Imperial Brands: Hold The Inhale After FY 2025 Results

The tobacco industry's long-term transition from combustible products to alternative nicotine delivery systems has reached a critical inflection point. Imperial Brands' FY 2025 results underscore this shift, revealing a company that is navigating the dual pressures of declining cigarette demand and regulatory uncertainty while accelerating its pivot to next-generation products (NGP). With adjusted operating profits rising 4.6% to £3.98 billion and NGP net revenue surging 13.7% year-on-year, the firm has demonstrated resilience in a challenging macroeconomic environment. However, the broader question for investors remains: Is Imperial Brands' current strategic positioning sufficient to secure its relevance in a market increasingly defined by innovation and regulatory volatility?

Financial Performance: Stability Amid Structural Headwinds

Imperial Brands' FY 2025 results reflect a mixed but strategically coherent performance. While reported revenue declined 0.7% to £32.1 billion, driven by weaker demand in traditional combustible markets, the NGP segment emerged as a standout growth engine. Next-generation products accounted for 14.9% of total revenue, with oral nicotine products in the U.S. and Europe driving a 13.7% net revenue increase. This divergence highlights the company's ability to offset stagnation in legacy markets through its smoke-free portfolio.

The CEO, Lukas Paravicini, emphasized the importance of "sustainable value in combustibles" while pursuing "exciting growth opportunities in NGP". This duality is critical: Imperial Brands retains a significant portion of its revenue from traditional cigarettes, which remain profitable but face declining global consumption. The challenge lies in balancing short-term cash flow from combustibles with long-term reinvention through NGP-a strategy that mirrors peers like British American Tobacco and Philip Morris International.

Strategic Positioning in the Alternative Nicotine Market

Imperial Brands' NGP strategy has gained momentum over the past five years. Since FY20, the company has expanded its market share by 48 basis points across smoke-free categories, a testament to its product diversification and regional execution. Oral nicotine products, in particular, have proven to be a differentiator, capitalizing on consumer demand for discreet, non-combustible alternatives. This aligns with broader industry trends: global heated tobacco use is projected to grow by 40% over the next five years, while e-vapour adoption faces headwinds from a rampant illicit market.

The company's competitive positioning is further strengthened by its focus on innovation. Unlike rivals that have overextended into volatile e-cigarette markets, Imperial Brands has prioritized high-margin oral nicotine and heated tobacco products. This approach mitigates exposure to regulatory crackdowns on vaping, which have intensified in markets like the U.S. and EU. For instance, Altria Group's aggressive acquisitions in e-cigarettes have exposed it to higher compliance risks, whereas Imperial Brands' portfolio appears more insulated from such volatility.

Industry Trends and Competitive Dynamics

The tobacco and alternative nicotine landscape in 2025 is defined by three key forces: declining cigarette consumption, regulatory fragmentation, and the rise of synthetic nicotine. Imperial Brands is navigating these dynamics with a dual strategy: maintaining a foothold in combustibles while accelerating NGP adoption. However, the company faces stiff competition from both traditional peers and agile startups.

For example, Lost Mary's entry into the reusable vape market with high-capacity devices has disrupted pricing models in Asia and Europe. Meanwhile, synthetic nicotine producers are challenging the dominance of traditional tobacco-derived products, a trend that could erode margins for companies reliant on legacy supply chains. Imperial Brands' response-investing in R&D for functional stimulants and herbal-based alternatives-positions it to adapt to these shifts. Yet, the pace of innovation will be critical.

Investment Implications: A Hold With Conditions

Imperial Brands' FY 2025 results justify a "hold" recommendation for now, but with caveats. The company's NGP growth is robust, but its reliance on combustibles remains a drag on long-term value creation. Investors should monitor two key metrics: (1) the rate of NGP revenue growth relative to peers and (2) the company's ability to navigate regulatory headwinds, particularly in the EU's evolving vaping framework.

The broader industry context also favors patience. While the illicit market continues to siphon growth in e-vapour, the shift toward heated tobacco and oral nicotine is structurally sound. Imperial Brands' disciplined approach to NGP-prioritizing quality and regulatory compliance-gives it an edge in markets where trust and brand equity matter most. However, the company must accelerate its transition to smoke-free products to avoid the fate of legacy tobacco firms that failed to adapt.

Conclusion

Imperial Brands has demonstrated that it can thrive in a transitional market, but its future depends on executing a clean break from combustibles. The FY 2025 results are a step in the right direction, but investors should remain cautious until NGP revenue surpasses that of traditional products. For now, "hold the inhale" is a prudent stance-provided the company continues to double down on innovation and market share gains in the smoke-free space.