Key Points
- U.S. ZYN Investment: PMI plans to increase second-half investment behind nicotine pouch brand ZYN, covering product expansion, marketing, distribution and in-store execution.
- ZYN Portfolio Expansion: Early data following the ZYN ULTRA launch showed sequential growth and share gains, while a planned 1.5 mg variant is intended to lower the entry barrier for adult smokers new to nicotine pouches.
- IQOS Volume Strategy: PMI said each IQOS tobacco stick generates roughly twice the dollar revenue of a cigarette, making volume expansion more valuable than aggressive pricing at the current stage.
- Regional Market Divergence: Tax increases are shifting some Japanese IQOS users from TEREA to lower-priced SENTIA, while European flavor restrictions are testing PMI’s broader portfolio of DELIA, LEVIA, VEEV and ZYN.
- Combustible Resilience: Stronger cigarette performance was concentrated in markets such as Turkey, India, Egypt and Indonesia, where smoke-free products remain unavailable, restricted or less developed.
2Firsts,
July 24, 2026
Philip Morris International plans to increase U.S. spending behind ZYN in the second half while prioritizing volume over price for IQOS, executives said during the company’s July 22 earnings call.
2Firsts listened live to the full call, where analysts from Goldman Sachs, Stifel, Morgan Stanley, UBS, Barclays and Needham questioned management on ZYN’s U.S. performance, tax-driven shifts in Japan, European flavor restrictions and the outlook for cigarettes.
The exchanges provided additional detail beyond the company’s earnings release and prepared presentation, including the rationale for a 1.5 mg ZYN variant, consumer movement between TEREA and SENTIA in Japan, and PMI’s approach to future IQOS pricing.
PMI reported second-quarter net revenues of $11.19 billion, up 10.4% from a year earlier. International smoke-free revenue increased 14.2%, while U.S. ZYN shipments rose 1.8% to 2.9 billion pouches and consumer offtake was broadly flat to slightly higher in a growing nicotine pouch category.
What the Q&A clarified
Higher U.S. investment contributed to PMI’s decision to maintain its guidance. Despite stronger-than-expected first-half results, PMI kept its underlying full-year growth outlook unchanged. Chief Financial Officer Emmanuel Babeau said the company saw an opportunity to accelerate investment in the United States and planned a “360-degree” effort around ZYN, including marketing, commercial activity and in-store execution.
Early ZYN data following the ULTRA launch were encouraging, but covered only two weeks. PMI said ZYN recorded sequential growth and share gains, while consumer feedback was positive. Babeau cautioned that the period was too short to support firm conclusions and said the company expected a clearer assessment after the summer.
The planned 1.5 mg ZYN variant is intended to reduce the entry barrier for adult smokers. PMI said nicotine levels that are too high can create a poor initial experience for some users and discourage them from trying the category again. Management positioned the lower-strength product as a consumer-acquisition tool rather than only an extension of the existing strength range.
PMI is adjusting ZYN’s premium positioning without abandoning it. The company declined to discuss specific future pricing actions. It said its variants would be positioned to maximize both volume and earnings growth, while ZYN would remain the premium leader in the category.
Japan’s price increase is shifting some IQOS consumers from TEREA to SENTIA. PMI said higher-priced TEREA had been more affected, while SENTIA had acted as a “safety net” for price-sensitive consumers. SENTIA was probably above its previous level, management said, while TEREA had not fully recovered.
IQOS volume remains the near-term priority. Babeau said each IQOS consumable generates roughly twice the dollar revenue of a cigarette and provides an even larger gross-profit advantage because of its higher margin. That economics makes volume expansion more valuable to PMI at this stage than pushing price aggressively.
PMI is using a wider portfolio to respond to European regulation. DELIA gives the company a lower-priced heated tobacco option. LEVIA adds a non-tobacco consumable, while VEEV and ZYN extend the portfolio beyond heated tobacco. Management said LEVIA had reached a double-digit portion of PMI’s relevant portfolio in some markets, including Hungary.
Cigarette growth remained concentrated in markets with limited smoke-free access. PMI identified Turkey, India, Egypt and Indonesia as contributors to its stronger second-quarter combustible performance. Babeau cited India, where he said smoke-free products were banned, as an example of a market where demographics and limited access to alternatives continued to support cigarette demand.
ZYN: More Products, More Spending, Premium Positioning
Goldman Sachs analyst Bonnie Herzog opened the Q&A by asking why PMI had maintained its full-year underlying growth guidance after two stronger-than-expected quarters. She also asked whether the company’s planned U.S. investment would include a substantial increase in promotional spending behind ZYN.
Babeau linked the unchanged guidance partly to the decision to invest more aggressively in the United States. PMI had already outlined a broader commercial program covering marketing, distribution and in-store execution, alongside the rollout of its “When It Clicks” brand campaign. It is also preparing for a future U.S. launch of IQOS ILUMA, subject to regulatory action.
The questions centered on whether higher spending and portfolio expansion could help PMI regain a larger share of nicotine pouch category growth without weakening ZYN’s premium position or profitability.
ZYN ULTRA entered the market with 9 mg and 11 mg moist variants priced lower per pouch than PMI’s flagship dry range. The company also added peach, Dragonberry and black cherry flavors to the dry portfolio and plans to introduce 1.5 mg and 8 mg dry variants in the third quarter.
Herzog asked whether the ULTRA launch was gaining retail space and generating incremental demand. PMI did not quantify either measure. Babeau said the first two weeks showed sequential growth, higher share and positive consumer feedback, but said it was too early to determine the product’s longer-term contribution.
The 1.5 mg product addresses a different part of the market. While recent competition has focused heavily on higher-strength and moist products, PMI said the lower-strength variant was intended to provide a more accessible first experience for adult smokers considering nicotine pouches.
UBS analyst Faham Baig then asked whether PMI’s effort to optimize ZYN’s price premium applied only to ULTRA or also to the flagship range. He also questioned whether a change in price positioning could help accelerate category growth.
Babeau said PMI would manage different ZYN variants at price points designed to maximize both volume and bottom-line growth. He did not confirm a price reduction and repeated that ZYN would remain the premium market leader.
PMI’s prepared remarks had identified three factors affecting recent share performance: gaps in higher-strength and moist products, gaps in some flavor segments, and an elevated price premium. The new variants are intended to address those weaknesses while retaining a clear premium over competitors.
The U.S. segment remained lower year on year despite a marked sequential improvement. Second-quarter net revenues declined 0.7%, while adjusted operating companies income fell 19.1% organically. PMI attributed the result partly to weaker gross profit, costs related to expanding ZYN manufacturing capacity and the timing of marketing, administration and research spending.
IQOS: Volume First, Pricing Later
Baig also asked whether pricing would become a larger part of the IQOS growth model and whether it could drive further gross-margin expansion.
Babeau said volume remained the immediate priority because of the financial contribution from each additional IQOS consumable. He said dollar revenue per unit was about twice that of a cigarette, with a still larger gross-profit advantage because IQOS carried a higher margin.
Under that model, converting more smokers and increasing consumable sales can produce a stronger financial return at the current stage than maximizing price.
PMI can still take tactical price increases where it believes they will not damage volume. Babeau said broader pricing power should develop as IQOS gains scale, markets mature and consumers place greater value on the brand.
The distinction is central to PMI’s current IQOS strategy: volume and consumer conversion remain the main near-term drivers, while stronger brand-led pricing is treated as a longer-term opportunity.
Japan: Tax Changes Reshape Price Tiers
Stifel analyst Matt Smith asked how Japan’s April tax-driven price increase had affected the heated tobacco category, IQOS share and the mix between PMI’s consumable brands. He also asked whether another excise change in October could create further volatility between the third and fourth quarters.
PMI said the category had slowed but continued to grow. Management described the increase as significant for Japanese consumers, who were less accustomed to sharp price changes, and said the resulting disruption had been broadly in line with expectations.
The clearest impact was within the IQOS portfolio.
TEREA, PMI’s higher-priced consumable, was more affected by the increase. SENTIA retained some consumers seeking a lower-priced alternative. PMI said SENTIA played an important role in capturing price-sensitive TEREA users, while TEREA had not yet fully recovered.
IQOS ended the quarter with about 68% of Japan’s heated tobacco category, compared with 69% in the previous quarter. Babeau said he did not view the movement as significant. PMI’s prepared remarks also said adjusted IQOS category share remained in the high 60s despite the company implementing the largest increase in the market.
Morgan Stanley analyst Eric Serotta focused on the competitive environment, asking whether the rise in promotional activity from competitors over the previous year was changing as the market absorbed the tax adjustment.
Babeau said suppliers were primarily focused on managing the excise increase and that brands with weaker consumer perceptions could find it harder to justify large price rises.
He also acknowledged that Japan Tobacco had been gaining share before the latest excise equalization. PMI’s own category share, he said, remained broadly stable, but the market would need more time to settle before the competitive impact became clear.
Serotta also asked about Japan Tobacco’s October price application and whether PMI had filed its own request. Babeau declined to discuss either company’s pricing strategy beyond publicly available information.
PMI said the tax equalization could imply an overall increase of about 10% for its portfolio, compared with as much as 20% for some competitors if they passed the tax through in full. Babeau did not identify which competitors faced the higher figure or predict what actions they would take.
PMI expects further volatility around the October excise change, including consumer stockpiling followed by normalization. It nevertheless said the largest step was behind it and continued to target full-year growth in adjusted IQOS in-market sales in Japan.
The analysts’ questions focused on price-tier migration, tax pass-through and future pricing power rather than category adoption alone.
Europe: A Broader Portfolio Faces a Regulatory Test
Barclays analyst Pallav Mittal asked why PMI expected IQOS growth in Europe to recover after disruption from characterizing-flavor bans, particularly in Poland and Hungary.
Massimo Andolina, PMI’s regional president for Europe and incoming group CFO, said the underlying European growth trend had not changed substantially after excluding the two markets, where flavored products previously represented a high proportion of the portfolio.
Andolina said PMI’s experience in other markets showed that flavor bans could produce a significant volume hit during the first few quarters, followed by a return toward the earlier growth trajectory. That remains PMI’s expectation for Poland and Hungary rather than an established outcome.
The company’s response relies on a wider range of products.
DELIA gives PMI a lower-priced heated tobacco option and can provide a more affordable proposition in markets with higher taxes. Andolina also said some cigarette smokers found its product profile easier to understand.
LEVIA adds a non-tobacco consumable. Management said it had reached a double-digit portion of PMI’s relevant portfolio in several markets, including Hungary, although it described the product as being at an early stage.
VEEV and ZYN extend the portfolio beyond heated tobacco. PMI said VEEV was the leading closed-pod brand in Europe, while international ZYN volumes outside the Nordic markets continued to expand in countries including Poland and the United Kingdom. These rankings and market estimates are based on PMI data.
The regulatory changes will test whether sales from DELIA, LEVIA, VEEV and ZYN can offset part of the disruption to IQOS.
PMI said adjusted IQOS in-market sales in Europe increased 5.1% in the second quarter. Excluding markets where flavor bans took effect during the previous 12 months, underlying growth was about 8%.
Combustibles: Growth Concentrated in Markets with Limited Smoke-Free Access
Needham analyst Gerald Pascarelli asked whether PMI’s stronger-than-expected cigarette volume performance had continued into July and whether its revised full-year outlook remained conservative.
PMI declined to comment on July or third-quarter trading.
Babeau said the second-quarter strength was concentrated in markets with no smoke-free presence or only limited availability, naming Turkey, India, Egypt and Indonesia.
He linked the performance to large and growing legal-age populations and the lack of widely available alternatives. India was cited as a clear example because, according to Babeau, smoke-free products were banned there while the legal-age population continued to expand.
PMI revised its full-year cigarette shipment outlook to a decline of about 2% to 3%, compared with an earlier expectation of around 3%. It cautioned that the second-quarter performance should not be extrapolated at the same level through the rest of the year.
International cigarette shipments increased 1.1% in the quarter, while combustible net revenues rose 9.8%, supported by pricing. PMI said unfavorable geographic mix offset part of the benefit because growth was concentrated in markets with lower revenue per unit than more developed smoke-free markets.
The stronger combustible result did not lead PMI to increase its group revenue guidance. Management said higher cigarette volumes and pricing were largely offset by geographic mix, while first-half smoke-free shipments had run slightly ahead of in-market sales and were expected to realign over the full year.
Analysts continued to examine combustibles because they remain a major source of revenue and gross profit, particularly in markets where smoke-free products have limited legal or commercial access.
The questions centered on four issues: whether ZYN can regain momentum without sacrificing margin, whether IQOS can turn scale into pricing power, whether a broader portfolio can cushion regulatory disruption, and how long combustibles can continue to support PMI’s transformation.
PMI provided more detail on its strategy, but several outcomes remain to be tested in the second half, including ZYN ULTRA’s incremental contribution, consumer responses to Japan’s next tax change and the recovery of IQOS in markets affected by flavor bans.
Follow 2Firsts for further coverage of PMI and other international tobacco companies’ financial results.
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