Philip Morris Intl (NYSE:PM) held its second-quarter earnings conference call on Wednesday. Below is the complete transcript from the call.
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Summary
Philip Morris Intl reported H1 net revenues of $8.9 billion, with an adjusted diluted EPS growth of 9.4% excluding currency effects and 15.6% in dollar terms, driven by strong international performance.
The company's smoke-free portfolio, particularly IQOS, showed robust growth with a 13.7% increase in net revenue and a 16.9% rise in gross profit, despite some market challenges in Japan.
Cigarette volumes are expected to decline by 2-3% for the year, yet smoke-free product growth is anticipated to offset this decline, leading to stable to slightly positive total shipment volume.
Philip Morris Intl plans increased investment in the U.S. market, particularly for the ZYN brand, with new product launches and a comprehensive marketing campaign aimed at enhancing market share.
The company maintains its full-year guidance with an expected currency tailwind, projecting adjusted diluted EPS growth of 9.5-11.5% and continuing strong cash flow generation.
Full Transcript
Emmanuel Babeau, CFO
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 13.7% in net revenue and plus 16.9% in gross profit driving gross margin expansion of 190 basis points to reach 70%.
This primarily reflect continued IQOS growth with further enhancement from our ozosmo free category. Especially Viv combustible also performed very well exceeding our midterm 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 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 3.8% despite negative geographic mix.
H1 gross profit increased by 6.1% with margin expansion of 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 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 2.5% resulting in 0.4% growth for the first half.
Smoke free shipments grew by 7.5% in Q2 and plus 8.3% in H1 mainly fueled by IQOS HTUs with notable contribution from Taiwan, Global Travel Retail and Italy. E‑vapor shipments increased by a remarkable 55% in Q2 and plus 72% in H1 with Romania, Greece and Germany among the main drivers. Overall smoke free volumes declined by 1.2% in the quarter, primarily reflecting industry decline and inventory impact for snus in the Nordics. Despite a stable category share performance.
This was partly offset by continued rapid nicotine pod growth in international markets excluding the Nordics and the return to shipment volume growth for ZYN in the US Q2 cigarette shipments increased by 1.1% ahead of expectation. This reflects a combination of good category share performance, certain timing or comparison factors and more favorable industry dynamic in certain large markets, predominantly where smoke free products are banned or very small.
Notable callouts 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 mix impact on net revenue for H1. 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 remained 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 5.9 points of growth reflecting strong combustible pricing of 9.2%. With low single digit smoke free pricing including around 3% from IQOS. The positive mix impact from international smoke free growth Contributed A further/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 1 point mainly due to Q1 comparison as well as international combustible geographic mix and other factors which reduce growth by 2 points. As a result, H1 organic net revenue growth reached 5.3% while currency provided a tailwind of 4.5 points bringing reported net revenue growth to plus 9.8%. The composition of our growth once again highlight the consistency and sustainability of our model with 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%. Gross margin expansion remained a key driver contributing plus 70 basis points supported by strong pricing, favorable smoke remix scale benefit and manufacturing productivity. While SGNA costs were lower than expected in Q2 due to phasing, increased year on year investment in commercial initiatives, innovation and scale nonetheless reduced H1 margin by 30 basis points.
We now expect higher SGA cost in the second half than previously anticipated as we made the strategic decision to step up our US growth investment as we invest in our top line. We also delivered over $300 million of gross cost saving across COGS and SGNA in H1, keeping us firmly on track to achieve our $2 billion target for the 20242026 period with a cumulative total above $1.8 billion to date. This margin performance underscore 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 IQOS, the driving force of our smoke free and overall PMI growth trajectory, we continue to generate strong underlying growth despite transitory headwinds in Japan and the final EU flavorband 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 reflect 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 10.2% or over 11% for H1. Consistent with recent history, strong Q2 performance in more established IQOS 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 maintain its impressive trajectory with offtake 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 eating technology bonds by iqos which was launched in Poland, Czech Republic and Morocco this quarter with encouraging early results. The fundamentals of IQOS remains 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‑not‑burn category at approximately 76% in H1. This was further illustrated by the recognition of IQOS for the first time among the top hundred most valuable global brands according to Kantar. Looking at IQOS offtake 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 IQOS markets including Greece, Italy, Romania and the UK. Alongside global travel retail, we are also seeing very good momentum in emerging IQOS 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 IQOS in more established markets combined with excellent early adoption in newer markets reinforcing our confidence in the long term growth trajectory in evapor.
VEEV continued to deliver excellent results with H1 shipment growth of 72% and very good progression on financial metrics including profitability. This reflects robust growth across key European market reinforcing VEEV's leadership position. VEEV is now the clear number one brand in Europe both within closed pod and for pods and disposable combined and the estimated number one closed pod brand in global travel retail where VEEV is present all ahead of long established players.
This is supported by the structural evolution of the category with closed pods 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 enhancement. This includes the progressive rollout of our latest technology VEEV One, 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 ZYN.
International shipment volume grew plus 6% in the first half or 32% excluding the Nordics. ZYN 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 IQOS in Malta which recently established a new regulatory framework for smoke free product, our multi category portfolio drove strong growth with combined IMs up 8% in H1As ZYN and this strength and complement IQOS supporting growth, consumer acquisition and long term value creation. IQOS remained the core engine of our performance with adjusted IMS volume up by 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 flavour ban in markets such as Poland and Hungary.
Gary Excluding markets where the ban took effect in the prior 12 months, underlying IQOS adjusted IMS growth remained robust at around 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 Dahlia, new variants of both Terraria and Livia Special Edition devices and consumable and collaboration with partners that share our commitment to innovation, reinvention and transformation.
While VEEV is a global success, its biggest impact is in Europe where the E‑vapor category is highly penetrated. H1 shipments grew 81% including impressive results in Romania, Greece and Germany. Similar to its total international progression, ZYN displayed dynamic ex Nordics growth of around 33% as the category continued to gain traction. In Japan. IQOS fundamentals remain strong despite expected volatility from pricing and timing effect. First half performance was in line with expectation with adjusted ims growth of 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 excise driven price increase. Excluding this impact, underlying growth was around 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 cigarette. Despite implementing the largest increase in the market, IQOS 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 IQOS's resilience. Despite these factors, IQOS adjusted HTU share was stable at 31.8% in Q2 or up 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 continue 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 excise change in October and would expect similar consumer behavior patterns including pantry loading and subsequent normalization. We continue to target growth in IQOS adjusted IMS volume for the year overall, moving to the US where we delivered a sequential improvement of 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 ZYN 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 and unfavorable phasing dynamic in the wellness business. While ZYN net revenue were broadly flat. Gross profit was impacted by higher manufacturing costs mainly related to the ramp up of of new ZYN capacity in Colorado where full scale Commercial production began this month reflecting our continued investment to support future growth.
ZYN 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 offtake volume and includes some initial shipments of new variants in June including the ZYN Ultra range which contains 20 pouches per can. Looking to the second half, we expect the dynamism of ZYN 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 off promotional activity in September of last year which accounted for around 250 million pouches. Importantly, ZYN 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 segments including moist product and in certain flavour 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 1.5mg and 8mg dry format in Q3. Together these launches will broaden our offering with an expanded range of strength and test profile enabling us to better address the spectrum of legal age 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 the 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 ZYN's premium positioning and enhance consumer value perception.
In addition, our U.S. investment include preparation for the future launch of ILUMA, subject to FDA action. We also believe ZYN 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 ZYN 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 ZYN 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 9.2% in the first half or almost 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 skew 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 disciplined execution translated into robust profitability. With international combustible gross 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 the 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 IQOS 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 5 to 7% organic operating income growth of 7 to 9% and currency neutral adjusted diluted EPS growth of 7.5 to 9.5% in dollar terms. We now forecast a currency tailwind of around $0.15 at prevailing rates, translating into an adjusted diluted eps range of $8.26 to $8.41, an increase of 9.5 to 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 shipments 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 25 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 $0.08 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 IQOS, ZYN and VEEV gain scale and drive synergies across market. 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 call as group CFO of PMI and I would like to thank our shareholder 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.
Massimo Andolina, CFO
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 Intl 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.
Emmanuel Babeau, CFO
Thank you, Massimo.
OPERATOR
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 11 on your telephone and wait for your name to be announced. To withdraw your question, please press Star 11 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.
Bonnie Herzog, Analyst at Goldman Sachs
All right, thank you, Emmanuel. It's been great working with you and I do wish you all the best in the future. Yes, you're welcome. My first question is on your guidance. Despite Q2 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 is there something else we should be mindful of then?
Your guidance 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 planned investments? For instance, should we anticipate a big step up in promotional spend behind ZYN?
Emmanuel Babeau, CFO
Thank you, Bonnie. H1, you've seen it, is great. The fact that after a great H1, indeed with some very good news in Q2 globally and notably with the confirmation of a strong smoke-free business 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 planets 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 North ZYN 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 It Clicks.
I think we are very, very enthused by the potential of this campaign to build further the emotion around the ZYN brand and develop the brand franchise. I would say the MRTP is almost coming as an icing on the cake. We were confident this would come, we were confident about the quality of the product. But it's great that we're able now to have this authorization to market the product with this reduced-risk mention, and I've been elaborating on that.
So that's really a great moment in the U.S. to accelerate. And I would say we're going to go 360. So it's going to be, you know, every lever we can pull to accelerate the growth of ZYN and leveraging this new situation. And it's going to come of course with a lot of marketing commercial activity at the point of sale. 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, of course, going to comment in advance—that would be anti-competitive—any kind of price action. There is one starting point which is absolutely intangible: ZYN 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., after several quarters of frustration, it's a great moment and it's great that obviously we have the capacity to deliver very strong growth while accelerating our investment in the
Bonnie Herzog, Analyst at Goldman Sachs
U.S. Okay, that was super helpful. And just maybe a quick follow-up on ZYN. Just hoping for a little more color on the rollout of Ultra. Early feedback you've been hearing from retailers and consumers, space gains. How incremental do you expect it to be? Then you mentioned this morning that you have plans to roll out the lower-nicotine ZYN. So just love to hear how you expect to position that within the broader ZYN portfolio and how incremental that can be.
Emmanuel Babeau, CFO
Yeah. So on ZYN Ultra, 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-week period. We have a number of positive consumer feedback. I think here 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 weeks and I'm sure after the summer we'll be able to have a much better understanding of what 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 a nicotine content can actually create a bad experience and discourage some of them from moving to this product. So we hope that this 1.5 milligrams 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 beyond this 1.5 milligram.
OPERATOR
Thank you. Our next question coming from the line of Matt Smith with Stifel. Your line is now open.
Matt Smith, Analyst at Stifel
Hi. Thank you for taking the question. Emmanuel, good morning. I wanted to dig in a little bit further on the Japan dynamics during the quarter, more importantly, the progression both from a category growth standpoint in IMS as well as IQOS growth during the quarter. The overall IQOS HTU share was resilient. But any more detail on the share trends within IQOS, the mix between the IQOS 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.
Thank you.
Emmanuel Babeau, CFO
Yeah, 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 expected for 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 now focus on IQOS, we have been certainly more impacted on TEREA, which is the most expensive consumable 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 TEREA has not fully recovered yet because of this move from TEREA to SENTIA. But overall, I mean we finished at 68%. We had 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 excise 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. So we're not 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 IQOS strength 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 2026 there is no increase on combustibles. In 2027 there is already planned—and I think it's 2027 until 2029—three years of excise duty increase at a much more limited level, of course, but both equally for combustibles and for heat-not-burn. And as we've been moving to fixed, right, 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 a window to increase price, which was not always obvious in the past. The pass-on, I think, is around 12 yen for the coming years. And probably after what was a difficult moment to absorb in 2026, I think that is going to translate into a much more favorable landscape 2027 and beyond.
Matt Smith, Analyst at Stifel
It's very helpful. Thank you, Emmanuel. I'll pass it on.
Emmanuel Babeau, CFO
Thank you, Matt. Thank you.
OPERATOR
Thank you. Our next question in queue coming from the line of Eric Siroto with Morgan Stanley. Your line is now open.
Eric Siroto, Analyst at Morgan Stanley
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.
Emmanuel Babeau, CFO
Thank you. Thank you very much, Eric. Thank you.
Eric Siroto, Analyst at Morgan Stanley
You're welcome. Turning back to Japan, could 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, you know, starting to cycle the beginning of that. How are you seeing that or how have you seen that evolve in recent months? I know it's certainly noisy given the excise pass-through.
Emmanuel Babeau, CFO
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 pattern in two steps. So people are probably no longer playing with, I'm trying to make a promotion here, I'm going to try to play a kind of strange game here and there. I think everybody is saying, how do I absorb to the best possible of my capacity 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's a little bit in the middle of that. I think we've been flagging 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 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 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 with the further price or excise duty increase. I mentioned what is a new game of the competitor, but I think today everybody is trying to really work on absorbing this significant excise duty.
Eric Siroto, Analyst at Morgan Stanley
Great, very helpful. And then just a quick follow-up on that. Have seen that Japan Tobacco applied to the Ministry of Finance for the October price increase. It looks like it was very slightly below the full pass-through of the excise. 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 October pricing yet?
Emmanuel Babeau, CFO
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—the competition, the excise duty equalization meant a significantly higher price increase at first. You remember that for us altogether it's around 10%. For the competitor it could go up to 20%.
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 for us, for application—because this is your question—this is not public yet, so I'm not going to comment on what we've been doing or not doing. But if you can be bearing with us a little bit, I'm sure you'll learn soon.
OPERATOR
Thank you. And again, as a reminder, to ask a question please press star 11 on your touchtone telephone. Our next question coming from the line of Ahambek with UBS. Your line is now open.
Ahambek, Analyst at UBS
Hi everyone. Thank you for taking my questions. I've got two if that's okay, thank you. The first one is the clarification, Emmanuel: when you suggest optimizing ZYN's price premium positioning—I know you've introduced ZYN Ultra, which sort of helps with that—but are you also referring to ZYN flagship? And I know you're sort of conscious about market share, rightly so. But if that is the case, could this also help re-accelerate category growth, which is currently running around 20%?
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 IQOS growth algorithm going forward, and is that a lever that could further drive gross margin expansion at IQOS?
Emmanuel Babeau, CFO
Sure. Thank you for your question. So on optimizing, I think I'm going to go back to what I've been saying, which is for us optimizing means to put ZYN globally—and you will allow me of course not to elaborate between ZYN Dry, ZYN Ultra, or whatever ZYN in the future—it's to position our ZYN variants at the price point where we are maximizing volume growth, bottom-line growth. I'm going to repeat it: ZYN 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 U.S. 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 IQOS, you've seen that it's 3%, okay, in this first part of the year, the price increase on IQOS. To be clear, the name of the game today is more to optimize volume. And I don't need to repeat here that IQOS consumables 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 IQOS is becoming bigger, the market will mature at some point in time in the future, and at that time we are building a brand that is second to none. I mean, the fact that—I'm not sure that people noted—the fact that we are now in the 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.
Ahambek, Analyst at UBS
Thanks, Emmanuel.
Emmanuel Babeau, CFO
Thank you.
OPERATOR
Thank you. Our next question in queue coming from the line of Mittell with Barclays. Your line is now open.
Mittell, Analyst at Barclays
Hi everyone. Thanks for taking my questions. I've got two. So firstly, a question on IQOS in Europe. Clearly the second quarter saw an impact from the flavor ban in the remaining markets—you highlighted Poland, Hungary, etc. What gives you the confidence that IQOS 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 IQOS? That's the first one.
Emmanuel Babeau, CFO
So I'm going to hand over to Massimo on that one on Europe.
Massimo Andolina, CFO
Thank you. Thank you for the question. Look, if you eliminate the impact that we have had during this year from Poland and Hungary in particular—there are two markets that have been hit by 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 have 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 Dahlia 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 consumers a more affordable proposition. But more importantly, I would say a lot of consumers have found in Dahlia an opportunity—especially CC smokers—an opportunity that they understand better and that they find that the taste profile adapts better to their needs.
Together with that, you have seen that we have launched Levya in a variety of markets. That is our 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 Hungary 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 IQOS.
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 VEEV 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 markets 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 that characterizing flavor ban is obviously a very disruptive action.
Mittell, Analyst at Barclays
Sure, that's very helpful. And just one question. On your full-year group revenue guidance, I understand higher investments and 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 offsetting that in terms of smoke-free volumes and pricing?
Emmanuel Babeau, CFO
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 based on H1 and on the overall trajectory for smoke-free. I should also emphasize the fact that in H1 you have shipments 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—we expect IMS to be a bit above 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 in 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.
OPERATOR
Thank you. Our next question in queue coming from the line of Terrell Pescarelli with Midheim Co. Your line is now open.
Terrell Pescarelli, Analyst at Midheim Co
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 is maybe sustained over the first part of July? Just looking at the comparisons, the volume comparisons look 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.
Emmanuel Babeau, CFO
No, nothing to flag, and you will allow me not to start commenting on the Q3 numbers, but indeed what is behind the strength of combustible in Q2 are countries with no smoke-free product presence or limited smoke-free product presence. And we talk about Turkey, India, Egypt. Indonesia has been doing well as well. And these are countries we know where you have big demographics, or the legal-age cohorts 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 that. So that's the trend in Q2, okay. It doesn't mean that the rest of the year is going to be at the same level. But nevertheless, this is why we have been revising a bit the volume outlook from around -3 to 2 to 3% decline. But that's what we can say for the time being.
Once again, we see a big, big difference between countries where people have largely access to smoke-free product and other countries.
OPERATOR
Thank you. I am showing no further questions in the queue at this time. I will now turn the call back over to management for any closing remarks.
Investor Relations
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. Bye.
OPERATOR
This concludes today's conference call. Thank you for your participation. You may now disconnect.
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