opposed to what has been characterized as the "quit or die" approach - has accelerated dramatically ever since the publication in 2001 of a 600-page report by the respected Institute of Medicine (1OM). In that report, entitled "Clearing the Smoke: Assessing the Science Base for Tobacco Harm Reduction," the 1OM concluded that "smokeless tobacco may be a valid substitute for cigarette smoking...." In a sense, this conclusion was not surprising in light of the considerable agreement in the scientific community that the use of smokeless tobacco involves significantly less risk of adverse health effects than cigarettes.

Yes, more than two decades ago, the debate over tobacco harm reduction was underway. Likewise, manufacturers, including UST, were citing the existing pool of adult smokers as a growth driver for oral tobacco categories:

ATTRACTING ADULT SMOKERS

Our research tells us that about half of the nation's 46 million adult smokers are interested in a socially acceptable option to cigarettes when they are not able to smoke, or would have to relocate to do so. From our current base of approximately five million adult consumers, this represents a tremendous opportunity to significantly grow the smokeless tobacco category.

Despite converting that pool of users being a robust driver for oral tobacco products, the company’s annual report highlighted the need to protect its core business, which was under attack. Commentary on the smokeless tobacco segment showed a continuation of the share/volume dynamics that had been at play for years:

The Company's Retail Activity Data Share & Volume Tracking System (RAD), which measures shipments from wholesale to retail, indicates that, for the year-to-date period ending December 28, 2002, total moist smokeless tobacco category shipments to retail grew 1.8 percent over the corresponding 2001 period, on a can-volume basis. The premium segment declined 2.2 percent and the price value segment increased 19.2 percent to 21.4 share points during the same period. Shipments of the Company's products to retail, per RAD, decreased .2 percent, with an overall share decline of 1.5 percentage points to 76 percent.

In 2002, UST shipped 635.8 million cans of moist smokeless tobacco products. Those products produced net sales of $1.45 billion and an operating profit of $852 million. For the sake of speeding things up, let us jump forward one decade.

In 2012, UST, operating under the Altria umbrella, shipped total oral tobacco volumes of 763 million cans, a clean 20% increase from ten years earlier. Those volumes generated sales of $1.69 billion and revenues net of excise of $1.56 billion. At a 59% reported margin, oral tobacco operating company income measured $931 million. Not too shabby, though it is worth noting that the gain in operating income compared to 2002 was less than half the rate of volume growth.

Let us now compare this to today. Since then, competition mounted, nicotine pouches came into existence and have rapidly grown, and legacy oral tobacco volumes have declined at an elevated pace. In the trailing twelve months, Altria’s oral tobacco companies (UST + Helix) shipped 726.9 million cans, or about 5% less than in 2012. This produced sales of $2.81 billion ($2.72 billion net of excise), a 66% increase versus 2012. What about the operating company income? A whopping $1.83 billion.

How rare, not to mention magnificent, is such a feat? Quite. It should also be mentioned that Altria’s share of the total oral market has collapsed by nearly half, from 55.4% in Q4’12 to 29% in Q1’26, which really says more about how much the overall oral market has grown than anything else.

You could accuse me of cherry-picking the dates compared. If you are curious, Altria’s oral volumes peaked in 2016 and have fallen by about 15% since then, while segment operating income has increased by 64%. Far from horrendous. You would also be right to call out that a portion of the TTM sales reflects nicotine pouch sales, and that, to form Helix, Altria paid an all-in price of $622 million for Burger Söhne, making comparisons to prior periods not perfectly apples-to-apples. That’s fair. However, that raises the question of whether Altria’s oral volumes permanently peaked in 2016, or whether the rise of nicotine pouches will lift them back over time. Working to answer that shouldn’t be stressed about, though, as the point of this history walk is to show that it is unproductive, even dangerous, to place sole importance on volumes or market share.

With that in mind, let us also consider that Altria has been quite promotional with on!, and the recent nationwide rollout of on! Plus, included in the TTM figures is weighing on profits, too, which brings me to my next point.

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This past week, Philip Morris International reported for Q1’26. Results aligned with my prior views, and, much like the brief update from Imperial Brands, left little in the way of surprise. Perhaps the rest of the reporting over the coming weeks will be rather dull.

Once again, combustibles impressed. Volumes were down by more than 5%, well above the comparable period last year, though set to moderate through the remainder of the year. Yet, pricing proved strong, at 8.5%, delivering gross profit growth of 9.8% (3.9%, organic). Again, we can say with confidence that the cigarette is not dead yet.

New reporting has led to everything ex-U.S., ex-combustibles being lumped into one, International Smoke-Free. Providing further perspective on the stellar performance in combustibles is to consider where the company continues to deploy the majority of its investment.

Q1’26 ISF revenue and gross profit growth measured 24.7% and 28.6%, respectively (15.8% and 19.4%, organic). This was on the back of strong volume growth and modest pricing. During the call, Emmanuel Babeau decided to remind the audience how stellar IQOS remains, driving the performance:

The biggest driver for our performance as combined is IQOS. I mean I don’t think you have any equivalent in the smoke space in the world to IQOS, this multibillion-dollar brand, I mean, much north of $10 billion. This is a unique proposition. This is a brand that has been consistently owning around 75% of the category…

There is some irony here. IQOS remains uniquely positioned, insulated by technological barriers that do not exist in other categories. The product has had its share of challenges and setbacks, but over the years has become a radical engine. In the last few years, PMI management stopped stressing that point to the same degree, instead placing greater emphasis on nicotine pouches, and specifically pouches in the United States. It is no surprise that IQOS is once again centered, given the challenges ZYN faces in the U.S. market.

Quite a lot of chatter followed the unsubstantiated Reuters article suggesting that the FDA was slowing down the pouch PMTA pilot program. I explored what a potentially static competitive environment would look like for each respective company, stating for PMI:

The unmistakable loser is Philip Morris International. This runs counter to common views predicated on the fact that PMI is the only other company with pouches authorized, and its authorized portfolio is broader than on! Plus. I do not believe that is the right angle. In April of last year, I wrote that ZYN was not the best product in the U.S. market, and I have continued to discuss the pressures the brand faces. Let me tell you, those pressures aren’t going away.

ZYN Ultra is a high-grade product, only surpassed overall qualitatively by the European variant of Velo. A slowdown, in which the two products are unlikely to be authorized at or near the same time, avoids a significant escalation in the promotional battles we have witnessed. However, I see PMI as unable to maintain its position in the United States without either 1) the introduction of ZYN Ultra or 2) the denial and subsequent removal of higher-quality, competing products. At some point, management’s messaging must change to more accurately reflect the challenge.

Interestingly, management still continues to tout ZYN as the premium leader, citing brand power. Yet, by trend, the figures show the continued rise in competitive pressures. ZYN’s offtake sales rose 10% in the quarter, though that growth lagged the category as a whole. Shipped volumes, revenues, and associated profits were all down markedly. The company’s prior reporting signaled a more pronounced spread between shipped volumes and offtake, reflecting channel movements occurring in late last year. However, the company’s own release provided foreshadowing (emphasis added in bold):

ZYN offtake volumes, as estimated by Nielsen, grew by 10%, notwithstanding an uneven competitive landscape where we do not yet have access to all of the most dynamic strength and flavor segments. As expected, distributor and trade inventory movements in both the current and prior year periods, and a challenging promotional comparison, led to a decline in volumes, net revenues and profit. Total smoke-free shipment volumes decreased by 21.2%, including a 23.5% decline in ZYN shipments to 2.3 billion pouches or 155 million cans. This reflects the aforementioned offtake growth when compared to our previously communicated estimate of an underlying Q1’25 base of approximately 160 million cans, and the anticipated normalization of channel inventories also flagged last quarter. We continue to invest behind the ZYN brand and in the capabilities that will support the long-term growth of our U.S. business. As we navigate a complex and dynamic regulatory environment, we are preparing to launch innovations in the coming months, including ZYN ULTRA, which remains under active FDA review as part of the nicotine pouch pilot program.

Despite multiple questions seeking a more substantial response, management remained tight-lipped during the call about exactly what the bolded section means. There are several interpretations, although it appears each path heads in the same direction.

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Shares of Imperial Brands are down 8% following the release of its April Trading Update, and down 13.5% since my last note on the company. By now, you know I have little interest in short-term market price movements. But this case is interesting. Is this movement expressing fear? Doubt? I have re-read the release several times, assuming I must have missed some very fine print that clearly states that things are going poorly. I have yet to find such a statement. In fact, business appears rather ho-hum, with the company continuing to execute exactly as it said it would.

There is chatter about NGP losses. The company rightly remains guarded as it scales. Then there seems to be some discussion about the group signaling a loss of aggregate market share in its top markets this year, as if that were a foreboding sign. Chasing market share is dangerous. Imperial Brands continues to explicitly talk of balancing share and price. Many investors seem to want the former, without admitting that the latter plays a meaningful role in driving larger and larger cash flows. And in that vein, the company continues to deliver. Roughly half of the FY’26 £1.45 billion repurchase program has been deployed. Once this program dries, another will be put in its place.

“But wait!” they say. “This can’t go on and on!” We have heard the arguments time and time again. Imperial has not innovated. It is not a leader in NGPs. It is not the largest. Surely, any minute now, the descent toward oblivion must begin.

The point has been made before that one must consider the anticipated decline rate of the business they expect against the rate at which equity is retired through share repurchases. I maintain my view that the latter will keep winning that race. Such a view remains in the minority but is further supported by the fact that the company’s H1’26 trading update has upheld FY’26 guidance.

It is with that consideration that a continued, sizable repurchase program, paired not with a shrinking business but with a modestly growing one, rests. There is a simple formula for growing earnings-per-share at a high clip, alongside a 6% forward dividend yield and an easily met payout ratio, at multiples below the industry’s, which itself is far below the market’s. I may tire of saying it one day, but not today: any further selloff in share price must be cheered, as it will positively support the rate of repurchase.

Given the short length of the trading update and the lack of any real surprises, stopping there would be adequate. Instead, let us take a different route to drive these points home. We must start by striking a somber note.

By now, you have likely heard of the death of the venerable Murray Stahl. As co-founder, Chairman, and CEO of Horizon Kinetics, Stahl exhibited curiosity, creativity, and conviction to the extreme. He was a lifelong student of history and had built a massive breadth of knowledge. His writings often pulled inspiration from the seemingly unrelated, inevitably connecting the dots in his own unique way, with a level of clarity practically unmatched. I have no doubt that his writings will continue to teach and aid countless. They will certainly continue to inspire me.

Amongst the well-known writings of Horizon Kinetics is the Contrarian Research Report on Texas Pacific Land Trust, dated May 8, 1995, “How to Buy 1 Million Acres of Fine Texas Grazing Land for $20.00.” It is clear, concise, and perfectly demonstrates elite ability in the most compelling way. Since that write-up, TPL shareholders have recognized remarkable returns.

What does this have to do with Imperial Brands? Nothing, and everything.

The contrasts are numerous. In 1995, TPL had zero debt and a fixed dividend that equated to a yield of 2% and a payout ratio of 40%. Presently, Imperial Brands is less levered than its industry peers, but still has net debt roughly x2 its EBITDA. Imperial’s forward yield is currently 6%, equating to a payout ratio of 50%, and is aimed to grow by roughly 4.5% each year. These different metrics are eclipsed by the contrast in the nature of these businesses.

TPL, as a going concern, is inextricably linked to land in West Texas. Conversely, Imperial’s value is largely tied to intangibles associated with its product portfolio. There is no asset with a greater duration profile than land. While not necessarily as durable, brands can take up considerable real estate in consumers’ minds, with such plots even being passed down through generations.

In both cases, these are extremely defensive businesses. The nature of the TPL’s business makes it an unmistakable beneficiary of inflation. Imperial has tremendous pricing power, underpinned by inelastic demand for its products. Both of these concerns are relatively predictable and carry lofty margins, far higher than those of the average business. Each is also supported by a mix of barriers, such as regulation, physical proximity, and the like. Compared to so many other flashy companies, both of these are also straightforward businesses.

In its early years, TPL’s revenues were primarily from grazing lease rentals and modest land sales, followed by oil and gas royalties and related matters. Though composition and nominal amounts changed, the 1990s did not show much difference in categories, with revenues recognized through Oil and gas royalties, Grazing lease rentals, Land sales, Interest, and Easements and sundry income. All along the way, land prices have appreciated, which, until recently, were more modest. HK’s 1995 thesis pre-dates the radical productivity unlocked by fracking and horizontal drilling by roughly 15 years. And it was only 20 years later that the company’s ambitions in source and produced water began to show in earnest. Alongside these more recent developments has been a proliferation of easements. Now, there is potential for data centers and related activities to become residents in the Permian, and, with them, presumably a significant increase in the need for everything that TPL monetizes.

Preferred Shares

Texas Pacific Land Corporation: The Riches of Royalties

Welcome to Episode 19 of the Preferred Shares Podcast…

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a year ago · 20 likes · Preferred Shares Podcast, Devin LaSarre, Douglas Ott, and Lawrence Hamtil

Imperial’s main business, in the plainest terms, is to continue to embrace the mighty cigarette. There are also benefits associated with Logista’s expansion and related distribution income. There is also the potential for NGPs to further enhance the business.

It may feel a bit off to compare fracking and next-gen nicotine products, but it is fair to say that each has and will continue to have a radical impact on their respective industries. It is equally fair to dismiss the expectation that Imperial Brands will directly capture the same benefits from NGPs as its competitors. The company remains unbelievably cautious in investing in new categories. The key point to acknowledge here is that just as HK’s TPL thesis excluded future catalysts, no radical catalyst is needed for Imperial.

In the math provided by HK, the primary driver of forward returns would not be share price appreciation. In fact, alongside the dividend, the share price was illustrated to remain flat. There was no expectation of radical changes to the business or entirely new operating segments. Instead, given the business’s capital-light nature, the key driver would be the use of excess profits for share repurchases. Each year, repurchases would trim not just the number of shares, but also the absolute dividend paid. This would free more capital to be redeployed in larger repurchases each year, accelerating over time.

Two exercises were illustrated. In Exercise 1, revenues were kept flat from 1995 to 2010. In Exercise 2, revenues grew by 3% per annum over the period. These are not exactly heady figures (TPL’s 2010 report shows the actual revenues realized in 2010 were $20 million, roughly double HK’s second scenario). Yet, the cumulative effect of repurchases, should the share price remain flat, would be magnificent. Exercise 2 showed a 96% decline in shares outstanding over roughly 15 years. Exercise 1, with flat business performance, still resulted in the share count decreasing by 46% over the period.

I will not try to argue that Imperial’s business is precisely as durable. Nor would I pretend that its core business is as capital-light as royalties. But I am quite happy to point out that it doesn’t need to be.

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Analysis of the nicotine industry is well-served by a handful of maxims:

• Next-gen products have augmented demand for nicotine

• Relative cost profiles, both in monetary and health terms, foster a shift away from legacy categories and to these new products

• Sensible regulation does not move in unison with innovation and consumer behavior

That last point is perhaps the toughest pill to swallow. No matter how stark the differences between the cost profiles of products may be, governments have proven themselves slow, and occasionally even fully incapable, of developing sound, well-reasoned measures to address the needs of the market. Throughout the world, we have seen this expressed through poorly calculated excise tax regimes, arbitrary limitations, and even outright bans.

The United States has not escaped this characterization. The FDA is looked to as a world authority on many facets of life it oversees. Yet, when it comes to regulating nicotine, the machine has been broken for years.

For those of us who acknowledge the continuum of risk, embrace tobacco harm reduction, and simply refuse to stick our heads in the sand, it has been readily apparent, for quite some time, that nicotine pouches are, categorically, one of the most critically important consumer products to have ever been developed. Having the lowest relative risk profile of all recreational nicotine product categories, paired with being terribly easy and discreet to use, has supported their adoption in recent years. Despite that, there has remained considerable uncertainty about their longer-term trajectory, reflecting suspicion that the FDA may act unfavorably.

There was a glimmer of hope provided in September of last year, when news broke that the FDA was creating a pilot program to fast-track PMTAs for a select number of nicotine pouches. Following a short lull, a meaningful outcome was achieved when a select number of on! Plus variants received Marketing Granted Orders through the process. After that, however, we had been met with silence until April 1st, when a Reuters Exclusive broke, revealing that the FDA’s pilot program would be slowing down.

Is the murmur that the pilot program will slow really anything new? No. Largely, it reads as a mere continuation of what we’ve already known. The FDA is slow and ineffective, and, through the vast grayness surrounding the concept of ‘appropriate for the protection of public health,’ effectively has carte blanche to remain so if it so chooses. This is not to say that certain companies may be affected differently if the slowdown proves true. But before we get to that, please, allow me to step up onto my soapbox for a minute.

From the Soapbox

It is rather ridiculous that the supposed slowdown of the pouch pilot is largely due to concerns about underage adoption and non-user adoption. I have previously written about the convenient mantra ‘Think of the children™.’ It is chanted by zealots whenever they wish to bend public opinion and regulation with emotion rather than data. When it comes to pouches, opponents, with the ultimate goal of outright bans, suggest we start by banning flavors that may appeal to youth.

I have seen some industry operators make soft concessions on such points, believing that doing so will put them in a favored position with regulators. This includes accepting a limitation on flavors and, in the case of another category, vapor, agreeing that requiring embedded age-gating technology within devices is a practical and effective solution. Ceding on these points will simply lead to the proposal of even more ridiculous measures in the future.

I have touched specifically on the absurd notion of ‘youth-appealing flavors’ before, pointing to the fact that Nicorette, an essential medicine for nicotine cessation, comes in flavors such as Cinnamon Surge, Spearmint Burst, and Fruit Chill. It has also been quite easy to poke fun at the supposed merits of flavor bans by imagining the public outrage that would occur if similar proposals were made for alcohol.

Nearly all discourse has missed the mark. Adults have taste buds, and flavors play an important role in adoption, moving adult consumers away from higher-risk legacy products. Instead, a greater emphasis should be placed on age verification at the point of sale to ensure these products don’t fall into the hands of minors.

Opponents will cite rising underage use as a reason to swiftly act with a heavy-handed response. The data doesn’t support that, with underage usage terribly low, although, by way of simple mathematical functions, it is likely to increase in absolute terms as the category grows. Alarming? To play into the absurdity of flavor bans, allow me, standing on my soapbox, to point to the soap bottles plaguing our nation.

A recent publication concerning the dangers of children ingesting nicotine stated:

The study, published in Pediatrics, also investigated other nicotine products and formulations. Researchers examined nearly 135,000 cases of nicotine ingestions among children younger than 6 years old that were reported to U.S. poison centers from 2010 through 2023. Most ingestions occurred at home and involved children under the age of 2 years. While most exposures resulted in minor or no effects, there were 39 cases with major medical outcomes and two deaths.

The overall rate of all nicotine ingestions increased 59% from 2010-2015 before decreasing 34% from 2015-2023. This rate was primarily driven by the ingestion rate for liquid nicotine and nicotine solid formulations such as tablets, capsules, and caplets. The ingestion rate for liquid nicotine increased by 450% from 2010-2015 and then decreased by 45% from 2015-2023.

More recent data states that poison control centers reported 4,254 nicotine poisoning cases in 2025, roughly double that of 2024. The vast majority of these involved children under the age of six, and roughly 3/4 of such cases occurred at home, with liquid nicotine, not pouches, involved in the majority of serious cases. This should not be completely dismissed, but it is worth pointing out that these figures are dwarfed by the number of cases in which children six and under experience poisoning from ingesting household cleaning products.

Where are all of the politicians pushing for plain packaging of cleaning products? How can we allow the advertising of cleaning products to be seen by the innocent eyes of our youth? Please! Think of the children™!

Not all equal

Let us set the absurdity aside. It is worth noting that the FDA has not issued an official announcement regarding a slowing of the pilot program. At the same time, it seems wholly appropriate to curb expectations moving forward. After all, we are in April of 2026, when such authorizations were initially telegraphed for December of 2025. A further slowdown within an agency that is already known for moving at a snail’s pace does not inspire confidence. What happens if we do not see further authorizations in the near future?

Let’s explore the implications for:

• Altria

• Philip Morris International

• Turning Point Brands

• Imperial Brands

• British American Tobacco

• Haypp Group

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Driven. To build. To buy. To force a new market to bend.

In Part Three, Joseph F. Cullman III took Philip Morris where domestic competition had been skidish to venture. Overseas. Execution, while not flawless, bridged oceans and cultural divides alike. Cigarettes drove sales and profits to heights never before seen.

Marlboro’s growth was fierce. But so was the company’s appetite to diversify. This sense of needing to venture beyond tobacco was in no way unique to Philip Morris. It was a path nearly the entire industry took to reduce its exposure to the uncertain future regulations its core businesses would face. However, the deals that Philip Morris struck were quite unique. I’ve written about some of the deals before. Now it’s time to pay respect to a few specifics done under Cullman’s leadership.

1957 was monumental for Philip Morris, beyond the licensing deal with Fabriques de Tabac Réunies (FTR), which placed PM brands in the Swiss market and provided confidence in a blueprint for taking over Europe. That same year, Philip Morris acquired Milwaukee-based Milprint. Milprint assembled packaging materials for other manufacturers, primarily in food products. It also had a small business, Nicolet Paper, that provided printed materials to Milwaukee-based brewers. In 1956, Milprint’s sales were just over $55 million. Following the purchase of Milprint, Philip Morris acquired Polymer Industries, which manufactured a range of adhesives and specialty chemicals.

These acquisitions showed early signs of success, with modest increases in sales and profits. However, challenges presented themselves in short order. The company’s 1960 Annual Report addresses one with a level of candidness that is rarely provided nowadays:

I960 was not a good year for Milprint, Inc., our flexible packaging subsidiary with headquarters in Milwaukee, Wisconsin. Although sales volume was down only moderately, profit margins continued to reflect the highly competitive nature of the packaging industry generally, in which production capacity presently exceeds demand.

In 1965, to simplify reporting, these businesses were combined into the Industrial Products Division. Then, in 1967, the division was organized into the Philip Morris Industrial segment; the same year, Milprint experienced significant difficulties due to worker strikes. At the tail end of that year, Philip Morris acquired Koch Convertograph Company, which was tucked into Milprint.

By 1968, the narrative spun about the segment was fully at odds with the numbers. The company’s annual report highlighted Nicolet operating at full capacity, Polymer Industries volumes being five times larger than when it was acquired a decade prior, and Milprint playing a meaningful role in the Space Race:

Milprint has been a leader in the production of sophisticated flexible packaging materials for many years, and its growing list of important customers includes most of the producers of national brand food products. Its technology has contributed importantly to the development of vital and complex space age food packaging material which has been an integral part of the Apollo 8 and other Astronaut space missions.

The commentary glows, highlighting the increasing importance of PM’s industrial efforts. However, the same report states that, in the aggregate, net sales of these businesses had been roughly flat over the last 10 years. The intense competition in what would prove to be highly commoditized spaces forced the company to shift gears. It rationalized its product offerings, scrapping low-margin items and refocusing on higher-margin speciality products. Below, an ancient photocopy of a chart within the company’s 1967 report shows the stagnation relative to the rest of the booming business.

Revenues of the industrial segment would eventually hit their stride, growing considerably to $113.1 million in 1972 and $237.1 million by 1978. But the operating margin never expanded as hoped, fluctuating between 5.3% and 7.9% throughout the period.

Over time, the segment was sold off, beginning with the sale of one manufacturing plant to Reynolds Metals in 1981. This was followed by the sale of part of Milprint to BRH in 1982, Nicolet to Hammermill in 1985, and the remaining Milprint assets to Bemis in 1990. When looking at the full picture, the arc of Philip Morris Industrial would be suggested to be nearly inconsequential. In 1970, the segment contributed only 5.7% of the group’s consolidated revenues and a paltry 3% of operating income. By 1978, those figures had shriveled to 3.6% and 1.5%, respectively. However, there are two key considerations to bear in mind.

These endeavors took considerable resources, namely management’s focus, away from the other parts of the business. It is impossible to quantify, but this assuredly had a negative drag on the business as a whole. More importantly, is the nature of the company’s first non-tobacco acquisition, Milprint.

Milprint, despite its lackluster profitability, was a sizable operation, with more than 3,000 employees, serving large accounts across the country and generating substantial revenue. The $14 million purchase price was paid in Philip Morris shares, resulting in roughly 6% dilution at the time of the 1957 purchase. While exact sale figures for each divestiture are unclear, in aggregate they would have likely amounted to a pittance compared to the billions that equity would grow into.

Philip Morris learned hard lessons through its industrials business. Highly competitive, commoditized markets in which the company had no demonstrable expertise were not great places to find success. The company did make other, seemingly out-of-place acquisitions, but also steered toward grand opportunities.

There was the acquisition of American Safety Razor in 1960. This was followed by the somewhat logical acquisition of the shaving cream manufacturer Burma-Shave. There was Clark chewing gum in 1963, too. None of these produced any real kind of success. If only there were another consumer product that was dependence-forming and Philip Morris could leverage its marketing prowess…

In 1969, Philip Morris purchased a 53% stake in Miller Brewing Company from conglomerate W. R. Grace and Company. The purchase price was $130 million, $94 million more than what W. R. Grace had paid for the stake just three years earlier. The following year, Philip Morris purchased the remaining 47% from the De Rance Foundation of Milwaukee for $97 million.

Miller Brewing had survived a great deal, including prohibition, when it was forced to pivot to producing soft drinks, malt syrup, and other items to stay in business. Naturally, when prohibition ended, the company resumed producing beer. It experienced significant success with the rise of Miller High Life, championed as “The champagne of beer.”

When Philip Morris acquired it, Miller Brewing was in a peculiar position. It was producing over 5 million barrels of beer per year, and held just over 4% of the market. While it was the seventh-largest brewer in the country, it was dwarfed by Anheuser-Busch, Pabst, and Schlitz. The first step was putting someone in charge who could drive real results. After succeeding in the Philip Morris International segment, John Murphy was appointed CEO of Miller in 1971.

The company conducted intensive research on the domestic beer market. Its findings were straightforward. Critically, the product that was responsible for so much of its success, High Life, posed a problem. High Life was positioned as a premium product. Drinkers who could afford premium products gravitated towards other forms of alcohol, and when they did select beer, it was often imported varieties. Critically, it was also found that the vast majority of beer drinkers weren’t younger, blue-collar workers; however, younger, blue-collar workers were responsible for the majority of beer consumption.

Put simply, High Life’s position had gone stale. Research also showed an increasing preference for canned beer over bottles. Miller’s previous management had remained steadfast that its ‘champagne’ must be bottled. Serious change was needed.

Following Murphy to Miller was a team of marketers that led numerous successful cigarette campaigns. In addition to the internal marketing team, a new ad agency was selected. Rather than tasking Leo Burnett, who had helped redefine Marlboro’s image, the company selected McCann Erickson. The challenge they faced was reminiscent of the one Marlboro faced: How do you expand your appeal to a much broader audience without alienating your existing, loyal customers?

This partnership would once again prove Philip Morris had a knack for finding the right agency for the job. McCann Erickson developed a new campaign, using tactics similar to those Burnett used with Marlboro, focusing on the consumer’s identity rather than solely on the product's qualities. Ads, comprised of print, radio, and mostly TV, showcased everyday workers finishing their day with a cold, crisp Miller High Life.

The slogan became iconic.

“It’s Miller Time.”

While the campaign devised by McCann Erickson focused on consumer identity over the attributes of Miller High Life, that didn’t mean that the beer’s qualities were neglected. Quite the opposite, in fact. Philip Morris had proven its commitment to quality, having worked extensively to revamp Marlboro prior to its 1954 relaunch. The company applied that same degree of rigor to Miller.

Miller used a special strain of brewers’ yeast, brought to the country by Frederick Miller in 1855. The company also used more hops and barley than competitors, making the beer heavier. This, however, also resulted in a less mild aftertaste. It was time to take a few risks.

The first risk was reformulating Miller High Life. This made it lighter and led to a gentler aftertaste. Importantly, this also improved the beer’s shelf life.

The second risk was changing how Miller’s distribution functioned. Historically, wholesalers were given high priority, with direct access to Miller’s headquarters. This changed, with wholesalers being directed toward Miller’s marketing teams. As a tradeoff, Miller’s corporate marketing would provide support to any markets that needed additional advertising and promotion.

The third risk came to packaging. It was known that cans were gaining favor over bottles, but being bottled was part of High Life’s image. In 1972, the company introduced a 7-ounce bottle and started selling it in an eight-bottle pack.

Together, these changes provided a meaningful increase in sales. The product, higher-quality and more consistent, resonated with more drinkers. Philip Morris had once again succeeded in revitalizing a brand, but this would not be the most radical action taken with Miller, nor would it be the only parallel to Marlboro.

The beer industry had experienced several long cycles, and over time, the industry had meaningfully consolidated. Some small breweries snowballed modest success into mergers, gaining scale and expanding distribution. Many others simply failed to keep up with the changing market and ultimately closed their doors. To achieve the former, Miller was hunting for the latter. It found exactly what it was looking for in Meister Brau.

Meister Brau, a Chicago-based brewer, had only a few brands: Buckeye and its namesake, Meister Brau. It also had a product, Lite, that, while unsuccessful in its initial launch, proved intriguing to Philip Morris.

Lite was a lower-calorie beer, achieved by utilizing higher temperatures during the brewing process, along with specialty enzymes that stop starches from breaking down into alcohols and sugars. Like Marlboro and High Life, it was time to reformulate Lite.

It did not take long to strike the right balance, and soon the company was producing a beer that, in blind taste tests, was outscoring other leading brands. Trial markets in 1973 included select cities in Illinois, Tennessee, California, and Rhode Island. It being lower calorie and easier to drink multiples of was only part of the benefit. While selling for the same price as High Life, Lite also cost less to produce. Sales of Lite were just in their infancy, but the company was already firing on all cylinders, with the year’s annual report stating:

In 1973, Miller Brewing sales increased substantially—with revenues up 31 % and barrel sales up 28.8%. The dramatic jump in Miller's barrel tales represented the largest percentage gain among major U.S. brewers. The total brewing industry increased its barrel sales 4.7% In 1973. Miller moved from seventh to fifth place among U.S. brewing companies.

The company did not rush Lite and instead opted to refine all aspects of its packaging and positioning. In 1975, it was time to roll out Lite nationally. Like High Life, its slogan would go down as one of the most recognized of all time:

“Everything you always wanted in a beer. And less.”

The marketing campaign’s brilliance was not solely due to its memorable slogan. There were limitations on how products, especially beer, could be marketed, and restrictions on certain claims, such as those claiming use leading to weight loss. Miller avoided using slender celebrities, knowing that such a route might appeal to specific demographics but would alienate core drinking groups. Instead, the company wielded athletes, coaches, and men seen as ‘your everyday drinking man’ to promote the product. Undoubtedly, this path was influenced by the success of Marlboro Lites, and Lite beer quickly built an appeal in a similar fashion, extending far beyond any niche.

The initial success of Lite was astounding. In 1975, its first year of nationwide commercial availability, the brand represented 20% of Miller’s total production. Similar to the initial launch of Marlboro, the product became so popular that the company could not keep up with demand, becoming only available to wholesalers via allocation. Miller had already been expanding its production capabilities, but more was needed. Statements within the 1975 annual report capture the ascent:

The U.S. brewing industry in 1975 increased barrel sales for the 18th consecutive year, with a total of approximately 148.5 million barrels sold—again of 2.1%, For the third consecutive year, Miller Brewing was the fastest growing brewer in the U.S., with total sales of 12,882,000 barrels, an increase of 41.9% and 3,798,000 barrels more than the 9,068,000 barrels shipped in 1974.

To keep pace with the growing demand, Miller has accelerated its capital expansion program. The expansion of our Fort Worth brewery from two million to five million barrels of rated capacity was completed during 1975. Our Milwaukee brewery, the largest brewery in the state of Wisconsin, with a rated capacity of seven million barrels, has been expanded and modernized with high-speed equipment. Miller also has a brewery in Azusa, California- with a rated capacity of 1.5 million barrels. Our fourth brewery, in Fulton, New York, is scheduled to begin production this year and should be operational by the end of the year with a rated annual capacity of 3.3 million barrels.

Lite’s rise was further aided by what didn’t happen. Competitors were not initially convinced that lower-calorie beers were viable, viewing them as a potential passing fad. This allowed Miller to push on the gas. As Philip Morris had no interest in maximizing short-term profits, the company instead aimed to take as much market share as possible. By 1978, the company had achieved meaningful headway in that goal, with that year’s annual report laying out:

The U.S. brewing industry, including imported brands, sold about 166 million barrels of beer in 1978, an increase of 4% over 1977. Miller's barrel shipments rose 29.1%, reaching 31.3 million barrels, up 7.1 million barrels over shipments in 1977.

In 1972, Miller sold 5.4 million barrels. Since then Miller's volume has risen 25.9 million barrels, or 482%. In 1978, Miller's share of the U.S. beer market increased to about 19% from 15.2% in 1977, and Miller strengthened its position as the second-largest U.S. brewer.

Miller’s trajectory would not go uncontested. Anheuser-Busch, the true behemoth, began testing Bud Light in 1981 and released the product nationwide soon after. Other brewers would release similar products, and the saturation of ‘lights’ would force Miller to rebrand Lite to Miller Lite to avoid confusion.

Miller would never be able to overthrow the behemoth. However, simply looking at the timeline from when Philip Morris acquired its initial stake to the year Joseph F. Cullman III retired, the figures are rather astounding. In 1971, the first year Philip Morris recorded a full-year contribution after gaining 100% ownership of Miller, Miller Brewing generated revenues of $204 million. By 1978, Miller's revenues had grown to $1.83 billion. This was roughly $24 million more than what the Philip Morris International segment generated in the same year. Over that same time period, Miller’s operating income grew from $1.3 million to $150 million, showing an uplift in operating margin of 756 bps.

These figures are unmistakably impressive, but one can’t help but shudder at the financial implications had Philip Morris failed to successfully revitalize High Life or develop Lite. This is especially true when considering the significant resources the company was forced to invest in the business. When looking at Philip Morris as a whole, what stands out most sharply is the superior profits of domestic cigarettes during the period. In 1978, despite rapid growth at both Miller and Philip Morris International, Philip Morris USA accounted for 58.7% of the group’s operating income. Over the period, Philip Morris USA’s operating margin (not excluding excise tax) had expanded from 16.11% to 23.31%, a level of profitability more than double that of the international cigarette business and nearly three times that of Miller.

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Ownership Disclaimer

I own positions in Altria and other tobacco companies such as Philip Morris International, 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.

Additional resources:

1. Cullman, Joseph F. III. I’m A Lucky Guy. 1998.

2. Philip Morris Annual Report, 1957. Source

3. Philip Morris Annual Report, 1960. Source

4. Philip Morris Annual Report, 1962. Source

5. Philip Morris Annual Report, 1963. Source

6. Philip Morris Annual Report, 1965. Source

7. Philip Morris Annual Report, 1966. Source

8. Philip Morris Annual Report, 1967. Source

9. Philip Morris Annual Report, 1968. Source

10. Philip Morris Annual Report, 1969. Source

11. Philip Morris Annual Report, 1970. Source

12. Philip Morris Annual Report, 1971. Source

13. Philip Morris Annual Report, 1972. Source

14. Philip Morris Annual Report, 1973. Source

15. Philip Morris Annual Report, 1975. Source

16. Philip Morris Annual Report, 1978. Source

Driven. To have the vision. To execute. To create a global phenomenon.

In Part Two, Joseph F. Cullman III was tasked with overseeing the creation of the new Marlboro. Painstaking efforts to refine the blend, base, box, and brand led to an all-star product. Yet, at the time, not even Cullman understood what a phenomenon it would become.

The rebirth of Marlboro coincided with the decision to expand internationally. This was unusual because it ran counter to the path domestic competitors chose. None showed much interest beyond the borders of the United States, not even R. J. Reynolds or American Tobacco, both of which were notably larger than Philip Morris at the time.

There were clear reasons why competitors decided to maintain a narrower scope. Despite increasing criticism toward the industry, the U.S. market was still growing at a steady clip and was immensely profitable. Rather than look to other markets, they preferred to prioritize domestic demand, and to hedge against the uncertain regulatory overhang, they would diversify into unrelated industries. Philip Morris would certainly do plenty of its own diversification, but its efforts in (and timing of) international expansion would ultimately prove brilliant, though the path was not without significant challenges.

Language barriers posed a significant hurdle. Culturally, there were walls to breach as well. Consumers in other countries had established preferences for cigarettes with specific types of tobaccos. Even if you could effectively overcome those challenges, many countries had manufacturing requirements, including the use of domestically-grown tobacco, not to mention the tax complexities across geographies. Overshading all of this was the fact that many attractive markets were wholly dominated by state-backed monopolies.

Philip Morris got a taste of just how difficult other markets could be in 1954, when it created its first foreign affiliate in Australia. On paper, it seemed like a sensible place to start. Australia spoke English, had an affinity for all sorts of American products, and, given its geographic proximity, could serve as a launching point for entry into Asia. However, things didn’t exactly go according to plan. Joseph F. Cullman III captured the developments hilariously well in his autobiography, I’m A Lucky Guy:

…We also sent one of our marketing people out there to help; he came up with a cartoon character called Puffing Billy in an on-premises display unit to help promote the smokes. The Philip Morris brand was a complete failure.

Another failure was Dunhill, whose trademark we licensed to use at the time. We introduced the brand in Australia, where it was greeted with complete indifference. No, that’s not right. It was absolutely rejected; the Australians called it “Dunghill.”

To add insult to injury, one familiar brand was doing quite well in Australia: Benson & Hedges. However, despite purchasing Benson & Hedges that same year, Philip Morris did not own the Australian rights to the trademark. Those rights were instead owned by British American Tobacco.

In 1955, Philip Morris branched out elsewhere, licensing La Suerte Cigar and Cigarette to produce the company’s brands in the Philippines and Tabacalera Nacional SE in Panama. This was followed by the licensing of C.A. Tabacalera Nacional de Caracas to produce Philip Morris brands in Venezuela.

A defining relationship for Philip Morris began in 1957, when it licensed Fabriques de Tabac Réunies (FTR) in Switzerland. The royalty rate equated to Philip Morris receiving less than $0.01 per pack, but the benefits of this deal extended far beyond the terms of the license. FTR was well respected in Switzerland, and Marlboro succeeded splendidly there. More importantly, it provided confidence that the company’s brands could win in Europe.

Philip Morris licensed Brinkmann to manufacture its brands in Germany in 1960, and, soon after, management spoke of respectable volume growth in the German market and anticipated more to come. However, the deal quickly highlighted the potential pitfalls of a licensing agreement. While licensing agreements reduced upfront investment costs, they led to less control, and anything less than 100% control will always prove unsatisfactory to a team that obsesses over quality. Brinkman found the tobacco blend used unsuitable for the German market, and, responsible for local marketing, believed cowboys were inappropriate for ads. Marlboro gained roughly 1% of the German market, but was stuck there for years as Philip Morris was bound by its agreement with Brinkman, grossly underperforming the brand in neighboring markets.

1961 marked the start of a string of monumental developments. The French tobacco monopoly, SEITA, agreed to sell Marlboro in designated stores and struck a licensing deal with Philip Morris to produce Parliament. The company’s 1961 Annual Report expounds on good and bad alike:

NEW LICENSING AGREEMENTS SIGNED; In France, Parliament was successfully introduced under a manufacturing license arrangement with the French Government Regie. In Benelux, Philip Morris is being manufactured under a licensing arrangement made late in 1961 with Ed. Laurens "Le Khedive." Marlboro will be introduced in Finland in 1982, to be made there by Amer-Tupakka Qy, under license from Philip Morris.

In South America, Philip Morris brands have a wide acceptance and our sales in this important market increased in 1961. In the Far East we enlarged our position, especially in Hong Kong where Philip Morris, locally made to our quality standards, were successfully introduced. In the Philippines, sales of our locally made Philip Morris and Marlboro brands were sharply curtailed at year's end by restrictions on the Importation of American grown tobaccos.

As Philip Morris brands grew in popularity in surrounding countries, slowly eroding local brand market shares, the company signed a licensing agreement with the Italian monopoly in 1962. By the end of the year, Philip Morris was exporting its cigarettes to 104 countries, and its brands were manufactured and marketed in 13 countries by licensees. Then, in 1963, the company struck gold. FTR, the Swiss concern originally licensed to produce PM products in 1957, became available for purchase, allowing Philip Morris to acquire an interest in the business. The company’s 1963 report highlighted the significance (emphasis added in bold):

The single most important international event of the year was the acquisition of a substantial Interest in Fabriques de Tabac Reunies S.A. — our licensee for the past seven years in Switzerland—which gives Philip Morris in a highly manufacturing operation on the Continent for the first time. In Switzerland, Marlboro is the second leading seller, and Fabriques de Tabac Reunies S.A. is the second largest cigarette manufacturer.

Philip Morris did not slow down, continuing to either strike licensing deals or expand owned production throughout countless geographies. One of the most notable was its acquisition of a majority interest in the Argentinian manufacturer Massalin y Celasco. The following year, 1967, would capture the rapid ascent realized so far. The year marked the company’s reorganization into Philip Morris Incorporated, comprising three distinct segments: Philip Morris Domestic, Philip Morris International, and Philip Morris Industrial. With this reorganization, Joseph F. Cullman III’s role(s) changed from President and CEO to Chairman and CEO.

Philip Morris Industrial, made up of Milprint Inc., Nicolet Paper Company, and Polymer Industries, experienced two significant worker strikes that year, dampening the segment’s profitability. However, cigarettes were still delivering head-spinning numbers. International sales increased by over 26% from the year prior. The segment’s unit sales were ~44 billion, which was equal to what the entire business, domestically and internationally, moved in total just a decade prior, in 1957. And if that wasn’t impressive enough, the company’s 1967 Annual Report elaborated on the stellar domestic performance (emphasis added in bold):

During the year we continued to outpace the industry in sales growth, earnings growth and penetration of the cigarette market both within and outside the United States. Cigarettes were again the most important contributor to the Corporation's sales and profits with sales of our cigarettes, here and abroad, continuing to increase well in excess of the population growth rate, notwithstanding significant tax increases on cigarettes both here and in most of our affiliate countries overseas. Total United States industry unit sales are estimated to have increased about 1.5 percent in 1967 as contrasted with our gain in domestic unit sales of 16 percent. Filter cigarettes continued to increase in popularity throughout the world and this trend is favorable for Philip Morris Incorporated because of our strong position in filters.

Marlboro contributed significantly to the year’s performance. In the domestic market, the company had just released Marlboro 100’s.

Philip Morris continued its string of innovation, and, four years later, in 1971, released the acclaimed Marlboro Lights. That year, Marlboro was firmly the #1 U.S. brand in international sales. Highlighting Philip Morris International’s success, Marlboro became the #1-selling global brand in 1972. Three years later, it became the #1 brand in the United States, holding 15.2% market share. Within the Marlboro mix, Marlboro Lights and Marlboro Menthol accounted for 21% of all Marlboros sold in the United States.

Joseph F. Cullman III retired in 1978 after serving as CEO for 21 years. From rebirthing Marlboro to establishing a global culture of excellence, his contribution to Philip Morris is difficult to overstate. If we are to reduce his tenure to the cold, hard numbers, what we see is astounding.

In 1956, the year before Cullman became CEO, Philip Morris recorded revenues of $410 million. By the time he retired in 1978, revenues had grown sixteenfold to $6.6 billion. During his leadership, revenues never experienced a down year.

I believe we should be cautious when using revenues as a metric for success. After all, international expansion led to many sales, which were inherently of much lower margins than those experienced domestically. But if we look at net earnings, Cullman’s exceptionalism is only reinforced. Net earnings grew from $15.5 million in 1956 to $408 million in 1978; up more than 2500%. Reframed, 1978’s net earnings were nearly equivalent to the company’s 1956 revenues.

Making the growth rate in net earnings even more impressive is the fact that Philip Morris was spending more heavily on capital expenditures. For most of the first decade following the relaunch of Marlboro, the company was spending ~2% of revenue on capital expenditures. However, following 1970, that figure rose considerably, reaching 8.5% in 1978. That year’s Annual Report addresses the increase:

To meet demand and prepare for future growth in all of our businesses, we have invested more than $1.5 billion in capital expenditures over the five-year period from 1974 through 1978, of which $566 million was spent in 1978. The anticipated continued growth of the company, our constant emphasis on the high quality of all our products, and our efforts to maximize our production efficiency will require an even larger capital investment program over the next five years . For the period from 1979 through 1983, we estimate total capital expenditures will be somewhat in excess of $3.0 billion. More than 90% of this amount will be used to increase capacity and productivity to meet expected demand.

The tobacco business was still growing quickly, especially internationally. Part of the rise in capex was related to this, and it accelerated as the company began to favor owned production over licensing. However, a third story was being written at the same time. Much like its domestic competitors, Philip Morris could not shake the uncertain regulatory future facing its core business, leading to a string of unrelated acquisitions. Some where succesful. Others dreadful. As a whole, these ambitions demanded increasing amounts of capital.

Part Three concludes our exploration beyond the borders of the United States.

In Part Four, we will venture beyond tobacco entirely.

If you enjoyed this piece, hit “♡ like” on the site and give it a share.

Share

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

Ownership Disclaimer

I own positions in Altria and other tobacco companies such as Philip Morris International, 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.

Additional resources:

1. Cullman, Joseph F. III. I’m A Lucky Guy. 1998.

2. Philip Morris Annual Report, 1954. Source

3. Philip Morris Annual Report, 1955. Source

4. Philip Morris Annual Report, 1956. Source

5. Philip Morris Annual Report, 1960. Source

6. Philip Morris Annual Report, 1962. Source

7. Philip Morris Annual Report, 1963. Source

8. Philip Morris Annual Report, 1966. Source

9. Philip Morris Annual Report, 1967. Source

10. Philip Morris Annual Report, 1971. Source

11. Philip Morris Annual Report, 1972. Source

12. Philip Morris Annual Report, 1975. Source

13. Philip Morris Annual Report, 1978. Source

Driven. To be bold. To produce greatness. To redefine the industry.

We ended Part One in 1954, with Philip Morris having just finalized its purchase of Benson & Hedges. The acquisition armed the company with a leading premium filtered cigarette, Parliament. Despite Parliament’s success, it would not prove to be the driving force that allowed Philip Morris to take on its much larger competitors, American Tobacco and R. J. Reynolds. That ability came from the people gained through the acquisition, including Joseph F. Cullman III.

When Joseph F. Cullman III arrived at Philip Morris, it was not all that he expected. The company was far larger than the environment he was used to at B&H, but its advertising had grown stale, and recent product launches failed to propel it forward. It had never quite adjusted properly to its previous growth spurts, leaving it poorly structured and less efficient. The acquisition of B&H was just the first of many actions in which the company took on new risks for the prospect of outsized rewards.

One of Philip Morris’ brands, Marlboro, had stalled. First launched in 1924, positioned as a premium cigarette for women, it aimed to attract those who took up smoking during WWI. Alas, most smokers were men, and the company needed a solution to a new problem that had been uncovered.

Filtered cigarettes were fast-growing, and Parliament was in a solid position. However, research showed that more than half of smokers who trialed filtered cigarettes went back to unfiltered variants. Two conclusions were reached. Overall, the market lacked a filtered cigarette with full flavor, and many men saw filters as emasculating. To tackle these issues, the company would design a new cigarette with broad appeal, with flavor as bold as the imagery supporting the brand. This would be the new Marlboro. Appointed as a vice president following his exceptional work at B&H, Joseph F. Cullman III was tasked with assisting in its development.

Using the Marlboro name was rationalized in the simplest terms. It was already familiar, and while growth had stalled, it had a loyal consumer base. Initial advertising for the new Marlboro wouldn’t be quite as steep as launching an entirely new line. Four considerations, blend, base, box, and brand, would prove critical to success.

The original Marlboro used Virginia bright leaf tobacco, which has a high sugar content and is mild and sweet. The new blend would be designed by Wirt Hatcher, the company’s Vice President in Charge of Leaf Tobacco and a master blender, using a blend of Virginia and flavored burley tobaccos, along with small amounts of Turkish and Oriental tobaccos. Producing the blend was not cheap, but there was no objection from those overseeing the project. The company was obsessed with quality and knew it had to design something that could best RJR’s Winston. Winston was released in the spring of 1954 and sold 7.5 billion units that year. The next year, the brand would go on to sell 23 billion units, rising from #13 to #5 in the country. During testing, Philip Morris found that Marlboro outranked Winston in flavor, with users also reporting that Marlboro was smoother.

The design of the base of the new Marlboro, the filter, was an equally puzzling piece. Copying Parliament’s cotton filter was too primitive. Marlboro needed to stand out. Fortunately, while the company’s brand portfolio had stalled due to inefficient R&D, multiple years had been spent optimizing new filter technology. Competitors had released cellulose-based filters. Philip Morris had designed “Selectrate”, made of cellulose acetate. This would be purposed into a flush, cork-styled filter for Marlboro.

The next question to answer would be on the design of the box. Soft packs rose to prominence in the 1930s and continued to gain adoption through the 1940s. Again, Marlboro needed to be different. Inspired by a new design gaining popularity in England, the group settled on using a flip-top box. This would prove to be one of the most consequential decisions in the equation.

The new packaging, made of cardboard, was crushproof. When held, it felt more substantial; more important. Without a single extra word, it immediately conveyed a sense of superiority.

Just as important as the design of the new packaging was who was responsible for producing it. The boxes were made by Molins’ high-throughput machines. Molins had started in 1874 as a cigar and cigarette producer before focusing on manufacturing machines in the early 1900s, patenting its first cigarette maker, the Mark1, in 1926. Molins also held a patent on the flip-top box design. Philip Morris decided to take a risk. The company committed to a significant minimum order size. In doing so, Molins provided Philip Morris with exclusive use of the box design for a two-year period.

Philip Morris had a masterful tobacco blend, a perfect filter at the cigarette’s base, and the exclusive box. But how would it market the brand? Rebranding Marlboro was a difficult task, as the goal was to make it feel familiar yet entirely new. To solve this conundrum, Philip Morris felt that the go-to agencies regularly used by the industry simply wouldn’t do. Instead, in late 1954, they looked to Chicago and the smaller firm Leo Burnett. This relationship would prove to be as consequential as the one Philip Morris had with Molins.

Burnett’s outfit was small, but on the rise, having created legendary campaigns around the Jolly Green Giant, the Pillsbury Doughboy, and the Keebler elves. He had an adept ability to create ads that not only gained attention but also stayed in your head. For Marlboro, it certainly helped that he was an avid smoker himself (not that such a quality was rare at the time). However, during early discussions, Burnett made Philip Morris aware of a problem they didn’t even know they had.

Leo Burnett found Marlboro’s quality exceptional and was intrigued by its flip-top box. What he was not fond of was the design applied to the box, which was done by a separate firm earlier commissioned by Philip Morris. The “M” in “Marlboro” was lowercase, and the box had red-and-white pinstripes on the top, which he found unappealing and unsophisticated. He and his team redesigned the package in a single night, landing on the chevron design Philip Morris adopted, which would ultimately become one of the most recognizable products of all time. The iconic lettering features a capital “M” and elongated “L” and “B” letters. While the elongated letters are thought to help center the viewer’s eyes and balance the design, I cannot help but think of Leo Burnett’s initials when I see them.

The right box design was essential to Leo Burnett, not just because it would support his success and that of Philip Morris, but because he intended for the box to be prominently featured in the ads he would create for the brand.

Freedom. Toughness. Independence. The Cowboy spoke to everyone. It took practically no deliberations amongst the Philip Morris team to agree that this would be the route. They had better not be wrong. The processes involved in developing Marlboro took longer than initially expected, and time was not a luxury that could be afforded. Sales and profits had become challenged. In January of 1955, the reimagined Marlboro was launched.

In 1954, the final pre-rebrand year, the old Marlboro had sold 300 million units. Hardly a market-shaking number, but respectable for a premium niche. For the year, Philip Morris reported net earnings of $11.2 million on net sales of $294.9 million. Joseph F. Cullman III’s father would not see what his son, Marlboro, and Philip Morris would go on to achieve. He died on March 18, 1955, less than a year after Benson & Hedges was acquired and just two months after the release of the new Marlboro.

In 1955, the first year that the Cowboy was puffing, Marlboro sold 6.7 billion units. More would have been sold if not for the fact that production capacity was maxed out. The company’s 1955 Annual Report stated:

The year 1955 witnessed the national introduction of Marlboro, our Company's entry in the popular priced filter field. The success of the Marlboro filter cigarette in the hard flip-top box resulted in an encouraging increase in overall sales in the last six months of the year over the same period of 1954. Realization of the full sales and profit potential of Marlboro was not possible in 1955 due to unavoidable delays in the delivery schedules of imported packaging machinery. It was not until April that Marlboros were available in most of the major cities in the United States.

For the year, Philip Morris saw net sales remain roughly flat, while earnings increased only modestly. But this was only the beginning. In 1956, net sales increased to $326.8 million, with net profits rising to $12.7 million.

During the fall of 1957, the company’s president and CEO, Parker McComas, was diagnosed with cancer. In November of that year, he underwent surgery, but experienced a fatal heart attack shortly after. The company was in dire need of a leader who could leverage Marlboro’s momentum. Joseph F. Cullman III had been with the company for only a few years. However, considering his importance to Parliament at B&H and his critical role in developing Marlboro, the board ultimately decided he was the man for the job. The board did not choose poorly, and by 1960, net sales had grown magnificently, breaking the half-billion mark, and net earnings had grown to $21 million, nearly double 1954’s earnings. The 1960 Annual report glowed of Marlboro:

Marlboro cigarette volume was well ahead of sales for 1959. Advertising for this brand continued to call attention to its full favor and exclusive Selectrate Filter, and it was obvious from the years’ results that Marlboro delivered what the advertising promised.

Marlboro’s growth continued, supported by increased advertising across radio, TV, and print. Profits followed. Leo Burnett once again delivered, and the renowned Marlboro Country campaign began in 1963.

The United States had become Marlboro Country, and Philip Morris was in an enviable position. But not all was well. The company’s ambitions to expand internationally rose alongside Marlboro. Likewise, concern over domestic regulatory risk led to entirely new endeavors. Each had their own painful mistakes, but none too severe to thwart the ascent. With Marlboro, and Joseph F. Cullman III at the helm, Philip Morris was about to experience something radical.

In Part Three, we will begin exploring beyond the borders of the United States.

If you enjoyed this piece, hit “♡ like” on the site and give it a share.

Share

Subscribe now

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

Ownership Disclaimer

I own positions in Altria and other tobacco companies such as Philip Morris International, 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.

Additional resources:

1. Cullman, Joseph F. III. I’m A Lucky Guy. 1998.

2. O.P.M’COMAS DIES; TOBACCO MAN, 62; President of Philip Morris Had Been Bankers Trust Executive--Civic Leader. The New York Times, 1957. Source

3. Philip Morris Annual Report, 1954. Source

4. Philip Morris Annual Report, 1955. Source

5. Philip Morris Annual Report, 1956. Source

6. Philip Morris Annual Report, 1960. Source

7. Philip Morris Annual Report, 1963. Source

Driven. To master himself. To master his work. To change the world.

Joseph F. Cullman III was born on April 9, 1912, six years older than his brother, Edgar M. Cullman. Living in New York City, he was surrounded by family members deeply entrenched in the tobacco trade. His family was better off than most, with the money and connections to give him a leg up in the world. Following the same educational path as his father, Joseph F. Cullman Jr., he attended the prominent boys’ boarding school Fessenden in Newton, Massachusetts, and Hotchkiss, a private preparatory school in Lakeville, Connecticut.

1929 was marked by several key developments. The family’s tobacco business, Cullman Brothers, was growing and profitable. That year, Joseph F. Cullman Jr. established a closed-end investment trust, Tobacco and Allied Stocks, capitalized at $3 million, with the Cullman family owning 10%. Unlike many other investment trusts at the time, it wasn’t levered or used as a speculative vehicle. Turnover was rare, with capital being steered into investments under Joseph F. Cullman Jr.’s expertise in the tobacco industry. Its largest holdings included R. J. Reynolds, American Tobacco, Imperial Tobacco, and Philip Morris. Rather than being reinvested, the dividends from these holdings were passed through to unit holders.

1929 was also a turning point for the Cullman family, marking the Cullman Brothers’ entry into cigar manufacturing. A small cigar company, Webster-Eisenlohr, was in dire straits. The company had defaulted on a loan collateralized by its own shares. The provider of that loan, Chase Bank, took control.

Chase was determined to recover the loan’s value, striking a deal to have Joseph Jr. lead Webster into profitability and, in doing so, providing him with a sizable block of preferred shares at a discounted rate. This would be no easy feat. At the time, many popular cigars were selling for five cents. With the economy souring, fewer and fewer were willing to pony up ten cents for Webster’s Golden Wedding brand, and even fewer could afford Fancy Tails, priced at fifteen cents.

In 1931, again following in his father’s footsteps, Joseph F. Cullman III attended Yale. In the summer months, between terms, is when he would cut his teeth in the tobacco trade, driving a truck for Webster and acting as a door-to-door salesman at small cigar shops. Achieving new sales was rare, and maintaining clients was a constant struggle.

When Joseph III graduated from Yale in 1935, there was no cushy job awaiting him and his ivory education. The country’s unemployment rate was ~20%. His father, believing his sons should master all aspects of the trade from the bottom up, helped him secure a role as a store clerk at Schulte’s cigar shop in New York. It was mostly unchallenging work, but in that role, he learned to connect with customers on a personal level. Unchallenged, Joseph III left his post at the cigar shop in early 1936 and was shipped off to Havana, Cuba, to learn the nuances of cigar rolling from the masters at H. Uppmann.

Joseph III returned home and excelled in sales for Webster. However, in late 1936, accusations would tilt his father, and ultimately steer him in a new direction. Joseph Jr. had successfully turned Webster profitable, but Chase Bank claimed that he was self-dealing by having the company buy cigar wrapper leaf from the family business. Jr. stepped down as CEO, and Chase sold the business. Despite the unfairness shown to his father, Joseph F. Cullman III continued to work in sales for the business until 1941, when he went on active duty in the Navy.

After the Webster incident, Joseph F. Cullman Jr. had no interest in working for any business he did not fully control. He began to eye Benson & Hedges, originally a UK company that began retailing in New York in 1899. The company was small and seemingly out of date. Its stores were ornate, staff wore morning coats, and clientele steered posh. Retailing didn't stand out to Jr.; it was the brands the company owned that did. Alongside cigars, Benson & Hedges owned several cigarette brands, each differentiated. Some were scented. Some had golden tips. Others were extra long.

Most unique to Benson & Hedges was its strategy a decade prior, at the start of the Great Depression. Understanding that consumers would be strapped for cash, many manufacturers steered heavily into cheaper brands. That makes sense, considering that industry cigarette volumes fell from ~200 billion in 1930 to 113.5 billion in 1931. B&H, however, released two new premium products. The first was Parliament, a blend of Virginia, burley, and Turkish tobaccos, flavored with licorice, apple juice, and brown sugar. Parliaments had a cardboard tip and a cotton filter, producing a uniquely smooth smoke. The second was Virginia Rounds, made from all-Virginia tobacco and encased in high-end packaging.

Joseph F. Cullman Jr., through Tobacco and Allied Stocks, purchased 51% of Benson & Hedges for $850,000. In 1941, B&H produced profits of $158,000 on revenues of $2.1 million. With a controlling share, Jr. had a vision to significantly increase these figures.

Joseph F. Cullman III was not yet involved in this new endeavor. In the Navy, with World War II in full gear, he found himself…rather preoccupied, to say the least. He first reported for duty on board the Reuben James, a destroyer from WWI. However, when he arrived, the commanding officer told him his assignment had changed and that he was to work at the Bureau of Navigation in Washington, D.C. This reassignment would prove to be a blessing, as the Reuben James was sunk in the North Atlantic just two weeks later, killing nearly all on board.

The December 7, 1941, attack on Pearl Harbor led to Joseph F. Cullman III serving on board the USS Montpelier, a Cleveland-class light cruiser, as a gunner in 1942. Unbeknownst to Joseph III at the time, the Montpelier would go on to become one of the most distinguished ships in WWII, with numerous engagements in the South Pacific over the following few years, including bombarding airfields in the Solomons, sinking a destroyer in the Battle of Blackett Strait, and partaking in the monumental Battle of Empress Augusta Bay, earning a total of thirteen battle stars.

When World War II ended in 1945, Joseph F. Cullman III was not sure what to do with himself. The family’s love for tobacco persisted, but it seemed inconsequential compared to what he experienced over the last four years. He enrolled to study history at Columbia University. This new path would not last long, as he could not resist working with his father in the industry they both knew so well.

In his absence, Benson & Hedges had flourished. The war had been an absolute boon for cigarettes. In 1945, 12 million men and women were enlisted, and military sales totaled 65 billion sticks, roughly 10% of the industry’s output. A habit had been firmly entrenched in the nation, and that year, Benson & Hedges sales rose to $5.3 million. It was time to expand, and expand they did, with Joseph F. Cullman III now serving as vice president.

The company invested heavily in increased production to keep up with demand. Sales climbed to $7.2 million in 1949 as the company began advertising in a meaningful way for the first time. Its ad budget for the year was $300,000, or about $0.50 per 1,000 cigarettes sold. In the grand scheme of things, this was still small peanuts, as the major manufacturers were spending considerably more while also selling far more cigarettes, at roughly $0.20 per 1,000 cigarettes.

The war would only be the first major tailwind for Benson & Hedges. In 1952, the article “Cancer by the Carton” was published in Reader’s Digest, raising the public’s attention to the links between smoking and lung cancer. While this created concern, it would still take more than a decade for industry volumes to reach peak levels. More importantly for B&H, smokers began to gravitate towards filtered cigarettes, which were previously only a niche category. Never mind that Parliament’s cotton filters’ real role was to prevent bits of tobacco getting stuck on smokers’ lips or in their mouths; it acted as a magnet.

In 1953, Benson & Hedges saw sales climb radically, reaching over $27 million. On these sales, the company earned a net profit of $1.2 million, roughly 7.5x what it had earned 12 years earlier when Joseph F. Cullman Jr. took control. But not all was perfect. The company had paid modest dividends in 1949 and 1950, but paid nothing in the following three years because it needed capital to expand. In 1953, the company even issued new shares, allowing existing shareholders to buy one new share at a marginally discounted price for every ten they already owned.

Further expansion would be no walk in the park. Following the Reader’s Digest article, all major manufacturers began exploring ways to make new filtered cigarettes. Despite B&H’s growth, it was still a small player. In 1953, R. J. Reynolds generated sales of $881 million, 32x more than Benson & Hedges. That same year, American Tobacco generated sales of over $1 billion.

Another tobacco company was looking to make a move. Philip Morris was an up-and-comer, having grown sales from $179 million in 1946 to $315 million in 1953. But the company could not easily go toe-to-toe with the two giants, and its R&D pipeline was lacking. An alternative path was to buy its way into the fast-growing premium filtered cigarette category.

In late 1953, Tobacco and Allied agreed to sell its majority stake in Benson & Hedges to Philip Morris. The purchase price? $22.4 million, a magnitude more than what Tobacco and Allied initially paid for its stake, paid in full with 367,829 shares of Philip Morris stock. Philip Morris’ holders would approve in April 1954.

The deal received criticism. Philip Morris paid roughly 2x the going industry multiple. Additionally, while the purchase price exceeded $22 million, Benson & Hedges had total assets of only $5.9 million. That’s quite a premium to pay for premium brands. Yet, alongside the brands and all of the production, Philip Morris gained something else deeply valuable yet overlooked: the people. People with ideas, including Joseph F. Cullman III. Parliament would remain successful. But it was merely a precursor and would soon be overshadowed by the most outstanding rebrand of all time.

In Part Two, we travel through Marlboro Country.

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Ownership Disclaimer

I own positions in Altria and other tobacco companies such as Philip Morris International, 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.

Additional resources:

1. Cullman, Joseph F. III. I’m A Lucky Guy. 1998.

2. Robert E. Bedingfield. Personality: Tobacco Man in A Family Line; Philip Morris Chief, J.F. Cullman 3d, Heir to Dynasty. The New York Times, 1961. Source

3. 2 BOARDS APPROVE CIGARETTE MERGER; Consolidation of Philip Morris and Benson & Hedges Now Is Up to Stockholders. The New York Times, 1953. Source

Where are we in the arc?

Let’s revisit the titles of recent STG-related notes in reverse sequential order.

• A Tale of Two (Dec ‘25)

• Washed (Nov ‘25)

• Racked (Aug ‘25)

• Stretched (Jun ‘25)

• Wider (Mar ‘25)

• Elusive (Nov ‘24)

Words have meaning, and the ones above tell a story of progressive struggle. But the tipping point was only just before, following Q2’24, when Scandinavian Tobacco’s aggressive posture became too evident to ignore. Caution has grown as estimates (my own included), and results (both reported and adjusted) keep moving in the other direction. Now, the company has been boxed. Again, words have meaning, so choose the meaning that suits best: the company has been punching above its weight, taking on too much, too fast; it sits in the penalty box, imprisoned for moving targets and metrics after missing its priors; the aggression previously shown has forced the company into a corner, or perhaps a box which has been painted black. Take your pick, or all of the above.

Q4’25 was anticipated with a degree of optimism in the reporting as far as cleanliness goes, having already lapped the acquisition of Mac Baren and the loss of ZYN-related distribution in the United States. Unfortunately, there was still a good deal of grime. Competitive pressures in the U.S. handmade cigar market persist following changes to tariffs. Australia’s lack of tact in excise policy has ballooned illicit markets, tainting legal volumes of all products, including MRC. Attempts to stabilize MRC in Europe have been shaky, at best, with the group’s ERP rollout causing supply issues beginning in Q3, and Q4 showing a stark mismatch in FCF due to an associated failure to collect receivables in a timely manner.

Since becoming public, a central part of the STG thesis has been hinged on the rate at which capital has been returned to shareholders. Between dividends and share repurchases, the pace was rapid at times. Repurchases have already been shelved, with resources instead being spat across the countless projects the group is tangled in. It is no surprise that many headlines tout the reduction in dividend as a crushing development. The reduced dividend was included in the headline of the company’s own release. So it is also not surprising that it has been pointed to as the reason for the colossal drop in share price following the report’s publication. However, for those following along, this is a wholly unsatisfactory explanation, as it is no explanation at all, with the change in dividend policy well telegraphed during the group’s Capital Markets Day event last November. The move to a more flexible payout resulted in my prior illustration showing a forward dividend of DKK 4.75, just above the 4.5 that the board ultimately approved.

So what is the real source of commotion? There are many.

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Logista’s Q1’26 report cited numerous challenges. The war between Russia and Ukraine was front and center in the geopolitical sphere, as were threats of military action between the United States and Iran. Fast-forward a mere few weeks, and those threats have materialized, with the United States having struck Iran in devastating fashion. No doubt, Logista will cite this in its coming reports as yet another source of uncertainty.

Tacked on to geopolitics, inflation, and blooming unease, Logista wastes no time in citing countless other issues as well. Within Ibera, the fruit season was delayed, directly affecting long-distance transport. International maritime transport was curbed by export restrictions due to swine flu. Fortunately, we will not catch the disease, as there has never been much piggishness in covering the company.

Despite all the near-term noise and even the legiment headwinds affecting parts of the business, Logista remains resilient. Just as it always has, it marches forward, expanding its reach and extending its importance. Revenues and economic sales sharply contrast with the macroeconomic context the company describes.

You could push back, pointing to the group’s net profit in Q1’26, measuring -8.4% below the same period last year. However, that would only show the pitfalls of placing too much importance on a single quarter. Of the three drivers primarily responsible for the reduction in net profit, one is largely outside management’s control: the reciprocal credit agreement Logista holds with Imperial Brands. While the terms were renewed to partly hedge against movements in rates, it is indeed still affected by the EU’s lower rates, reflecting in financial income declining by just under €3m for the period, with financial expenses declining by a mere €0.3m. The other two, directly related to operations, are primarily about timing.

A theme that ran through my Logista-related notes last year was the degree of cyclicality introduced to the business through its efforts to diversify away from tobacco and related products distribution. Growing pressures against El Mosca and Carbó led to restructuring last year, aimed at improving efficiency by better integrating both outfits into the parent’s broader operations. Unsurprisingly, these efforts have carried over into 2026, with a restructuring charge of €3.7m recognized in Q1; not a glaring figure, but a similar charge was absent in Q1’25.

It is again worth noting that while long-distance transport and maritime are being ironed out, not all non-TRP distribution faces the same struggles. Parcel has overall remained remarkably stable. Pharmaceutical Distribution posted a 1.7% decline in revenue; however, Pharma economic sales (the more important figure) increased by 6.5% as services expanded across hospitals and the total client list grew.

Last, but not least, concerning the three factors weighing on Q1’26’s net results, is the performance of TRP distribution in Italy. Over the last several years, this segment has grown meaningfully, more than offsetting declines in France. Driving this has been a tame decline rate in legacy combustibles paired with an accelerating contribution from next-gen products, primarily HnB. This has led to Italy outgrowing Iberia, well-captured in the trailing twelve-month figure below:

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The U.S. market, the greatest opportunity, which Haypp continues to prioritize, is growing radically. Haypp has regained an advantageous direct supply of ZYN from Philip Morris International. We have witnessed market fragmentation, with British American Tobacco’s Velo Plus (along with reformulated Grizzly) taking nearly a quarter of the market in record time. Industry pouch volumes (offtake) grew by 35% y/y in Q4, and 32% in January 2026. on! Plus has been authorized through the FDA’s pilot program. We have no way of knowing if or when other authorizations will come, but the environment is already favorable for Haypp. If Velo Max and ZYN Ultra are both authorized, the environment moves closer towards ideal.

More high-quality products, appealing to a wider adult audience, will support the continued growth of the category. The physical limit of shelf space at c-stores means the widest assortment will be available online. Scale, and the absence of additional costs associated with physical distribution and retail, will mean that Haypp remains able to sell at remarkably low prices. This is especially so when its Media & Insights business provides high-margin dollars that can be used to subsidize the proposition presented to consumers.

Haypp’s new consumer acquisitions in the U.S. have heated up too, growing by 195% y/y in Q4’25 and 58% sequentially from Q3’25. Not shown in the figures, but disclosed by the company, January 2026 shows pouch volumes up 120% and new consumer acquisitions up by more than 250%. Staggering. Naturally, but perhaps overlooked, is the fact that new consumer acquisitions can not be extrapolated into immediate revenue growth 1:1. The majority of sales are made to existing consumers, with mature, ingrained usage and purchase habits. New consumer growth hints at what is to unfold over multiple quarters and years.

Haypp sports remarkably high retention, and both retention and new consumer acquisition conversion rates are improving. These efforts were tackled in earnest in Q4’25 by the new U.S.-dedicated team and are expected to continue through H1’26, as illustrated on slide 7 of the Q4’25 presentation. Once refined, the company will then deploy resources to accelerate new consumer acquisition. This is absolutely the correct order and the route I have advocated for. As highlighted last quarter, the company’s new loyalty and referral programs can act as a dual engine for growth. I have seen little discussion elsewhere on these programs, but I expect them to gain serious attention. Each fully refined prior to engaging in more significant marketing can provide an outsized amplification of all dollars devoted. Focusing on near-term Growth Markets margin compression is missing the forest for the trees.

Given the size of the opportunity, it’s understandable that Growth Markets, primarily the U.S., receive disproportionate focus. However, Haypp’s Core Markets can not be overlooked. Core net revenues grew by 6.2% in FY’25, driven by strong growth in nicotine pouches, partly offset by the decline in Snus. Critically, full-year segment EBITDA margin expanded by 160bp to 10.3%, and was at 10.5% in Q4. This segment comprises highly competitive markets, including Sweden, where Haypp holds just over 30% of the total category share. Sweden is also second to none when it comes to positive pouch regulation, providing minimal risk from the government. Usage trends shifting from snus to pouches, usage occasions rising, and pouches accounting for a greater share of total sales support a modestly improving net sales growth rate. FY’25 net sales compounding at a 7% rate through 2028 results in SEK 3.4 billion for the segment. While we should not assume segment margin expansion in 2026, there is a clear path to modest margin expansion, driven by scale and M&I, to between 11-12% in 2028, resulting in segment EBITDA of approximately SEK 400 million. In other words, the company currently trades at ~14x 2025 Core markets EBITDA and just over x10 for 2028, ignoring the vast potential of the U.S. and beyond.

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Hidden amongst

In February of last year, I noted how Haypp’s underlying financials have always been hidden to a degree as the business has expanded. Declines of snus masked the growth of pouches in Core Markets. Losses in Growth Markets obscured the Core's profitability. How exactly those Growth Markets were growing was masked by declines in legacy oral tobacco products that also carried weaker unit economics. After Growth Markets became profitable, the new Emerging Markets segment began eroding the group’s profitability.

These developments are mostly straightforward. They weren’t detectable if you were looking at Haypp through a basic screen, but became evident once you started digging through the company’s reports. But these are not the only factors that have muddied the waters. Ending sales in California and pausing sales in other select states contributed. The ZYN shortage, which initially drove users online in search of the beloved product, reversed. Haypp was forced to ration its inventory, capping allowable amounts per order. Then, when Haypp ran out and could no longer source directly, there was a nontrivial level of churn among those new cohorts.

The recent reacceleration of new users and pouch volumes in the United States is partly attributed to Haypp reestablishing a direct ZYN supply from PMI. However, the implications aren’t wholly straightforward, and not all metrics, at face value, appear positive for Haypp. Another mask has been layered on. To explore that, we must first consider what actually occurred because of the ZYN shortage.

Revisiting the button

On May 11, 2025, I posed a question: Pretend there was a button you could push that would ‘erase’ the ZYN shortage. Ignore the effect on PMI and all other industry participants and only concern yourself with how it would affect Haypp. Would you press the button?

I believed most people would immediately slam that button. My personal perspective was quite different (emphasis added):

The absence of U.S. ZYN is captured in Haypp’s top line and the number of active consumers in Growth Markets. All else equal, it would be preferred if those figures didn’t experience a drop—an eventual resumption of ZYN sales would be unmistakably positive for the group, as not having a popular product available diminishes the value proposition. However, as I’ve highlighted over the last month in notes on Haypp Group’s 2025 CMD and the Q1’25 results of Philip Morris International and Altria, the U.S. market is becoming more fragmented. This is one of the most essential and beneficial dynamics for Haypp. The ZYN shortage has unmistakably accelerated growth rates of new competing brands. I believe that, even with ZYN normalizing channels in H2’25, there is considerable momentum behind other brands. While they are nascent, I expect them to continue to take share. Cracks will spread. This is ideal timing for Haypp to significantly ramp up investment into customer acquisition and raise awareness of the online channel.

Fre/Alp, zone, and other brands were aided by the wavering absence of ZYN. No brand benefited more than Velo Plus.

You might question how much Velo Plus benefited, given its launch came after the most intense period of the ZYN shortage. However, I will steadfastly argue that Velo Plus had a far easier time generating product trials because many users, previously accustomed to using ZYN exclusively, had already changed their behavior and had trialed other products. The quality of Velo Plus led to significant repeat purchases. The only reversal in market share trend was when PMI initiated temporary, but intense, promotions.

The U.S. market has changed.

Despite the short-term headwinds that hit Haypp, the ZYN shortage was a phenomenal boost for the company’s long-term trajectory in the United States. We are only starting to see the effects. But one of those effects is again shrouding the underlying trend.

When Haypp was affected by the ZYN shortage, its consumers shifted to other products that carried lower ASPs. This had a direct, negative effect on average order value and net revenues. However, those products also carried higher margins, allowing Haypp to more than offset the impact at the gross level. While exact details aren’t disclosed, we know that the reestablished direct ZYN supply is now more comparable to the margins of other products. Despite this, due to the fragmentation that has occurred and the persistent heightened competition among brand owners, it is also priced lower than it was pre-shortage, which again has a negative effect on AoV and net revenues.

on! Plus, having received FDA authorization for a number of SKUs, is confirmed for a nationwide rollout beginning next month, with broad retail distribution by the end of H1’26, as Altria confirmed during its 2026 CAGNY presentation. Even without additional authorizations through the FDA’s accelerated pilot program, this will again increase competition and overall promotions, potentially leading to temporarily lower ASPs for Haypp, further masking the underlying evolution. This will coincide with the company’s higher rate of reinvestment into its Growth Markets.

Pushing on the gas

Despite turbulence within the U.S. market throughout 2025, Haypp wasted no time working to capture the ever-growing opportunity. The year was marked by the buildout of the U.S.-dedicated team, which was the primary driver of the significant increase in headcount.

The company also conducted intensive research to determine the most effective way to raise awareness of the online channel and to tailor Haypp’s value proposition to consumers. Improved site infrastructure has allowed for greater iteration and customization, and the company is actively refining how it communicates with consumers and presents its value proposition.

In the middle of slide 7 of Haypp’s Q4’25 presentation sits the marker “Refine fundamentals.” This includes a host of things such as navigation, highlighting special offers, checkout, shipping rates, and numerous other aspects that factor into the user journey. It also covers the company’s still-nascent referral and loyalty programs. Regarding what exactly these programs entail, I point you to last quarter’s note.

I will say, in and of themselves, referral and loyalty programs offer nothing of significance. Provide a poor product or service? Charge too much? People are unlikely to repeat their purchase. They are even more unlikely to refer their friends and family to you.

There is a counterargument to the opposite: if you provide exceptional value to your customers, why on earth would you need referral or loyalty programs? But such a line of thinking misses the point of Haypp’s scale economies shared model. As I laid out in my Q2’25 note, Skyward, with ‘Never enough’, pushing on the gas is what produces greater value for all parties. I expect these programs to be extremely impactful, along with other systems the group is meaningfully investing in.

Insights on Media

The importance of Haypp’s M&I business can not be overstated. It is critical not only for funding growth but also for providing incremental high-margin dollars that sustain low unit prices for pouches. Outpacing the rest of the business, implied M&I sales grew by 55% in FY’25.

Understanding the growth drivers behind the Insights side is fairly straightforward. More brand owners competing equates to more demand. Demand from regulators and academic bodies is also growing. More consumers reinforce the quality and value of the Insights data.

The Media side has its own straightforwardness. As competition intensifies within a geography, brand owners become more willing to spend more on media placements. This includes anything from sponsored listings to banner ads. As the number of consumers using Haypp’s sites increases, the value of media placements increases. But there was previously a concern. Over the last two years, we have seen total media placements increase across Haypp’s sites. That’s certainly good for driving incremental Media sales, but there is a ceiling. You can only increase placements so much before the density is overwhelming and degrades the user experience.

Haypp’s management has stated that M&I demand going into 2026 was robust. But Media is bound to provide an increasing contribution as the group actively enhances its Media offerings. Historically, Haypp’s Media offerings have been primitive compared to large-scale, established platforms in other industries. This is changing meaningfully.

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Set aside British American Tobacco’s buzzy phrases like “quality growth” and ambitions to be a predominantly smokeless business by 2035. It is evident that quality growth must relate to earnings-per-share growth, and if you want earnings-per-share growth, while smokeless may enhance it, it will not replace the awesome profitability of combustibles anytime soon. This does not mean legacy categories are immune to trials and tribulations. All one must do is look at Australia and Bangladesh, which significantly dampened APMEA performance for the year. But the same is true for new categories, and to a greater degree. Consumer demands are rapidly changing, as are the regulations that govern new categories.

In 2025, vapor showed mixed performance, with illicits acting as a headwind, the group exiting markets, and expanding offerings in others. THP experienced turbulence, too. BAT touts glo Hilo and associated consumables as premium offerings. They are indeed an improvement. Considering the timing of launch, it is best not to put too much emphasis on early figures, but it is worth pointing out that success is not strikingly evident. The group’s THP volumes, both in absolute terms and in share, were down for the year. Category revenues in reported terms were marginally down as well. This may come off as overly pessimistic, but we must look beyond the phasing of the initial rollout and consider the level of promotion needed to build momentum.

Contrasting the host of pressures in APMEA and the greater volatility within vapor and THP is the group’s exceptional turnaround in its most valuable market, the United States. It was music to my ears when BAT, during its Capital Markets Day 2024, announced it would be refocusing its combustibles business. FY’25 showcased U.S. combustibles net revenue growth of 1.4% (4.6% constant). Price/mix and duty drawbacks more than offset volume declines, also supporting a slight margin pickup; though, fully adjusted group operating margin remained flat.

My pre-close note also cheered the radical reversal in BAT’s U.S. modern oral business, moving from a product firmly in last place to far ahead of the competition in quality. Considering the product’s nascent life, the numbers are staggering. U.S. modern oral volumes increased by 249% during 2025. The achievement of reaching critical mass, reducing the need for heavy promotion, did in fact lead to net revenues growing by 297%, outpacing volumes. The quality of Velo Plus speaks for itself, and in record time, the Velo brand has captured significant volume share, now the #2 brand by volume, behind ZYN and ahead of on!.

Speaking of on!...The authorization of on! Plus through the FDA’s pilot program presents a new challenger in the U.S. space. The product is high-quality, and Altria’s practically endless resources are assuredly to be used to promote it heavily throughout H1’26. I expect the product to have a strong appeal, primarily among consumers who prioritize comfort, while Velo Plus will remain the preferred choice for those who value flavor, intensity, and duration. While behind the initial timeline set out by the FDA for its pilot program, I also see it as exceedingly likely that we see additional pouch authorizations, though we can in no way be certain of timing, considering the FDA’s history of dragging its feet.

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The 2023 full-year note chanted about more volumes, brand loyalists, and market share. Last year’s spoke of Philip Morris International’s conquest across more categories and markets. Today’s highlights the unending, taking form as the group’s durable formula for growth and the return of even greater value to shareholders. Sprinkled in is my own unending (and perhaps annoying) highlighting of the pressures facing ZYN in the United States.

Philip Morris International’s management continues to refer to ZYN in the United States as premium, implying this by citing price or market share leadership. Over time, I believe the opposite will be proven true, and, while it is a bit dangerous to place significant weight on a single quarter’s results, Q4’25 points to an underlying trend supporting the thesis.

Throughout the year, I’ve been straightforward with my opposition to such framing. ZYN is not the leading product in terms of quality. Market share reflects its first-mover advantage, not a premium nature. Pricing a product at a premium does not automatically confer premium status. In fact, that is much like fighting a gravitational force and is the opposite of what we see across the vast majority of consumer product categories. It is premium qualities that allow for a sustained price premium.

Last quarter, I cited two developments I expected to directly challenge PMI’s ability to balance unit growth and ZYN’s margin. First, on top of the resumption of standard commercial activity, was the buy-another-get-one promotion. This was costly to PMI. Aimed to grow the category and, ultimately, ZYN, I believe it likely helped spur trial of competing brands, for which those brand owners paid nothing. Second was the FDA pilot program to expedite PMTAs of pouch products. In September, I noted:

While there is a growing belief that the current iteration of ZYN in the US is poised to lose share, there is an idea, floating in the background, that, due to the PMTA filing date for ZYN Ultra, PMI would again be given a first-mover advantage when it comes to ‘2.0’ products. I would argue, qualitatively, that ZYN Ultra is superior to all current offers in the US market. However, the pilot program launched by the FDA to expedite applications somewhat throws a wrench into such lines of thinking. At the end of the day, the European ‘Mini’ Velo bests ZYN overseas, and there is little reason to expect a different outcome should both products find their way onto the US market. Not to mention, should the pilot program be sustained, the door could open for the many other highly compelling Scandinavian brands.

Sure enough, the timing wrench was substantiated on December 19th, 2025, when the FDA authorized six on! Plus variants. Since then, the FDA has been largely silent on any further authorizations, with no clear timeline for when ZYN Ultra could receive a determination. Altria intends to roll out on! Plus nationwide during the first half of 2026, presenting a clear threat to ZYN.

Not only is on! Plus differentiated and overall higher quality than ZYN, but Altria has the resources and relationships to compete at the retail level beyond that of any other. Considering on! Plus shipments that occurred when Altria defiantly launched the product last year, before authorization, were small enough to have no material impact on the company’s reported figures; they should also have had no noticeable impact on competition, including ZYN. That is about to change, likely amplifying the expected soft start for ZYN in 2026.

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The headlines write themselves. Volumes down. Eroding market share. Plot the trends on a chart, and the company will appear headed toward oblivion.

We both know it is not that simple.

I’ve often cited the importance of zooming out to shed short-term noise. But what period is right? If we look at FY’25, Altria’s oral segment grew adjusted OCI by 1.3%. But there is truth in the idea that zooming in helps you identify the potential formation of new trends, or at least things deemed worthy of keeping a pulse on. Q4 showed revenues net of excise up 2.9%, while adjusted OCI was down 4.6%, partly reflecting reinvestment, and partly confirming the pressures participants in the nicotine pouch category are under, while pouches themselves continue to cannibalize legacy volumes swiftly. on! volumes were up 10.9% for the year, while only up a mere 0.7% in Q4. Against a backdrop of competitors cutting prices and engaging in far higher degrees of promotion, the trade-off is not all too painful considering on!’s average retail price climbed $0.11 year-over-year.

Yes, more volume declines within the segment are to come. Legacy volumes will not be spared; however, rest assured that plenty of pricing will occur, as users switch to pouches. The trajectory of on! may not be as rosy as it once was, given new competition and increased promotion. However, Altria will surely apply pressure of its own with the recent authorization of on! Plus, which was fast-tracked following last quarter’s note, which stated:

on! Plus’s advanced launch was in defiance of the FDA, indicating a more aggressive approach by Altria to capitalize on the category’s growth. Whether the FDA takes action against this launch is as uncertain as whether Altria will roll the product out nationally in the near term. While Altria had initially stated that the product would be launched in a few select states, the product became readily available online on on!’s standalone website, with shipping available to the majority of states. It appears on its standalone website for on!, Altria has stopped selling on! Plus in the United States, indicating potential apprehension. Avoiding FDA hostility may be for the best in this instance, as one of the most significant recent developments is the FDA’s announced pilot program to expedite PMTA reviews concerning pouches, which on! Plus is included. With the prospect of determinations being made by year-end, the US market could be shaken up significantly with on! Plus, European Velo Mini, and ZYN Ultra

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