Philip Morris International Inc

Good day, and thank you for standing by. Welcome to the Philip Morris International 2026 Second Quarter Results. At this time, all participants are on a listen-only mode. After the speaker's presentation, we'll open up for questions with a limit of two questions per person before rejoining the queue. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's call is being recorded. I would now like to hand it over to our first speaker, James Bushnell, Vice President of Investor Relations and Financial Communication. Please go ahead.

Welcome. Thank you for joining us. Earlier today, we issued a press release containing detailed information on our 2026 second quarter results. The press release is available on our website at PMI.com. A glossary of terms, including the definition for smoke-free products, as well as adjustments, other calculations, and reconciliations to the most directly comparable U.S. GAAP measures for non-GAAP financial measures cited in this presentation, are available in Exhibit 99.2 to the company's Form 8K, dated today, and on our Investor Relations website. Today's remarks contain forward-looking statements and projections of future results. I direct your attention to the forward-looking and cautionary statements disclosure in today's presentation and press release for a review of the various factors that could cause actual results to differ materially from projections or forward-looking statements. I'm joined today by Emmanuel Babeau, Group Chief Financial Officer and Massimo Andolina, currently Regional President for Europe who will succeed Emmanuel as Group CFO in August. Emmanuel, over to you.

Thank you, James, and welcome everyone. I am pleased to report a very strong Q2 as we generated plus 8% organic growth in net revenue and plus 11% in operating income, driving plus 14% currency neutral progression in adjusted deleted earning pressure to $2.20 or plus 15% in dollar terms. This better-than-expected delivery contributed to very robust H1 growth, despite the tough comparison of the first quarter. Our Q2 results were once again powered by excellent performance, as expected, from our international smoke-free business, with high single-digit volume growth, double-digit top-line growth, and impressive growth margin expansion. ICOS adjusted in-market sales volume increased by plus 5%, including expected transitory headwinds from the April excise increase in Japan and the characterizing flavor ban in Poland. Excluding these two markets, double-digit growth continued, reflecting the broad-based strengths of our smoke-free business across markets. Our multi-category commercial approach continues to gain momentum, supported by Zinn and Vive. Our combustible performance was above our expectation in an especially strong quarter with growing volumes, very good pricing, stable category share and gross profit growth. While we do not expect this delivery to be repeated to the same magnitude for the full year, such results demonstrate the robustness of our portfolio as we leverage our leadership in cigarettes to support the switching of legal-ed smokers to better alternatives. In the US, we posted a significant sequential improvement in net revenues, gross profit, and operating company income compared to a challenging Q1. While the U.S. nicotine pouch category continued to grow, ZIN off-tech volumes were broadly stable to slightly growing versus the prior year, reflecting the uneven competitive landscape described in recent quarters. ZIN shipments increased by plus 2% to 2.9 billion pouches despite an inventory tailwind in the prior year. broadly reflecting off-tech trends and the initial shipments of new variants, including Zyn Ultra. We are excited about this first phase of portfolio expansion with additional initiatives planned in the coming months to enhance and enrich our offering to legal-edge American nicotine consumers. Supported by your rich product pipeline and improving regulatory clarity, We believe it is the right moment to accelerate US investment in the second half of the year to support Zins brand equity and portfolio expansion and to prepare for the future launch of ICOS Iluma. Overall, Our strong first half performance reinforces our confidence in our ability to consistently invest behind smoke-free growth opportunities while delivering another year of best-in-class top and bottom line growth. Looking now at our Q2 financials, we delivered very good shipment volume growth of plus 2.5%. underpinned by continued momentum in ICOs and favorable combustible dynamics. Organic net revenues grew plus 7.6% or more than 10% in dollar terms to reach over $11 billion in quarterly net revenues for the first time. This strong top-line performance translated into robust profitability. Adjusted gross profit grew by plus 8.7% organically or plus 11.5% in dollar terms driven by pricing, volume leverage and favorable smoke-free mix. Adjusted operating income grew close to plus 11% organically and plus 12% in dollar terms to reach 4.8 billion dollars. reflecting the same underlying business drivers and continued growth investment. Adjusted deleted earnings per share grew by an impressive plus 15% to reach $2.20. This includes a $0.03 favorable currency impact, which was notably better than our previous forecast despite ongoing dollar strength. This was primarily due to a positive impact from unrealized transactional effects from deferred tax liability associated with a weaker Russian ruble. This current impact represents around one-third of the EPS outperformance compared to our prior forecast. The remaining two thirds reflect a combination of SG&A phasing, as certain commercial investments previously anticipated in Q2 are now expected to occur in Q3, and the strong performance of our combustible business, which I'll come back to. Combining our Q2 and first quarter performance, we delivered a very robust first half, despite the comparison headwinds of Q1. Total shipment volumes increased plus 0.4% as smoke-free growth outweighed combustible declines. Organic net revenues grew by plus 5.3%, while adjusted operating income increased by plus 6.1% organically, or plus 11% in dollar terms to reach $8.9 billion. Adjusted diluted EPS grew by plus 9.4%, excluding currency, and by plus 15.6% in dollar term, reaching a first half record of $4.16. The strength of our international business, which made up 93% of H1 Group Net revenues, was naturally at the core of this remarkable performance. International smoke-free was again outstanding, with H1 organic growth of plus 13.7% in net revenue and plus 16.9% in gross profit, driving gross margin expansion of plus 190 basis points to reach 70%. This primarily reflects continued high-cost growth, with further enhancement from our other smoke-free category, especially Veve. Combustible also performed very well, exceeding our mid-term trajectory of low single-digit organic top-line growth and low to mid-single-digit gross profit growth. An excellent Q2, with organic growth of plus 6.4% in net revenue and plus 8% in gross profit, driven by resilient volume and strong pricing, enabled us to realize H1 organic net revenue growth of plus 3.8%, despite negative geographic mix. H1 gross profit increased by plus 6.1%, with margin expansion of plus 150 basis points to 67.7%, including the benefit of effective cost management. As a result, total H1 international net revenue grew by plus 7.4%, and gross profit by plus 10.1%, with gross margin expansion of plus 160 basis points to 68.6%. In turn, adjusted OCI increased plus 11.7%, all on an organic basis. Turning now to volumes, where total shipment growth returned to a positive trajectory in the second quarter, with an increase of plus 2.5%, resulting in plus 0.4% growth for the first half. Smoke-free shipments grew by plus 7.5% in Q2 and plus 8.3% in H1, mainly fueled by high-cost HTUs with notable contributions from Taiwan, global travel retail, and Italy. E-vapor shipments increased by a remarkable plus 55% in Q2 and plus 72% in H1, with Romania, Greece, and Germany among the main drivers. Oral smoke-free volumes declined by 1.2% in the quarter, primarily reflecting industry decline and inventory impact for snus in the Nordics, despite the stable category share performance. was partly offset by continued rapid nicotine-powered growth in international markets, excluding the Nordics, and the return to shipment volume growth for Zin in the US. Q2 cigarette shipments increased by plus 1.1% ahead of expectations. This reflects a combination of good category share performance, certain timing or comparison factors, and more favorable industry dynamics in certain large markets, are predominantly where smoke-free products are banned or very small. Notable call-outs include Indonesia, Turkey, Egypt, and relative resilience in India and Mexico. However, with industry volumes declining low to mid single digit in more developed smoke-free market, where the average unit economic of cigarette are more favorable, this generated an unfavorable mixed impact on net revenue. For each one overall, Cigarette volumes declined by 1.9%. Given our Q2 performance and the latest industry dynamics, we now expect a more moderate full-year decline in our cigarette volumes of around 2% to 3% versus 3% previously, which remain consistent with the structural evolution of the category. Taken together, We now expect total shipment volume to be around stable to slightly positive for the full year, with high single-heat growth in smoke-free products broadly offsetting the decline in cigarettes. Turning to our H1 top line growth drivers, pricing was the largest contributor, adding plus 5.9 points of growth, reflecting strong combustible pricing of plus 9.2% with low single-digit smoke-free pricing including around plus 3% from ICOS. The positive mixed impact from international smoke-free growth contributed a further plus two points as the increasing weight of SFPs continues to enhance our revenue profile. These drivers were partly offset by the US which had a negative impact of 1 point mainly due to Q1 comparison as well as international combustible geographic mix and other factors which reduced growth by 2 points. As a result, H1 organic net revenue growth reached plus 5.3% while currency provided a tailwind of plus 4.5 points bringing reported net revenue growth to plus 9.8%. The composition of our growth once again highlights the consistency and sustainability of our model with stable to growing volumes, durable pricing power and superior smoke-free economics continuing to be the primary drivers of our performance. Moving down to H1 adjusted operating income margin, which expanded by plus 40 basis points organically or plus 60 basis points in dollar term to reach close to 42%. Growth margin expansion remained a key driver, contributing plus 70 basis points supported by strong pricing, favorable smoke-free mix, scale benefit, and manufacturing productivity. While SG&A costs were lower than expected in Q2 due to phasing, increased year-on-year investment in commercial initiatives, innovation and scale nonetheless reduced H1 margins by 30 basis points. We now expect higher SG&A costs in the second half than previously anticipated, as we made the strategic decision to step up our US growth investments. As we invest in our top line, we also delivered over $300 million of gross cost savings across COGS and SG&A in H1, keeping us firmly on track to achieve our $2 billion target for the 2024-2026 period, with a cumulative total above $1.8 billion to date. This margin performance underscores the strength of our model as we continue to invest behind our smoke-free transformation while expanding profitability. As implied in our full year forecast, we expect to deliver organic operating income margin expansion for the full year. Focusing now on ICOs. the driving force of our smoke-free and overall PMI growth trajectory. We continue to generate strong underlying growth despite transitory headwind in Japan and the final EU flavour ban market implementation. Adjusted in-market sales volume grew by plus 8% in the first half despite these dynamics reflecting broad-based global momentum. The moderation in Q2 growth to plus 5.1% primarily reflects expected volatility in Japan as Q1 pantry loading reversed and consumers adjusted to the excise-driven price increase on April 1. Excluding Japan and Poland, Q2 growth was strong at plus 10.2% or over plus 11% for H1, consistent with recent history. Strong Q2 performance in more established high-cost markets such as Italy, Greece and Romania was complemented by continued momentum in newer markets including Saudi Arabia, the Philippines, Mexico and in Taiwan which maintained its impressive trajectory with off-tech volume growth growing double-digit on a sequential basis as we progressively expand distribution. Global Travel Retail also delivered double-digit adjusted IMS growth. In tandem, we are driving strong commercial execution and ongoing innovation across our device and consumable portfolio, with the Remix Special Edition shown on this slide as one example. We also continue to expand our alternative heating technology bonds by ICOS, which was launched in Poland, Czech Republic and Morocco this quarter with encouraging early results. The fundamentals of ICOS remain strong. We continue to benefit from formidable brand equity, deep consumer connection and an unparalleled commercial presence across a broad and diversified geographic footprint. and we maintain our global share of the fast-growing heat node bond category at approximately 76% in each one. This was further illustrated by the recognition of Icos for the first time among the top 100 most valuable global brands according to Kantar. Looking at Icos off-tech share performance, we continue to drive impressive progress across key cities globally. An important lead indicator of broader national adoption. In Q2, we recorded further strong share gains across established high-cost markets, including Greece, Italy, Romania and the UK, alongside global travel retail. We are also seeing very good momentum in emerging high-cost markets, notably Mexico, Indonesia, and Taiwan, with Taipei share of around 8% in a seasonally higher total market for cigarettes. These results reflect our strong commercial execution, as well as the increasing presence and scale of high-cost in more established markets, combined with excellent early adoption in newer markets, reinforcing our confidence in the long-term growth trajectories. In eVapor, Veve continued to deliver excellent results with H1 shipment growth of plus 72% and very good progression on financial metrics, including profitability. This reflects robust growth across key European markets, reinforcing Veve's leadership position. Veve is now the clear number one brand in Europe, both within closed pods and for pods and disposable combined, and the estimated number one clothespot brand in global travel retail where Vive is present, all ahead of long established players. This is supported by the structural evolution of the category with clothespots now representing the predominant format internationally, excluding illicit and open systems. High levels of consumer retention and brand loyalty underpin our performance supported by responsible innovation and continued portfolio enhancement. This includes the progressive rollout of our latest technology, Vive One Plus, which offers an elevated consumer experience through a compact premium design, a swap and store functionality, enabling two pods in one device, and a longer lasting replaceable battery. For Veeam, International shipment volume grew plus 6% in the first half, or plus 32% excluding the Nordics. ZIN continued to gain share in this small but fast-growing category, reaching more than 17% of the international segment excluding the Nordics in Q2. We are seeing encouraging progress across a broad set of geographies, supported by portfolio expansion, and Consumer Adoption as awareness and availability improve. This includes markets such as the UK, Pakistan, Poland, Greece and the Philippines with further footprint and portfolio expansion planned in the second half. Zooming in on Europe, where we are now present in every market with smoke-free products following the Q2 launch of FICOS in Malta, which recently established a new regulatory framework for smoke-free products. Our multi-category portfolio drove strong growth with combined IMS up plus 8% in H1 as in and these strengths and complement ICOs supporting growth, consumer acquisition and long-term value creation. ICOS remains the core engine of our performance with adjusted IMS volume up by plus 5.1% in Q2 and plus 5.4% for the first half. We achieved this despite ongoing disruption in Ukraine and the impact of recent flavor ban in markets such as Poland and Hungary. Excluding markets where the ban took effect in the prior 12 months, underlying ICOS adjusted IMS growth remain robust at around plus 8% for both Q2 and H1, reflecting momentum across the region. This includes excellent growth across a broad set of markets, including Italy, Germany, Romania, Bulgaria, Greece, and Spain, supported by our innovation and commercial initiatives, such as the broader rollout of Delia, new variants of both Terea and Livia, special edition devices and consumables, and collaboration with partners that share our commitment to innovation, reinvention, and transformation. While Viv is a global success, its biggest impact is in Europe where the eVapor category is highly penetrated. H1 shipments grew plus 81%, including impressive results in Romania, Greece, and Germany. Similar to its total international progression, Zinn displayed dynamic ex-Nordic growth of around plus 33% as the category continued to gain traction. In Japan, high-cost fundamentals remain strong despite expected volatility from pricing and timing effects. First half performance was in line with expectation with adjusted IMS growth of plus 3.4%. Following an exceptionally strong first quarter, Q2 adjusted IMS declined by 3.4%, reflecting the reversal of consumer pantry loading ahead of the April 1st excess driven price increase. Excluding this impact, underlying growth was around plus 1%. While this represented a moderation from recent quarters, The initial impact of consumer adjustment to the price increase was in line with our expectation. The April excise change required the largest HTU price increase to date in Japan to pass on the tax, while there was no excise change for cigarettes. Despite implementing the largest increase in the market, ICOS adjusted category share held in the high 60s and adjusted IMS recovered nicely through the quarter to essentially match Q1 monthly volume excluding pantry loading, a further testament to ICOS resilience. Despite these factors, ICOS adjusted HTU share was stable at 31.8% in Q2 or up plus 0.9 percentage point excluding pantry loading, supported by our tier portfolio with Sentia playing an important role in capturing more price-sensitive terrier consumers. Importantly, underlying demand remains robust. The heat-not-burn category continues to represent more than half of total nicotine off-tech, and we expect this to continue growing over time. While the biggest step is behind us, We expect further category volatility in H2, notably around the XI change in October, and we expect similar consumer behavior patterns, including pantry loading and subsequent normalization. We continue to target growth in ICOs adjusted IMS volume for the year overall. Moving to the US. where we delivered a sequential improvement of plus 38% in net revenue and plus 46% in adjusted gross profit compared to a challenging Q1. This largely reflects the plus 25% sequential growth in ZIN shipment and reduced sales promotion as we prepared for new product launches. On a year-on-year basis, segment net revenue declined by close to 1% reflecting a decline in cigars, an unfavorable phasing dynamic in the wellness business, while ZIN net revenue were broadly flat. Growth profit was impacted by higher manufacturing costs, mainly related to the ramp-up of new ZIN capacity in Colorado, where full-scale commercial production began this month, reflecting our continued investment to support future growth. Zin shipments returned to growth with an increase of plus 2% year-on-year to 2.9 billion pouches, despite an inventory restocking tailwind of around 150 million pouches in the prior year. This growth is broadly in line with stable to slightly growing off-tech volume and includes some initial shipments of new variants in June, including the Zin Ultra range, which contains 20 pouches per can. Looking to the second half, we expect the dynamism of Zing to be enhanced by our expanding portfolio and increased commercial activity which I'll come back to shortly. However, it is important to note that volume comparison in Q3 will be impacted by the one of promotional activity in September of last year which accounted for around 250 million pouches. Importantly, Zinn remains the clear premium leader of the nicotine pouch category, with a retail value share of around 57%. As discussed in prior disclosures, recent category share performance has been impacted by both competitive gaps in the growing higher strength segment, including moist products, and in certain flavor segments, as well as an elevated price premium. With improving regulatory clarity and operational readiness, we have now taken the first step to address this with additional variants. We started with the launch of Zyn Ultra in 9 and 11 mg moist variants at a lower per pouch price than the Zyn flagship range of dry pouches, reducing the price premium to the closest competitor while maintaining a clear premium position alongside targeted addition to our flagship flavor range. These new variants are rapidly building distribution, and while early days, we are pleased by promising initial off-tech trends and positive consumer feedback. As a related aside, I will note that while Scanner data typically provide a good directional indication of volume trend, it does not always fully capture the effective consumer price. We plan further extension in the coming months, including the introduction of 1.5mg and 8mg dry formats in Q3. Together, these launches will broaden our offering with an expanded range of strengths and test profiles, enabling us to better address the spectrum of legal-edge consumer preferences and further strengthen our competitive positioning across segments. With such an exciting lineup of new products to complement the existing portfolio, we plan to accelerate our U.S. investment in the second half. This includes a comprehensive commercial program across marketing, distribution, and in-store execution with a rollout of our major new brand campaign when it clicks starting this month to support brand engagement and consumer relevance. We are also implementing commercial initiatives to optimize Zin's premium positioning and enhance consumer value perception. In addition, our U.S. investments include preparation for the future launch of ICO Siluma, subject to FDA action. We also believe Zin is well positioned from a regulatory standpoint, notably following the modified risk tobacco product authorization of 20 SQs, making it the only nicotine-powered product with the designation and allowing us to market the claim using zine instead of cigarettes puts you at a lower risk of mouth cancer, heart disease, lung cancer, stroke, emphysema, and chronic bronchitis. This further reinforces its differentiated and sustainable positioning supporting consumer trust and long-term growth potential. Overall, we remain confident in the long-term trajectory of Zin and the US nicotine pouch category supported by strong legal edge consumer demand and the investment we are making in responsibly commercializing a significantly enhanced product range for long-term leadership. Finally, Moving to combustible, where our business delivered a particularly strong Q2 performance. In addition to the favorable volume trajectory I described earlier, this was driven by a pricing variance of plus 9.2% in the first half or almost plus 10% in Q2 with notable contribution from markets including Turkey, Indonesia, the Philippines, and Mexico. While we expect some moderation in H2 due to timing factors and annualization, we now forecast a pricing variance of more than 7% for the full year, although we expect this additional benefit will be largely offset by a more adverse geographic mix as volumes queue more to market with lower per unit revenues. Despite such strong pricing, our portfolio maintains its international category share at 25.3% in Q2, with Marlboro again demonstrating the strength of its premium brand equity, matching its record high of 11%. This combination of pricing power, brand leadership, and disciplined execution Translated into robust profitability with international combustible growth profit growing by plus 6.1% in organic terms and by an impressive plus 8% in Q2. Our combustible business continues to demonstrate the strength of its model, delivering solid top and bottom line growth while supporting the ongoing expansion and increasing profitability of our smoke-free portfolio. This brings me to our outlook for the full year. With our international smoke-free business growing very strongly as expected and the combustible business outperforming our prior expectations, we have additional capacity to invest while maintaining a best-in-class growth performance. The success of PMI is built on investing in the short term for long-term growth. just as we have with ICOS and in decades past, Marlboro. The defining characteristic of our company over the last 15 years is that as we invest, we also deliver strong growth and cash generation. For 2026, we continue to target organic net revenue growth of plus 5% to plus 7%, organic operating income growth of plus 7% to plus 9%, and currency neutral adjusted diluted EPS growth of plus 7.5 to plus 9.5%. In dollar terms, we now forecast a currency tailwind of around 15 cents at prevailing rates, translating into an adjusted diluted EPS range of $8.26 to $8.41, an increase of 9.5 to plus 11.5%. With an expectation of broadly stable to slightly growing volumes, we are also aiming for our sixth consecutive year of total volume growth. For the second half, this implies a continued strong top line and an acceleration in organic operating income growth. Further robust international progression should be complemented by U.S. momentum, notwithstanding a fairly even phasing of international HTU shipment through the four quarters, with shipment broadly in line with adjusted IMS for the full year. We also expect robust progress at the EPS level, while noting challenging H2 comparison on net finance cost and the effective tax rate. For Q3 specifically, we expect HTU shipment volume of around 41 billion units. Against a strong Q3 2025 when HTU shipment grew by 15.5%, we thus expect mixed single-digit international smoke-free organic net revenue and gross profit growth. For PMI overall, we forecast mid-single-digit Q3 organic top-line growth with modest organic margin expansion. We target adjusted deleted EPS of $2.20 to $2.25, including an unfavorable currency impact of 8 cents at prevailing exchange rate. This also reflects the challenging tax rate comparison from Q3 last year. Finally, we continue to expect operating cash flow generation of around $13.5 billion providing further flexibility to support both investment and continued attractive shareholder return. I will now conclude today's presentation with a few key takeaways. We delivered an excellent first half, underscoring the quality of our business model and placing us firmly on track for another year of strong performance. Our results reflect the powerful combination of smoke-free growth and Strong Combustible Execution with the profitability of our smoke free portfolio continuing to improve as ICOs, ZIN and VIVE gain scale and drive synergies across markets. This performance together with effective cost management provide us with the flexibility to reinvest behind our smoke free future while sustaining best in class growth. We also remain a highly cash generated business with an unwavering commitment to our progressive dividend policy and to returning value to shareholders. Looking ahead, we approach the remainder of 2026 with confidence, well positioned to deliver superior and sustainable growth. On a more personal note, this is my last earning calls as Group CFO of PMI. And I would like to thank our shareholders and analysts for your support, engagement and constructive challenge over the past six years, a period of strong performance and shareholder returns. As I look at the business today, I am confident PMI will continue to represent a standout performer within CPG over the coming years. And I leave you in the very talented hands of my successor, Massimo Andolina, who will transition from his current role as regional president for Europe in August.