Philip Morris International Inc. 2026 Q3 Earnings Call

Please go ahead. Welcome. Thank you for joining us.

Earlier today, we issued a press release containing detailed information on our 2026 third 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 US GAAP measures for non-GAAP financial measures cited in this presentation, are available in the exhibit to our Form 8-K, 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 am joined today by Massimo Andolina, Group Chief Financial Officer.

Massimo, over to you. Thank you, James, and welcome everyone.

We delivered excellent performance in the third quarter. We continued volume momentum, putting us firmly on track for a sixth consecutive year of total shipment growth and yet another year of best-in-class results in 2026. The strong underlying momentum of our smoke-free business continued, with IQOS HTU shipments at the high end of our expectations and accelerated growth fundamentals across all three of our flagship brands. Coupled with standout combustibles performance, we achieved +7% organic growth in Q3 net revenues and more than 10% growth in operating income, despite challenging comparisons on smoke-free shipments and incremental cost pressures, notably due to the ongoing conflicts in the Middle East and Ukraine. Q3 adjusted OI exceeded $5 billion for the first time, while our adjusted OI margin reached close to 45%.

Our strong operational performance supported better-than-expected adjusted diluted EPS growth of +6%, excluding currency, to a record quarterly level of $2.36. IQOS continued to deliver strong and broad-based progress, with adjusted IMS volume growth increasing to +7.1% in the quarter, or +10%, excluding Japan and Poland, where we faced specific headwinds from the impact of excise-driven pricing and the characterizing flavor ban, respectively. In nicotine pouches, ZYN's Q3 shipment growth accelerated in international markets and reached +4% in the U.S., or +13%, excluding the special promotional activity of September 2025. This performance was supported by the ongoing rollout of new variants as we invest significantly in the accelerated expansion of our product offer and align the portfolio value proposition over the second half of this year.

We are pleased with the initial consumer reaction and sequential increase in category share, even as we have yet to reach full commercial deployment of the first wave of expansion. We remain focused on further strengthening the brand, building consumer awareness of the expanded portfolio, and continuing to invest behind the significant growth opportunity ahead. In e-vapor, VEEV continued its outstanding progress with a step-up in shipment growth to +62%. We delivered strong performance across key markets and continued to build our leading position in Europe, the primary international profit pool. Our combustible business delivered a standout Q3 performance, exceeding our expectations through a combination of stable volumes, high single-digit pricing, and a specific benefit from the restructuring of distribution terms in certain markets.

Volumes were especially resilient in markets where smoke-free alternatives remain unavailable or have limited presence, while the continued strength of our brand portfolio, led by Marlboro, supported category share gains and further margin expansion. This is in line with our objective of maximizing combustible value over time to support the growth of our smoke-free business. Our overall year-to-date performance further demonstrates the sustainability of our growth model. We continue to expect another year of high-quality, best-in-class volume, sales, and profit growth as we continue to invest behind our leading smoke-free platforms to drive long-term value. Turning now to our headline financials for the third quarter. We delivered shipment growth of +0.6%, outperforming a broadly stable industry despite unfavorable comparisons on HTUs. Together with robust pricing and favorable category mix, this drove organic net revenue growth of +7.1%, or +5.5% in dollar terms, to reach $11.4 billion.

Gross profit grew organically by more than +8%, and adjusted operating income increased +10.5% organically and +9.6% in dollar terms. This reflects strong top-line growth and effective cost management, even as we accelerated our growth investments, notably in the U.S. Adjusted diluted EPS increased +5.4% to a new quarterly high of $2.36. This includes an unfavorable currency impact of $0.01 due to dollar strength and lower positive transactional impacts than previously expected, mainly due to the strengthening of the Russian ruble. As flagged last quarter, this growth also includes an unfavorable comparison against a low tax rate in the prior year period, which reduced Q3 EPS growth by approximately four percentage points. Our outstanding year-to-date results further demonstrate the strength and quality of our business fundamentals, with shipment volume growth of +0.5%, strong pricing, and favorable category mix.

This drove organic net revenue growth to +5.9%, or +8.2% in dollar terms, bringing year-to-date net revenues to nearly $33 billion. Adjusted gross profit increased by +7.1% organically, while adjusted OI grew by 7.7% organically and +10.6% in dollar terms, reaching more than $14 billion. We delivered adjusted diluted EPS of $6.52, representing growth of +8.4% excluding currency and +11.8% in dollar terms. Turning to shipment volumes, we achieved solid growth in both the third quarter and year-to-date. Consistent with recent years, the structural growth of our smoke-free portfolio more than offset declines in combustibles, and we are firmly on track to achieve our sixth consecutive year of growth. Smoke-free shipments increased by +2.7% in the quarter, despite the strong prior year comparison, and by +6.4% year-to-date, driven by IQOS.

We continue to expect high single-digit growth in smoke-free adjusted IMS volumes and shipments for the year, with the latter subject to year-end inventory movements. IQOS HTU shipments reached 41.5 billion units in Q3, with year-to-date growth of +6.7%. We now expect HTU shipment growth to be slightly below adjusted IMS growth for the full year, with the Q3 dynamic of adjusted IMS growing faster than shipments to continue in Q4, notably due to the in-year phasing impact of price changes in Japan. Q3 shipment growth was supported by a wide range of markets, including Germany, Greece, Spain, Indonesia, the U.K., the Netherlands, and global travel retail, all of which delivered strong double-digit progression.

Oral smoke-free volumes increased by +1.8% in the quarter, supported by our readiness and ability to introduce new product variants in the U.S., alongside an acceleration in international ZYN growth and share gains in Swedish snus. E-vapor shipments grew by a remarkable +62%, demonstrating the increasing scale and importance of our multi-category portfolio and VEEV's role within it. Cigarette shipments were flat in the quarter despite strong pricing, outperforming an industry decline of 1.1%. This reflects both the strength of our brands and the resilience of the category in markets where smoke-free products are banned or have limited presence, such as Turkey, Indonesia, and Egypt. On a year-to-date basis, cigarette volumes declined by 1.2%.

While the markets driving this better-than-expected performance generate an unfavorable geographic mix, the continued resilience of our combustible portfolio means we now expect full-year cigarette volumes to decline by a similar level, subject to year-end inventory movements. We continue to generate strong top-line growth from the fundamental pillars of our business model, namely volume growth, pricing power, and the mixed benefits of smoke-free unit economics. Year-to-date, pricing remained the largest contributor, adding +6.2 points of growth. This reflects continued combustible strength with pricing of +9.1%, together with a positive contribution from our smoke-free portfolio, including low single-digit pricing on IQOS HTUs. The increasing contribution of smoke-free products in our international business provided a further +1.5, I repeat, +1.5 points of growth. Notwithstanding a lower impact in Q3 due to timing factors.

This was partly offset by a 0.6 point headwind from the U.S., driven predominantly by the impact of lower ZYN shipment volumes and challenging comparisons earlier in the year. With these headwinds moderating significantly in the third quarter. Combustible geographic mix and other factors reduced growth by 1.7 points. These headwinds were partially mitigated in Q3 by the impact of restructuring of certain distribution terms I mentioned earlier, which we do not expect to be significant in the fourth quarter. As a result, year-to-date organic net revenue growth reached +5.9% and +7.1% for Q3. Currency contributed a further +2.3 percentage points year to date, bringing reported net revenue growth to +8.2%.