Philip Morris International Inc. Q2 FY2026 Earnings Call

Good day and thank you for standing by. Welcome to the Philip Morris International 2026 Second Quarter Result. At this time, all participants on a listen-only mode. After this biggest 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 one one 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 Investillations 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. gap measures for non-gap 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 Babaut, 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 eight percent 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 five percent, 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 ZIN and VIV. 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 u.s 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 zin 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 Zin's brand equity and portfolio expansion and to prepare for the future launch of FICO's Illuma. 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 percent and the pin by continued momentum in icos and favorable combustible dynamics organic net revenues grew plus 7.6 percent or more than 10 percent in dollar terms to reach over 11 billion dollar 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, 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 three cents 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 effect from deferred tax liability associated with the weaker Russian ruble. This currency 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 percent as smoke-free growth outweigh combustible declines organic net revenues grew by plus 5.3 percent while adjusted operating income increased by plus 6.1 percent organically or plus 11 percent in dollar terms to reach 8.9 billion dollar adjusted diluted EPS grew by plus 9.4% excluding currency and by plus 15.6% in dollar term reaching 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 percent in gross profit driving gross margin expansion of plus 190 basis points to reach 70 percent This primarily reflects continued high-cost growth, with further enhancements from our other smoke-free category, especially VIV. 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 enable us to realize H1 organic net revenue growth of plus 3.8% despite negative geographic mix. H1 growth 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 percent resulting in plus 0.4 percent growth for the first half smoke-free shipments grew by plus 7.5 percent in q2 and plus 8.3 percent in h1 mainly fueled by ico's 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 snooze in the Nordics despite a stable category share performance. This was partly offset by continued rapid nicotine port growth in international markets excluding the Nordics and the return to shipment volume growth for Zine in the US. Q2 cigarette shipments increased by plus 1.1% ahead of expectation. This reflects a combination of good category share performance, certain timing or comparison and factors, and more favorable industry dynamic in certain large markets, 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 markets, where the average unit economic of cigarettes are more favorable this generated an unfavorable mix impact on net revenue for h1 overall cigarette volumes declined by 1.9 percent given our q2 performance and the latest industry dynamics we now expect a more moderate full year decline in our cigarette volumes of around two to three percent versus three percent 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-digit growth in smoke-free product 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 percent, with low single-digit smoke-free pricing, including around plus 3 percent from ICOs. The positive mixed impact from international smoke-free growth contributed a further plus 2 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 one point, mainly due to Q1 comparison, as well as international combustible geographic mix and other factors, which reduced growth by two 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 percent 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 While SG&A costs were lower than expected in Q2 due to phasing, increase year-on-year investment in commercial initiative, innovation and scale, and nonetheless reduce H1 margin 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 U.S. growth investment. 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 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 Edwin in Japan and the final EU flavor band market implementation. Adjusted in-market sales volume grew by plus 8% in the first half, despite these dynamics reflecting a 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 1st. 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 IKOS, 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 brand category at approximately 76% in H1. 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 FICO's in more established markets, combined with excellent early adoption in U.A. markets, reinforcing our confidence in the long-term growth trajectory. In eVapor, Veeve 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 the European market, reinforcing Veeve's leadership position. Veeve is now the clear number one brand in Europe, both within closed pods and for pods and disposable combine and the estimated number one closed spot 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 closed spots now representing the predominant format internationally excluding illicit and open system high levels of consumer retention and brand loyalty underpin our performance, supported by responsible innovation and continued portfolio enhancements. 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 ZIN, 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 plan 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 icos in malta which recently established a new regulatory framework for smoke-free product our multi-category portfolio drove strong growth with combined ims up plus eight percent in h1 as in and this strength and complement icos supporting growth consumer acquisition and long-term value creation icos remain the core engine of our performance with adjusted IMS volume up by plus 5.1 percent in Q2 and plus 5.4 percent 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 ACO's adjusted IMS growth remained robust at around plus 8 percent for both q2 and h1 reflecting momentum across the region this includes excellent growth across a broad set of markets including italy germany romania bulgaia greece and spain supported by our innovation and commercial initiatives such as the broader rollout of delia new variants of both stereo and livia special edition devices and consumable and collaboration with partner that share our commitment to innovation, reinvention and transformation. While VIV is a global success, its biggest impact is in Europe where the e-vapor category is highly penetrated. H1 shipments grew plus 81 percent, including impressive results in Romania, Greece and Germany. Similar to its total international progression, ZIN displayed dynamic ex-Nordic growth of around plus 33% as the category continued to gain traction. In Japan, ICO's fundamentals remain strong despite expected volatility from pricing and timing effect. 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 exercise-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, ICO's adjusted category share held in the I-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 Centia playing an important role in capturing more price-sensitive Terria consumers. Importantly, underlying demand remains robust. The Eat Not Burn category continues to represent more than half of total nicotine of tech, and we expect this to continue growing over time. While the bigger step is behind us, We expect further category volatility in H2, notably around the XTI change in October, and we'll 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 zine 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 return 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 zine ultra range which contains 20 pouches per can looking to the second half we expect the dynamism of zine 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, Zin 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 most 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. This started with the launch of Zyn Ultra in 9 and 11 milligram 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 would 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 1.5 milligram and 8 milligram dry formats in Q3. Together these launchers will broaden our offering with an expanded range of strengths and test profile 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 us 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 Zim's premium positioning and enhance consumer value perception. In addition, our U.S. investments include preparation for the future launch of ICO Ciluma 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 SKUs, making it the only nicotine pouch product with a designation and allowing us to market the claim using ZIN, 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 Zine 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 market 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 seven percent 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 maintained 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 discipline execution translated into robust profitability with international combustible growth profit growing by plus 6.1 percent in organic terms and by an impressive plus eight percent 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. A 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 US 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 Q325, when HTU shipment grew by 15.5%, we thus expect mixed single-digit international smoke-free organic net revenue and growth 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 eight 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 profitability of our smoke-free portfolio continuing to improve as ICOs Zine and Viv gain scale and drive synergies across markets. This performance together with effective cost management provide us with the flexibility to reinvest behind our smoke 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 head of my successor, Massimo Andolina, who will transition from his current role as Regional President for Europe in August.

Thank you, Emmanuel. Good morning and good afternoon to everyone. Emmanuel, I would first like to pay tribute to your significant contribution to the performance of our company over the last few years and to the great collaboration that you and I have personally enjoyed, both in my previous roles and in the process of this transition. Emmanuel, I am fully aware that you leave behind big shoes to fill, and I will continue to count on your support in the coming months to do so effectively. Thank you. I am very much looking forward to serving as the Group CFO of Philip Morris International and continuing our relentless focus on delivering superior shareholder returns over the long term. We have a very robust business model built on investing for sustainable smoke-free growth and a strong and talented organization with an excellent track record of delivering for shareholders. I look forward to engaging with our investors, our analysts, and all other stakeholders over the coming months and beyond.

Thank you, Massimo. Thank you, Emmanuel. The team are now happy to answer your questions.

Thank you. At this time, we will conduct a question and answer session. As a reminder, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please limit yourself to two questions per person and rejoin the queue again for further questions. Please stand by while we compile the Q&A roster. Our first question coming from the line of Bonnie Herzog with Goldman Sachs. Your line is now open.

Thank you. Emmanuel, it's been great working with you, and I do wish you all the best in the future. Thank you, Bonnie. Yes, you're welcome. My first question is on your guidance. You know, despite two quarters of better than expected performance and strength, you did maintain your full year underlying growth guidance. So I did just want to verify this is primarily due to your strategic decision to step up investments in the U.S. in the second half, or, you know, is there something else we should be mindful of? And then your GAIN still does imply slightly faster income growth in 2H versus 1H. So I wanted to understand how much flexibility you have with this greater spending. And then could you maybe just give us a little more color on these plan investments? For instance, should we anticipate a big step up in promotional spend behind ZIN?

Thank you, Bonnie. So, I mean, H1, you've seen it, is great. And the fact that after a great H1, indeed, you know, with some very good news in Q2 globally and notably with the confirmation of a strong smoke-free business, CC, that is doing better than expected. The reason why today we're not revising the guidance is indeed the fact that we also are facing a very exciting moment in the U.S. We have an alignment of planet that is, of course, great. We have, as we've been explaining now, a much broader portfolio of variants. We're coming with more flavor on our dry offering. and you've seen that, you know, we talk about peach, dragonberry, and black cherry. We are coming with Norzine Ultra, so with 9 and 11. We are announcing that we are coming with 1.5 and 8 milligrams. So we are really putting together now a portfolio that is really, I would say, nicely matching consumer demand and the evolution of the market. on top of that we have our new marketing campaign when he clicks i think we are very very enthused by the potential of this campaign to build further the emotion around the zine brand and and develop the brand franchise i would say the mrtp is almost coming as a nice thing on the cake we were confident this would come we were confident about the quality of the product that is great that we're able now to have this authorization to market the product with this reduce risk mentioned and have been elaborating on that. That's really a great moment in the US to accelerate and I would say we're going to go 360 so it's going to be every lever we can pull to accelerate the growth of Zin and leveraging this new situation and it's going to come of course with a lot of marketing, commercial activity at the point of sales That's going to be really important. I think you were questioning, okay, what does it mean in terms of promotional activity? Well, you've seen that Q2 has been more reduced in terms of promotional activity. That's why we are close to flat year on year in terms of revenue with volume slightly up. I think we'll see. I'm not going, of course, to comment in advance that would be anti-competitive, any kind of price action. There is one starting point which is absolutely intangible. Zin is a leading premium brand of the market and it's going to stay as the leading premium brand of the market. And then everything we will be doing in that respect will be to optimize the volume growth and the bottom line growth. And once I've said that, I've said everything I can say in that respect. But it's illustrating how we are looking at things. But that's certainly in the U.S., you know, after several quarters of frustration, it's a great moment. And it's great that obviously we have the capacity to deliver a very strong growth while accelerating our investment in the U.S.

Okay, that was super helpful. And just maybe a quick follow-up on Zinn. just hoping for a little more color on the rollout of ultra, you know, early feedback. You've been hearing from retailers and consumers, you know, space gains, you know, how incremental do you expect it to be? And then, you know, you, you mentioned this morning that you have plans to, to roll out the lower nicotines in. So just love to hear how you expect to position that within broader Zen portfolio and, you know, how incremental that can be. Thanks.

Yeah, so on Zin Ultra, you know, I don't think we want to be overplaying the first two weeks. I mean, you have seen these first two weeks of Nielsen as we did. It's very nice. We have sequential growth. We are growing our share. We are capturing, I think, a large part of the evolution of the category over this two weeks period. We have a number of positive consumer feedback. I think we want to stay cautious because we talk about two weeks, a lot to come. but I would say the first data and first feedback are certainly encouraging. Let's have a bit more week, and I'm sure after the summer, we'll be able to have a much better understanding of what Zyn Ultra is bringing. On your question on the low nicotine, I think we've always said, and it's not specific to the U.S., generally on the nicotine pouch category, that we see the 1.5 milligram as particularly relevant to convince smokers to switch to this better alternative. And we know that too high in nicotine content can actually create a bad experience and discourage some of them to be moving to this product. So we hope that this 1.5 milligram is going to be helping really millions of Americans to really test the category, I would say in the most favorable possible condition and with the best possible experience. Now, of course, you know, I will stay silent on our plan in terms of rollout and what we want to do because that's sensitive information. But that's really the philosophy that we have behind this 1.5 milligram.

Thank you. Our next question, coming from the line of Matt Smith with Stiefel. Your line is now open.

Hi, thank you for taking the question. Emmanuel, I wanted to... Good morning. I wanted to dig in a little bit further on the Japan dynamics during the quarter, and more importantly, the progression, both from a category growth standpoint in IMS, as well as ICOS's growth during the quarter. The overall ICOS HTU share was resilient, but But any more detail on the share trends within ICOs, the mix between the ICOs consumable portfolio and expectations in the second half, given another excise tax increase in October, whether you think that has another impact on the third quarter versus fourth quarter phasing?

Yeah, Matthew, happy to do that. So, again, maybe let me start by repeating that what we've been experiencing in Japan is in line with our expectations. So we knew it would be a bit chaotic to read between Q1, pantry loading, Q2 with, of course, negative impact at the beginning, and then a recovery. If you take a kind of macro approach on what has been happening in Japan, yes, the category has been slowing in terms of growth. But what else would you expect? I mean, it's a significant increase for the consumer in a country where the consumer is not, I would say, used to have a very significant price increase. So there is a kind of cultural shock here that is happening. So that is, of course, something that is a disruption, but that's what we're expected to the category. So that has meant that the category has been slowing down, but it's still growing. And as we see the data through Q2, we see things that are regularly improving and if I know I focus on on Icos we have been certainly more impacted on Terra which is the most expensive consumable and brand and there was a very nice Sentia safety net I would say for the consumer so without giving the precise number what we've seen is that Sentia is probably above where it was when Terry has not fully recovered yet because of this move from Terra to Centia. But overall, I mean, we finished at 68%, we're at 69% in the quarter before. So frankly, I don't even know whether this is really significant. We have been the one, and I've been saying it again in my remarks, with the biggest increase with our 40 yen. And we've gone through the worst for us because this first increase was the worst. and the pass-on, I'm not going to say what we're going to do in H2, but the pass-on is lower, it's closer to 20 yen in the second half. So we've been going through the worst and we know that the competition, if they want to absorb their exercise duty increase, they have to increase more than us or they will have to have significant adverse consequences. So that's really what we can say on Japan. plan, so we're not, you know, totally with this adjustment behind us. As we flagged, there will be more disruption in H2, but I would say we're quite confident that we've been going through the most difficult moment. It reacted as expected, and I think it's a tribute to the ICO strengths in the country. And now we go for H2, as I said, with a lower impact in terms of pass-on. Now, just let me say about what's going to happen next, because it's important to have in mind, and this one I think is going to play positively. You know that in 26, there is no increase on combustible. In 27, there is already planned, and I think it's 27 until 29, three years of excise duty increase at a much more limited level, of course, but both equally for CC and for for Eat Not Burn. And as we've been moving to fixed rights, that is going to open the window probably for a favorable environment where as a leading brand in terms of price, we are less impacted proportionally than others. That is creating window to increase price, which was not always obvious in the past. The past one, I think, is around 12 yen for the coming years. and probably after what was, you know, a difficult moment to absorb in 26, I think that is going to translate into a much more favorable landscape 27 and beyond.

It's very helpful. Thank you, Emmanuel. I'll pass it on.

Thank you, Matt. Thank you.

Thank you. Our next question in queue, coming from the lineup, Eric Sirota with Mark and Stanley. Your line is now open.

Hi. Good morning. First of all, thank you, Emmanuel. It's been a pleasure working with you. Looking forward to working with you ahead, Massimo. And best of luck, Emmanuel, in your next… Thank you.

Thank you very much, Eric.

Thank you. You're welcome. Turning back to Japan, can you comment a bit about the competitive environment there? We definitely saw a pickup in promotional activity over the past year from some of your competitors starting to cycle the beginning of that. But how are you seeing that or how have you seen that evolve in recent months? I know it's certainly noisy given the exercise pass through.

Yeah, Eric. So in Japan, as you can imagine, I would say it's probably all hands on deck for every player given this very strong pass on in two steps. So people are probably no longer playing with, I'm going to try to make a promotion. you know here i'm going to try to to play a kind of of of strange game here and there i think everybody is saying how do i you know absorb to the best possible uh of my capacity uh what is a big increase and when you don't have the best image in the market it's more difficult for you to convince the consumer that your product deserves a significant price increase so i believe everybody is a little bit in the middle of that i think we've been flying the fact that before this excise duty alignment or equalization happened, Japan Tobacco had been gaining share. I'm not going to comment on the trend on H1 and I'm even sure that it's, you know, at that moment easy to read what's going on. But the fact that we are maintaining our share broadly, I mean 68 versus 69, is just showing that, yeah, you can have, you know, between competitor number two, competitor number three, you can have some move. But at the end of the day, we stay largely ahead of the competition. I think we will need to have the dust settling a little bit towards the end of the year to see what's going to be the – and with the further price or excise duty increase I mentioned, what is the new game of the competition. But I think today everybody is trying to really work on absorbing this significant excise duty.

Great. Very helpful. And then just a quick follow-up on that, have seen that Japan Tobacco applied to the uh ministry of finance for the october price increase it looks like it was very slightly below the full pass through uh of the excise um is that consistent with your read on it based on pricing in the marketplace and have you guys applied to the ministry in terms of uh october pricing yet?

So, look, I'm not going to comment on what a competitor has been doing. I think it's public what they've been granted by the Ministry of Finance. I'm not going to comment either on their strategy. I think we've been saying that globally, here I'm not being specific to the competition, the excise duty equalization meant a significantly higher price increase that for us you remember that for us all together it's around 10 percent for the competitor it could go up to 20 percent so it's a much bigger price increase if they want to fully pass on but i don't know what they're going to do and and for us for application because this is your question this is not public yet so i'm not going to comment uh on what we've been uh what we've been doing or not doing uh but if you can be bearing with us a little bit uh i'm sure you'll soon.

Thank you. And again, as a reminder, to ask a question, please press star 1-1 on your touchtone telephone. Our next question coming from the line of Ahambeck with UBS, Yelanis Melvin.

Hi, everyone. Thank you for taking my questions. I've got two, if that's okay. The first one is a clarification, Emmanuel. When you suggest optimizing ZIN's um price premium positioning um i know you've introduced an ultra which which sort of helps with that but but are you also referring to um thin thin flagship um and and and i know you're sort of conscious about market share rightly so but but if that is the case could could this also help re-accelerate um category growth which is currently running um around 20 percent um that's my first question. My second question, and I appreciate pricing is a highly sensitive topic and I'm not here looking for forward-looking guidance, but is it reasonable to assume that pricing is likely to be a greater part of the ICOS growth algorithm going forward? And is that a lever that could further drive gross margin expansion at ICOS?

Sure. Thank you for your question so on on optimizing i think i'm going to go back to uh what i've been saying which is for us optimizing uh means to put zin globally and you will allow me of course not to elaborate between you know zin dry or zin ultra or whatever zin in the in the future is to position our zin variance at the price point where we are maximizing volume growth and bottom line growth i'm going to repeat it, ZIN is and will remain the premium leader of the market. And of course, it's a very exciting market that is the fastest growing category in the US. We want to take our fair share of the growth of the category and to do it in a profitable manner. So that's what we mean by optimizing the price. And I'm not going to elaborate more on that. Now on ICOs, um you've seen that uh it's it's three percent okay in uh in uh in this first part of the year the the the price uh increase on icos to be clear uh the name of the game today is more to optimize volume um and i don't need to repeat here that icos consumable are coming with two times more dollar per stick revenue even more in terms of gross profit because the gross margin is higher So really optimizing volume is the name of the game, which doesn't prevent us from, of course, tactically when we can and without damaging the volume, increasing price. But for the timing, that's really the priority. Now, on the long term, of course, there will be a moment where Icos is becoming bigger. The market will mature upon the time in the future. And at that time, we are building a brand that is second to none. And I mean, the fact, I'm not sure that people know that the fact that we are now in the counter list of the top 100 brands, I mean, that's quite an event. I mean, that's quite remarkable. The brand is 10 years old. And I think we're building something very strong in terms of brand. And we all know that a strong brand in the future will mean our capacity to increase price because the consumer will see value in the brand. So we are preparing the ground for, indeed, the capacity to accelerate price in the future. But today, the priority, as I said, is on optimizing volumes.

Thanks, Emmanuel.

Thank you.

Thank you. Our next question in queue coming from the lineup. I'll ask Mattel with Barclays. Your line is now open.

Hi, everyone. Thanks for taking my questions. I've got two. So firstly, a question on ICOS in Europe. Clearly, the second quarter saw an impact from liver ban in the remaining market. You highlighted Poland, Hungary, et cetera. What gives you the confidence that ICOS, IMS can accelerate again in Europe? And what, in your view, is a sustainable level underlying, say, growth rate in the near term in Europe ICOS? That's the first one.

So I'm going to hand over to Massimo on that one on Europe.

Thank you. Thank you for the question. Look, if you eliminate the impact that we have had during this year from Poland and Anger in particular, that there are two markets that have been hit by a characterizing flavor ban and two markets where we had a high percentage of flavor propositions in the market, you will see that the underlying growth trend in Europe has not substantially changed. And I think the confidence comes for me from a couple of things. Number one, we have already gone through this in a variety of other markets, and we have seen that after the first couple of quarters in which we take the hit, obviously, in terms of volume from the flavor ban, then we reestablish the growth trajectory that we had before that occurred, which is a testament to the commercial engine that we have in place and the strength of the portfolio. The second thing is that we've been expanding the portfolio in order to be able to prepare for this. And therefore, at this point, the portfolio is both tiered vertically with the introduction of Delia that is playing more and more a significant role for us, both in terms of acquisition, but also in certain markets where there have been significant tax increases, also in allowing consumer a more affordable proposition. But more importantly, I would say, a lot of consumers have found in Delia an opportunity, and especially CC smokers, an opportunity that they understand better and that they find that the test profile adapts better to their needs. Together with that, you have seen that we have launched Levia in a variety of markets. That is a non-tobacco flavor proposition. It's obviously still early days for that proposition. It's a different type of product, but we have seen that in many markets, and Anger is certainly one of those, we have rapidly achieved double-digit percentage of our portfolio. Last but not least, I would bring the fact that our playground is at this point not only ICOS. You have seen that in the course of the past 24 months, we have made a significant pivot to a multi-category commercial engine. in which we also play significantly with BEEV in the e-vape category. And as Emmanuel said before, in the space of a couple of years, we have reached the number one position in Europe in closed pods and disposables. But also more recently and from a small base, also with Oral, where the early signals in market like Poland, for instance, or the UK or Austria, are extremely encouraging. We have been outperforming the category in growth in the markets and therefore gaining share pretty much everywhere where we have launched. So I think these are all the reasons why we remain confident despite the fact the characterizing flavor brand is obviously a very disruptive action.

Sure, that's very helpful. And just one question on your full-year group revenue guidance. I understand higher investments, which is why you're not increasing your EBIT guidance after a strong H1. But you are talking of better cigarette volume numbers, also better cigarette pricing with some adverse mix. But there's no change in the group revenue guidance. Can you just talk about what is upsetting that in terms of smoke-free volumes and pricing?

Yeah, so, of course, we have a nice growth in H1, and we are, you know, 5.3% in terms of organic growth, so it's dynamic despite Japan, and for the full year, we're targeting actually to be 5 to 7, so it's giving us ample headroom to be within the guidance while having a very dynamic H2. So I think it is based on that that we are comfortable keeping the guidance. Indeed, as you know, as we said, we expect better volume on CC and there is more price, but as we said, there is a negative mix. So this one is probably largely offset as we've been explaining. So that explains why we are comfortable keeping the guidance, again, based on each one and on the overall trajectory. For smoke-free, I should also emphasize the fact that in H1 you have a shipment that are a bit above IMS when for the full year we expect shipment and IMS to be broadly aligned. So that means that we expect the reverse. So we expect IMS to be a bit above of shipment in the second part of the year, and that also will have an impact on the growth of our revenue. But as I said, if you look at the guidance and what we have been seeing on H1, we are pointing to another six months, I mean H2, of very dynamic growth for revenue, and we are targeting an acceleration on the growth of the operating income. So it's not as if we are expecting a slowdown in H2. Actually, quite the contrary.

Thank you. Our next question in queue, coming from the lineup, Jarrell Pascarelli with Midham & Company. Yolen is now open.

Great. Thank you very much. I'd like to just go back to combustibles. Given the outperformance that you delivered in volumes this quarter, are you able to provide any color on whether that momentum has maybe sustained over the first part of July. Just looking at the comparisons, the volume comparisons, very favorable in 3Q and really in the back half of the year more broadly.

Just curious if there may be some conservatism in your full-year volume outlook or if there are any, I don't know, specific regional headwinds or timing considerations for us to be mindful of as we model this out. thank you no nothing to flag and you will allow me not to start you know commenting the Q3 numbers and July but but indeed I mean what is behind the strength of combustible in Q2 our countries with no smoke-free product presence or limited smoke-free product presence and we talk about Turkey India Asia, Egypt, Indonesia has been doing well as well. And these are countries we know where you have big demographics. So the legal edge costs are growing every year. There is a trend on smoking. India for me is a perfect example. You know how powerful the demographics are over there. Smoke free products are banned and therefore combustible products are fully benefiting from from from that so that that's the trend in in q2 um okay it doesn't mean that the rest of the year is going to be at the at the same level uh but nevertheless this is uh why we have been revising a bit the volume out loop from around minus three to two to three percent uh decline but that's what we can uh we can say for for the time being once again we see a big big difference between countries where people have largely access to small free products and other countries.

Thank you. And I'm showing no further questions in the queue at this time. I will now turn the call back over to management for any closing remarks.

Thank you. That concludes our call today. Thank you for joining us. If you have any follow-up questions, please contact the Investor Relations team. Thank you again and have a nice day.

Thank you all.

Bye-bye. this concludes today's conference call thank you for your participation you may now disconnect