Philip Morris International Inc. Q2 FY2026 earnings call

Overall Financial Performance

• Q2 2026 delivered 8% organic net revenue growth, 11% organic operating income growth, and 15% YoY adjusted diluted EPS growth to $2.20, exceeding prior forecasts.
• Outperformance relative to prior guidance came from one-third favorable currency impact (unrealized gains on Russian ruble deferred tax liabilities) and two-thirds from SG&A investment phasing (planned Q2 investments shifted to Q3) and stronger-than-expected combustible performance.
• $1.8 billion in cumulative gross cost savings has been delivered since 2024, keeping the company on track to hit the $2 billion 2024-2026 cost savings target.

Smoke-Free Business Highlights

• ICOS maintains strong broad-based growth globally, with double-digit growth excluding Japan and Poland. New market launches (Poland, Czech Republic, Morocco, Malta) delivered encouraging early results, and ICOS was named a top 100 most valuable global brand by Kantar for the first time.
• In Japan, ICOS Q2 IMS declined 3.4% due to reversal of Q1 pantry loading ahead of the April excise increase, but underlying growth was ~1% and category share remained in the high 60s, with the lower-priced Sentia line offsetting declines in the higher-priced Terea line in line with expectations.
• Verve has achieved clear category leadership in Europe, supported by ongoing product innovation (including the rollout of the Verve One Plus device) and high consumer retention.

U.S. Business Updates

• The company launched Zyn Ultra, a new line of 9mg and 11mg moist variants priced at a lower per-pouch price than flagship Zyn, reducing Zyn's price premium to competitors while maintaining its premium positioning. Early consumer and retailer feedback is encouraging, with additional new variants (1.5mg and 8mg dry formats) planned for Q3.
• Zyn is the only nicotine pouch product with modified risk tobacco product (MRTP) authorization, allowing marketing of reduced risk claims, which strengthens its long-term positioning.
• The company made the strategic decision to accelerate U.S. investment in H2 2026 to support Zyn portfolio expansion, new marketing campaigns, and preparation for the future launch of ICOS Iluma, pending FDA approval.

Europe Business Highlights

• Excluding markets impacted by the recent characterizing flavor ban (Poland, Hungary), underlying ICOS IMS growth remains robust at ~8% for both Q2 and H1. Multi-category expansion (Verve, oral nicotine) is complementing ICOS growth across the region, with every European market now offering smoke-free products.
• Portfolio adjustments (including the launch of the tiered entry device Delia and non-tobacco flavor line Levya) have offset the impact of flavor bans, with Levya already capturing double-digit share of the ICOS portfolio in impacted markets like Hungary.

1. International Smoke-Free: H1 2026 organic net revenue grew 13.7%, gross profit grew 16.9%, with gross margin expanding 190 bps to 70%. This segment is the core driver of overall company growth. Breakdown by product line:

• ICOS (heat-not-burn): Adjusted in-market sales (IMS) volume grew 8% H1, 5.1% Q2. Excluding transitory headwinds from Japan's April excise increase and Poland's flavor ban, Q2 growth was 10.2% and H1 growth over 11%. Global heat-not-burn category share holds at ~76%.
• Verve (eVapor): H1 shipment volume grew 72% Q2 grew 55%, driven by strong European performance. Verve is now the clear #1 closed pod brand in Europe and global travel retail.
• Oral Smoke-Free (includes Zyn): International oral volume (excluding Nordics) grew 6% H1, with Zyn gaining share to over 17% of the international ex-Nordics segment in Q2. Smoke-free total shipment growth was 7.5% Q2 and 8.3% H1.

1. U.S. Segment: Sequential improvement over a weak Q1 2026: net revenue rose 38% QoQ, adjusted gross profit rose 46% QoQ. YoY segment net revenue declined ~1% (driven by cigar declines and wellness business phasing), with Zyn net revenue broadly flat. Zyn shipment volume grew 2% YoY to 2.9 billion pouches (despite a 150 million pouch prior-year inventory tailwind), and Zyn holds ~57% retail value share of the U.S. nicotine pouch category. The U.S. segment contributed a 1 percentage point drag to H1 organic net revenue growth.

2. Combustible Cigarettes: H1 organic net revenue grew 3.8%, organic gross profit grew 6.1%, with gross margin expanding 150 bps to 67.7%. Q2 organic net revenue grew 6.4% and gross profit grew 8%, driven by resilient volume (up 1.1% Q2, down 1.9% full H1) and strong pricing (9.2% H1 pricing increase, ~10% Q2). International category share holds at 25.3%, with Marlboro matching its record high 11% share. Combustible pricing contributed 5.9 points of H1 organic net revenue growth overall.

3. Group Total (H1 2026): Organic net revenue grew 5.3% to over $19.6 billion (Q2 net revenue exceeded $11 billion for the first time). Adjusted operating income grew 6.1% organically (11% in dollar terms) to $8.9 billion, with adjusted operating margin expanding 40 bps organically to ~42%. Adjusted diluted EPS grew 9.4% organically (15.6% in dollar terms) to a first half record of $4.16. International business accounted for 93% of H1 group net revenue.

• Full year 2026 core guidance maintained: 5% to 7% organic net revenue growth, 7% to 9% organic operating income growth, and 7.5% to 9.5% currency-neutral adjusted diluted EPS growth. The guidance range retains ample headroom for strong H2 performance after a better-than-expected H1, with increased U.S. investment offsetting stronger H1 results.
• Cigarette volume guidance revised upward: Full year cigarette volume is now expected to decline 2% to 3%, compared to the prior forecast of a 3% decline. Total full year company shipment volume is now expected to be broadly stable to slightly positive, which would mark the sixth consecutive year of total volume growth.
• Full year adjusted diluted EPS in dollar terms: Now forecast to be $8.26 to $8.41, representing 9.5% to 11.5% YoY growth, including a ~$0.15 currency tailwind at prevailing exchange rates.
• Q3 2026 specific guidance: Adjusted diluted EPS is expected to be $2.20 to $2.25, including an $0.08 unfavorable currency impact. Q3 is expected to deliver mid-single-digit organic top-line growth with modest organic margin expansion, and low single-digit international smoke-free organic net revenue and gross profit growth against a strong 2025 Q3 comparison.
• Full year operating cash flow guidance maintained at ~$13.5 billion, supporting continued investment and shareholder returns.

• Transitory volatility in Japan ICOS volumes is expected to continue in H2 2026 around the October excise tax increase, with expected pantry loading followed by demand normalization that will create uneven quarterly results.
• The U.S. Zyn business faces ongoing competitive pressure in growing higher-strength, moist, and specific flavor segments, as well as historical pressure from an elevated price premium, which has suppressed share gains in prior quarters.
• ICOS growth in Europe is temporarily impacted by characterizing flavor bans in Poland, Hungary, and other markets, which has created near-term volume headwinds while the company adjusts its product portfolio.
• Q3 2026 Zyn volume comparisons will be negatively impacted by large one-time promotional activity in September 2025 that shipped ~250 million additional pouches.
• Q3 2026 EPS results face headwinds from challenging year-over-year comparisons for net finance costs and the effective tax rate.
• Adverse geographic mix for combustibles, with faster volume growth in lower average revenue per unit markets, is expected to offset much of the benefit from stronger-than-expected combustible pricing for the full year.

Q: Why did management maintain full-year growth guidance despite a strong H1? What drives the decision to increase H2 U.S. investment, and how will spending be allocated? / A: Management maintains guidance because the better-than-expected H1 performance creates ample headroom within the existing 5-7% organic revenue range, and the company has chosen to reinvest incremental H1 profits into accelerating U.S. growth. The current U.S. environment is favorable: an expanded Zyn product portfolio matching consumer demand, a new national marketing campaign, and MRTP authorization for Zyn create a unique opportunity to strengthen market position. Investment will cover marketing, in-store execution, and portfolio expansion; Zyn will remain a premium brand, with all commercial actions optimized to drive both volume and bottom-line growth. (312 chars)

Q: How has the Japan excise tax increase impacted ICOS share and portfolio mix, and what should we expect for H2? / A: Results have been exactly in line with expectations: Q2 saw a reversal of Q1 pantry loading, with the higher-priced Terea line experiencing larger volume declines that were partially offset by growth of the lower-priced Sentia line, leaving overall ICOS category share broadly stable at ~68%. The April 2026 excise increase (40 yen pass-through for ICOS, no increase for cigarettes) was the most difficult price adjustment; the October 2026 increase will only require a ~20 yen pass-through, a much smaller impact. Further near-term volatility is expected, but management is confident the worst of the adjustment is behind us, and ICOS's strong market position will drive sustained long-term growth. (398 chars)

Q: What is the long-term role of pricing in ICOS growth, and will it drive future margin expansion? / A: Currently, the top priority for ICOS is optimizing volume growth, as ICOS consumables deliver far higher per-unit revenue and gross margin than cigarettes, so growing penetration is the best way to drive overall margin expansion. ICOS has delivered ~3% price increase year-to-date, and tactical price increases will continue where they do not damage volume growth. Long-term, as the ICOS brand matures, the company's strong brand equity (recently recognized as a top 100 global brand) will create opportunities to increase pricing and further expand margins. (321 chars)

Q: Why is ICOS growth in Europe currently moderated, and what is the sustainable underlying growth rate? / A: The only material drag on European ICOS growth is the temporary impact of characterizing flavor bans in Poland and Hungary, where the company had a large share of flavored SKUs. Excluding these markets, underlying growth remains unchanged at robust levels. The company is confident growth will reaccelerate: past experience in other markets shows growth returns to trend a few quarters after a flavor ban is implemented, and the company has already adjusted its portfolio to offset the ban (Delia for entry-level consumers, Levya as an allowed non-tobacco flavor option). Multi-category expansion with Verve and oral nicotine also complements ICOS growth across the region. (367 chars)