PMI's Smoke-Free Surge Outpaces Cautious 2026 Guidance

Date of Call: Feb 6, 2026

Financials Results

• Revenue: Organic top line growth of 6.5% (7.9% excluding Indonesia impact) for 2025.
• EPS: Adjusted diluted EPS of $7.54 for full year 2025; Q4 adjusted diluted EPS growth of 14.2% currency-neutral.
• Gross Margin: Adjusted gross margin increased 270 basis points to 69.5% for 2025.
• Operating Margin: Adjusted operating income margin of 40.4% for 2025, up 140 basis points organically.

Guidance:

• 2026 organic net revenue growth forecast of 5% to 7%.
• 2026 organic operating income growth forecast of 7% to 9%.
• 2026 currency-neutral adjusted diluted EPS growth forecast of 7.5% to 9.5%, translating to $8.39 to $8.54 with currency benefit.
• 2026 operating cash flow forecast of around $13.5 billion.
• Q1 2026 adjusted diluted EPS growth forecast of $1.80 to $1.85.
• Renewed 2026-2028 medium-term targets: 6%-8% CAGR organic net revenue, 8%-10% CAGR organic operating income, 9%-11% CAGR adjusted diluted EPS at constant currency.

Business Commentary:

Smoke-Free Product Growth:

• Philip Morris International's smoke-free products volumes grew by 12.8% in 2025, with IQOS shipments and adjusted IMS increasing around 11%.
• The growth was driven by the shift of adult smokers to better alternatives and the success of the multi-category strategy with brands like ZYN ex-Nordics and VEEV.

Financial Performance and Margin Expansion:

• The company reported a 15% adjusted diluted EPS growth in dollar terms, marking the strongest growth since 2011, and a currency-neutral growth of 14%.
• This performance was supported by strong pricing, portfolio resilience, and disciplined execution, leading to significant margin expansion.

International Market Dynamics:

• Smoke-free products represented 41.5% or close to $17 billion of PMI's total net revenues in 2025, with 27 markets exceeding 50% net revenue from smoke-free products.
• The international business's strong performance was due to the scaling of global smoke-free presence and successful market penetration in regions like Japan and Italy.

U.S. Market Opportunities:

• Despite supply constraints and competitive challenges, ZYN shipments in the U.S. grew by 37%, and the company aims to broaden its market reach with innovations like ZYN Ultra.
• The focus is on enhancing brand equity and navigating a dynamic regulatory environment to capture significant growth opportunities.

Impact of Excise Taxes and Pricing Strategies:

• In Japan, excise tax increases are anticipated to impact category growth, with PMI planning price increases that may affect consumer purchasing power.
• The company aims to manage these headwinds through pricing strategies and continued investment in brand building and market expansion.

Sentiment Analysis:

Overall Tone: Positive

• Statements include: "2025 was another outstanding year for PMI," "strong sustained growth," "delivered 15% adjusted diluted EPS growth in dollar terms," "strong and increasing cash generation," "renewing these growth targets for the next 3 years," and "we look forward with confidence to 2026 and beyond."

Q&A:

• Question from Matthew Smith (Stifel, Nicolaus & Company): Can you expand on the reacceleration in smoke-free volume growth compared to the 2026 growth guidance? And how are other closed markets and the opportunity to expand platforms into existing IQOS markets considered?
  Response: Reacceleration is expected from Japan excise tax changes (headwind in 2026 but symmetrical taxation from 2027) and U.S. market symmetry (ZYN FDA authorization pending).

• Question from Eric Serotta (Morgan Stanley): How are you thinking in terms of IQOS HTU shipments and IMS for the '26 guide? And how has the competitive environment in Japan evolved, particularly with price increase filings?
  Response: IQOS has strong global momentum (e.g., Italy, Europe, new markets like Taiwan). Competitive activity in Japan increased but IQOS share remains resilient; detailed Japan outlook is not specified to avoid revealing specific plans.

• Question from Bonnie Herzog (Goldman Sachs Group): Could you talk about the elasticities and margin impact from the excise tax increases in Japan? And what are the key growth drivers for 2026 guidance and planned investment spend?
  Response: Excise increases will impact consumer prices from April and October 2026; margin strategy involves passing on costs. 2026 fundamentals remain strong with smoke-free mix and combustible pricing resilience; investments are planned but not explicitly quantified.

• Question from Mirza Faham Baig (UBS Investment Bank): What technical/functional attributes could further improve consumer conversion for IQOS in emerging markets? And is the recent reduction in U.S. ZYN promotions a deliberate shift ahead of ZYN Ultra?
  Response: IQOS innovation details are confidential. U.S. promotional intensity varies normally; ZYN success requires brand equity, product portfolio (including higher strength like ZYN Ultra), and price premium.

• Question from Gerald Pascarelli (Needham & Company): What are your thoughts on New York considering a significant excise tax increase on nicotine pouches and potential impact on the competitive landscape?
  Response: Such excise taxes are counterproductive as they undermine public health benefits; state actions are not necessarily coordinated, but PMI opposes shortsighted regulation on better alternatives.

• Question from Damian McNeela (Deutsche Bank AG): Should we expect a similar level of cost savings for the medium-term guidance to 2028, and what role will AI play in accelerating cost savings?
  Response: Cost savings target is not quantified in guidance but efficiency efforts continue. AI is expected to be an engine for future cost efficiency and performance.

Contradiction Point 1

IQOS Competitive Environment and Growth Outlook in Japan

Contradiction on the impact of increased competition and the company's confidence in IQOS growth.

How are you projecting IQOS HTU shipments and IMS for 2026 given Japan's excise taxes, and how has the competitive environment evolved, particularly with upcoming competitor price increases? - Eric Serotta (Morgan Stanley)

2025Q4: Competitive activity in Japan has increased, but IQOS maintains strong market share due to 10 years of brand building and innovations like ILUMA. - Jacek Olczak(CEO)

How will increased competition in Japan affect IQOS' ability to sustain high single-digit growth? - Mirza Faham Baig (UBS)

2025Q3: Increased competition in Japan is positive for the category's growth. IQOS maintains a stable, high market share (>75%) despite competitive intensity, driven by product quality. Japan remains a growth market. - Emmanuel Babeau(CFO)

Contradiction Point 2

Characterization of ZYN Promotional Activity in the U.S.

Contradiction on whether recent reduced promotional intensity is a deliberate, temporary choice or indicative of a broader trend.

What technical or functional attributes could enhance IQOS conversion in emerging markets, and why has ZYN's promotional intensity decreased in the U.S. recently? - Mirza Faham Baig (UBS Investment Bank)

2025Q4: Regarding ZYN promotions, the reduced intensity over the last two months was a deliberate choice, not a trend. - Jacek Olczak(CEO)

Can you clarify ZYN's short-term growth goal relative to the category, current October progress, and the mismatch between IQOS HTU shipments and IMS? - Eric Serotta (Morgan Stanley)

2025Q3: The Q3 acceleration (39% offtake growth) included a special free can promotion and a return to normal promotional activity after a period of low promotion. - Emmanuel Babeau(CFO)

Contradiction Point 3

IQOS U.S. Market Launch Timing and Outlook

Guidance shifts from being heavily dependent on U.S. launch timing to not being materially dependent.

Does the 2026 target include the U.S. ILUMA launch, and is it also included in the 2027–2028 guidance? - Eric Serotta (Morgan Stanley)

2025Q4: The guidance is not heavily materially dependent on U.S. ILUMA volumes. The timing of FDA authorization remains uncertain, but plans are balanced to account for it. - Jacek Olczak(CFO)

What is the current timeline for IQOS ILUMA's U.S. FDA authorization? - Eric Serotta (Morgan Stanley)

2025Q2: The change to the Blackwell GPU mask is complete without functional changes. Production is expected in Q4. - Jensen Huang(CEO)

Contradiction Point 4

IQOS Japan Market Performance and Outlook

Outlook shifts from strong, sustained momentum to being cautious and avoiding specific volume guidance.

How are you planning for IQOS HTU shipments and IMS in 2026 given Japan's excise taxes, and how has the competitive landscape in Japan changed, especially regarding upcoming competitor price hikes? - Eric Serotta (Morgan Stanley)

2025Q4: Competitive activity in Japan has increased, but IQOS maintains strong market share... He avoided providing specific volume outlooks for Japan to prevent revealing detailed plans. - Jacek Olczak(CFO)

What factors drove the reacceleration in international IQOS IMS, and is this growth sustainable through H2? - Eric Serotta (Morgan Stanley)

2025Q2: Growth accelerated due to markets recovering from the EU characterizing flavor ban (e.g., Italy), strong performance in Spain, Germany, and others, and continued momentum in Japan and new growth markets (e.g., Mexico, Philippines). Expect continued nice performance in H2. - Emmanuel Babeau(CFO)

Contradiction Point 5

IQOS U.S. Launch Timeline and Regulatory Timing

Contradiction on the certainty and timeline of FDA authorization for IQOS ILUMA.

Does the 2026 target include the U.S. ILUMA launch, and are the 2027–2028 targets also inclusive of it? - Eric Serotta (Morgan Stanley)

2025Q4: The algorithm assumes IQOS enters the U.S. market in a planned period, but the guidance is not heavily materially dependent on U.S. ILUMA volumes. The timing of FDA authorization remains uncertain... - Jacek Olczak(CFO)

How will recent FDA CTP regulatory actions affect IQOS ILUMA's U.S. launch timeline? - Faham Baig (UBS)

2025Q1: It is too early to say. The company is awaiting an efficient regulatory process and a formal FDA response, which was mandated within 6 months. No change to the launch timeline was indicated. - Emmanuel Babeau(CFO)