Good day, and thank you for standing by. Welcome to the Philip Morris International 2026 Third Quarter results. At this time, all participants on a listen-only mode. After the speaker's presentation, we will open up for questions with a limit of two questions per person before joining 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 one one again. Please be advised that today's call is being recorded. I want to hand it over to our first speaker, James Bushnell, Vice President of Investor Relations and Financial Communications. 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 U.S. 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 4 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%.
Moving further down the P&L, our adjusted operating margin organically expanded by +60 basis points year to date and +130 basis points in Q3, reaching a very strong level of almost 45% in the quarter. Gross margin expansion remained the primary driver, contributing +80 basis points in both Q3 and year- to- date, bolstered by strong pricing, favorable smoke-free mix, increasing scale benefits across our smoke-free business, and manufacturing productivity gains. At the same time, we continue to invest strongly behind future growth opportunities. While SG&A organically increased by less than net revenues in Q3, this reflects the ongoing benefits of our G&A productivity initiatives and the favorable comparison against the prior year period, which included certain combustible-related items. Both international and U.S. smoke-free commercial investments continued to grow ahead of the top line, accelerating versus the second quarter.
For the full year, we expect SG&A to grow broadly in line with net revenues as we continue to work on our back-office costs while strongly increasing commercial investments behind our growth platforms and consumer-facing initiatives across the world. This includes increased investments in the U.S. to support our ZYN portfolio expansion and competitiveness. Indeed, our productivity program continues to deliver strong results. We have now generated more than $2 billion of cumulative gross cost savings across both cost of goods sold and SG&A since 2024, achieving our three-year objective ahead of schedule. Focusing now on our international business, which continues to be the primary engine of group performance and represents 93% of our year-to-date net revenues. International smoke-free delivered excellent year-to-date results, with organic growth of almost 10% in net revenues and +12% in gross profit, driving +120 basis points of gross margin expansion to 70%.
This reflects the continued growth and increasing profitability of IQOS, with additional contributions from our expanding smoke-free portfolio, particularly VEEV. As expected, Q3 growth was slower due to shipment timing comparisons and related category mix. Importantly, IQOS gross margins continued to expand meaningfully despite additional cost disruption in Ukraine. Our international combustible business also delivered a strong year-to-date performance. Higher category share, robust pricing, and efficient execution drove organic net revenue growth of +5.2% and gross profit growth of +7.4%, supporting +140 basis points of organic gross margin expansion. Together, our international smoke-free and combustible businesses drove +7% organic net revenue growth and +9.1% gross profit growth with +140 basis points of gross margin expansion to 68.8%.
This performance supported international organic OCI growth of around +11% in both Q3 and year- to- date, comfortably exceeding the targeted OI growth rates for total PMI. Focusing on international smoke-free, we drove +8.6% growth in total adjusted IMS year- to- date, including an acceleration to +8% in Q3 and despite the impacts from Japan and Poland. Excluding these two markets, growth was +11.8% year- to- date, consistent with the strong growth rates delivered over recent years. Importantly, our smoke-free portfolio continues to outgrow the comparable industry by approximately 1 percentage point, with our share increasing to 62%, reflecting the increasing strength of our multi-category strategy. I also note that our international market share of cigarettes and HTUs exceeded 30% in the quarter for the first time, underscoring the combined strength of our smoke-free and combustible portfolios.
IQOS remains the driving force behind our smoke-free growth. Adjusted IMS volume growth accelerated from +5.1% in Q2 to +7.1% in the third quarter. We are especially pleased with the delivery of +7.7% growth year-to-date, despite the known headwinds in Japan and Poland. Excluding these two markets, adjusted IMS growth remained around +10% in the quarter and almost +11% year-to-date, consistent with the strong underlying trajectory of the business and the durability of demand across our geographic footprint. Key European geographies, including Italy, Greece, and Spain, all delivered double-digit adjusted IMS growth year-to-date, complemented by excellent performance in markets such as Indonesia, Mexico, the Philippines, Saudi Arabia, and Taiwan, as well as global travel retail, highlighting the increasing geographic diversification of our IQOS business. Our device and consumables pipeline remains active, supporting both legal-age consumer acquisition and brand loyalty.
We continue to enrich our premium TEREA and LEVIA HTU offerings with new taste experiences. Our mainstream price variants of DELIA and SENTIA are also supporting acquisition and exceed the size of our closest category competitor. In addition, the expansion of our alternative heating technology, BONDS by IQOS, is ongoing and is resonating well with harder-to-reach entrenched smokers in initial launch areas. The strength of IQOS is exemplified by excellent key city offtake share progress across the world, a strong indicator of national-level growth potential. We recorded further strong Q3 share gains across established IQOS markets, including Germany, Greece, Italy, Japan, Romania, the Netherlands, and the United Kingdom, alongside global travel retail. We also continue to see very promising momentum in newer growth markets such as Mexico, Indonesia, and Taiwan, in which IQOS increased its national category share to more than 80%.
Switching to VEEV, whose momentum remains very strong, year-to-date shipment volumes increased by +68% to 4.0 billion equivalent units. This includes continued gains and increasing category leadership across European markets, with VEEV further extending its lead over established competitors as the number one closed pod brand in the region. Elsewhere, we continue to see promising growth in markets such as Egypt, Malaysia, global travel retail, and in South Korea following its recent launch. The business continues to benefit from our unique multi-category deployment using the unparalleled commercial infrastructure and consumer reach of IQOS, while also benefiting from the structural shift toward closed pod systems across international markets. This trend aligns with our portfolio and commercial strategy as we drive momentum with meaningful innovation, such as the current rollout of our new beautiful VEEV ONE PLUS device, which you can see here on the slide.
Moving now to ZYN, which continues to generate promising growth in international markets as we invest to build the category. Year-to-date international shipment volumes reached 1.5 billion pouches, representing growth of +6.3% on a like-for-like basis. This includes a sequential step-up of +7% in Q3, supported by improving sequential trends in Sweden following the launch of new ZYN flavor variants. Strong double-digit progression continued in markets such as Poland, global travel retail, and Mexico, partly offset by inventory movements in the United Kingdom and Pakistan. Growth was supported through portfolio innovation such as ZYN Black Menthol, continued category expansion, and growing consumer adoption across a broad range of markets. ZYN's year-to-date ex- Nordics IMS growth reached +30%, outperforming the industry and growing ahead of shipments.
In Europe, our most advanced multi-category region, combined smoke-free IMS volumes for IQOS, ZYN, and VEEV increased by approximately +8.6% year-to-date and +8.9% in Q3, reflecting strong momentum. IQOS adjusted IMS growth strengthened to +6% in Q3, notably driven by an acceleration in Germany and Spain. Performance was broad-based across the region, with strong growth continuing in Italy, Greece, the United Kingdom, and Bulgaria, more than offsetting the impact of disruptions in Ukraine. Excluding headwinds in Poland due to the characterizing flavor ban implementation earlier this year, adjusted IMS growth in Europe was around +8%. Our other smoke-free categories continue to scale rapidly. VEEV shipment volumes increased by +75% year- to- date, and +66% in Q3, with outstanding growth in Romania, Greece, Germany, France, Bulgaria, and Spain.
ZYN volumes reached 1 billion pouches year- to- date, accelerating to almost +6% growth in Q3 on a like-for-like basis as we invest behind the category. This was supported by strong progress in markets such as Poland, Austria, and Finland, in addition to the better Swedish delivery. In Japan, IQOS fundamentals remain strong amidst the volatility of the two-step excise increase on heated tobacco this year. Following a Q2 decline in adjusted IMS volumes due to pantry de-loading, HTUs returned to growth in Q3 with an increase of +3.4%. As in Q1, before the April excise-driven price increase of JPY 40 per pack, Q3 IMS growth includes a favorable impact from consumer pantry loading ahead of our JPY 20 increase in October.
Excluding this impact, underlying growth was +1.3% as consumers gradually adjust to higher prices in an environment where combustible cigarettes did not yet face any excise change. This remains in line with our expectations, and we continue to expect growth for the year, notwithstanding a likely softer Q4 as pantry loading again reverses and consumers adapt to a further price increase. Our adjusted heat-not-burn category share remained stable at approximately 68%, despite taking more pricing than competitors in April, highlighting the strength of the IQOS proposition. Looking forward, the excise calendar for the next three years looks less disruptive, with moderate increases on both combustibles and heated tobacco-like each April. While the April 2027 increase will mark the third change in 12 months, with a potential cumulative impact on the consumer, we remain excited about the category's midterm growth potential in Japan.
Although heated tobacco continues to account for over 50% of total nicotine offtake, there remains a substantial pool of smokers yet to switch, supporting our confidence in the capacity for strong IQOS performance in the years ahead. Turning now to the U.S., where we delivered strong financial performance in Q3, supported by ZYN volume growth of +4.2% to 3.2 billion pouches, or +13%, excluding the impact of one-off promotions in September last year. Sequentially, shipments increased by 10% versus Q2, reflecting category expansion and the ongoing launch of new portfolio variants, which have contributed to an improvement in our category share and should position us well for future growth. We expect Q4 shipment volumes to be broadly in line to modestly above Q3 levels as we continue to expand distribution and support the rollout of the enhanced portfolio.
U.S. net revenues increased by almost 23%, and gross profit by +24%, with gross margins expanding organically by +60 basis points to 64.4%. This was supported by favorable pricing comparisons against the same prior year promotions, notwithstanding the impact of higher manufacturing overheads and startup costs from our new ZYN facility in Colorado, which is gradually ramping up production. Adjusted operating company income grew by +1.5% as we meaningfully increased commercial investments to support the expansion of our ZYN portfolio. Supported by our readiness and ability to launch new products, we are taking significant actions across the second half of this year to strengthen ZYN's competitive position as the leading and premium U.S. smoke-free brand. The first action is the expansion of the ZYN offering in two waves to address a broader range of legal-age nicotine consumer preferences.
The first wave of expansion comprises the higher nicotine moist range of ZYN Ultra and an expanded flavor lineup for our flagship dry portfolio, which are now approaching full distribution. While we are still building consumer awareness around our new range, especially for ZYN Ultra, we are encouraged by the initial consumer reaction. Indeed, following several quarters of volume progress below the category growth rate, ZYN's category offtake share increased by an estimated 1.4 points from June to September, demonstrating the incremental contribution of the new variants and interest from competitor pouch consumers. We also began shipments of the second wave of product introductions in the quarter with new flagship variants in both 1.5 mg and 8 mg strengths, further broadening the consumer offer and supporting our objective of encouraging legal age nicotine users to switch to the category.
The second important action is to align the value proposition across the portfolio and optimize ZYN's per pouch price positioning. We began this process over the summer with the launch of ZYN Ultra in 20 pouch cans, and starting in October, we are now transitioning our 1.5 mg, our 3 mg, and our 6 mg flagship variants from 15 to 20 pouches. These variants represent a large majority of our volumes, and as we work to execute the change smoothly for both consumers and trade partners, we expect the transition to be largely complete in the fourth quarter. As we flagged at Q2 earnings and in subsequent communications, these actions are accompanied by a need to step up investments. Total U.S. segment SG&A increased significantly to around $370 million in Q3, and we expect a further exceptional sequential increase of around 10% in Q4.
This reflects increased consumer communication to build awareness of the expected portfolio and enhance value proposition together with the ramp-up of our When It Clicks brand campaign. Looking beyond Q4, we view the Q3 level of spend to be sufficient to support the brand. The transition to 20 pouch cans represents a significant investment in consumer value, which all else equal, translates into approximately 25% less revenue per pouch. Combined with additional short-term support on the existing 15 pouch variants to manage the sell-out at retail, this will impact Q4 net revenues. Indeed, taking the aggregate impact of these actions and the expansion of our manufacturing capacity to support future growth, Q4 will be a unique quarter of investment. We expect an abnormally low level of U.S. profitability in the fourth quarter with adjusted OCI around zero or slightly negative.
Our leading global position and strong growth profile reflects continuous investment for mid and long-term growth, and we are excited to be implementing the significant improvements to our ZYN consumer offer. With a fast-growing category and ZYN's leading brand equity, we believe we are positioning the brand for strong and sustainable growth over the coming years. Finally, turning to combustibles, which posted an exceptional Q3 performance. Pricing remained a key driver, reaching +8.9% in the third quarter and +9.1% year- to- date, with broad-based contributions across markets including Turkey, the Philippines, Indonesia, and Poland. We now expect full-year pricing of above 8% with the net revenue impact partially offset by a more unfavorable geographic mix. Despite this strong pricing, our portfolio increased Q3 international category share by 0.4 points to 25.9%, driven by Marlboro, which reached an all-time record high of 11.4%.
The strong share performance and robust pricing drove another quarter of excellent profitability with international combustible gross profit increasing by +9.8% in Q3 and +7.4% year- to- date. This brings me to our outlook for the full year, where we're targeting a second consecutive year of double-digit adjusted diluted EPS growth in dollar terms. Indeed, following our strong first nine months, we're on track for another year of excellent performance as we continue to invest behind smoke-free growth. We now expect growing total shipment volumes for the year, making 2026 our sixth consecutive year of growth. For net revenues, we continue to forecast +5% to +7% organic growth. Moreover, given the strong year-to-date delivery and our expectation for a robust fourth quarter led by international smoke-free, we believe the business could deliver in the middle or upper half of this range.
At the operating income level, we continue to expect organic growth of 7%-9%, reflecting strong inherent margin expansion from our top-line performance and productivities, and despite our substantial ongoing investment in SAP internationally and in the U.S. Our forecast range for currency neutral adjusted diluted EPS growth also remains at 7.5%-9.5%. With a favorable currency impact at prevailing exchange rates of approximately $0.18, notably including recent weakness in the euro. This results in an adjusted diluted EPS range of $8.29-$8.44, representing growth of approximately +10% to +12% in dollar terms. However, considering the significant H2 step-up in U.S. investments and the cost impact of ongoing geopolitical tensions, we see the full year delivery more likely to be at the midpoint or lower half of both brackets.
Although the inflationary outlook remains uncertain, most notably the persistence of energy-related inflation linked to the conflict in the Middle East, the prices of certain inputs have begun to reflect the increases in energy and shipping costs. While we are less exposed than many other areas of consumer goods, and this remains manageable overall, these factors were a headwind in the third quarter and are expected to evolve further in Q4 as a greater proportion of increased input prices flow through. Overall, we estimate the impact on full-year adjusted diluted EPS growth to be around half percentage point, in addition to a similar-sized headwind from disruptions in Ukraine. This results in a combined impact of approximately one point of growth for the year. For Q4 more broadly, we anticipate a strong net revenue and OCI performance from our international business, including a re-acceleration in smoke-free performance.
We expect continued robust adjusted IMS growth and HTU shipment volumes of 39.5 billion-40.5 billion units, consistent with our comments on shipment phasing. In contrast, this will be a unique quarter of elevated investment and portfolio transition for the U.S., for the reasons I explained. Despite this special quarter for the U.S., we expect a strong delivery for the group overall, as captured in our full-year outlook. We also expect to generate a record level of approximately $13.5 billion in operating cash flow, testament to our strong cash flow generation. This provides substantial flexibility to invest behind future growth while continuing to deleverage and deliver attractive shareholder returns. Let me now conclude with a few key takeaways. Our year-to-date performance reflects the quality of our underlying fundamentals, positioning us for another year of superior top and bottom-line growth as we continue to invest substantially behind future opportunities.
This reflects the durability of our model, supported by category-leading brands, strong pricing power, disciplined cost management, and the increasing scale of IQOS, ZYN, and VEEV. We remain a highly cash generative business with an unwavering commitment to our progressive dividend policy and to rewarding shareholders. In September, we raised our dividend for the 19th consecutive year to $6.40 per share, with another increase of almost 9%. Looking ahead, we remain confident in our mid- and long-term trajectory, which reflects the unique strengths of PMI's growth model. Structural smoke-free momentum built on science, innovation, commercial strength, and brand building, allied to combustible resilience and effective reinvestment. We look forward to sharing more on these elements at our next Investor Day, which we plan to hold in Q2 next year. Thank you very much for listening, and we 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 one one on your telephone and wait for a name to be announced. To withdraw your question, please press star one one again. Please limit yourself to two questions and rejoin the queue again for further questions. Please stand by while we compile the Q&A roster. One moment for our first question. Our first question will come from the line of Bonnie Herzog from Goldman Sachs. Your line is open.
All right. Thank you. Hi, how are you? I guess my first question is on your guidance. Your Q3 came in better on both the top line and EPS versus your guidance for the quarter. Yet, as you mentioned, you are pointing to the middle or lower half of your full-year organic OI growth guidance, and it sounds like on your EPS growth guidance as well. I know you called out the higher cost pressures from the ongoing geopolitical tensions, but I really did want to verify if you are also now planning on spending more in the U.S. For instance, are you finding that it is now costing you more to implement some of the strategic initiatives that you have called out, such as putting 20 pouches in all ZYN cans?
How should we think about some of these higher costs and spending in the U.S. on your profitability and EPS growth next year?
Thank you very much, Bonnie. Nice to hear from you. You are right. Our guidance points for the OI and for the EPS for the full year towards the mid or lower half of the range. As you could read, the predominant element that we have in there are two predominant elements fundamentally. One is the cost pressure that is coming from geopolitical elements. This cost pressure has been increasing over the year, and we start feeling more the impact of that during Q3 and Q4. We guided you through a full year impact of half a point of EPS. You could read that therefore, the flow in is mostly in H2.
We guided you to another half a point that is coming from disruptions, which are kind of one-off things that have happened in Ukraine due to, sadly, three events of bombing of some of our supply chain facilities, and therefore destruction of goods. Quite frankly, if you look at that and you look at our guidance, that constitutes one point, and it means that just that one, if we had not had those impacts, we would be mid to higher half of the range. The other important element that there is in the quarter, and especially in Q4, is the exceptional level of investment that we are making in the U.S. I assume you will all acknowledge that the investment that we are making in the U.S. over the course of Q3 and Q4 is exceptional, by all means.
I would point you out to a couple of elements in that. First and foremost, the fact that we are moving our flagship portfolio to an optimized premium price positioning, which de facto means a better value proposition for the consumers, and in practical terms, it means a 25% price reduction on a per pouch basis. We are migrating our entire flagship portfolio from 15 to 20 count at the price of the 15 counts. That alone, as you can understand, has an impact on the revenue line of it. As we go through a phase of transition over the course of Q4, we will accompany that with commercial activities at retail level, which are revenue line impacting activities in order to ease the sellout of the remaining 15 count cans in the market.
The third step that we take is an exceptional investment that is already flowing in in Q3, and we guided to a potential increase over Q4 exceptionally by 10% versus the Q3 impact. We said about $370 million in Q3 and a 10% increase exceptionally in Q4, in order to continue to do a couple of things. The first one is continue to build ZYN into the strongest smoke-free brand in the U.S. The second element is we have practically tripled our portfolio of variants of nicotine pouches over the course of the year, and we are making this value optimization in terms of price adjustment. Therefore, we want to step up both branding communication with the When It Clicks campaigns and continue to expand that.
At the same time, we want to do something very important, that is continue to build the awareness of consumers around the existence of these new variants, but also the awareness on the new price of the product. You should interpret all these elements as elements that for Q4 are going to be even ramped up versus Q3. But as we said in the guidance, you could assume that the Q3 level of cost would be a good proxy for what the level of commercial investment is going to be over the course of next year.
So when you put all of these things together, Bonnie, quite frankly, I see strength in the guidance that we are giving for the bottom line and for the EPS in that we are moving it to the mid and bottom half of the range just for the correction of the cost that I detailed before.
We are de facto almost absorbing the strong investments that we are making in the U.S., supported by the strength in all the rest of the business. In other words, if it were not for those inflationary pressures, which we have felt to a much lower extent from what I am seeing in the disclosures of other FMCG companies in the areas, that we have felt to a much, much more manageable level than many other companies. If it were not for those, we would actually be in the mid to upper end of the range. I hope I addressed your questions.
No, definitely. That was helpful. Just to confirm, Massimo, that as I think about next year, the spend levels in the U.S. this year, I think about that continuing next year. Did I hear that correctly?
I think what we-
Maybe even more
Guided towards is the fact that the spend level that you are seeing in Q3 is a good proxy for the run rate that we're going to have next year.
Makes sense. Okay.
In Q3, consider that there is another element which is a higher cost the fact that we have just started up our Colorado facility. The level of loading in that facility is low, and therefore the impact from the overheads there. You are going to find yourself next year with a cost level where Q3 is a good proxy, and obviously we are banking on the future growth of the category next year, and we are bolstered by the share results that we have seen from June until now.
Okay. And maybe just a couple of quick follow-ups on ZYN, because you touched on it. I would be curious to hear, from your perspective, how some of the recent ZYN innovations that you have rolled out have been performing relative to your internal expectations and maybe ultimately, how incremental do you think the innovations will be to flagship ZYN? And then second, on the move to 20 pouches in each of the ZYN can, I am curious how you see this impacting consumer behavior, if at all. For instance, do you see it, I do not know, as a headwind to volumes, or could it be a possible tailwind if consumers now consume more since they have more pouches in each can they buy? Just trying to think through that. Thank you.
Okay. We are very excited with the initial results of both the expansion of flavors on our flagship dry portfolio and the introduction of the higher nicotine levels of 9 mg and 11 mg in our Ultra portfolio. I must tell you that the feedback that we have gotten from consumers, and I had the opportunity a couple of weeks ago to be in the U.S. and do a deep dive on that, has been overwhelmingly positive. This includes both existing ZYN consumers that were really looking forward to having more flavor options at the 3 mg or 6 mg levels that they were used to. The feedback on those flavors of dry have been really super positive. Also consumers that were wondering why ZYN did not have a higher nicotine level proposition, and that might have otherwise considered going to competition.
Where frankly, in data that we have seen from our consumer research, we see that there has been high interest in what we have launched. We have seen an inflow, both of legal-age smokers that are coming to the category, but also of competitors' users and people, in the case of 9 mg and 11 mg, that had left ZYN to go to competitors' propositions in higher nicotine levels and who have come back into ZYN, thanks to those launches. We see all of that in the share. As you see, the share is positive since June and since we started these launches. Therefore, I can only imagine that with the adaptation at this point of the price premium, we should be seeing even more competitiveness and more strength going forward. Regarding your question on consumer behavior.
Well, Bonnie, let's wait and see. I can tell you my personal experience. When I have more in the pocket, I tend to consume more.
Yeah.
I see it with my kids when they buy.
Yeah.
Juices and other things.
Yeah.
The more you have in the fridge, the more you take.
Yeah.
We can only assume that that's going to be the case. There is one thing that I will comment on, however, from my experience in international. As consumers come into the category and get used to it, and they stay with the category, we see two things happening. Consumers tend to trend up a little bit on the nicotine, but as they stay in the category, their average daily consumption tends to trend up. You may argue that in the U.S. today, where the category is at its beginning, you are probably in the low single digit in terms of average daily consumption. If you go to markets where the category has been present for longer, you are actually seeing more high single digit daily consumption. So that is another element of category growth that we can all look forward to.
Okay, great. Thank you for all of that. I will pass it on.
Thank you very much, Bonnie.
Thank you. Our next question will come from the line of Matt Smith from Stifel. Your line is open.
Hi, thank you for taking my question. I wanted to follow up on your inflationary comments and the impact. You called out the half a point of drag on EPS for the year with some impact in Q3 and higher in Q4. If you just isolate the fourth quarter, should we think of that as over a one-point drag on profit, and how do you view levers to offset the impact going forward? You realized your cost savings target ahead of schedule and pricing has run above historical levels, but how do you view both of those now going forward? Thank you.
Thank you, Matt. Well, let's first of all say one thing. This is a very volatile situation that this inflation is coming from, because it's coming from a geopolitical conflict predominantly in the Middle East that is driving energy prices up and therefore a variety of inputs and services. As we have showed in the past, we have a certain resilience in our supply chain. In fact, despite the fact that the conflict has been lasting also for the first half of the year, we're only seeing these elements of cost flowing more meaningfully into our P&L in the second half of the year. I'm not going to guide you, Matt, on the precise split of those elements across the various quarters.
The Q4 is probably the quarter in which we are feeling it the most, purely from a timely perspective, because those higher priced inputs are coming in now. What I would tell you is we have been through this before. You may remember at the times of the beginning of the war in Ukraine, and we have showed repeatedly the resilience of our model and our ability to mitigate those costs. Quite frankly, you're seeing it now again, because when you compare our half a point that we're guiding for this year to what is being guided by many of our other peer companies who operate in the area, you see significantly higher impacts from that.
Which is testament to the resilience of our supply chain and the fact that we have a broadly sourced set of materials that come from all over the world, and also contracts which protect us over a period of time that will allow us to navigate this. Having said that, all of those protections cannot last forever. The situation is very volatile. In the same way as it is impacting now, it may disappear the moment that the conditions on the ground go back to normal. To your last point, look, we have demonstrated this year and also in previous years that we have very strong pricing power, and we are entering 2027 with probably a super strong P&L at this point, and balance sheet, by the way, as well, with margins expanding at gross level, at operating income level.
You have seen that year-to-date, we have expanded 80 points, the margin at gross level and 60 at operating level. We are entering 2027 strong and therefore in an excellent position to be able to manage those impacts, should that move forward.
Thank you for that. If I could ask a follow-up. You changed your guidance a bit for the heated tobacco IQOS shipment versus in-market sales growth guidance. I think now you expect shipments to slightly trail IMS. Can you talk about or give more detail on that gap, and how do you view inventory levels as you are exiting 2026? Are those at a normal level, or is this gap an opportunity to further catch up as you go forward? Thank you.
Thank you for that question, Matt. Look, we have to take the fact that 2026 has been a bit of a peculiar year for heat-not-burn in that there has been especially one event. There has been this taxation and therefore, tax-driven pricing in Japan, not once but twice. Therefore, a variety of preparatory steps for that unprecedented event took place both last year when, in the end of the year, the shipments were higher. Exactly for us to prepare for pantry loading that happens from consumers that are not used to that level of price change, both at retailer level and at consumer level. You saw that there is a phasing of shipments where we have significantly higher shipments in the first half of the year, in H1, and lower shipments in H2.
When you look at what we just showed, you saw that the trend in IMS also reflects the pantry loading in Japan. Given that our April pricing was of JPY 40 , but our October pricing is of JPY 20, we are seeing obviously less pantry loading from the consumers given the smaller increase that is happening in the second half of the year as we saw in the first half of the year. Which means we entered into well-equipped from a shipment level and therefore with that phasing of shipments, IMS are going to run ahead slightly of shipments and therefore you will see inventories coming down, but always at a very healthy level, and therefore we also take the benefit on the working capital side.
Thank you. I will pass it on.
Thank you, Matt.
Thank you. One moment for our next question. Our next question will come from the line of Eric Serotta from Morgan Stanley. Your line is open.
Great. Thanks for taking the question, and thanks Massimo. First, could you talk a little bit about puts and takes for international smoke-free growth next year? Realizing you are not going to give us guidance today. But clearly 2026 was an extraordinary year. You talked about some less unfavorable or a more normal tax environment in Japan next year. You will be cycling the flavor ban in Poland. Any other big considerations to keep in mind as we start to think about international smoke-free IQOS next year? I know there is tax changes in Germany, much smaller than Japan, but I believe impacts HTUs. But anything more broadly in terms of puts and takes for next year for IQOS internationally?
Thank you very much, Eric, for the question. Well, look, I am not going to provide guidance for next year. We are going to talk about that one in February. As you said, puts and takes, I will give you my takes on this. My first take that I would give is, if you look at our IQOS performance over the course of the year, we have displayed that there is strong momentum in terms of IMS of IQOS. The thing that I would remark here is that the geographical base over which that growth spread is becoming wider and wider. You saw that we presented year-to-date 7.7% adjusted IMS growth. If you take out the impact from Japan and Poland, we are at 10.8% IMS growth.
You could compare that with 2025, which was at 10.6%, which means that you see that the momentum is there and is actually increasing. This increase is also related to the fact that there are more and more markets that have double-digit growth in IMS and sizable markets. You have in double digit at this point, Italy, Greece, Spain, the Netherlands, the United Kingdom, Germany. Many of these markets were not markets that were on the list previously, meaning these were markets where we started investing a few years ago and where we are seeing the results coming. We are seeing Indonesia with excellent growth, Mexico, Saudi, Taiwan, where we have captured more than 80% of the share in the category. GTR, Global Travel Retail, that continues to contribute positively.
You see that the momentum from an IMS perspective, when you take out those one-time event of Japan and Poland is there, and the geographic diversification of the growth gives me confidence for the resilience of that growth. The Japan event of this year, I would say that was a little bit atypical because you have asymmetrically only one category that takes a pretty important tax and price increase. If you look at the price increases that we had to pass on the IQOS consumables alone, you are looking for the Japanese consumer that is not used to seeing price increases, over a 10% price increase over the course of one year with the cigarettes not moving.
Now that we move into next year and you have a JPY 12 increase across the board for HTUs and for cigarettes, you may argue that that is a more progressive increase and something by which there is going to be less of a shock wave for the category itself. The other thing that I would ask you to consider is that at this point, we have launched also our new proposition, that is BONDS and BLENDS, in a variety of markets, including, by the way, in some of the prefectures in Japan.
You remember that one of the elements that we wanted to really crack, especially in a place like Japan, where you have more than 50% penetration of the category among nicotine users, is for those that are still entrenched and haven't moved yet, what is a proposition that may actually encourage them to move. We're at this point with BONDS and BLENDS in a number of markets. The proposition is actually doing, and we see that the consumer feedback tells us that the proposition does what we wanted it to do. That is, it's managing to convince entrenched smokers to actually move because they find the more similar experience to cigarettes in BONDS and BLENDS that they're looking for. Therefore, we're seeing less or fewer HTU users moving to BONDS and BLENDS.
They actually tell us, "Hmm, too strong for me," but more smokers moving there, meaning it's working exactly as we want. We're at the beginning of that journey. I cannot but be just encouraged by what I'm seeing. I will say one last thing. My answer has already been long, but we are starting to see also some new markets opening up. We saw Taiwan that opened up last year, and you see what a quick run we have had in Taiwan, where the business is growing strongly, and we have become absolutely the category leader in the category ahead of the traditional leading player in the CC business there. More recently, you have seen regulatory changes in Argentina, which is a positive step towards the ability next year to be able to enter the market in Argentina as well.
Which means that there may be more markets that come on board. It's not a matter of whether they're going to come on board. It's more a matter of when. So our sentiment towards the trajectory for HNB remains extremely strong, Eric.
Great. Very thorough and very helpful. One quick follow-up. Realizing pricing has never been the primary lever for IQOS growth, it's really mostly about driving penetration. It does seem like the price mix or the implied price mix in international smoke-free was a little bit softer this quarter. I think it ran about 3.5% in the first half, closer to, I get 70 basis points in the third quarter. Just wondering what's happening there. Is it simply the comparisons from last year? Is it some geographic mix? Is it product mix with BONDS by IQOS? Just wondering what happened in the quarter and how to think about price mix for international smoke-free going forward.
Excellent question, Eric. There are two things that I would mention when it comes to the revenue growth of IQOS in the quarter. Two things to keep in mind. The first one is, it's obviously hit by the comparison on the shipments versus previous year. You saw that our shipment volume in total SFP was at 2.7% growth, which is a lower level of growth that you have seen in previous quarters. Obviously, being IQOS such a large part of our smoke-free portfolio, the comparison on IQOS shipment volumes is the one that is actually holding that down because you have seen excellent growth in the other two categories. There is a second element to consider. There is therefore category mix within that, when you want to take that to revenues.
And one third element, there have been certain pricing decisions, timing of certain pricing decisions, especially in IQOS, that have been made and which have hit the quarter, and that's all, but nothing else on that is of any concern to us.
Great. Thanks so much. I'll pass it on.
Thank you, Eric.
Thank you. Our next question will come from the line of Pallav Mittal from Barclays. Your line is open.
Hi, good morning. Thanks for taking my question. The first one is on ZYN and Ultra. Clearly, there have been some concerns around the pickup in volume over the last couple of months. The EBIT this quarter in the U.S. is growing only 1.5% on a very easy comp. For Q4, you are saying it would be zero or slightly negative. Given that the investments will continue into next year, is it fair to assume that the U.S. EBIT would decline next year?
The U.S.?
The EBIT-
Can you repeat the last?
in the U.S. The EBIT in U.S. would decline next year?
Pallav, sorry, your line's not very clear, but I think you're asking about U.S. EBIT for next year.
Yeah, for next year. Look, as I said before, I'm not going to provide guidance for next year here. I can provide some considerations for you to make your own conclusions on it. You have seen that we have now nicotine pouch volumes that have grown quarter-on-quarter over the past three quarters, and we guided over the performance in Q4. You know that we are bold about the category going forward, and we said that it's going to be in strong double-digit growth going forward. And you have seen our share performance. Quite frankly, we also guided, and I explained that in the question before from Bonnie, on the cost level that you can expect for next year and taking Q3 as a good proxy for the run rate for next year.
Therefore, you can assume that with volume growth continuing from the category and from our ability to retain or even increase share, the absorption of those costs is going to be better, including the investments that we have made in Colorado for the manufacturing facility. Therefore, you can derive what the possible trajectory for the EBIT is going to be. One thing to keep in mind is the fact that obviously the 25% price optimization that we are making in Q4 will have a lagging effect for three quarters on the revenue level, but on a growing volume. That is what I would keep in mind, and then we can provide better guidance when we talk again in February.
Pallav, your line is very unclear, so I am afraid we will have to move to the next question. Please do contact us if you have a follow-up to that.
Thank you. Our next question will come from the line of Andrei Andon from Jefferies. Your line is open.
Hi, Massimo and James. It is Andrei Andon from Jefferies here. Thank you very much for taking my questions. Two quick ones from me, please. First of all, in Germany, we have had this law that means excise taxes will increase much more sharply in the next four years. It was passed last week. How do you expect this to affect combustibles and heated tobacco in Germany in terms of volumes and pricing ability in 2027 and beyond? Then the second question, we have had this shipment growth for ZYN in the U.S. just over 4% year-on-year in Q3. It does seem like it is fairly ahead of third-party scanner data, which seems to suggest volumes down mid-single digits in Q3. Is this due to a restocking benefit, or are there any other factors that would help explain this difference? Thank you.
Thank you very much, Andrei. I will start from the Germany question. As you know, we operate across a variety of countries around the world, and this is not the first time that we find ourselves confronted with higher than usual taxation passed in one time. If you look at the recent past, similar events of actually higher magnitude have happened past couple of years in Belgium and the Netherlands, two years ago in Poland, more recently in India, in Mexico. We are actually quite well-versed to deal with events like this one. The German government came with a higher than usual tax pass on because now it's ranging between EUR 0.83 and EUR 0.88 , I understand, starting on January 1st. I would point you, Andrei, to certain positive elements of this, which are the following.
First and foremost, the differential with HTU has been retained, and therefore, HTU retains a tax advantage versus the underlying cigarette tax. The second element that I would bring you to is, if there is a market where we are perfectly positioned to be super competitive, even in an environment with higher tax, that's Germany. We have the strongest brand in the market, which is Marlboro. Marlboro's equity in Germany is one of the highest that we have in the entire world, accompanied by a few other brands, second to it, L&M, that is accompanying it. Marlboro and the entire portfolio has been well deployed across a variety of formats, including very large stick counts packs, but also banded with the launch last year of Marlboro Crafted.
That has been extremely successful, which means that it allows us to compete at all the various price segments, and therefore, to compete very powerfully. I've had to tell you, is it welcome that the German government comes with a tax increase of that magnitude? No, it's not, because we know what that trajectory does. We have seen that well in the U.K. We have seen that well in France, in Belgium, in the Netherlands. Fundamentally, it moves more volume to illicit players, and ultimately, the government collects fewer taxes, and sometimes the lawful industry collects fewer revenues. But if there is one company in Germany that is well-versed to compete in that environment, that is us, thanks to the portfolio that we have and the strengths of the brands that we have.
At this point, I would say, with cigarette prices going up, yes, the HTUs are going to go up, but by a lesser extent, given the tax differential, and we're going to continue to be focused on the growth of IQOS in Germany, which, as I said before, is recording double-digit IMS growth this year, and that is, for us, super important. I'll come to your question on the ZYN growth. Andrei, if I may ask you to clarify your question on the ZYN growth again, please.
Mm-hmm. The reported shipment number, the just over +4% in the U.S. on volumes, does seem to be ahead of the scanner data that we've seen, which would have suggested around mid-single digit volume decline in Q3. I was just wondering if that delta is explained by a degree of restocking or if there are other factors in play that would explain this difference.
Well, what I can tell you is, this is the shipment data that we have, so we're growing 4.2% in the quarter. And actually, what you can consider is that if you consider the comparison to the fact that in September last year, we had the nicotine pouch promotion that hit the month of September. We are actually removing that unfavorable comparison, growing 13% in the quarter net of that comparison. That is maybe the element that you may want to keep in mind in order to reconcile your figures. The second thing that I would point out to you is that obviously in the quarter, there is the rollout and pipelining and increase of distribution of our new variants and the flavors on the dry portfolio and the launch of the ULTRA variants. So over the course of the quarter, there was obviously increase of distribution.
We believe that for those variants, we are now fully covered in terms of distribution. We're now building the 1 for 1.5 at 8, but those obviously have contributed to the growth of shipments for us in the quarter. Does that address your question, Andrei?
Yeah. Thank you very much.
Thank you.
Thank you. That is all the time we have for Q&A today. I want to turn it back over to management for closing remarks.
Thank you very much. Sorry if we did not manage to address everybody's question. Please do follow up with the Investor Relations team. That concludes our call today. Thank you for joining us, and have a great day.
Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone have a great day.