As at 22 June 2026

Executive Summary

Key highlights

In this report we review PM’s 1Q26 results released in April 2026 and assess the impact on our outlook:

Financial results at a glance:

• Group net revenue was up 9.1% with organic growth up 2.7%. This was driven by strong growth in the international smoke-free segment, which grew by 24.7% (15.8% organically), and international combustibles which rose by 6.8% (1.0% organically). US revenue declined by 30.9% (down 31.6% organically), driven less by a decline in demand but rather by a higher prior period base and inventory normalisation. The US accounts for approximately 6% of revenue.

• Group volumes declined by 1.9% for the period, driven primarily by a downturn in the volume of cigarettes being sold, which decreased by 5.1%. Smoke-free product volumes were up 9.1%, with a net revenue contribution of 43% for the period, up 1.3 percentage points. Smoke-free products remain a growth driver within PM, and as its contribution increases, the risk around the falling cigarette volumes is partially alleviated.

• Group gross profit increased by 10.1%, and 3.8% organically, driven by strong performance from international smoke-free products, which was up 28.6% (19.4% organically), and international combustibles which grew by 9.8% (3.9% organically). The gross profit for the US segment was down by 44.5%, driven by the volume declines compared to a higher prior period and inventory normalisation, rather than lower consumer demand.

• Group gross profit margin was elevated by 0.6 percentage points to 68.1%, with margin expansion in international smoke-free products of 2.1 percentage points to 70%, and international combustibles up 1.8 percentage points to 67.5%. The US margin decreased by 14.7 percentage points to 61.9%, driven by lower volumes against a higher prior-period base and inventory normalisation.

• Reported diluted earnings per share declined by 9.3%. This was largely due to a non-cash fair value adjustment of a minority shareholding in India. When adjusted for the impairment, diluted earnings per share rose by 16% and when further adjusted for currency, diluted earnings per share was up 5.3%.

• Sales and earnings results beat FactSet consensus expectations, with overall performance showcasing strong operational resilience along with the positive impact of the growing contribution of smoke-free products to revenue and earnings. The growth of the segment alleviates some of the overhang from a downtrend in cigarette volumes.

Analyst thesis

Our recommendation is based on:

• Growing volumes and a rising revenue share from Philip Morris International’s (PM) smoke‑free product segment — now 43% of net revenues in 1Q26, up from 42% in 1Q25 — are helping to offset risks associated with the global decline in cigarette volumes.

• Re-entry into the US market through Swedish Match, focused primarily on smoke-free products, although exposure remains limited at approximately 6% of net revenues in 1Q26.

• Stable topline growth with expectations of high-single-digit diluted adjusted earnings per share growth after currency impacts in FY26. The company expects a 3% decline in cigarette volumes, in line with changing consumer behaviour and a shift towards more health-conscious nicotine consumption methods, putting pressure on traditional combustibles. Although the contribution from smoke-free products continues to increase and partially mitigates the structural decline in traditional combustible volumes, we anticipate some pressure on earnings and margins.

• Although PM has stable topline growth and anticipates earnings growth while remaining a stable dividend payer and defensive counter, P:E valuations remain elevated, leading us to a hold recommendation.