Philip Morris Aktie

Okay. Good morning, everybody, and thank you for attending this meeting, fireside chat with Jacek Olczak this morning, Chief Exec of Philip Morris. I'm Damian McNeela, Head of Tobacco Research here at Deutsche Bank. I think Jacek, you have some opening comments to make before we get into some questions.

Just to close the loop earlier today issued a press release reflecting the latest dynamic environment on the exchange rates. So we adjusted our guidance just for the currency. The whole underlying view for the year remains intact. I guess later on, we're going to talk, which is also in our release about the ZYN, ZYN Ultra and maybe in Japan.

But the way we look how we're unfolding -- well, almost about the half of the year through I mean most of our assumptions are coming as we predicted them, we're estimating them at the beginning of the year, including the evolution of the volumes in Japan post the tax hike and price increase. And also, I know there is a lot of focus on the U.S. quite rightly and the expansion of the portfolio.

But at the beginning of the year, when we're giving a guidance, we have said and communicated that we expect an expansion towards the end of the first half. And actually, we have said this before the FDA guidance have been released. So now we actually converge in terms of FDA's views and our views on how the market is going to evolve. The rest is in the release in the detail.

Okay. Well, let's start there then. I mean, obviously, IQOS is the driver of the business. But I think given the focus of what's happening within the FDA, is it worth just sort of talking through your current views on where the FDA is heading, what you think of the progress has been made in terms of sort of how they're changing the enforcement guidelines, and then we can sort of dig into the U.S. performance of ZYN and what you hope to do with ZYN Ultra?

Look, any clarification from a regulator, especially like FDA is very warmly welcome, right? So we avoid the assumptions and speculations and we're receiving on the receiving end, we somehow can incorporate this into our planning. So as a consequences of these guidelines and our assumptions before we start shipments of IQOS -- excuse me, ZYN, we will come back to IQOS. But the ZYN Ultra in the 9 milligram and 11 milligram strength and the portfolio of flavors essentially this week, we start the shipments. We have started the manufacturing already sometime before.

So it's all is a convergence, as I said, of FDA views on how they want to regulate, wish to regulate the market, in our views, how to interpret the regulations. And there will be more to come. I see the guidelines as a net positive. Obviously, the ideal scenario is that you have a very firm sort of very clear regulations. But in absence of those, these words from FDA found very positive, which should contribute, I'm talking about the pouch category or oral nicotine category.

I think this should contribute to the further growth of the category. Let's remember one thing that the category is still in a very embryonic phases and/or phase. And as a portion of the total nicotine space very much in the U.S., but also in international is the smallest one, okay, by all measures.

So this is good. I mean we're also taking opportunity while introducing Ultra to the market to address some pressure on the price points. So I mean, we said it on the release, but just to be very clear, the Ultra will go in a pouch -- in a can of 20 pouches. But the price which we set for this part of the portfolio is an equivalent of 16 pouches. So per can is slightly more expensive, per pouch is, we're adjusting the price index at least this is our move for now.

Yes. And what's sort of driven that sort of thinking? Because obviously, ZYN has sort of maintained its premium price point throughout the sort of the last couple of years. What's behind the thinking with the pricing with...

Well, I think ZYN, if you -- ZYN is, as we all know, is under market share pressure over the last few quarters for a variety of reasons, partially because of what I call the asymmetry in the portfolio, so lineup of the products from a competition and lineup of the products from us, from ZYN. But it's also the price. I mean, essentially, as we speak now, ZYN will be trading or retailing, sorry, at about $1.60 plus, $1.70 price index. 70% premium, obviously, this translates into the share pressure.

Now the good thing about it is that at 70% premium, many other product categories, including combustibles, if I compare Marlboro, this will be completely unvariable price premium. So ZYN under these circumstances, obviously, is not growing, but it's also not tanking. Very sorry for the language. I believe adjusting to the adjustment in the price premium is needed there. But I believe ZYN has the ability to command the premium price positioning of price premium in the market.

And given the sort of the changes with the FDA and your ability to perhaps move innovation faster or start to move innovation full stop, what do you think the outlook is for the category in the U.S. I mean some people talk about it tripling over the next couple of years. Do you subscribe to that?

I mean a category today -- okay, category today is growing somewhere in the range of, I don't know, 20%, 30%. Can this accelerate from this level? Yes, you could see the path day. Will it happen? I mean it's very much on the consumer readiness. Remember that switching between inhalable products from a combustible cigarettes to the inhalable smoke-free requires a different behavioral, et cetera, adjustment from the consumers and going from the inhalables to the oral category.

Obviously, for people -- for consumers who where in the oral tobacco, snus, loose tobacco, et cetera, which is quite not large, but still a substantial market in the U.S. It's definitely much easier to migrate a cleaner form of the product formulations, which are the pouches. The same is in the Nordics, in Sweden, et cetera.

In vast majority of our locations, I mean, people have to go for the inhalation to the oral use, which is not so obvious. So the runway for adoption is longer. And you need to have the right product portfolio and the right marketing approach how to get the consumers there.

Now pouches obviously offer much less, if you like, much more opportunities during a day. It depends how your day goes on. I am in the office, I am at home, I am in a taxi. I mean all of the situations when people will reach out for nicotine-containing products, obviously, the freedom of use is a vastly better almost unrestricted, right, compared to inhalable products. So I think long-term oral has great potential. The question is now how quickly consumers will be going into this category.

Yes. And do you think innovation has got a big role to play in that?

It is. But the spaces today, the way I look into this whole thing from all smoke-free product categories, so heat-not-burn, vape and oral. I mean the product differentiation on the heat-not-burn is presumably the broadest one between market, what is in the market, very much to the advantage of our IQOS and hence, you know, 10 or 11 years after the launch of IQOS, we still come under 3/4 of the total market. And there is a product differentiation. And obviously, consumers are preferring IQOS to other proposition.

E-vape is a little bit convoluted in absence of -- this mix of illicit and a lot of flavors, a lot of proposition. It's a little bit -- it's difficult for consumers to navigate. Product differentiation on the pouches is not to the level which you will have on a heat-not-burn. Yes, you have a dry formulations, you have the moist formulations, they translate in a different speed of nicotine release, which some people prefer this one, some people prefer the other one. But I think there was more product differentiation on a heat-not-burn than on the pouches, for example. Yes.

And one last question on pouches before we get on to the IQOS. In terms of the international markets that ZYN is in, are there any ones in particular where you're particularly excited about the potential of the brand?

I mean we are today in a 30-plus markets, right, with ZYN. And I mean the reason -- obviously, we're leveraging the scale which we have for infrastructure, if you like, which we have built for IQOS. So it's relatively easier for us to use the same brand retail infrastructure, but many other consumer-driven infrastructures, which is deployed in about 100 markets.

Some of these places we're going also to test in what is the reception of this category in a given market. Obviously, if you go to the market, as I said before, when you have a history of oral usage of tobacco, obviously, starting point is different. It also requires a different product portfolio. If you go to the market, which they're not even aware that you could consume a tobacco nicotine product for oral forms, I mean the starting point is different.

Now in every market, you will find today the phenomenal growth, but we also have to be aware that this is the early adopters group of consumers, which I believe is in every category. And obviously, it's good how consumers -- what is the first reaction for the consumers, but I believe more time is needed to see what actually stakes. And once you go for those people who will always are very open to innovations and trying new formats, new formulations, would really will stay in the market.

But I do believe that in every market when the oral -- new oral pouches exist, you could see the growth, okay? I think may -- will follow the same path as a heat-not-burn vape. Presumably, the runway will be a bit longer. But for us, the most important is the destination, right? Is the consumer finding this format is interesting, maybe I am not fully okay of adopting my full day consumption into this format and the mix, and we have said it in previous communications that at least with PMI, we strongly believe in a multi-category approach.

And we see a synergetic effect between a heat-not-burning vape and pouches, not only from us leveraging the route-to-market infrastructure, consumer-facing infrastructure, but also consumers. And you could see that consumers don't mind having another product format in the pocket because it offers them ability to consume the nicotine consumer to consume the product in a different moments of the day. So I mean I, myself, I'm IQOS user and okay, I'm in Paris. So I will tell you what I have in pocket, but I have a vape in my backpack. So -- and I can find the places where sometimes it's convenient. So it's a synergetic effect that the sum of the 3 is more than the individual one of the category at the consumer level, and this is what we're trying to push as a commercial strategy.

Yes. If we move to IQOS now, I mean, I think going towards the end of last year and through this year, the sort of some investor concerns about IQOS' ability to maintain its share in key markets like Japan, given the expectation of increased competition. And this morning, you sort of said, look, we've got -- we still maintain strong share in Japan. I mean given the journey that you've been on with IQOS, can you give some high-level key learnings about the brand that supports your conviction in your ability to...

Yes. So IQOS -- it's a great question. So IQOS is -- okay, look, it's a 10-plus years of us staying behind IQOS. And I think as many of you have noticed, is the one execution across every place where you go. Whether you are in Tokyo, Milan, London, whatever and hopefully, so in U.S., you will say the one product presentation, is the one brand presentation, is the one retail presentation, et cetera. There's nothing else, by the way, that has to recycling the recipe from the past, how we build Marlboro.

Okay. So our aspiration is to build a truly global leader premium positioning brand. And we know that the consistency in execution is very important, especially in the world that everything is extremely connected online, offline, et cetera. That is a product differentiation and the experience which IQOS offers you today from a duration of experience, consistency of experience when I'm consuming a stick is still today not matched by other products in the market.

And also -- and it's very interesting is that IQOS price premium index is presumably the highest on SFP categories, if I compare it to our products. So that's the brand and product differentiation. I never know how this methodologies are done, but if last 2 weeks ago, I think it was -- forgot the agency, which showed the top 100 most valuable brands in the world. And obviously, Marlboro iconic is on a 30-something position. IQOS made it to the list with the position 70-something. I know it's not the #1, 2 or 3.

But within 10 years, if you're building the brand, which is being recognized and start entering the rankings, it means we're doing something very well, very right. So IQOS is the brand. To the extent that we also know that the IQOS is expandable because of a common usage of infrastructure to our product proposition. Let me just translate it is we have a VEEV, our e-vape proposition, and we'll put the VEEV co-merchandising co-presence in a brand retail, et cetera, despite the VEEV doesn't carry the symbols of IQOS and the name of IQOS, consumer will connect the dots and we'll treat it as another innovation from IQOS.

And this is where the brand is start being expandable or extendable to other categories. We'll not talk about this because it is in the very early stages. But as we speak, we're launching or trying ZYN in Japan, when we're doing ZYN by IQOS. So this is the examples when 10 years of investment behind the brand, we can start leveraging to accelerate the growth of our propositions.

Obviously, the product has to be right, et cetera. But ZYN stands -- excuse me, IQOS stands definitely for the -- is a reputable brand for the high-quality great experience, et cetera. So these things is not just the money which you put as an investment, but the time and the repetition of the investment, which gives you the ability to leverage this later.

Yes. Okay. And if we sort of move to Japan, I mean, I think you described it as an atypical year for 2026.

Yes.

Can you just talk through some of the strategies that the business is deploying to sort of, a, fend off the competition and b, deal with the exciting...

Yes. So there is -- what we have in Japan is the first out of 3 steps of the tax -- excise tax changes on the heated tobacco products and cigarettes later on. And obviously, this resulted in the price increases. So we have increased our portfolio of heated tobacco products, and reference by JPY 30. And what we see was a tobacco was a pump loading, I mean, a very proportional or maybe even disproportional at the consumer level to the size and the relevance of IQOS in the market. So we have this distortion on the offtake level, but I think the things now have ironed out. and we'll see where the category is.

Obviously, it's a slowdown in the growth of a category because it's just the heat-not-burn, which increases the prices, not the cigarettes at this stage. And IQOS share plus/minus is intact. There obviously is on the higher pressure than the second-tier product, which we have in the portfolio. So the second-tier product captured more. But so far it is going as per our assumptions or expectations. As you know, Japan is not the market when you have a frequent price changes, right?

So every time you take the price and especially if you take the magnitude as we did, there will be some adjustment of time needed for the consumers to adjust to the new reality. But so far, cross the finger so good.

Yes. And then sort of you touched on it earlier with the sort of the potential launch of IQOS ILUMA in the U.S.

Yes.

Can you just give us your thoughts on, a, where you are with that application...

Every time when I got this question, since I remember...

Yes.

And, look, I'm a CEO, not a fortune teller, right? But every time I said I think it is close, we have to define what is close. But I do believe it is very close. Look, the file is being to our information, and there is quite a regular exchange for our U.S. unit with FDA. I think the file is being processed. I mean FDA is doing these things very thoroughly. Like one could argue could do it faster, but leave it around.

But I think IQOS is coming -- is closer to us than we think. I'm not saying this will be this quarter, et cetera. But I could see that we're progressing well. And look, we always were also very clear that I mentioned earlier about the multi-category. Our aspirations are that in every country in which we operate, we are present in all 3 categories of smoke-free products as we have today. And in order of priorities, when we reenter or enter U.S., Swedish Match acquisition pouches. I mean, IQOS is long awaited to get into the market.

I believe there is a potential for the product proposition like it is. But we also start thinking what we do about the e-vape, et cetera. Because I think e-vape, and I do appreciate the power, I do understand the fact that in most of the countries very much in the U.S., e-vape has its own problems and the category is not properly regulated and it led to the massive penetration of so-called the illicit product. But we have to be careful the illicit on a combustible product is very much about the tax price arbitration between the countries, where illicit on the smoke-free product is very much by the fact that the regulations do not allow some products to be present and therefore, as the response to the demand and the growing demand, the so-called the illicit products find way.

Well, I believe e-vape category is also very attractive. It's ultimately eventually the problems in the market organizations will go away. The most important for us is where is the demand. And if I see that one thing which we see very clearly after the 10 years of transformation, there is not a single country, which you will not see the growing demand for the smoke-free products. Maybe some more e-vape, maybe more pouches, maybe more a heat-not-burn, but the direction of travel for the smokers is set.

And you see the accelerations of accelerations of this demand growth only driven by your ability to supply the product to the market in legal, in a regulated type of matter. So I think this thing we have confirmed that the smoke-free is not just a sentiment of this quarter, but this is what the smokers of current nicotine users are looking for.

Yes. And just going on that point about potential U.S. vape opportunity. I mean it's clearly very large at the minute, but heavily dominated by illicit. Sort of what degree of improvement would you need to see...

Okay. So I will bridge to one of your earlier questions. I think the guidance, which we read very much obviously from the pouches perspective. I think what -- I can't say by design or by coincidence, but what FDA does right is that if there will be more innovative innovations or new products coming in the oral category from the legitimate part of the market, the less space you're leaving for the illicit market.

What went wrong, I believe, on the e-vape category is that FDA as such through the authorization process have not created the legal market in a sense of product offerings, whatever the consumer is looking for. And obviously, when you have this massive demand, demand will find the supply. Unfortunately, there is illicit supply. So now nobody knows what consumers are using. FDA is not comfortable. And you have a couple of other things, which is more difficult to enforce, for example, youth prevention and you name it, right?

So there are quite significant serious concerns, which people might have around the category. So I think what is right, what is happening in the U.S. that the pouch is somehow finding a regulated pathway to the market, which by definition, take the oxygen out for any attempts to supply the market from illicit sources. And the consumers don't really feel like going and buying something in a Mickey Mouse, sorry, whatever, questionable shop, et cetera, environment. They want to participate in the legal market when they have a guarantee of the product quality, et cetera, et cetera.

So this is good. And I believe, ultimately, FDA will achieve the same on an e-vape market. It's just the starting point is very messy at this stage as we are today.

Yes. And I think sort of a lot of the organic growth that PMI delivers is driven by IQOS. Can you just talk about how much further the margin opportunity is from sort of increased scale in the IQOS platform from where we are today?

Well, there is. I mean, we have guided the Street that we see the opportunity for the margin improvement this year, and there is a margin improvement is baked in into our 3 years midterm like growth algorithm. This is coming from the -- I mean, a number of factors, but we operate at scale, okay? So we're truly leveraging the global footprint. This is followed by the same product strategy, et cetera.

So upstream economies of scale are going into our direction. And if we were talking about the cost of our propositions, doesn't matter which product at the very beginning, when you have a small volumes and you don't know which of the product formulations will stick, you take a devices, you take a consumer bill, but also e-vape. Where are we today? You have a massive advantage to this.

Second is that over a period of time, you're also normalizing your value sharing between the retail yourself and so on. So all of these things are actually coming to the margin enhancement territory. And there is a third component very much, which we'll see on a heat-not-burn. Obviously, as the taxation is lower, but very often, we forgot about the thing that the price productivity on a heated tobacco products is better than the price productivity of the combustible due to the tax structures, not tax levels, but tax structures, essentially the difference between paying per unit, whatever the unit is whoever more skewed to the ad valorem price related.

So net-net, there is for smoke-free category, there is the room for the continuous margin improvement. Now having said so, and I know that we will run out of time, we'll never talk about the cigarettes. But we still see the room for improving the margins on a combustible cigarettes, which is the case as we speak. There's obviously different dynamics and different levers which we're using there. You know that we're playing to the value extraction from a smoke -- from a combustibles category. But you could look at our past results and what we see going forward, there is still a room for the further margin already high, but the margin enhancements in the combustible products.

Yes. Okay. I mean let's jump into combustibles. I want to come back to VEEV and the role it plays in the multi-category strategy. But like you say, we probably run out of time and combustibles are still the largest part of the business. I mean, how should investors think about how you prioritize your efforts on maximizing value from combustibles whilst trying to drive that smoke-free business?

Okay. Great question. So, if I take it from a resource allocation and the long-term resource allocation, which is your R&D -- which is our -- excuse me, R&D and CapEx, 90-plus percent is coming behind the smoke-free product. I mean I use this as an example that our CapEx on the combustibles is well below the depreciation on a combustible. We have not built over the last 10 years, a single cigarette factory, but we have opened 16 manufacturing centers for smoke-free product.

So this is how you allocate the resources. 3/4 of our commercial spend is behind the SFPs, smoke-free products and so on and so. I will never disclose how much time I spend as the CEO on the smoke-free and the non-smoke-free, but it's a significant amount of time. A little bit less than R&D. No, but so that's the alignment because, look, this is where we see -- we brought the company to, I believe, a very strong top line growth, starting that for the last few years, we absolutely today operate on a different trajectory of the volume evolution.

Because I remember the days when you always had a pressure on the volumes offset by the pricing. And today, we brought the company on a combined basis to the flat or growing total volumes within which, obviously, you have a decline in combustibles grow SFPs. Pricing on a combustible stays intact. And obviously, you have all the margin enhancements coming from SFP.

So both parts of the business are actually delivering as intended. There is a massive resource allocation from the combustibles going to SFP. It's difficult for me always to talk about the average, but I think one thing which people may underestimate how we approach the transformation or the vision of a smoke-free is that we didn't treat it or we're not treating this as addition to the existing business. We make -- our direction of travel is this business is to replace the previous business. but we will borrow from the past business, the best of the things which we like in the past and try to protect them and enhance them in the new business.

So one of them is the margin profile. Another is the high cash conversion. And I can go on and on and on, which we're trying to take ability to build a great brands like Marlboro and now we're trying to use it for IQOS and for other brands. So this is how we're playing this game here. But I think it's very important that if you make up your mind, do I want this business to be extension of the business or addition to the business? So this is one business which is to overshadow and to take over the other business is completely different decision-making over short term, but very much long term.

And I believe today still differs us in the marketplace, this razor sharp focus on where we want to go, and yields the results. So as I said, I started with the top line. Unlike in the space in which we operate in our industry, you have a flat growing volumes, you have a pretty quality, I would argue, top line growth. And we not only retained the margins from the past business, but we're actually enhancing the margins further. Okay.

Yes.

There's still a lot of things we can do. But so far, I believe so good.

Yes. Okay. And just moving back to the final leg of the multi-category strategy. It's done really quite well across Europe. What do you attribute that success to?

Well, there was a massive learning of organization, okay, because we always talk about the resources in terms of the monetary. But look, what we know today, it's not me, but the thousands of people at PMI, what we know today about the consumer centricity, consumer journey, remember, we've been repositioning the company from a classical B2B to B2C, not maybe from a transactional perspective, but from the relations perspective. And I think that it serves us very well, okay? And this is now we're leveraging the investment, which very much was carried by IQOS.

As I said earlier, we can leverage this growth to other product categories within the smoke-free territory. I think maybe there were setbacks, right? I mean there is no question that you never have a flat grow line and interrupted. There's always something happens on the regulations. I mentioned unintentionally or intentionally the new regulations in France that you can end up in jail, but having a nicotine pouches.

Look, the level of the human stupidity sometimes have no limits, and every time we're getting surprised. But look, I've seen a lot of crazy things in my life. And I think, okay, it's just the blip. At the end of the day, people will come up to a senses and we will have a sensible regulations, okay? So on the one hand, you have almost enthusiasm on the pouches in the U.S. you have a France, which is in the moment of weakness, one of many to come up with regulations like this, okay? I'm not involved in the French politics. I think the experts in this country who know what to do. But I think the regulation is simply stupid.

Yes. I do have a question on EU regulation, which I think you probably...

EU regulation. No, actually -- no, it's very important actually because we haven't talked for a while. I mean we are in the middle of the final stages of the tobacco excise directive -- what, conversation, final negotiations. We'll see. I think in the next few weeks, we should have an outcome of this. I think it will go in the right direction. Obviously, EU also everyone has the say, and there is a lot of convergent divergent opinion, but I believe it's going in the right direction.

Within EU, you have mix of countries, which is very open mind, forward-looking carbon reduction-based regulations. And you have islands of still being stuck in the past, but I think the things are going in the right direction. So I'm positive on this. I believe when we'll be closing the quarter, the second quarter, we should presumably know more facts about the tobacco excise directive and there was a tobacco product directive, which is the next wave of the regulations there.

Okay. And slightly conscious of time. Just -- I know you've reiterated guidance this morning. It's always a focus for investors. What are the key sort of risks, both positive and negative to delivering the guidance for this year?

Yes. So look, I don't think we are unique, right? We're all exposed to the same external world dynamics, right? You have impact of conflict, it's not the one conflict and you have energy prices, which start going up. So you have to somehow accommodate this into your numbers. You have the currencies which are -- they've never been very stable, but definitely, this is not a period of uneventful world for the currencies.

But we're reiterating the guidance. I think we have ability in the business to offset some things which we have not been thinking about at the beginning of the year. But the other hand is we operate at scale at a global basis, smoke-free products is in 100-plus markets. There's always things which are getting a bit better, so you can accommodate the things which are going against you. Not the major things. I always underline this whole thing. The things which keeps us going and keeps me going is the demonstration of a growing demand behind smoke-free product in every part of the world.

And that's the nice problem to have because if I see where the consumer is going and the consumer is voting, I want and I am open to try more smoke-free products, the rest is closer to where we can -- to our abilities, how do we develop the product, how do we market the product, how do we advocate for the product with the regulators, et cetera. There are some other industries which have a demand problem. We're not in the space with the demand problem, and that's a nice problem to have.

Yes. And I think maybe just sort of the final question is around -- I mean, the business has had very strong cash generation. Gearing has been coming down consistently over the last couple of years, and you look to be on track to sort of hit the sort of the 2x net debt to EBITDA. So how is the Board currently thinking about capital allocation priorities?

The same way as a management, and I think the same way with the investors, okay, every time when you bring your balance sheet to the territory, which we've been very transparent and open. The proper conversations will be what do we do with excess available cash. And as always, it was not the magic, right? You don't have to use AI for this one, either you invest or you give it back to shareholders.

You know that Philip Morris was always very strong about the dividend policy. We have very nicely over the last period, brought the dividend payout ratio to the level which I believe it's good sustainability of dividend and the progress of the dividend in terms of growth. It's the question if we have a view on the permanent excess of cash, you know what we did in the past. We returned it to shareholders...

Shareholders...

Yes.

Yes. Okay.

So the Board is aligned where there's no magic, right, in this whole thing. It's more the questions now about the timing, okay, when it's appropriate for this one. And we have to remember one thing that on the underlying basis, transformation is not transformation. PMI was always doing well. What stand us out or what forced us at that time to stop the buyback, et cetera, was now that we started having the underlying performance problem with the currency, right? Then we have lost a lot of the cash flows, if you like, due to the currency conversion and they put us into the territories.

Obviously, then you have a Swedish Match acquisitions, et cetera. But this was one of the key factors around our numbers. Now we're going into territories that the currency is not really the drag on us. It's actually becoming net positive and underlying business is still delivering and actually continue growing and I think, in a good quality manner. So the path and with the margins which we have and the cash conversion, which we have, CapEx is not really the -- we are not in the data centers, chip type of business. Our CapEx is 1.5x, 1.4x, 1.3x the period business. So if you take the cash which the company generates versus CapEx, let's say, minus dividend, okay, the rest is available.

Yes. So no timing update on when the share buyback is going to be...

No. Well, we have a regular meeting with the Board. The Board looks at the management, the balance sheet with the same frequency, and they see whether we have said that we will bring the leverage ratio to the level where we wanted to have before the year-end. And it seems that we're landing there where we wanted to land. So these conversations are in front of us.

Okay. I think that's a good place to end it. Yes. Thank you very much for your time. It's been very, very insightful.

Thank you.

[Audio Gap] a strong start to the year with outstanding growth from our international smoke-free business and very robust pricing driving impressive progress despite a particularly strong prior year comparison for both the U.S. and combustibles. Income growth exceeded our expectations driving plus 10% adjusted OI growth and plus 16% adjusted diluted earnings per share growth to reach $1.96 International smoke-free delivered a striking performance with double-digit volume growth, mid-teens organic top line progression and high teens organic gross profit growth or almost plus 30% in in dollar terms. This was led by IQOS with close to plus 11% adjusted in-market sales growth alongside further multi-category accretion from ZYN [indiscernible] which reached the estimated joint #1 [indiscernible] position in Europe based on Nielsen of [indiscernible].

The financial performance of our combustible business was robust, delivering results in line with our midterm model with low single-digit organic top line growth and low to mid-single-digit organic gross profit growth. This was especially remarkable considering cigarette volume declines were at the more negative end of our expectations following a prior year period of volume growth due to a number of temporary factors. This reflects the enduring pricing power of our portfolio led by Marlboro alongside efficient cost management. In the U.S., ZYN offtake volumes grew by plus 10% despite an even competitive landscape.

As anticipated, segment financial performance was challenging due to the specific combination of impact this quarter, including increased investment and the comparison to Q1 2025 which had close to no price promotion and significant in inventory rebuild as we exited supply constraints. As we flagged last quarter, there was also a channel inventory overhang at the end of 2025, which largely normalized in Q1 and thus impacted shipments. We continue to invest for future growth and expect U.S. performance to progressively improve over the course of 2026 as we prepare to launch ZYN Innovations and comparison normalize, notably in the second half.

Overall, while the global economic outlook is uncertain, our strong financial performance in Q1 underscores our momentum and gives us confidence in delivering another year of best-in-class growth. Let's discuss our Q1 results in more detail, starting with the headline financials. We delivered over $10 billion in net revenues, representing a plus 9% increase in reported terms and plus 2.7% organically surpassing our expectations for a broadly flat delivery.

The strong performance in category portfolio more than offset the Q1 specific combination of U.S. and combustible headwinds I just mentioned. Adjusted gross profit grew by plus 10% to $6.9 billion, reflecting plus 3.8% organic growth and plus 70 basis points of organic gross margin expansion. We achieved this through strong pricing, operating leverage and the continued benefit of smoke-free mix, partly offset by the anticipated U.S. impact driven by the same factors and partly offset by increased growth reinvestment, adjusted operating income also exceeded our forecast, growing plus 10% to $4.2 billion with close to plus 1% organic growth.

Adjusted diluted earnings per share grew by an impressive plus 16% to $1.96, including an $0.18 currency tailwind supported by positive Q1 transactional impact in addition to the generally weaker U.S. dollar. Our effective tax rate was also slightly better than expected and more favorable in this quarter compared to the forecast full year rate.

Our international business delivered an outstanding quarter with both gross profit and OCI growing by around plus 10% organically and around plus 16% in dollar term. This was achieved even as we invested strongly behind our smoke-free portfolio. The excellent organic performance of smoke-free was the clear standout with plus 11.9% volume growth plus 15.8% net revenue growth and plus 19.4% gross profit growth, driving gross margin expansion of 210 basis points to 70%. This was primarily driven by the continued broadband momentum of IQOS in addition to increasing contribution from ZYN and VEEV.

Looking at PMI as a whole, our global smoke-free business delivered very solid organic net revenue growth of plus 5.3% and organic gross profit growth of plus 3.9% and despite the dynamic in the U.S. We continue to expect strong global smoke free growth for the full year, supported by high single-digit volume progression and normalizing U.S. comparison. In international combustible, while volumes declined by 5.1%, organic net revenues grew by plus 1% and gross profit increased by plus 3.9% and with strong pricing and effective cost management outweighing volume mix headwinds.

Gross margins expanded organically by 190 basis points, underscoring the resilience of this business. Turning now to volumes, where total shipments declined by 1.9% as compared to our broadly stable forecast for the full year. Smoke-free shipments increased by a very good plus 9.1% versus prior year, in line with our full year target of high single-digit growth. This was primarily driven by plus 11% growth in HTU to 41.3 billion units, including a modest net phasing benefit of around 0.5 billion units across several markets.

In addition, the stellar plus 95% growth of e-vapor largely offset a decline in oral smoke-free volume of 16%, notably reflecting the U.S. shipment and inventory headwinds previously discussed and timing dynamic in the Nordics. Total smoke-free product in-market sales volume increased by plus 11%.

Cigarette volumes declined at the high end of our expectation and above the international industry decline of 2.3%. This reflects a number of dynamics including the lapping of exceptional plus 1.1% volume growth in Q1 2025, which included inventory replacement in a few markets such as Indonesia, Russia, Italy and Spain.

In addition, a challenging economic environment has contributed to higher level of illicit consumption in certain markets, while excise increases in country, most notably Mexico in January, drove a significant industry decline.

Looking ahead, we expect volume declines to moderate over the coming quarters, and we continue to forecast a cigarette volume decline of around 3% for the full year. This includes a negative industry impact in India following the introduction of new excise rates in Q1. Looking at our Q1 top line drivers, strong pricing and the positive mix impact from intentional smoke-free more than offset the negative volume and mix dynamics from the U.S. and combustible.

Pricing was the largest contributor, adding plus 5 points. This was driven by another strong quarter of combustible pricing at plus 8.5% and with international smoke repricing of plus 2.9%, led by IQOS offsetting the impact of more regular promotional activity in the U.S. compared to the very low level of Q1 2025. International smoke-free mix also made a substantial positive contribution of plus 2.7 points. This was partly offset by a 1.8 point impact from the U.S. reflecting the abnormal combination of factors outlined.

Currency added a further plus 6.4 points, resulting in reported net revenue growth of plus 9.1% for the quarter. Overall, the composition of Q1 growth closely mirror the structural driver of pricing power and smoke-free mix delivered consistently over recent years. underscoring the sustainability and consistency of our growth model.

Moving now to adjusted operating income margins, which expanded by plus 40 basis points to reach over 41%. This notably includes a positive currency impact, which enabled us to increase margin despite additional reinvestment in future growth as well as unfavorable timing and comparison effect. Gross margin expansion contributed plus 70 basis points, driven by the factors mentioned earlier, while only a small impact from disruption and cost increases related to the conflict in the Middle East.

With regard to SG&A, as planned, we continue to invest in control program, scale and innovation, both internationally and in the U.S. While Q2 is likely to see further strong year-over-year investment, we expect this to moderate in H2 and for SG&A progression to be organically at or below the level of net revenue growth for the year. Currency provided a meaningful tailwind of plus 110 basis points, supported by a favorable comparison to transactional losses in the prior year.

Overall, while this quarter had the slowest expected organic growth of the year, we continue to invest in our smoke-free portfolio supported by efficient back office and manufacturing cost management, including approximately $150 million of gross cost efficiency realized in Q1. We remain on track for full year organic margin expansion in 2026.

Turning now to our worldwide smoke-free business, we delivered IMS volume growth of around plus 11% in Q1, approximately 3 percentage points above the industry smoke-free product growth rate in market and category where PMI is present. This reflects our ability to capture over 70% of industry growth in this market as compared to our share of around 60% and driven by the strength and scale of our multi-category portfolio.

We remain focused on expanding the strengths with 3 geographies, adding another category to reach 55 multi-category markets and 2 new markets for smoke-free products in total to reach 108. This includes the launch of ZYN in Portugal and Kenya and VEEV in Egypt.

Within smoke-free International, IQOS delivered another strong quarter with adjusted in-market sales growth of plus 10.9%. This reflects very good and broad-based momentum across markets and regions, including Europe and Japan. Adjusted IMS volumes outside these 2 geographies grew by plus 19%, including dynamic growth in Korea, Malaysia, Indonesia, GCC Mexico and remarkable early results in Taiwan.

At this stage, following its launch in Q4 '25, Taiwan is the most successful major IQOS launch market to date with a national exit offtake share of almost 6% in March. This represents around 70% of industry [indiscernible] volume and a near doubling of our combined Taiwanese cigarette and HTU market share in the last 6 months. Global Travel Retail also continued to post double-digit HTU growth with only a limited impact from the Middle East. Q1 adjusted in-market sales included a consumer pantry loading benefit of approximately [ 0.5 billion ] in Japan, ahead of the April 1 excise-driven price increase. Even excluding this temporary effect, growth remained strong at plus 9.4%.

Importantly, IQOS profitability continues to expand as we invest consistently behind the brand, driven by a growing contribution from pricing, continued scale benefits and productivity improvements across both consumables and device costs. Innovation remains a key enabler of legal edge nicotine consumer acceptance and retention broadening choice across test profile and price points. During the quarter, we continued to innovate on our flagship [indiscernible] consumables in addition to excellent traction from the expansion of mainstream price DELIA and tobacco-free variant, [indiscernible].

We also continue to make progress on the rollout of our alternative it not burn technology bonds by IQOS following promising results from initial key city launches in Italy, we commenced a national rollout during the quarter. A significant proportion of consumers are entrenched traditional cigarette consumers fully line with our mission to provide better alternative, which appeal to all courts of adult smokers. The strength of IQOS continues to be illustrated by sustained offtake share gains across key cities, which act as a lead indicator for national success. This includes impressive Q1 milestones such as Tokyo surpassing 40% share for the first time Global Travel Retail at over 20%, Munich exceeding 16% and Madrid over 10%.

Coming back to Taiwan. A particular highlight was Taipei, where IQOS share reached over 7% in its second quarter post launch and exited in March at close to 8%. You will find additional market and SSP volume data in the appendix to these slides. While IQOS is a core engine of our international smoke-free business, ZYN and VEEV strengthen and complete our multi-category strategy with excellent momentum and significant global opportunities.

ZYN continued to deliver rapid growth. Modern oral shipment volumes increased by plus 7% on a comparable basis or plus 42% excluding the more mature Nordic market. On this latter scope, where the greatest opportunity lies. We estimate offtake volumes grew by well over 50% and gaining share in a dynamic category. This notably includes strong results in markets such as the U.K., Pakistan, Poland and Mexico.

Volumes declined in the Nordics, primarily due to timing dynamics. We continue to expand our portfolio to better meet the needs of legal aged smokers looking to switch by offering a broad spectrum of adult appropriate flavor and strength. This includes the rollout of our lower strength offering the XO 1.5 milligrams across a large majority of our 58 international ZYN markets, driving a significant improvement in first experienced nicotine acceptance among adult nicotine consumers.

In e-vapor, VEEV continued its remarkable momentum in the quarter reinforcing its position as the fastest-growing international [indiscernible] brand among major players. I am pleased to share that VEEV became the joint #1 close pot brand in Europe in Q4 '25, as estimated by Nielsen [indiscernible] across 19 markets, surpassing long-established players. Quarterly shipments exceeded 1 billion equivalent unit for the first time and IMS volumes almost doubled, driven by impressive growth in Italy Romania, Germany, the U.K., France, Spain and Indonesia. With an expanding footprint across 49 markets, this rapid volume growth and improving positive margin profile demonstrate its growing value within our multi-category portfolio. This is especially clear in Europe where VEEV was an important contributor in delivering plus 12% shipment volume growth for IQOS, ZYN and VEEV in the quarter, more than offsetting the ZYN dynamic in the Nordics I covered earlier with plus 31% in growth elsewhere.

IQOS adjusted IMS volume increased by plus 5.4% with a very good performance across the region, despite ongoing disruption in Ukraine and the initial impact from the implementation of the EU characterizing flavor ban in Poland. Excluding markets where the bank took CapEx in January 2025 such as Poland and Hungary. Adjusted IMS volumes grew by around plus 8% as the brand's powerful momentum continues.

Double-digit growth continued in Italy after annualizing the flavor ban, which came into effect in mid-2024. Other notable markets delivering strong growth include Spain, Germany, Greece, Romania, Serbia, Bulgaria and the Netherlands. We expect further good growth from IQOS in Europe in the remainder of the year. In Japan, the heat-not-burn category continued to grow strongly, reaching around 53% of total industry offtake volume in Q1.

IQOS adjusted IMS volumes grew plus 10.4% or around plus 6% excluding consumer pantry loading. This robust level of growth demonstrates the ongoing momentum behind the brand which delivered an impressive increase in adjusted market share to reach a record 34.9%.

While competitive intensity in the category remains high, IQOS returned close to 70% of industry heat-not-burn volumes, reflecting the strength of the combined proposition of product, brand and commercial reach. In shipment terms, Japan HTUs increased only slightly compared to the prior year period, which included a timing benefit of around 1 billion units.

As we mentioned last quarter, volatility between shipment and adjusted IMS is possible over the year due to the excise changes in April and October. Indeed, we expect Q2 adjusted IMS growth to reflect the reversal of consumer pantry loading and the price increases, which took effect on April 1. While too early to comment on the initial consumer reaction we remain confident in the growth of IQOS and the wider category in Japan over the coming years.

Moving to the U.S. ZYN continues to lead the nicotine pouch category, delivering offtake growth of plus 10% in Q1, as estimated by Nielsen. This performance comes despite the competitive landscape where our portfolio does not yet address all of the most dynamic strength and flavor segments. While offtake volume increased, Q1 shipment declined to 155 million can, reflecting the inventory dynamic explained last quarter, which I will now briefly recap.

With around 40 million cans of inventory rebuild in Q1 '25, the underlying shipment base linked to consumer offtake was around 160 million can. Therefore, the underlying volume for this quarter were around 10% higher at approximately 175 million cans. As flagged at our full year results in February, we estimated around 25 million cans of surplus inventory in the downstream supply chain at the end of 2025.

As anticipated, this was largely normalized in the first quarter of 2026, resulting in lower shipment volumes compared to consumer offtake. While some quarterly shipment volatility is to be expected in any market, our base expectation is that ZYN shipments should broadly track offtake growth in future quarter against the estimated underlying 2025 basis provided in February of approximately 180 million can in Q2, 205 million cans and 200 million cans in Q4.

More important than inventory movements, however, is the trajectory of offtake growth for both ZYN and the category. To that end, alongside brand building and commercial execution, we are sharply focused on innovating and we are preparing our manufacturing and commercial operation for new product launches in the coming months. This is further investment in our U.S. manufacturing footprint with our Aurora facility progressively increasing initial operations. This brings me to our key areas of focus to drive growth and value from the leadership of this promising category.

First, we continue to invest in the ZYN brand and in the long-term growth of our U.S. business. This includes marketing, distribution and commercial activation as well as regular promotional activities which were unusually low in H1 '25. Second, we continue to navigate a complex and dynamic regulatory environment which impacts timely innovation and the switching of legal smoker to better alternative. It is clear from the science that nicotine pouches are a much better choice for those legal edge consumer we would otherwise smoke.

We also note the recently published data from the National Youth Tobacco Survey showing that underage usage of the category remained stable or slightly declining at low levels below 2% despite the strong growth of the category. The authorization of [indiscernible] via the FDA's nicotine pouch pilot program remains a priority. Our application remains under active scientific review. And we have a continued dialogue with the FDA as part of this process.

The FDA's intent for the pilot program is to increase efficiency and streamline the review process. And while it has taken longer than targeted. The science supporting our application is robust, and we are optimistic that we will be able to launch this product to consumers in the coming months. In addition, we have made a number of ZYN submission to the FDA that are at various stages of the regulatory process, and we are preparing to bring further innovation to market also in the coming months.

With regards to IQOS, we are pleased that the FDA has now reauthorized the previous version as a modified risk tobacco product. We continue to engage with the FDA with respect to the authorization of IQOS ILUMA to enable American smokers to access the world's biggest and most successful smoke-free product in achieving full switching away from cigarettes.

Overall, we look forward with confidence to the future growth of our U.S. business. Finally, moving to combustible, which once again demonstrated the resilience of our net revenue and gross profit growth model despite significant Q1 specific volume headwind which we expect to substantially ease in the balance of the year. Very strong pricing of plus 8.5% was the key driver with notable contribution from Turkey, Indonesia and Mexico. While we expect some moderation notably in the second half of the year due to timing and comparison effect, we now forecast a full year variance of more than 6%.

International combustible gross profit grew by plus 3.9% organically and plus 9.8% in dollar terms, despite strong performance in the prior year, passing us nicely on track for another year of robust delivery. Our cigarette category share declined 0.6 points to 24.8%. A strong performance in Egypt was offset by market mix and declines in Indonesia and Russia, largely reflecting pricing dynamic as well as the ongoing share recovery in Turkey.

Marlboro once again underscore the strength of its premium brand equity, reaching a record first quarter share of 10.7%, an increase of plus 0.4 points year-on-year. Our objective remains to maintain broadly stable category share over time with a clear focus on maximizing value through top and bottom line growth, while actively supporting the continued growth of smoke-free products.

This brings me to our outlook for 2026. The Middle East conflict had a small impact on our business in the first quarter, which affected shipment to global travel retail and certain markets in the region for both combustible and HTUs. While we have observed increased energy prices and some disruption in energy supply in a number of markets, this has not, at this stage, translated into a discernible shift in consumer behavior. The situation remains uncertain in both duration and potential impact, and it is difficult to assess the broader implication for the consumer or the global cost environment.

We have factored in some increases in transport, energy and other input costs. And we will continue to closely monitor development to assess the mid- to long-term impact across the main variables. Acknowledging this uncertainty and following a good start to the year in Q1, we are reconfirming the currency-neutral growth outlook we provided in February.

We continue to expect broadly stable shipment volumes, organic net revenue growth of plus 5% to plus 7%. And organic operating income growth of plus 7% to plus 9% and currency-neutral adjusted diluted earnings per share growth of plus 7.5% to plus 9.5%. While exchange rates are volatile at present, we now forecast a currency tailwind of $0.25 at prevailing rates. This result in an updated adjusted diluted EPS forecast of $8.36 to $8.51 or plus 10.9% to 12.9% growth in dollar terms.

For the second quarter, we expect continued strong performance from our international business and a sequential improvement in growth with HTU shipment volume of 40 billion to 42 billion slower HTU adjusted IMS growth due to the short-term impact of excise-driven pricing in Japan and a low single-digit cigarette shipment volume decline. We expect mid-single-digit organic net revenue growth and solid operating income progression despite another quarter of strong commercial investment.

We forecast adjusted diluted EPS of $2.02 to $2.07, including a higher effective tax rate and a favorable currency variance of $0.02 at prevailing rates. This quarter also coincides with the publication of our value report 2025 which provides a comprehensive financial and nonfinancial overview of our strategy, governance and priorities for sustainable long-term value creation.

Following the completion of our 2025 road map, we highlight the progress made over the past 5 years across our most material sustainability priorities. Key achievements include the continued expansion of our smoke-free business, further strengthening underage access prevention in indirect retail, carbon neutrality in our direct operation eliminating systemic child labor from our tobacco supply chain and advancing effective anti littering initiatives.

We also introduced our value plan 2030 a focus, business-driven framework across 6 priorities: Consumer, circularity, our workforce, workers in our value chain, climate and nature. As outlined in the report, our approach to sustainable value is fully integrated with our business strategy, supporting the growth of our more transformation and reinforcing long-term resilience competitiveness and value creation.

I would strongly encourage who's interested in how we are executing our transformation to review the report. I will conclude today's presentation with a few key takeaways. Our strong and resilient first quarter performance reflect the structural growth fundamentals of our business model. Our results continue to be underpinned by 3 powerful drivers: Strong pricing, favorable mix from the ongoing shift to smoke-free product and volume growth led by IQOS, ZYN and VEEV.

While we continue to invest in future growth, these drivers are profit accretive and together with pricing power and cost management, reinforce our confidence in our midterm growth targets. While the operating environment remains complex marked by macroeconomic uncertainty, we believe we are well positioned to navigate external headwinds. Our smoke-free transformation continues to gain momentum, supported by remarkable cash generation and a strong balance sheet.

Finally, we remain firmly committed to our progressive dividend policy and to returning value to shareholders as our transformation delivers sustainable long-term growth. We look ahead to the remainder of 2026 with confidence. Thank you, and we are now very happy to answer your questions.

[Operator Instructions] Our first question will come from the line of Eric Serotta from Morgan Stanley.

So starting with smoke-free or international smoke-free, your profit performance of gross margins over 70%, very impressive. You guys have spoken in the past that while you're still in the early innings of the optimizing the supply chain and really harvesting gross margins across international IQOS. As you look at [indiscernible], how much of a priority is that with your margins at very high levels and a lot of growth potential ahead and then the other question was on U.S. ZYN. Your price gaps have certainly widened back out not that far from where they were when [indiscernible] called them out last September as being wider than you'd like. Has there been any sort of strategic change in terms of how you're thinking about what your -- sort of the trade-off between pricing and market share that you're willing to win to balance in terms of U.S.

Thank you, Eric. So first of all, on smoke-free International margin, I mean, you're right, we continue to improve. And I would say it's a combination. First and foremost, you said it, IQOS that continued to do well. We've been increasing price in a number of markets. We're close to 3% on price increase on smoke-free and of course, IQOS is the biggest contributor to that. To be clear, that's not the top priority because we've been in many occasions, explaining the fact that on IQOS and on our smoke-free portfolio globally, we are benefiting from a higher margin than on combustible, which is very nice. But also in dollar terms, we are significantly above more than 2x in terms of dollar per unit for revenue but also for gross profit. So maximizing volume, of course, is a big objective. But as we are building the portfolio, we are building a very attractive brand with IQOS very differentiated, but look at what we're doing with VEEV. So they are coming more like these brands, if you want, Viva in international. They are much smaller than IQOS at this stage, but we are also working on the profitability of these 2 brands. But IQOS here is a big driver. We do, I would say, the best possible job to optimize the profit per unit, but we don't lose track from the fact that here, the name of the game is to maximize volume because that is very powerfully contributing to our overall profitability. Now your second question on ZYN in the U.S. I think, to a large extent, the premium versus competition remains the same as a few months. Let's not forget that it is a moving target because, of course, competition is also evolving their price, and we've seen globally in the market a lot of I would say, commercial aggressiveness on pricing. Fundamentally, ZYN is the leader of the market. If you look at the brand power instant really out versus any other brand in the market in terms of differentiation, in terms of brand strength. And this is as the leader of brand that will remain as the more premium brand in the market, and it's our intention that is going to be the case. Of course, we need to permanently monitor how with the right level of premium versus competition. And at the end of the day, while again, we're not going to lose our compass, which is to develop a leading brand with a very nice premium and profitable positioning we need to ensure that we have the best pricing for that and that we optimize all the parameter, including pricing to achieve this objective. Now of course, not able to elaborate more on pricing. This is a very sensitive matter. But at the end of the day, you should just have in mind that our objective is to keep in as the leading brand, premium brand, meeting a bit different versus competition, and then we'll navigate the parameters to achieve that.

Next question will come from the line of Bonnie Herzog from Goldman Sachs.

I maybe wanted to do a follow-up question on ZYN in the U.S. You did mention you expect performance to improve over the course of the year. So maybe I'd like to better understand what gives you the confidence in this. And curious to hear how much you're willing to, I guess, continue to sacrifice short-term profitability to drive volume growth? And then finally, we all know you've been at a disadvantage given the FDA's failure to fast-track reviews of the nic pouch applications. So curious if you consider just rolling out some of the innovation you have that you mentioned without approval.

Yes. Sure, Bonnie. So I'm happy to take this one. I'm going to repeat what I've just been saying on what is our objective on ZYN fundamentally in the U.S. But I'm certainly happy to elaborate on why we expect a much more positive dynamic in the second part of the year. First of all, allow me to spend a few seconds on Q2. So remember last year, we still have a little bit of market reloading in Q2, much more other than in Q1. But that means that we don't have a fully underlying performance as a basis of comparison for Q2. Second, you will remember that last year in Q2, there was, again, almost no promotional activity, which means that we had an abnormally high level of revenue per can. And therefore, in Q2, we will be facing what is the growth of ZYN in the market. And here, this year, I mean, every week, you can track the Nielsen and that giving some views. I'm not saying it's scientifically precise, but it's giving some view on the ZYN performance. And you will have this impact on invoicing and revenue [indiscernible] Then in the second priority of the year, that's when we get to normalization of the basis of comparison in terms of revenue per can. We should have as well in term of shipment, something that is more underlying in terms of reference. There will be, of course, in Q3, this one-off operation last year of the free can that will have to be taken into account. But as you know, it also impacted negatively our financial performance in Q3. So that's a negative element that is not going to to impact. And then as we said, we are expecting innovation to come in the coming months. I'm not going to be able to say exactly when it's going to come and when it's going to play. But of course, when we say we expect to be able to launch innovation in the coming months, that means that we expect innovation to positively impact our second part of the year. We'll say exactly when this is going to add. So if you take all these elements, the capacity that we expect to have to come with innovation to be benefiting from some of the dynamic category, the comparison that were difficult in H1 in terms of shipment and in terms of revenue per can, all that is going to be more favorable in the second part of the year. So that -- I think that explains why we expect this dynamic. I'm not going to elaborate on innovation globally and what we intend to launch, I'm sure you appreciate that this is extremely sensitive, and we're not going to share on that. But I think we're clear on our ambition to come with innovation, which is what a leader like in deserve.

Fair enough. And I appreciate that color. And then if I may, just a question on IQOS. Your Q1 results came in better than your expectations. And a key driver of this really was the strength behind IQOS. And Emmanuel, you did touch on this, but I guess, hoping for some more color on the drivers behind the strength and maybe what exactly came in better than your expectations. Also I did want to just clarify if there were any timing benefits in Q1 on IQOS, I guess, just that might reverse. And then finally, as it relates to profitability on IQOS, your margins continue to expand. And as you mentioned, you continue to invest. So wanted to understand just the key drivers of profitability growth moving forward, whether it's between pricing and productivity improvements.

[Audio Gap] The biggest driver for our performance as combined is IQOS. I mean I don't think you have any equivalent in the smoke space in the world to IQOS, this multibillion-dollar brand, I mean, much north of $10 billion. This is a unique proposition. This is a brand that has been consistently owning around 75% of the category, which when we talk about novation is really unusual. There is a differentiation that is very clear for the consumer. And now, of course, as we talk about the $10 billion plus brand, this is coming with a unique brand franchise and the unique impact. So at the end of the day, the success is explained by the fact that IQOS is a great product that is meeting smokers requirement and expectation and that is making a clear differentiation on any other competing product. So that is what is behind the iQOS success. I mean if I was to take 1 market to illustrate that. And I think it's quite remarkable in this quarter. is Italy back to a strong double-digit growth. Okay, Italy has been clearly disrupted by the flavor ban and it took a few months to adjust. But we're back in -- to this [indiscernible] growth in Italy, we are reaching in some key city, very high share north of 20% and we're coming with innovation. So as I was talking about innovation for in a few minutes ago, a leading brand has to innovate. And I think no 1 is matching IQOS in terms of innovation. Terra, what we do with DELIA, what we do with [indiscernible]. We are launching bonds and bonds is having some very good step in Italy, very interesting to watch. I think this is the DNA of a leading powerful brand, and that is really what is behind the success of IQOS. On the margin improvement, it's price. So we are increasing price, not -- of course, it's a very different, as I explained, it's a very different story versus combustible, but we are increasing price on IQOS and on iQOS consumable in a number of markets. We keep, of course, working on the efficiency of the supply chain, the cost of electronics of the device. We are working on our supply chain on productivity to consistently and constantly improve the cost of the consumables. So that's another driver that is really what is behind IQOS success. I mean I could speak for many, many minutes about the reason for ICOS success. I could have been mentioning Taiwan. Of course, I mean, it's quite impressive in a few months, to reach 6% market share in Taiwan, March 8% in Taipei. And the brand was not present. So I think it just showed that even in markets where IQOS is not present, the brand does exist already with a strong image. I think it's a tribute to what IQOS is today.

Our next question will come from the line of Pallav Mittal from Barclays.

Them of them, and I'll take it one by one. So firstly, on nicotine pouches in the U.S. Can you help us understand the excise tax environment. We have seen some proposals from a few states planning to increase excise taxes. And then earlier this month, in [indiscernible] data, I think the pricing for the entire category accelerated significantly. So is there something which is changing on the tax front? And how is the industry responding to those tax increases and discussions.

Happy to take this one. Look, of course, as all of us, we are hearing in a few states, not everywhere, but in a few states, discussion about putting some excise duty on nicotine pouch. Let's be cautious. I will be much more comfortable to comment things when they happen because it's difficult to comment on project speculation. We're not saying that nicotine part should have no taxation as a general rule. I'm not talking about -- only about the U.S., I think we believe there should be in the continuum of risk, some very differentiated taxation between small free product and combustible. And nicotine power being, of course, at a very well location in the continue risk should be particularly well treated in terms of low level of excise duty. So for us, that should be the general behavior of regulator worldwide and that should enable the smokers and the consumer towards the better product with more purchasing power. In the U.S., I would say this comment can be also valid because you have a regulator, the FDA that is clearly, I think, saying that this product are much better product than a combustible cigarette that is working to accelerate a number of PMTA because they believe that consumers should have the choice between product to maybe maximize the chance of switching away from compatible cigarettes. And I believe that putting high taxes in that context is going against the intention and the vision of the FDA. So that -- I think that would be a PT and that we're not going in the right direction very clearly.

Sure. And just again on nicotine pouches in the U.S., if I look at Zen volume trend, based on what Nielsen it as a dosing, it might soon become a flattish volume or maybe even a declining volume number, assuming there are still dealers in ZYN Ultra, if I extrapolate the current trend, and clearly, the PMDA timing is not in control. But what gives you the confidence that Zen Ultra once it comes into the market, it can accelerate the growth again, any particular market from where you get this confidence? And then just also on the innovations that you are highlighting. I'm not asking you to comment on what that exactly is. But is the timing of those innovations and getting those products in the market are again dependent on the FDA, PMDA process? Or is it something which is under your control?

Yes. First on this one, on innovation, of course, we follow the processes. So again, for obvious when this would come, but there is a process in the U.S., and we are following it extremely diligently I'm stating the obvious year. On the ZYN volume evolution, so yes, we are in the [indiscernible] around 5%, 6% growth. I'm talking about the last week. We'll see what is ever going to speculate. But obviously, our expectation is that ZYN Ultra is going to come with a proposal. We think it's a great product, and it's going to come with a proposal that will be matching areas of strong dynamism in the nicotine pouch market today in the U.S. And therefore, we expect ZYN Ultra to be able to bring some renewed momentum to the Zen brand in the coming months. That's our expectation.

Sure. And then just very quickly on IQOS. So looking at the growth in Europe, around 5.5%. Is it a bit lower than what you were expecting? Because historically, the growth in Europe has been high single digit, low double digits. How do you plan to accelerate that 5%, 6% growth back to the high single-digit number?

No. The growth actually is very good in Europe because if you exclude the market that has been growing recently through the flavor ban, you are at around 8% growth. So I would say, of course, in absolute level, it would be even higher because you have a higher base, but it's very much in line with what you've seen in the past quarter. So I would say if you put aside these 2 markets. And Poland is a significant one, plus a few disruption in Ukraine. I mean we have ongoing disruption in Ukraine, but there was a number of impact during the quarter. The rest of the market is staying extremely dynamic, and we expect Poland and Hungary, of course, to go through this disruption and put that behind them in the coming quarters as we did in other countries in Europe.

[Operator Instructions] Our next question will come from the line of Andrei Andon from Jefferies.

Firstly, on in heated tobacco. Could you tell us a bit more about the early trends you're detecting in Japan after the excise tax increase on the 1st of April? And then secondly, incombustible, you mentioned in the release that in Germany, you have been seeing a discernible volume decline. Is that market share driven? Or is the industry itself seeing a slowdown in early 2026? And then finally, perhaps a bit more of a technical question. We noticed corporate expenses registered a significant year-on-year decline. Could you tell us what it's attributable to and whether you expect that to persist into Q2 and beyond?

[ Happy to ] take this one. So on Japan, look, if you heard the comment at that stage, of course, we're not making any comments. It was only a fortnight ago or a bit more than the the price increase was implemented in Japan. It's too early to say. The only thing I'm going to share is the fact that there is nothing in what we see in the first days that would, I would say, contradict what I mentioned about our confidence in the continuation of -- on the long term of a strong growth of the category and of the success of IQOS in Japan. But look, let's look at what's going to be the disruption in Q2. I think we explained the reversal we expect. And in a few weeks and in a couple of months, we'll be much more able to comment on the trend in Japan after this excise duty increase. In combustible in Germany, I think there was both -- there is a market that is a bit weak. But the industry as well is a bit weak, and you have some decline. So a combination of both, I would say, with the German consumer probably a bit under pressure. And on the corporate expense, it's largely technical. It's currency losses and transactional losses in the 125 because that's where we are putting transactional losses and it's by comparison effect, it looks better. So that's really what is behind. But it's a Q1 event, to be clear. It doesn't mean that for the rest of the year, we're not expecting things to be much more in line year-on-year on corporate expenses.

And our next question will come from the line of Matt Smith from Stifel.

A follow-up on some of your commentary regarding IQOS by bonds and launching nationally in Italy. Can you talk about the incrementality you're seeing from that offering versus trade down and the profitability today for IQOS by bonds compared to IQOS and how you expect that to evolve? And what type of scale you need for that evolution and profitability?

Yes, happy to take this one. So bonds by IQOS is, as I mentioned, a very nice evolution in line with what the leaders should provide to the market.

[Audio Gap] And the first step in Italy and a few other markets seem to be confirmed that there is something clearly of interest for this in [indiscernible] and that we could convince some of them that so far have not been switching to it not then to switch to a better [indiscernible] with bonds. And in terms of profitability, as you would expect, the name of the game is that it has to be at the level of combustible as a minimum. If we can do better, we'll look at. But certainly, it's not coming at a lower margin than our combustible business.

And a follow-up on the dynamics in Japan regarding IQOS inventories. I think you've laid out the 2Q expectation pretty clearly. But as we look ahead to a second excise tax-driven price increase later in the year, was the inventory dynamic in the first quarter entirely driven by consumer pantry are there mechanisms in place to keep the wholesalers from stocking up on inventory and just how you think about that potential impact between the third and the fourth quarter and the second half of the year.

Look, we'll see exactly it's too early to talk about October. You could have some similar features that will depend, of course, on what each player is going to do in terms of price increase. And I certainly won't comment at that stage. So we'll see, it's not impossible that there will be a similar impact, but it's too early to say. And allow me to come back on this question later this year when we'll have a better visibility.

And our next question will come from the line of [indiscernible] from UBS.

I'll take 2 questions, please. Both of them on SI in the U.S. or the nicotine pouches category. I guess the first question I have is on the category. If we look at recent scanner data U.S. nicotine pouch volume growth, a bit have moderated over the past 3 to 6 months. From your perspective, what are the key factors, do you think that are driving this is the first one. The second one, coming back to ZYN Ultra, I'm not really asking for timings, but how are you thinking about potential regulatory concerns around higher nicotine strengths and a broad flavor range, particularly in relation to the category attracting non-nicotine users?

Yes. I guess on this one, and maybe I'm going to start with that. You are probably referring to this article, which were largely speculation. I think we stated very clearly that there is a very clear scientific fact that are supporting that this products are much better than smoking. You have this NYTS survey that is showing that there is no increase was even a slight decrease in the underage usage in the U.S. according to this study. So it's difficult to see anything that has changed from the FDA perspective. And they've been giving to another product. I think it was in December, so not that long ago, which is coming with a higher nicotine content higher than what ZYN has today. And I think if they had an issue with flavor and with higher nicotine content, I doubt they would have been giving this authorization only a few months ago.

[Audio Gap] too much impacted by the percentage because when you are having with high percentage, you are having gross profit with high percentage of growth. Well, obviously, the percentage is declining, but it still means that in terms of absolute number of nicotine pouch level, it's still growing at the same time or even faster. So let's not lose track of the real underlying growth. And then maybe as we see some new consumer to the category. There could be a question mark on at least at the beginning. And very often, they are poly user when they start using nicotine pouch what is the average daily consumption of the new user. And maybe 1 of the reasons for some very slight softening of the trend in the past months. may have been the fact that some of the newcomers for the time being are coming with a lower ADC. But frankly, beyond that, I'm not sure I can highlight anything.

Can I squeeze in a sneaky 1 I guess, we have this high single-digit.

Apologies, we're actually running out of time, and we just want to squeeze in 1 more analyst after you, but we'll follow up with you after.

And our last question for today will come from the line of Gerald Pascarelli from Needham.

I just follow-up I just wanted to ask a follow-up on the last question just on on U.S. ZYN and nicotine pouch consumer dynamics, just as the category continues to grow, it's also matured. And I guess, are we at a point now where you are seeing evidence of I don't know, higher per capita consumers graduating from 3 to 6-milligram pouches into higher nicotine content pouches like 9 milligrams maybe at a faster rate. than we've seen in the past, and that's obviously asked in the context of ZYN Ultra and whether or not like just a simple nature of having a higher nicotine content patch on the market to compete with is enough to drive a reacceleration in volumes

Gerald, I mean, as I explained, we see a number of ion nicotine content product and more flavor and notably fruit flavor being more dynamic part in the market today. And that's where you have the biggest dynamism. And 1 of the problem is that within, we don't have anything above 6 milligrams, and we have a limitation in terms of favors. So that could be -- again, I'm not going to say that I have any kind of [indiscernible] study to support that. But the higher nicotine strength development could be people who are trading up a little bit from a lower nicotine content. And as they evolve in their consumption well, they may explore new flavors and that could be behind the new flavors, fruit-type development, and they may also go for higher nicotine content. Again, I'm not saying I have anything that is clearly supporting that. but that could be an intrusion or a speculation we could make.

And I would now like to turn it back over to management for closing remarks.

Thank you for joining us today. That concludes our call. Please contact the Investor Relations team if you have any followup. Thank you again, and have a great day.

Thank you. Speak to you soon.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.

Okay. Let's please take our seats, we can start in just a moment. All right. A few people start trickling in from the breakout session. But good morning. I want to thank Philip Morris for joining us today. It's a pleasure to welcome them back to the CAGNY Conference. This morning, we are fortunate to have CEO, Jacek Olczak, with us today as well as CFO, Emmanuel Babeau. Fundamentally, Philip Morris has turned out to be a terrific story.

PMI continues to execute one of the most successful smoke-free transformations in global staples today. With over 40% of its revenues and gross profit mix now derived from smoke-free products. The transformation is translating into sustained volume growth on a multiyear basis, margin expansion and accelerating free cash flow generation for the company.

With leverage now declining, a clear framework is in place for durable double-digit EPS growth over the next several years with accelerating shareholder returns, Philip Morris is now entering the next phase of its investment thesis. With that, I will welcome Jacek and Emmanuel to the stage. But first, let's give a round of applause to Philip Morris for sponsoring this evening's dinner reception.

Thank you, Steve, for your kind words, for introduction. Because we're sponsoring dinner tonight is the only reasons why we could afford to bring so many members of my management team, otherwise, being cautious about our margin expansion plans, we wouldn't do it. Earlier today, 2 hours ago, we issued a press release reaffirming our '26 guidance given the earnings call 2 weeks ago. Materials on this presentation will be available on our website, including obviously, the content of slides, which you will see in a minute.

I ask you to read our forward-looking and cautionary statements as usual in this type of communication with the investors community. Let me introduce my PMI executive team. It is not all but the very important people who are helping us in navigating the walk in a park of a transformation. We have recently implemented the new organizational structure.

Hence, we brought with us today, Emmanuel, you know very well, our Chief Financial Officer; but also Fred de Wilde, who is heading our International business; Stacey Kennedy, who is heading U.S. business; Stefano Volpetti, who is our Chief Growth Officer; Massimo Andolina, who is running our very profitable and large European business; and Yann Guerin, who is our Chief Legal Officer. I will take -- we divided this presentation into 3 parts or 3 segments.

I will cover 2. One is where we are -- where we started, where we are with the transformation to become a smoke-free company. We'll talk about the consumer, what we see, how we look at the market, trying to get a little bit deeper of the role of the different product platforms, heat-not-burn, vape and the pouches. And then I will hand over to Emmanuel to cover some of our financial KPIs achievements.

And I think we'll summarize with my excellent slide of what the shareholders return Philip Morris has historically offered to our investors. So that's about 11 years of our journey when we started it. And I remember vividly in that sort of settings, large group CAGNY conference, or much smaller meetings with investors, 11 years ago, we were spending on average about 2 to 5 minutes on the innovations in the tobacco industry.

Fast forward 10 years later, we're spending -- we're blowing our schedule time to talk about the innovations, how the different product platforms are penetrating very successfully every single market in which they appear. This generated for us today about $17 billion in our -- $17 billion in smoke-free revenues and 180 billion volumes. If you would compare it to some other players in the industry, this could have been a very important player in the tobacco industry just on a stand-alone basis.

We now have exceeded our target, which we set for ourselves some years ago by 2025, be present in at least 100 markets. We are now present in 106 markets with our smoke-free portfolio. Now you know very well that we have put for ourselves also ambitious target to achieve 2/3 of our revenues coming from smoke-free products by 2030. Now obviously, one number is the consolidated global number for the group, but the change is happening at the market level, at the regional level.

With the final progress and very important achievements of our European region, actually by the year-end of last year, by Q4 of last year, we have had the 3 regions. We already have 3 regions out of 4 regions, which have well exceeded the 50% mark of smoke-free products versus to the total revenues. More importantly, these 3 regions represent today 75% of our operating income.

So this is not just the change coming from any sort of the markets, but the markets which also are very important contributor to the financial performance of the company. You could see today -- sorry, you could see on this slide, and this is a further support to my earlier statement that we also look at the quality of the markets in terms of the financial weight in the Philip Morris. In the top 5 of our operating income markets, the smoke-free products represent 62% of our total revenues.

Obviously, the question is what is happening in the larger by geography regions, but also by underlying cigarette volumes region, the South, Southeast Asia, Middle East, Africa, everything, which is in this territory. But we're also very pleased that in every market in which we have a license to operate, i.e., the regulators open these markets for at least the 1 category, if not 3, we're actually making pretty nice progress. I mean this is just the example of a few of the many geographies in this region.

This is Saudi Arabia, Mexico, Indonesia and Egypt. We're also very pleased and I highlighted on the slide what has happened in Taiwan. Some of you who follow us very closely, we've been talking about opening Taiwan for smoke-free products for many, many years. We finally got the license for IQOS for our heat-not-burn flagship product. And in Taipei, we have achieved a 6% market share of a combined cigarette and heated tobacco product within -- I think this is within less than 3 months.

So it just tells you that even the market, we are still closed for the smoke-free products, when they eventually open, they actually start benefiting from all the work, popularity, awareness, et cetera, of smoke-free categories, okay, in this case, IQOS and how quickly you can start generating quite a significant sales and market share. What is very also for us important in Taiwan is an example of the market that Philip Morris historically had a very low or small presence in the cigarette category.

And our share of the market was somewhere in the mid-single-digit numbers. With that achievement of IQOS, it means that within a year, we are on the path to doubling our share of the total nicotine space in this country. Now -- the critical consequences of our transformation, I think, is very well highlighted on this chart. So we essentially left behind the times of a classical characteristics of a tobacco very much the cigarette industry or cigarette company with declining volumes.

And you know very well what was the growth algorithm. We obviously offset it with the pricing. You have a pretty very good margins because all flows to the bottom line. Actually, over the 5 years with the progress of a smoke-free, we have been -- we were able to offset the underlying declines on the cigarette, some of them which were purposefully triggered by our chasing -- offering the smoke-free products to cigarette smokers.

And essentially, we put the company on the volume growth target which was answered, as I said, in the past, which obviously means that our very strong top line growth now is from a quality perspective of the composition of this top line growth is actually better than we used to have in the past because obviously, we tried without the strong pricing power, but now we're having much better volume performance.

Now here is the example of what is happening over the last 5 years in the divergent, if you like, total industry trends and we differentiate the market, but those who have an access to the smoke-free products, this is what you have on the bar chart and those who don't. We put here arbitrarily the threshold that if Philip Morris products have at least 2% of the market, we classify them as a smoke-free product and the market which products are not existing.

So Philip Morris is less than 2%, we classify them as an SFP market or cigarette market. So you could see clearly the divergence in the trends -- underlying trends for the volume. So on the 5-year period, the markets which are cigarette market essentially still continue to be combustible cigarettes market, you have a combined compound annual decline rate of 0.6%, you could argue it's essentially flat.

But in the market when a smoke-free products enter the market, and remember, the bar is just the 2% penetration, that acceleration of a decline is the fivefold. So it's more than 3% on a compound basis. Now in the markets in which no smoke-free products are available due to the bans, restrictions, et cetera. Actually, last year, we saw the cigarette sales going up. Now this is from a public health perspective, counterproductive what everyone wanted to achieve.

So I believe the more people are getting familiar with that sort of a divergence in the trends, the faster it will allow us to open remaining markets, which are still quite substantial in terms of underlying cigarette volume. Now what has happened also over the last 10 years and very much over the last 3 or 5 years that we observed more mature pragmatic science and fact-based conversations about the, a, potential of a smoke-free product; b, very importantly, key component or key denominator in all of these products, which is nicotine.

So you can read the statements that will be, as I said, published on our website. But this is just a snapshot of hundreds, if not thousands of pages of statements made by the regulators, different health institutes, et cetera, across the globe. It's not just the U.S. driven that more will see -- more and more we will see. This is, as I said, very mature, pragmatic, science-based conversations about the product and the role of nicotine.

So as I have said a year ago in this conference and in many other occasions, yes, nicotine is addictive, but we all know it's not the primary cause of smoking-related diseases. Nicotine does not cause intoxication and is not functionally impairing. It can affect mood, cognitive skills, especially in the area of focused memory.

That's the reason why people in the past were smoking cigarettes as the people, that's the reasons why people can migrate to the same product prevailing the benefit or perceived benefit while drastically reducing the risk coming from the exposure to all toxicants, which a smoker has while smoking a cigarette. Nicotine is not classified anywhere as a carcinogen and has not been found to itself cause cancer.

And obviously, all of the statements and all of the debate are translating into better and better operating environment, which we divided here into the regulatory policy, a product allowed, a product being regulated in a sense that the more and more product standards are being introduced. So it also helps with leveling the playing field.

But how this also translates into the fiscal policy because it is unquestionable fact that the products which offer such a significant reduction in the risk profile compared to cigarettes should have -- should be treated differently from the fiscal perspective. And you can read the slide, and this is just the progress which we have achieved or was achieved over the last 2 years since 2023, but you could see the very strong momentum that the regulations, both on the product side and on the fiscal side are going in the right direction.

I am by no means trying to say that there are not places in the world that we still have the battles that we still have to have conversations which are -- let me put it that way. Somebody very recently interested in this category and the opportunity of smoke-free products told me, yes, your problem is not that there is too little science about this product. Your problem is that there is too much politics about this product because the science is very undisputable what this product offer versus the cigarette.

It just takes a while until it really starts penetrating and open the last, if I may say, closed mines in the world. Now this is an example of a very large countries in terms of underlying cigarette volumes, India, Turkey, Brazil, Vietnam. Altogether, there is more than 440 billion cigarettes consumed annually in these places. Very much in these countries, you will see the cigarette sales going up and the characteristic is none of these countries is allowing any of the smoke-free product.

I think with this growing momentum around the regulations and the recognition of the tremendous potential this product offers to individual consumer and public at large, this market will get open as well because they're getting very isolated in what we see today. There are also some other smaller markets important to us, which we are pursuing our regulatory strategy. I mentioned I have here on the slide, Hong Kong, Singapore, Australia.

And there are some other markets that may be 1 or 2 of the categories within a smoke-free product portfolio still is somehow fully restricted. We have a case in Germany, Belgium, Canada, Ireland, Holland, Netherlands and France. Now let me move now to the consumer. Now as I mentioned earlier, 10 years ago, 2 to 5 minutes innovations in the tobacco industry, what are you doing? And do you have any meaningful innovations? Are you doing something on the fringe? We took it the hard way.

We went into the product, how we can drastically change the performance of the product, offer consumers the same benefit, but drastically reduce the exposure to the toxic and therefore, it should lead to the reduction of the harm. The focus which we have, and this is what gives us a lot of further encouragement and how brightly we look at the future of PMI, what has been achieved so far is just barely not even 20% of the total cigarette market.

I mean, if I take a global basis, including U.S., obviously, for obvious reasons, excluding China, I mean, 81% of -- 81% of the total nicotine space is still occupied by the combustible cigarette. So we're all very excited and rightly excited about the heat tobacco categories, e-vape category, and we know that the e-vape category depends on the geography very much, unfortunately, also in the U.S., we need to recognize that there is quite a significant element of the illicit products in the market and the nicotine pouches, which are barely on the global basis, 1%, very rapidly growing.

But still we operate within a 20%, not even 20% of the total space. Good thing is that this space grows at a double-digit number year after year. And again, this is a result of regulations, products getting better and better, but more importantly, the consumer demand, right? Because in today's world, consumers are learning about this product very often irregardless of the regulators will allow those products in the market or not.

One of the criteria which we cross, which we watch very carefully is how many people start interacting versus smoke-free product versus what is the current share of the volume of the smoke-free product. And we consistently year after year, see that there is a growing penetration of these products, in this case, past 7 days use, doesn't matter whether the consumer is immediately fully adopting this product as we know potential for adoption varies from a category to category.

But it's a very important thing that if a smoker is trying to try the product, is trying to interact with the product, maybe today doesn't find the right product, but it means that his or her mind is open to jump into this category just a matter of time. So we have a growing usage of penetration measured by the past 7 days across the globe. And obviously, the volumes are trailing or following this trend.

Now if I have a different look and I divide now from PMI perspective, international and the U.S. and there's 2 separate blocks, we obviously that the U.S., by the way, is a smoke-free country, if I measure this by the penetration of a smoke-free product, still bearing in mind there is a lot of illicit vape, et cetera, which I believe one day, the issue is going to be resolved. The counter side of the -- opposite side of this whole thing, how many exclusive cigarette use is still there.

And obviously, on the international is much higher in the U.S. We're talking about the exclusive use of a cigarette. And obviously, you can see a rapidly declining numbers in the U.S. Now there is one difference between U.S. and international from our perspective, which is in many of the countries on the international, we have a presence of all 3 categories. So again, the heat-not-burn, e-vape and the pouches and each of them are offering a different conversion potential to the to cigarette smoker.

I mean obviously, inhalable products are somehow closer to the ritual of smoking, heat-not-burn is very close, e-vape is slightly similar, but slightly different. And oral category, obviously, pouches, if you like, requires a little bit longer runway for the consumers to adopt fully the category, but doesn't stop consumers from interacting with the category. And I think this is behind the explanation.

While on the international, we see the much higher percentage of a smoke-free product, exclusive use, doesn't matter now which category they're using, are they using one or they mixing a few categories together versus what we have in the U.S. as you know, heat-not-burn is still not present. Nicotine pouches, as I mentioned a few times, have an important role in the switching consumers, switching smokers.

We know also that the nicotine content pouches are not only obviously sourcing from a traditional oral products but also offer a good alternative for smokers and the users of the e-vape products. The only thing which you have to bear in mind that the runway, as I mentioned, for adoption is longer. So here is the example of the changes in the consumption of a daily consumption measured in the number of pouches per day among those who are just 1 year in the category or those which are 3 years.

This is -- there is a progress. It will take a time. And I put as the reference today, the average daily consumption in Sweden, which in today's world is the standard, if you like, for the oral category to quite a while in Sweden to get to that level. But I think if you take it from a perspective, this is an opportunity which one day at that number or closer on that number, the market can go is a matter of fact. Now it's much more difficult.

So I think where we're going to land, where the industry is going to land is essentially given. The question is now how much time it will take that we land into that sort of a range of numbers. Now the multi-category strategy, and we observed it after 2 years of pursuing multi-category strategy is definitely accelerating the growth. In the markets when we are present with more than one product, we could see that our in-market sales, the IMS grows more than 15%.

In the market when we're present with one smoke-free category, there is still a very strong growth, but it is 10%. So we clearly see advantage that offering the smokers, offering the adult consumer a choice of 3 distinctively different product categories yields the better results than just offering one. There is a lot of polyuse, but I think it's on a positive because as long as consumers will stay away from cigarettes and will become exclusive smoke-free product use, there's an opportunity not only from a health perspective, obviously, opportunity for a company like ours.

Now over a period of time, very often we get the question, are you investing? When you will stop investing or do you -- should you invest more, et cetera? Over a period of time, we have built, I don't think, essentially unparalleled infrastructure to support the smoke-free products, representing very much our very global footprint. So we have 1.5 million points of sales, which -- in which the PMI products, smoke-free products can be found.

We run close to the 8,000 of our own brand retail networks, different formats, boutique, flagship stores and other arrangements with the consumer not only can try and enjoy the new products, but they are experiential points when the people are not just coming for a transaction, there is more which is happening in the stores. We have more than 500 million interactions through this experiential touch point.

Obviously, there is a lot of data involvement around this whole thing, which starts with the fact that we very much want to register users of our products very early in the journey, which allows us also later on to deploy much better targeting, marketing, and support of a conversion activity. That infrastructure was very much until very recently serving only one product, one brand, which was IQOS.

Now obviously, when we're rolling out the multi-category, we're getting to the point of the products like, they are not the products like VEEV, our VEEV proposition, essentially enjoying this platform with very little, if not at all incremental cost to that platform, which we have built. Now I think our smoke-free product strength is very clear and is demonstrated by the share across the different category.

What is very important in this whole thing -- in this picture is that our combined share of smoke-free products as is today stays at the 65%, which is 2.5x higher than the share which we had on the cigarette category. Obviously, the situation is dynamic. There is a competition. There will be a lot of innovations. There will be regulatory interventions, et cetera.

But that's the success of this transformation that we didn't create that category 11 years ago as in addition to, but as a replacement to, actually here is the results because we're building not marginally better business, but by the factor of X much bigger and the better business that we used to have. Now there is innovation. We today, the way we look at the innovations that behind each of the product platforms, again, heat-not-burn, pouches and electronic cigarettes.

We try to have a 2, if not more, distinctive propositions, not necessarily competing with each other, but very nicely complementing our portfolio vis-a-vis the vast number of the cigarette users. So we have two propositions on IQOS. One is sold per se under the umbrella brand name of IQOS and another is the BONDS and BLENDS. And you know that we have the plans of rolling this more broadly to the number of geographies this year.

ZYN when we play in the dry and moist and the VEEV, which we play in the classical version of electronic cigarettes, but also we have the first ever induction heating. So we essentially removed the electronics from a cartridge, which offers a variety of advantages to the consumers and obviously gives us much better cost profile of the proposition. We still have cigarettes. We have allocated massively our resources behind the smoke-free products.

You know very well that 99.8 or 99.9% of our R&D spend is behind the smoke-free product. The vast majority of our commercial spend is dedicated to the smoke-free products, but we still hold the fort when it comes to our presence in the cigarette market. And I think the market share of Marlboro and evolution of Marlboro market share is the testimony that we still use the cigarette category as the value creation, which better supports our transformation to smoke-free products when we can still leverage our existing cigarette infrastructure, but still deliver a very strong result.

By the way, this is the record highest share Marlboro ever had on international. I think this is the moment when Emmanuel will come on the stage, and we'll share with you a few of the financial performance criteria, and we'll close with our shareholders with that. Thank you very much.

Thank you, Jacek. Good morning, everybody. As always, great to be here. So indeed, Jacek, over the last 30 minutes has been leading you through why do we have such a powerful growth model between the very strong growth that we generate on our smoke-free portfolio and the resilience that we are enjoying on our combustible business. If we look at the past years, thanks to this strong growth model, we've generated very dynamic growth.

And actually, we believe that we are going to continue to deliver such a dynamic growth in the coming years. And this is the reason why we have been confirming a few days ago the growth algorithm for the year '26 to '28 at a similar level than the one we were targeting for '24 to '26. So first, let me lead you through this growth algorithm. Of course, it starts with a very strong performance on our smoke-free portfolio and Jacek has been giving plenty of details of that.

We are targeting for '26, '28, high single-digit to low teens growth for our smoke-free volume. And this we expect is going to more than offset the decline on combustible, generating overall positive growth for our volumes. Then -- and I'm going to elaborate on that in a minute, we are going to, on top of the growth of the volume, add a number of powerful driver to generate an organic revenue growth between 6% to 8%. Then as we are progressing and improving our profitability, again, I will provide detail about that.

We are targeting an organic growth of our operating income between 8% and 10% and finally, we are targeting a growth, excluding Forex of our adjusted EPS between 9% and 11%. So now let's enter into the detail of this algorithm and the growth model. As I said, everything is starting with our dynamism on our smoke-free portfolio. And actually, if you look at the last 4 years, there is a very dynamic and consistent pattern of growth. Everything is starting with IQOS. IQOS is at the very core of our growth.

And as you can see, since 2022, the growth, in fact, has been quite consistent. We talk about an additional 15 billion sticks every year in a very consistent manner. But as we are increasingly now playing the multi-category approach, we are adding on top of the IQOS growth, the growth that is coming from ZYN and VEEV. And look at the acceleration that these 2 categories, these 2 brands are bringing to our growth.

You see that it has been growing to a record high of 20 billion stick growth in 2025 because we are accumulating the dynamism on 3 categories. So let's move now to the revenue growth. And indeed, of course, volume is the first -- volume growth is the first pillar of this growth. But then we're adding 2 very powerful growth pillar or growth driver to this revenue progression. The first one is pricing. We have significant pricing power. It starts with combustible.

As you know, over the past few years, we've been growing our price more than 7%. For 2026, we've been guiding to around 6% growth, and it is showing our capacity with an attractive desirable portfolio of brand, of course, centered around Marlboro, but very focused on a few brands to increase power and this is -- to increase prices, and this is acceptable to our customers because of the strength of our brand. We are also growing price on our smoke-free product.

But here, the name of the game, and I will explain why in a few seconds, is more to maximize volume. But nevertheless, we've been delivering around low single-digit growth on our smoke-free portfolio as well. The third pillar of our growth is the very positive mix that we are generating with our smoke-free portfolio. And I'm going to give details and elaborate on that because this is very important to understand this performance. Then you have a negative element.

This is the negative geographical mix coming from the fact that on combustible, the countries that are doing well on average are coming with a lower revenue per stick. And actually, as you can see, this is giving, again, a very consistent pattern of growth. First of all, the organic revenue growth itself versus the last 5 years and what we delivered in '25. Remember, '25, we had a technical impact of the change of business model in Indonesia.

Otherwise, it would have been 7.9%, very much in line with the 7.8% that we delivered over the last 5 years as a CAGR. And then if you look at the 3 components I've been describing, volume, price, positive mix from the smoke-free, it's very consistent as well, 3%, 4%, 1.5%, which is showing the robustness of this growth model on revenue. Now let's pause on why we have such a positive mix coming from our smoke-free portfolio.

And look, here, you have the data. If you look at the revenue per stick per unit equivalent, and here, I'm speaking about dollar, okay? I am in dollar terms. We are generating on average 2.5x more dollar per unit than on our combustible portfolio. What does it mean? Well, it means that if we are just replacing, even not growing in terms of volume, which, as I said, we are intending to do, the simple fact of replacing our combustible by a smoke-free business is generating a significant growth in our revenue.

And if you look at the level of the gross profit per unit, here again in dollar terms, it's equivalent. It's even a bit higher. We generate in dollar terms 2.6x more gross profit in dollars on our smoke-free portfolio than on our combustible business. And the positive mix effect doesn't stop there because if you look at the gross margin rate, smoke-free portfolio is also coming as an enhancer of our overall gross margin.

So here, you have over the last 3 years, the progression of our gross margin rate, both on smoke-free and on our combustible business. We're growing on both, okay? So we have a positive trajectory on the 2. But look at the growth on our smoke-free portfolio. We've been reaching almost 70% with a very dynamic growth over the last 3 years, and we are generating 4 percentage points of differential in growth between smoke-free and combustible. So of course, we're growing volume fast.

They are very profitable in terms of dollar per unit, and we are improving the margin. No surprise that in 5 years, we've been doubling up the share of our smoke-free product in our gross profit from about 22% to close to 43%. We grow, we are profitable. We are increasing the profitability with all the drivers I've been mentioning, and that is explaining how we have been delivering close to double digit and even in '25, above double-digit organic growth in the past years.

And we have been very consistent in the performance once again between '25 and the last 5 years. As I explained, this is coming with an improvement in our gross margin that has been coming at a Climax versus the past years in '25 with 140 basis points improvement of our operating income margin, and we've been passing 40% OI margin. There is one element in this performance that I have not been commented so far, and that is the fact that over the last 3 years, we managed to increase our gross profit faster than our cost, our SG&A.

And here, I want to clarify the fact that we make a big difference between what we call productive investment when we build a brand, when we invest in marketing, when we invest in our commercial impact, where we are indeed increasing a lot our investment. I won't elaborate by how much, of course. And then the G&A, the back-office cost, where we are relentlessly looking for efficiency, looking for simplification.

And of course, the next wave of big saving here is going to come from leveraging artificial intelligence. We are happy to grow very fast in terms of organic performance. But at the end of the day, of course, we want to deliver strong growth in dollar term. And look at the performance since 2020, we've been moving from $5.17 our adjusted earnings per share to $7.54.

And we've been reiterating our guidance this morning, and we are targeting at the prevailing rate when we announced our full year numbers, $8.38 to $8.53. If we deliver this guidance, that would be the third year in a row where we deliver close to double-digit or even above double-digit growth in dollar term. We grow fast. We are very profitable. We are even further increasing profitability, and we deliver in dollar term. We are also highly cash generative.

Last 2 years, '24 and '25, we generated operating cash flow of more than $12 billion. And for the next 3 years, so '26 to '28, we are targeting to generate an operating cash flow of around $45 billion. And at the same time, we're going to stabilize our CapEx with an average between $1.3 billion to $1.5 billion. This strong growth in profit, strong cash generation is enabling us to deleverage first, and we confirm that we are targeting to be close to 2x net debt to EBITDA at the end of 2026.

That is also allowing us to reward our shareholders. We are today about our target in terms of payout ratio, which is 75% of our net profit into dividend. And that means that in the future, we're going to be able to be increasing the speed of our dividend growth as we're going to be much closer to the profit growth when it comes to the dividend growth. And it has started already in 2025, where we've been increasing by almost 9% our dividend.

Needless to say that this very strong cash flow generation, increasing profitability is giving us extra flexibility in our capital allocation, including shareholder reward. And I want to finish on this one. We grow fast. We are profitable. We increase profitability. We are highly cash generative. We are rewarding our shareholders. This is translating into total shareholder return that has been extremely high in the last years.

Whatever the reference you take, if you take since the spin, if you take last 3 years, last 5 years, as you can see, we've been beating the MSCI Tobacco Index, the S&P 500 and the U.S. Staple, confirming our status of best-in-class company when it comes to total shareholder return in the consumer goods space.

Thank you very much. We may have time for one question maybe. And after that, anyway, we have the breakout session, and I would really encourage you to join us to answer all your questions. Thank you very much.

Thank you. I think I have time for one question from the room. Perhaps Eric?

Eric Serotta from Morgan Stanley. Jacek, with the increased focus on the multi-category SFPs, is there a need for increased investment or moving these into more markets? It always seems like that's been less of a focus than obviously IQOS and even VEEV lately. How is your view towards the e-vape category evolved? And how do you look at that going forward?

Yes. So in the countries when IQOS already has established strong position, obviously, the requirement for the additional investments or incremental investments are much lower. So if I take Japan, it's more the function of competitive dynamics rather than infrastructure and the heavy lifting has been done. I mentioned Taiwan, obviously, we'll have to invest a little bit, especially that our cigarette presence was very small.

But on the other hand, every new market, which will open these days or in the coming period is benefiting from the halo effect, which the brand has already built, carrying with its from abroad. So obviously, if you go to the Taiwan, the 6% after 3 months is not happening by miracle because the Taiwanese consumers was well aware about the product in Japan and many surrounding places.

Yes, I mean, if we open a large geographies, I mentioned a few of those, 4 of those, Turkey, India, et cetera. I mean we have some infrastructure in some of these countries. So maybe the incremental again is there less of the spend needed to build awareness because the product already somehow is bringing this awareness from abroad and there is some retail investment.

But this is nothing in the magnitude I would argue that the step-up in the investments, which we had to have on the very beginning of the transformation coming back to the e-vape. The way I look into this whole thing, and I know there's a lot of focus on the U.S. and the illicit market and how these things can be cleared up. And there's a lot of similar type of dynamics in many international countries.

Hence also our strategy for the e-vape is to engage when we think that there is more near term, not immediate, but near-term path to the sustainable from an economic perspective business model and don't enter into the places where there is no level playing field and we better allocate the resources to the few other places when we can make more meaningful also from an economic perspective impact. Having said so, I always encourage everyone to take the view of the consumer.

If the consumer U.S. and international is using e-vape product, the fact that today, they're using this product from illicit market or legal market is a secondary. That problem has to be resolved. But a very important fact is that there is a demand for the e-vape product. And now it is up to us, the industry and regulators, law enforcement to go and clean up the market.

Remember that illicit -- use of the terminology of illicit product for e-vape products is different than when we're talking about the illicit on the cigarette business, which still perceive they are at 11% or 12% on a global basis. But that illicit was very much driven by the tax avoidance, tax evasion, that sort of the thing, a little bit of an arbitrage between the pricing between the market. Illicit on the smoke-free product, it's not driven by the fact that you have the differences in the fiscal treatment in the tax rate.

It is driven by the fact that the regulators is not paying enough attention to create the legal market, the FDA in the U.S. Should the FDA be issuing more authorizations to whoever are the players in the market, then you can address the illicit part of that market very quickly because I believe most of those people would like to go into something, which is consumers would like to go into something which has some reputation, has some assurance of the quality standard, okay, has been reviewed, authorized, et cetera, with the appropriate regulatory bodies, et cetera.

So you have 2 different illicit, and cigarette illicit is very difficult to resolve because you have this massive tax distortion, which creates some opportunities for some criminals, unfortunately. But this is not a fiscal-driven illicit for e-vape. So again, I look at this, there is a demand for e-vape product. The demand stays and will grow, which is a very nice problem to have. What has to be resolved is how you bring this -- how you create the legal market.

And I believe by mere fact that -- by sheer fact that this legal market is being created, the problem is resolved. We've been a very -- there's nothing wrong with having some luck in the business as well, but we -- we're in a very good spot when it comes to heat-not-burn that the market definitely is not as much "corrupted" from the illicit products or by the illicit products. I think we have a pretty good hold on the pouch categories.

So the one category which has to be resolved is the vape product, but I think it's a very promising category. It is just today and unfortunately, for some years, economies of the whole things, et cetera, is unbearable for the reputable legal players. But I think it's going to -- one day, it's going to be resolved.

All right. Thank you, Philip Morris, and please join us in the breakout.

Thank you.

Good day, and thank you for standing by. Welcome to the Philip Morris International Inc. 2025 Fourth Quarter Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, James Bushnell, VP 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 2025 fourth quarter and full year 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 company's Form 8-K dated today's date and on our IR 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'm joined today by Jacek Olczak, Group CEO of PMI; and Emmanuel Babeau, Chief Financial Officer. Over to you, Jacek.

Thank you, James, and welcome, everyone. 2025 was another outstanding year for PMI. The shift of adult smokers to better alternatives is the lasting structural movement, one that we continue to lead and from which we are generating strong sustained growth. Our leading global position in smoke-free products enable us to deliver a fifth consecutive year of positive volumes with a rapid top line progress and significant margin expansion.

We grew our smoke-free products volumes by an excellent 12.8%, with the increasing profitability of the portfolio reflected in organic smoke-free gross profit growth of 18.7%. IQOS remains the core driver, with both shipments and adjusted IMS growing around 11%. This includes an impressive acceleration in the fourth quarter with a return to strong double-digit growth in Italy and a very promising start in Taiwan, just two examples of the broad growth across geographies.

This performance also reflects the success of our multi-category strategy [ with both ZYN ex Nordic and VEEV ] more than doubling shipment volumes in international markets. Our strong brand offering, which includes high-quality science-backed products in all [ 3 ] smoke-free products categories, allows us to better serve consumers and enhance our financial performance. While the nicotine pouch category remains nascent in most geographies, ZYN gained significant international share as we expanded the product portfolio and market reach. The more established e-vapor category, VEEV is the fastest-growing brand of any major player in international closed pods and holds the #1 position in 8 markets with a substantial increase in gross profit.

Although our performance continues to be fueled by the international business, we generated the vast majority of total PMI organic net revenue growth led by SFPs. We have a substantial opportunity in the U.S., where ZYN grew shipments by 37% despite supply constraints in the first half, a significant price premium and the competitive portfolio gaps. Our Aspeya wellness business also grew organic net revenue strongly.

Combustibles delivered robust top and bottom line performance, notwithstanding a more normalized industry volume decline and supply chain issues in Turkey. We accomplished this with strong pricing, portfolio resilience and disciplined execution, with Marlboro reaching a historic high share. Managing this business responsibly enables us to invest boldly in better alternatives and sustain our smoke-free momentum.

Together, these factors enabled us to deliver 15% adjusted diluted EPS growth in dollar terms, the strongest growth since 2011, excluding the pandemic recovery year of 2021. This reflects currency-neutral growth of 14%, well above our expectations at the start of the year and the second year of mid-teens progress. Indeed, we have successfully achieved our 3-year CAGR targets for organic OI and currency-neutral EPS in 2 years. With another strong performance expected in 2026, despite some transitory headwinds, we are today renewing these growth targets for the next 3 years, further validating our best-in-class growth profile within the consumer packaged goods.

Importantly, this is accompanied by strong and increasing cash generation, and we target a leverage ratio of close to 2x by the end of 2026 at prevailing exchange rates. With our dividend payout now close to our objective of around 75% of adjusted diluted EPS, this provides capacity for strong returns to shareholders.

Before I turn it over to Emmanuel, I would like to highlight the achievement of several important milestones as we entered the second decade of our smoke-free journey. Our total net revenues reached over $40 billion in 2025 were 41.5% or close to $17 billion generated by our smoke-free business. Even more impressive is the smoke-free gross profit contribution, which has essentially doubled in 5 years to 43% of total PMI. Our adjusted operating margin also returned to above 40% this year as our transformation expands profitably. Our business is increasingly smoke-free, with 27 markets exceeding the 50% net revenue milestone, including South Korea, Poland, Italy, Romania and of course, the U.S., which is also 1 of 8 markets exceeding 75%. In last quarter of 2025, the Europe region also surpassed 50%, making 3 out of 4 regional segments majority smoke-free.

We continued to scale our global smoke-free presence, reaching 106 markets, 52 of which have already deployed a multi-category strategy, which is a critical accelerator of consumer adoption and long-term growth. As adult nicotine consumers search for better alternatives to smoking, we continue to lead the broader industry transformation.

A prime example is Japan, where the heat-not-burn category crossed the 50% total industry threshold in December, driven by the undiminished strength of IQOS. Across our 106 smoke-free markets, our double-digit adjusted IMS volume growth continues to outpace the industry, demonstrating the collective strength of our leading brands.

While we are proud of what we have accomplished so far, our focus remains sharply on the future, with an exciting pipeline of initiatives and innovations over the next 3 years. This is supported by increasing digitalization and our new organizational model.

With that, I will hand over to Emmanuel to discuss our results and outlook in more detail, and I will come back at the end of this presentation.

Thank you, Jacek. I will begin with the headline financials for the year, which were indeed impressive. Organic top line and operating income growth were in line with our forecast ranges set at the start of 2025, and currency-neutral adjusted diluted EPS growth exceeded with expectation by 1.7 points. Positive shipment volumes, strong smoke-free category mix and pricing drove organic top line growth of plus 6.5% or plus 7.9% excluding the technical Indonesia impact, positioning us at the high end of our plus 6% to plus 8% midterm CAGR target.

We delivered another year of double-digit organic operating income growth at plus 10.6%, above our midterm target range and reflecting plus 140 basis points of organic margin expansion. In dollar terms, adjusted operating income grew by plus 11.8% to $16.4 billion. Excellent currency-neutral adjusted diluted EPS growth of plus 14.2% was ahead of our expectation. This was driven by strong underlying business performance, notably in international multi-category and incombustible, coupled with a more favorable effective tax rate and lower net financing costs. In dollar terms, adjusted diluted EPS of $7.54 was at the high end of our last guidance range despite a lower-than-expected currency tailwind of $0.04 due to nonrecurring transactional losses in Q4 largely related to the Russian ruble and the Swiss franc.

Robust cash generation enabled us to deliver operating cash flow of $12.2 billion, matching the record delivery of 2024. Now looking at Q4 specifically, while growth rates were below the overall year, partly due to the shipment and phasing factors outlined last quarter, underlying performance was ahead of our expectations. This enabled us to deliver almost 10% in adjusted diluted earnings per share growth to $1.70 or plus 9%, excluding a $0.01 currency tailwind.

I will now cover our 2025 performance in more detail, starting with volumes. As Jacek mentioned, we delivered our fifth consecutive year of positive volumes with total shipment growth of plus 1.4%. This was driven by the continued dynamism of our smoke-free business, which generated more than 100 billion incremental units over the past 5 years, combined with a very resilient cigarette performance. In 2025, smoke-free shipments grew plus 12.8% or plus 20 billion units to 179 billion, more than offsetting the 1.5% decline in cigarette shipments.

All smoke-free categories grew strongly, with IQOS HTU shipment growth of plus 11% to 155 billion units. VEEV, plus 102% to 3.3 billion equivalent units and oral smoke-free product, plus 18.5% to 20.7 billion units. Notably, this includes plus 37% growth from U.S. ZYN to 11.9 billion pouches, making up close to 7% of total smoke-free product volumes. As expected, adjusted IMS growth for IQOS HTU accelerated in Q4 to plus 12%, while shipment volumes were impacted by the dynamic flagged last quarter and grew by plus 7.5%. Notwithstanding this impact, total Q4 smoke-free product volume increased by a healthy plus 8.5%.

The full year cigarette volume decline of 1.5% was slightly better than our expectation of around 2%, with our category share performance in the second half proving resilient in several markets, including Egypt and India. The total international cigarette industry, excluding China, declined by an estimated 1.1% with continued divergence between markets where smoke-free products are available, which declined by around 3%, and markets where smoke-free products are not permitted or still at low level of penetration, which were broadly flat.

The composition of our 2025 top line performance was extremely consistent with the 5-year average of each key component, demonstrating the sustainability of these dynamic drivers. Continued volume growth is the first pillar of our growth model. The second is pricing, which contributed plus 4.1 points. The 2025 impact reflect plus 7.6% pricing from combustible and low single-digit pricing on IQOS, partly offset by the H2 normalization of U.S. ZYN promotional activities. The third pillar of growth is smoke-free mix, which contributed plus 3.5 points in 2025. Combustible geographic mix and other factors had an unfavorable impact of 1.1 points, whereas currency and scope effect added plus 0.8 points.

Breaking down our full year performance by category. Both smoke-free and combustible contributed to our strong net revenue and gross profit delivery, with gross margin expanding organically by plus 220 basis points to over 67%. Smoke-free net revenue grew organically by plus 14.1%, while gross profit advanced by plus 18.7%. As a result, adjusted gross margin increased by 270 basis points to reach 69.5%, further widening the gap to combustible to 4 points for the year. IQOS was again the primary driver of this performance, combining global top line momentum with increasing scale and cost efficiencies. VEEV's improving profitability also contributed positively. And while the normalization of U.S. ZYN commercial activity in H2 had a dilutive year-over-year impact, its gross margins remain best-in-class, above the average of our IQOS business, including in Q4. As mentioned last quarter, we expect this to be an enduring positive mix driver.

Combustible performed well in 2025 with low single-digit top line growth and low to mid-single-digit gross profit growth, a proxy of what we expect this business to deliver over time. Strong pricing more than offset volume declines and unfavorable mix, with disciplined cost management supporting gross margin expansion of plus 160 basis points to reach 65.5%.

Moving to operating margins. We delivered full year organic expansion of plus 140 basis points and plus 160 basis points in dollar terms to reach an adjusted operating income margin of 40.4%. We achieved this in a year of strong investment in commercial, marketing and brand building behind our smoke-free portfolio, including international multi-category deployments and U.S. ZYN. We also continue to invest in expanding our U.S. capabilities to capture the substantial growth opportunities ahead. This performance was supported by a relentless focus on both cost of goods sold and back-office efficiency, enabling meaningful margin expansion even as we continue to invest for growth. We have delivered around $1.5 billion in gross cost savings since 2024, placing us firmly on track to achieve our $2 billion objective for the '24-'26 period.

Focusing now on our smoke-free business, where all categories have an important role to play. Our global presence continues to grow, with PMI smoke-free products now available in 106 markets. This includes the recent launch of ZYN in Argentina and IQOS in Taiwan. We increased the number of markets with all 3 categories to 26 compared with 9 markets 2 years ago. We continue to outpace the smoke-free market. Measured in the categories where we are present across these 106 markets, we delivered over plus 12% estimated in-market sales volume growth for the year compared to over 9% for the industry. We estimate our volume share of smoke-free products on this basis is around 60%, and our 2025 share of category growth is over 70%.

With our portfolio of leading premium brands, our share of smoke-free in value term is notably higher than 60%. As we expanded our portfolio and geographic reach, the number of legal age consumer of our smoke-free product, which an estimated 43.5 million as of December 31, an increase of around 10 million users in 2 years with broad-based growth across categories.

IQOS adjusted IMS growth accelerated to an outstanding plus 12% in the fourth quarter, reflecting strong momentum across the globe and a presence now in 79 markets. All regions contributed, as illustrated by exceptional performance in key cities such as Mexico City, Manila, Riyadh, Rome, London, Madrid and Munich. You can find further key city and European shared data in the appendix to these slides. This enabled us to achieve full year growth of plus 10.5%, within our target range. Annual adjusted IMS again increased by around 15 billion units despite the continued headwind of the EU characterizing flavor ban and a step-up in competitive intensity. Our global share of the [ Ina bank ] category remains impressively resilient at approximately 76%. This is supported by brand engagement initiatives and continuous innovation across devices and consumables, including the continued introduction of ILUMA i to reach a total of 55 markets.

Importantly, IQOS profitability continued to increase significantly, driven by pricing, scale and product improvement on consumable and device costs. This is illustrated by a substantial increase in product contribution over time.

Turning to nicotine pouches. ZYN is the global #1 brand with a 2025 PMI category share of around 40% in pouch terms. The U.S. represent approximately 2/3 of the category today, while international market, though still relatively small, are growing rapidly. We made excellent progress this year expanding ZYN's presence by plus 19 markets to 56 and delivering plus 36% shipment growth to 13.6 billion pouches or 880 million cans, achieving our 2026 target 1 year early. U.S. shipments grew plus 37%, while international volume grew plus 31% or plus 112% excluding the more mature Nordic market, where Q4 performance was impacted by a demanding shipment comparison.

We are focused on the future growth of the category, broadening our portfolio to address the need of legal age smoker looking to switch. This includes new strengths and flavor variance, including [ ZYN X Low ] 1.5 milligram, which was successfully rolled out to around of 2/3 of ZYN market, driving a significant improvement in first experience acceptance among adult nicotine consumers. While we are in the early stage of developing the category, which makes up only a low single-digit share of total nicotine in most markets, it's very encouraging to see ZYN's share of international pouches, excluding the Nordics, rise by around plus 60% in 2025 to reach 16% following the launches and relaunches of the past 1 to 2 years.

In e-vapor, this is the fastest-growing international vape brand of any major player within closed pods. The pod segment is growing rapidly as disposable decline, and VEEV is gaining significant volume share in the fragmented landscape, sourcing primarily from legal age consumers of other vaping products and adult smoker. As covered earlier, shipments doubled for the year with a meaningful improvement in profitability. VEEV is now present in 47 markets and grew notably well in Italy, Romania, Greece, the U.K., Germany and Indonesia.

Reviewing the smoke-free portfolio now by geography, starting with Europe, where as Jacek mentioned, smoke-free products now represent more than 50% of regional net revenue. Total IQOS, ZYN and VEEV volume grew by an impressive plus 13% for the year, with significant further growth potential given the overall penetration of SFP remain low compared to Japan or the U.S. IQOS delivered another strong quarter with an acceleration in adjusted IMS growth to plus 10.3%. This was led by an exceptional performance in Italy, where we successfully navigated the impact of the flavor ban, supported by recent innovation. With an acceleration through the quarter of 2025 to deliver double-digit in-market sales growth for the year, quarterly market share passed 20% for the first time. Other notable call outs with strong double-digit growth include Bulgaria, Germany, Greece, Spain and Romania.

ZYN pouch shipment volumes grew plus 9% for the year. And while the Nordics make up close to 60% of regional volume, shipments more than doubled elsewhere with good progress in the U.K., Poland, Italy and Austria. As noted earlier, excellent momentum continued with shipment growth of plus 110%.

In Japan, we reached an impressive milestone in December as the heat-not-burn category surpassed 50% of total industry offtake volumes, driven by the continued strength of IQOS. The path to 50% has not been linear and following 2 years of very strong expansion in '23 and '24, category growth moderated in 2025. The adjusted in-market growth of IQOS HTUs has reflected this trend with a healthy plus 7% in 2025, representing very robust absolute growth. In Q4, the Japanese nicotine industry and the heat-not-burn category grew slightly below the full year trend with some impact from inflationary pressures on consumer purchasing power. Nonetheless, IQOS HTU adjusted IMS grew plus 5.8%, while Q4 adjusted share grew plus 2 points year-on-year to 32.6%. While competitive intensity increased markedly this year, IQOS category share was broadly stable, with most movements occurring among other players. We are encouraged by early signs that the increase in category activity is generating higher [ test ] among more traditional adult smoker, a positive indicator for category growth.

Looking forward, the upcoming excise tax increases on heat-not-burn in April and October make 2026 a atypical year. As discussed at the Morgan Stanley conference in December, the [ level of Pason ] this headwind for the category, representing about JPY 50 to JPY 100 per pack, which translates to 20% of current retail prices, with the greatest impact for product at lower price points. As announced recently, we have submitted an application to increase our prices in April. We anticipate these price increases will impact category growth and volume for 2026 despite the fact that heat-not-burn consumers have demonstrated higher price resilience than cigarette smokers in the past.

Shipment volatility in 2026 is also possible, driven by in-market sales trends around April and October excise increases. Importantly, we do not expect the underlying category growth trend to change, and we target substantial further growth from IQOS in Japan in the years to come. We are also pleased to report ZYN's successful pilot launch in Tokyo.

Outside of the U.S., Japan and Europe, all 3 of our smoke-free categories are delivering strong broad-based growth, with full year shipment up plus 17%. This includes IQOS' strong start in Taiwan during Q4, where we exited the year with around 4% of offtake share and rapid progress in markets such as South Korea, Malaysia and the Philippines. This momentum was notably strong in Pakistan and Mexico. In e-vapor, we've achieved excellent results, particularly in Asia. Our Global Travel Retail business further support all 3 brands and continue to deliver impressive multi-category performance, serving as a powerful platform to showcase our portfolio.

Turning now to the U.S., which made up around 7% of our global net revenues and around 8% of our adjusted operating income in 2025. Nicotine pouches remain the fastest-growing U.S. segment, representing a high single-digit percentage of total nicotine industry volume. Despite supply constraints, commercial normalization and portfolio gap, ZYN continued to lead the category in 2025, with its premium offer capturing around 50% of category growth, 61.5% can volume share and a value share of over 67%. ZYN offtake volume also grew strongly by plus 25% for the year, as estimated by Nielsen. Shipment grew by plus 37% or 230 million cans to 794 million. The gap between shipment and offtake reflect a net channel inventory rebuild, and we estimate the underlying 2025 shipment base corresponding to consumer offtake was around 740 million to 750 million cans. This was notably concentrated in the first quarter of 2025, and we estimate the underlying shipment base by quarter for 2025 was around 160 million cans in Q1, 180 million cans in Q2, 205 million in Q3 and 200 million in Q4.

Indeed, Q4 saw a lower-than-expected destocking of about 5 million cans as we deploy promotion, limited time offers and announced a [ general lease ] price increase of $0.10 per can in December. Looking ahead to 2026, we expect ZYN shipment volume to broadly reflect off the growth from this underlying base before any further channel inventory movement. We estimate the remainder around 25 million cans of surplus inventory in the downstream supply chain, which we assume will normalize in due course, most likely in the first quarter.

The level of offtake growth for ZYN in 2026 will be influenced by 3 key factors in which we are investing. The most critical over the mid- to long term is in brand equity as we strengthen marketing in a responsible manner, enhance point-of-sale visibility and deepen the connection with our legal age consumers. Accessing all segments of the U.S. nicotine pouch category will require us to navigate a dynamic and uncertain regulatory environment. We have developed and are preparing to launch innovation to address a broad spectrum of consumer preferences. We have a number of pending ZYN submission before the FDA, including ZYN Ultra, which is included in FDA's pilot program. ZYN Ultra offers higher strength and an expected range of adult-oriented flavors. We are taking steps to prepare for the launch of ZYN Ultra as soon as possible, pending FDA action.

We also believe IQOS ILUMA strong application and demonstrated track record consenting smokers to better alternatives warrants expeditious FDA action. We also continue to optimize ZYN's premium price position. Despite elevated promotional intensity across the category, ZYN remain the leading premium brand by a clear margin, fully aligned with our strategy for sustainable long-term growth.

We have a comprehensive commercial program plan for 2026. And as a reminder, commercial activities, including promotions, were unusually low in the first half of 2025. As I mentioned before, we continue to expect ZYN to deliver best-in-class gross margin within PMI above the average of IQOS. We are very excited about the significant growth potential of the brand over the coming years, which fully justifies the above-mentioned investment.

One example of our enhanced brand building effort is the recently announced global partnership between ZYN and Ferrari, which recognized our long-standing heritage in Formula 1, with smoke-free product now at the forefront. Formula 1's overwhelmingly adult audience provides a highly impact platform to engage consumer responsibly and reinforce ZYN's premium equity.

Finally, moving to combustible, which delivered another robust year of pricing of plus 7.6%, including plus 6.8% in Q4 and very good gross profit growth. Our full year cigarette share declined by 0.2 points to 25.3%, mainly due to Turkey, and was otherwise stable, including record high for Marlboro both for the full year and in Q4, where its share reached 11% of the international category, excluding China. For 2026, we forecast a comfortable pricing variance of around plus 6%, reflecting continued dynamic performance.

With that, I will now hand it back to Jacek.

Thank you, Emmanuel. This brings me to our outlook for 2026, where we expect another year of a strong and profitable growth despite several transitory headwinds. Starting with volumes. We expect continued strong underlying momentum in our smoke-free business for all 3 categories. Both shipments and adjusted IMS volumes are projected to grow in high single digits after factoring in the headwinds from Japan excise taxes and U.S. inventory comparisons described earlier.

For combustibles, we forecast a cigarette decline of around 3%, with weaker industry volumes in India and Mexico following the recent excise tax increases and our ongoing recovery in Turkey likely to impact comparisons in the first half. Altogether, these results in a broadly stable outlook for total shipment growth, subject to the usual variability in shipment timing and trade inventory movement as compared to a forecast total industry decline of around 2% for cigarettes and HTUs.

We expect another strong year overall for pricing led by combustibles, notwithstanding the impact of a U.S. first half comparison and for continued positive smoke-free mix. Taking all these elements into account, we forecast 2026 organic net revenue growth of 5% to 7%. We expect the same factors in addition to operating leverage and ongoing cost efficiencies to drive further robust margin expansion with projected organic operating income growth of 7% to 9%. This includes continued strong investment behind our smoke-free portfolio.

We are forecasting currency-neutral adjusted diluted EPS growth of 7.5% to 9.5%, factoring in broadly stable net finance cost and an effective corporate tax rate approximately in line with 2025 at around 21.5%. Including an estimated [ '28 fence ] currency benefit at prevailing exchange rates, this translates to 11.3% to 13.3% growth to a range of $8.39 to $8.54, which would mark another year of double-digit EPS growth in dollar terms. We expect a significant acceleration in operating cash flow growth at around $13.5 billion at prevailing exchange rates and subject to year-end working capital requirements. The strong cash generation is expected to support further meaningful deleveraging in 2026, which I will come back to shortly.

On a quarterly basis, we expect the first quarter to be the softest quarter of the year, reflecting demanding year-on-year comparisons and investment phasing. We expect first quarter combustible volumes to decline by up to 5% as we lap a prior year quarter of volume growth, whilst having the highest expected impact of the dynamics in Turkey, India and Mexico, which I mentioned for the full year. Smoke-free product shipments will also be impacted by the U.S. ZYN shipment dynamics explained by Emmanuel and the strong HTU comparator. With low levels of commercial activity on ZYN in prior year, impacting the net revenue per can comparison and a higher quarter of investment globally behind our smoke-free due to phasing, we anticipate broadly flat year-on-year first quarter organic net revenue and operating income.

We forecast high single-digit adjusted diluted EPS growth of $1.80 to $1.85, including a $0.14 tailwind at prevailing rates, supported by a favorable comparison to transactional currency impacts in the prior year. As I mentioned earlier, we have delivered our 3-year CAGR targets on operating income and EPS in just 2 years. Combining our 2026 forecast with the strong results of 2024 and 2025, we expect to meet or exceed all of our 2024-'26 CAGR targets presented at our 2023 Investor Day. This is especially the case for operating income and EPS growth, despite our algorithm assuming a more favorable corporate tax rate. In addition, our expected adjusted EPS CAGR in dollar terms represent a strong double-digit delivery.

This brings me to the 2026-2028 outlook, where we are renewing our medium-term growth targets in the next 3 years. We continue to target positive total shipment volumes, with the growth of smoke-free products more than offsetting cigarette volume declines. While our 2026 forecast ranges are marginally lower due to the specific factors we explained, for the 3-year period to 2028, we continue to target compound annual growth rate of 6% to 8% in organic net revenues, 8% to 10% in organic operating income as margins expand and 9% to 11% in adjusted diluted EPS at constant currency. This renewed target reflects our confidence in sustaining the strong pace of top and bottom line growth over time. They also reaffirm our best-in-class growth profile within the large cap consumer packaged goods sector.

We target smoke-free product shipment and adjusted IMS volume growth of high single digits to low teens. Our multi-category strategy in international markets will continue to be the dominant driver of smoke-free products growth, further amplified by the substantial opportunity in the U.S. As we progress through the period, we expect this to be bolstered by the new market openings and an active innovation pipeline. The U.S. launch of IQOS ILUMA is included in the target, including initial commercial investment, with the precise cadence subject to the timing of launch.

Meanwhile, the resilience of our combustible portfolio provides a critical backbone, providing the infrastructure, financial firepower and consumer connection to accelerate smoke-free growth. We look forward to sharing more with you on this topic at the CAGNY Conference on February 18.

We remain a highly cash generative business, which is based on the strength of our brands and reinforced by disciplined management of cost and cash. This gives us the financial capacity to invest strongly behind our smoke-free business, maintain superior shareholder returns and optimize our balance sheet. Over the next 3 years, we target aggregate operating cash flow of around $45 billion at prevailing exchange rates. We anticipate capital expenditures of approximately $1.3 billion to $1.5 billion per annum on average, with the potential for lower amounts beyond 2026, and the lion's share of investments again focused on smoke-free products.

Alongside superior business results, we are committed to delivering superior shareholder value. Having essentially reached our target dividend payout ratio of around 75% of adjusted diluted EPS, we have the capacity to pursue dividend growth closer to the level of earnings growth, as demonstrated by the 8.9% increase announced in September last year.

Strong cash flow and EBITDA growth enables deleveraging. We closed 2025 with an adjusted leverage ratio of 2.5x, reflecting solid progress despite the unfavorable impact of year-end currency movements and our net debt. We expect further improvements in 2026, targeting close to the 2x by year-end at prevailing exchange rates, providing increased flexibility for capital allocation.

In summary, our full year performance underscores the strength and the momentum of our global smoke-free business, supported by investment in our premium brands and the continued resilience of combustibles. Despite the complex operating environment shaped by economic uncertainties, political tensions and evolving regulations, we continue to make significant progress towards our vision of a smoke-free future. As we delivered consistent best-in-class growth, we are reinvesting in our leading brands, innovation and the critical capabilities which support long-term performance. This allows us to generate significant value for our shareholders, including the largest dividend increase in over a decade. We look forward with confidence to 2026 and beyond.

Thank you. Emmanuel and I will be happy now to answer your questions.

[Operator Instructions] Our first question comes from Matt Smith with Stifel.

Starting with the new medium-term targets that you provided today, can you expand on the reacceleration in smoke-free volume growth compared to the 2026 growth guidance? And you called out the U.S. as a new market in the outlook. How are other currently closed markets and the opportunity to expand platforms into existing IQOS markets considered?

Yes, the acceleration in -- or beyond '26 is, at this stage, we mainly see coming from all the implementations of the tax changes, which are price -- or excise-driven price changes in Japan. As you may recall, Japan has the multistep excise tobacco, nicotine products, ex stack changes. It starts with the symmetry of heated tobacco products increasing the taxes first, and then followed by the cigarette price increases as of '27. So I believe -- we believe at this stage, there will be some headwinds or maybe some headwinds on the category growth, and obviously, IQOS growth in '26. But once we start moving to the '27 and beyond, more symmetry with regards to the fiscal policy and treatment between a cigarette and heat-not-burn. I mean, cost category should be returning or resuming growth. So that's the 1 factor.

And second factor, obviously, is that as we highlighted in our remarks, I mean there is a highly competitive environment in the U.S. And despite U.S. in the total smoke-free volumes maybe doesn't have that much of a weight, but for growth is very opportunities and the growth is very important to us. There are some symmetries on the portfolio versus what is presumably the most dynamic part in the total market. And we believe we've -- author -- pending authorization with the FDA once we will start moving hopefully through '26. But definitely '27, et cetera, we're going to put the portfolio into the symmetry of the consumer market expectations.

Now obviously, the other factors which we mentioned, they are more on the combustible side. I mean not on smoke-free products. I mean we mentioned India, Mexico, maybe a couple other smaller places which have some quite outsized, I would characterize, excise increases, which obviously will drive the quite outsized -- the normal price increases. So I believe once we -- we don't think that's going to be a recurring type of events, '27, '28, so we can come back and resume the strong [ top and bottom ] line growth in the outer years. I think I just highlighted the key drivers.

There is obviously the factor of innovations. But you will ask me the question, what exactly is the innovation for competitive reason. I will not be able to discuss. But this will be the main drivers coming or starting from '26. The excise Japan, excise in a few other places and the ZYN portfolio [ are symmetry ], bringing this to the [ symmetry ].

Our next question comes from Eric Serotta with Morgan Stanley.

Great. Thanks so much. In terms of a '26 guide for smoke-free volumes up in that high single digits to low teens range, how are you thinking, broad strokes? I know you're not guiding specifically, but how are you thinking in terms of IQOS HTU shipments and IMS? Obviously, there's the some of the specific headwinds you called out in terms of the excise in Japan.

And ZYN, in terms of the competitive environment in Japan, I believe it sort of started to step up around the second quarter of last year with some competitor product launches. How has that been kind of evolving on a sequential basis, particularly heading in now to the season where competitors have filed with the Finance Ministry for their price increases?

Yes. I'll start maybe with the second part of the second question. I mean, yes, there is a -- this year and the year before, there is an increased competitive activity in Japan. Judging by how strongly IQOS holds the share in Japan and continuing its growth, I think it all goes well. I think, look, we have 10 years of IQOS brand built in Japan and a number of steps of smaller, but also the big innovations, including IQOS ILUMA. So I think IQOS is entering this a bit challenging from a price excise perspective period, I think, relatively strong.

Now I bring a very legitimate question, how we see the IQOS in Japan, but we try to stand away from giving a very precise volume, another outlook for 1 specific geography. As you will appreciate, there is a competition, and we don't want to highlight too much to reveal what our plans with regards to the price and share expectations or volume expectations. But when we come up with the guidance for the total smoke-free products volume evolution next year, I mean, all of these factors are baked in, if you like.

And maybe, Eric, on your first question globally on the IQOS outlook among this high single-digit growth for our SFP volume in '26. We're very pleased with the growth of IQOS. I mean we finished '25 very strongly, more than 12% adjusted in-market sales growth. Yes, Japan has been slowing down a bit, as we mentioned. But the number of markets reaccelerated, Italy is 1 of them. Europe is showing a number of markets, which are, I would say, accelerating like Germany, like Spain. You still have markets such as Romania, Bulgaria that are very nice complement to the growth. So the picture is very nice for IQOS. And of course, we continue -- or we expect that to continue in '26.

And then you have all this new market in new economies that are being very successful. We have Indonesia, Philippines, the Gulf, Mexico. I mean you have plenty of markets where IQOS is accelerating. And last but not least, we are super pleased with the launch in Taiwan. I mean 4% in only a few weeks, it's quite an achievement, and we're excited about the outlook. So that is globally giving a nice picture for the continuation of a very good growth for IQOS in '26.

Great. And just 1 clarification question, just to be explicit in terms of the midterm or '26 to '28 guidance. Is the -- 26 -- correct me if I'm wrong, but '26 does not include anything for ILUMA in the U.S., but there is something included for the sort of '27-'28 time frame. Is that fair? Or correct me if I'm wrong, please.

It's broadly fair. Well, I do know. Sorry, I'm serious. We have a number of discussions over the last years with regards to the estimated or expected timing of this long overdue authorization from the FDA, but we have somehow make the assumptions for IQOS entering the U.S. market in a planned period. But I don't think the algorithm which we'll lay down in front of you today. is heavily materially dependent on the IQOS in the U.S. But IQOS is including there, both from the investment and some expected volumes.

Our next question comes from Bonnie Herzog with Goldman Sachs.

All right. I wanted to follow up on Japan and the excise tax situation. I mean as you mentioned, we've known or seen that you're applying or you did apply for a price increase on top of the tax. So hoping you could talk a little bit more about the elasticities you're expecting with volumes, I assume being pretty negatively impacted? And I guess, will the leverage on the incremental pricing you're hoping to get be enough to drive margin expansion and income growth [ in the room gen ]?

Okay. The price consumer will be -- or will start being impacted, we'll start seeing the prices as of April 1, right? So this is still a little bit in front of us. There obviously will be some IMS shipment type of distortions, consumers can do some buying ahead or maybe not. I mean all of these things will somehow wash out for the year.

Now there are 2 steps of excise increases for [indiscernible] tobacco products in 2026, one which, again, will the -- sorry, will hit the consumers in April 1, and the other in October, okay? The amount or the size of the excise increase may not immediately warrant that will -- and I don't want to now talk about the pricing strategy, et cetera -- may not immediately warrant, depends on which strategies at play on the margin expansion. But I do believe you know what is our approach to passing on prices, and we're continuously working on the margin expansion. I think over a bit longer period of time, we will get where we wanted to get. But I cannot comment more.

I figured, I just -- all right. That was still helpful, I appreciate it. And then I did want to just maybe ask a high-level question on your guidance this year. Could you maybe frame for us or touch on the key growth drivers that really will allow you to deliver on your top and bottom line guidance and possibly beat it? Considering you're lapping several strong years of growth. I think that's been a key question, just given the momentum, so it's helpful just to kind of have you kind of frame for us what are kind of the key drivers of this? And then in the context of that, I did want to just make sure to understand how much of an increase or not your guidance assumes in terms of planned investment spend this year versus last? And I guess, again, I'm asking, thinking about everything that you're planning on rolling out, of course, depending on the FDA.

Look, I mean, obviously, there is some degree of assumptions which we're taking on FDA. And -- okay. Let me answer this different. If we talk specifically about the ZYN and ZYN Ultra, our pending application, which is very much in the higher nicotine strength. Obviously, more is even some flavors, et cetera. We have a readiness to launch the product essentially as -- well, essentially as we speak. So it all depends on how quickly we can get an answer from FDA. And I will stay from fortune telling by my precise timing of FDA. I mean I didn't have a great track record of forecasting FDA in the past, so I have to be a little modest.

But I think it's going to happen, okay? Summer this year, I think the plan is very balanced. And obviously, we will be -- I mean -- sorry, ZYN is growing in the U.S., but it's not growing at our expectations. If you measure the category growth versus ZYN growth, at least the recently, et cetera, I mean this -- this will have to be addressed. IQOS, and I said, is somehow baked in a plant. And the way we did this algorithm provides a good balance between timing, volume expectations and investment.

Now we need to remember that when we talk about the ZYN and VEEV, for example, on international, I mean, at least the product categories are vastly enjoying the infrastructure which we have built over time on IQOS. And I believe the longer we wait also in the U.S., we may end up in the -- a similar but reverse thing. It is a ZYN and is infrastructure, back-office capabilities, et cetera, which will start being later on share for IQOS.

So I remember you always were asking these questions about how much we will invest behind the IQOS, but everything depends about what other investments until this date we have been making and so on. Obviously, there will be some variable investment. You need to build awareness and so on, but these are not that heavy, maybe structure, long-lasting investments which are already built because we continue investing behind it.

Bonnie, just to maybe complement. There is no rupture in '26 versus the trend of the past years. So the fundamental drivers remain exactly the same. You have a powerful smoke-free portfolio which has continued to be dynamic. Yes, you have this Japanese situation, which is a one-off. You have the high base of comparison in the U.S., which will have an impact in terms of growth versus what is real underlying growth. So that is something we are taking into account. But fundamentally, the dynamism is there. It's coming with a very nice positive mix impact on the margin and that is playing.

And on combustible, we have this resilient business model. Yes, in '26, we are expecting slightly more decrease, which is coming from, first of all, Turkey, where we still have a net one-off comparison even if things are gradually improving. But mainly 2 markets, India and Mexico, where you have massive excise duty increase that are going to happen. In India, you talk about a 40% plus price increase for the consumers. So we're going to have a huge impact on the market. So this is impacting the volume. But even with that, we are targeting to have this resilient model, where with the decline in volume, we believe we can grow low single digit, the revenue, and low to mid-single digit, the gross profit.

So as you can see, the '26 objective is not very far from the CAGR of the midterm growth algorithm. The fundamentals remain exactly the same. We have a couple of special events we're going to overcome and offset, and that is really what is driving the difference. But fundamentally, the powerful dynamic behind the business remain exactly the same.

Our next question comes from Faham Baig with UBS.

I've got a couple as well. I do want to push you on innovation a bit as we approach the 5-year mark since the launch of IQOS ILUMA and we look forward to the next evolution. What technical or functional attributes do you see could further improve consumer conversion, particularly in the emerging markets?

And the second question goes back to ZYN. We've observed notable absence of ZYN promotions over the last 2 months in the U.S. Can you clarify, is this a deliberate shift as you await the offering of ZYN Ultra, which is a higher [ moist ] product, which you mentioned? Or is there a shift between how aggressive you want to currently drive trial versus looking to capture the 50% category growth you've alluded to historically?

Okay. So the answer, I take the question. Okay. Starting with your first question. I'm very pleased and honored as the representative of PMI that you're tracking the innovation engine of PMI. You're absolutely right, we're plus minus in the plan period approaching 5 years of IQOS ILUMA. So I think your predictions are pretty good, but I will not answer second part of that question is what the innovation is going to be, for the reasons which I guess are understandable.

Now when it comes to promotions, I actually think it's the 2 months. There was obviously the difference in which promotions and intensity of promotions U.S. market has deployed in Q3 and Q4. There were a couple of schemes which we didn't repeat it for -- that was our decisions. But I wouldn't just conclude that from a shorter period of time about the promotional intensity of activity or have it in a plant. I cannot again talk about this.

But the way to look at this -- and I think we've been very transparent in our remarks. They are free aspect of what will make long-term success of our pouch business in the U.S. And we're repeating what we always were doing on -- so far on the international. One is the brand, and there has to be quite a degree of the support from a brand-building activity. There is obviously the component of a portfolio, which is meeting at least the current trends. We can have a separate conversations, which of these strengths we think may be longer lasting, which of this can be longer lasting. But the fact is that ZYN is doing okay within a day group of 3, 6 milligram, but clearly is missing a higher nicotine strength. Okay, particularly maybe 9, may be others, okay? So that's the thing which we'll have to address and here, we need to deal with FDA.

And there is a third component into this thing, which is obviously price and a price premium which consumer is willing to pay for ZYN in exchange for having a reputable, vibrant, dynamic brand and the right product. So there will be element of -- it's almost like we're going to the tax book of ultimately forgot a marketing mix and to have the right price, right product, right place, right promotions. And we will be diligently deploying all of those components together. I hope I answer at least partially, your question.

No, that's very helpful. Given my first question wasn't answered, can I squeeze in another 1 for Emmanuel quickly?

Sure.

Emmanuel, the currency guidance for the year was significantly better than the 3 estimates. Could you maybe share the key drivers why that could have been? And also provide the hedge rates for the year for the key currencies would be really helpful.

Yes. So probably the -- I mean the reason why is that we are going to benefit from some significant negative transactional impact in 2025 which are not going to repeat based on the current ForEx in 2026. So when I look at the $0.27 guidance, you have 2/3 that is coming from translation, but around 1/3 is coming from transaction. So I believe that is probably what the Street doesn't have, of course, because it's difficult to have.

I'm not going to share precisely, the hedging, but yes, we continue to have some hedging that are helping us a little bit, notably on the yen because the euro has been going up, so the hedging on the year are no longer making a big difference. So we still enjoy a slightly better rate than the spot you can see on your screen. And that is limiting a little bit the negative impact, but let's be clear, in '25, the yen had a negative impact, and we are expecting in '26, another negative impact coming from the Japanese yen.

Our next question comes from Gerald [ Jerl ] with Needham and Company.

Thank you very much for the question. I just have one, I would love to get your thoughts. But last month, it was reported that New York is considering a significant excise tax increase on nicotine pouches. So just would love to get your thoughts when you consider the obvious potential for other states to maybe adopt similar proposals? And then maybe the impact you believe that this could have on the promotional environment or the competitive landscape?

Yes. Obviously, we're aware of this proposal. I mean the comment I can make at this stage that is counterproductive to the health benefit for nicotine or smokers these products provide. So I think the legislator there is taking everything into consideration. Look, states in the U.S., as you know very well, are driven by the owner thinking process and not necessary 1 state actions are translating to our state actions, but let's see how it's going to unfold.

Again, I repeat because for us, it's very important that shortsighted approach to the excise on our products, which are vastly better than cigarettes, undermines real public health objectives. So I think it's just -- it's just a wrong idea.

Our final question comes from Damian McNeela with Deutsche Bank.

Just 1 question for me, really, just on costs. You've indicated that you're on track to deliver $2 billion of cost savings by the end of this year. Just wondering whether you're in a position to quantify whether we should expect a similar level of cost savings for the medium-term guidance to the end of '28 and what scope AI may have to accelerate cost savings, please?

Well, so it's not part of the guidance we're providing today, but we certainly ambition to continue to be very efficient on our cost. Roughly speaking, I'm not going to give precisely, the split, but it's around 60% on COGS and the rest is on our notably back office cost and G&A. It is clear that we are targeting to build efficiency in the future coming from AI. Again, that's a topic that is quite sensitive if you start to say what you invest and what you expect from AI. But you should certainly expect that AI is going to be an engine for more efficiency and for cost performance in the future, absolutely.

Thank you. I'm showing no further questions at this time. I would now like to turn it back to management for closing remarks.

So I have a last remark, and this is just the best proof that we're living in the environment when we have a digital AI and the human, both of us were human and this is not that the AI was hallucinating. I think I missed 1 number when it comes to the guidance of this year. Emmanuel corrected the number in terms of a currency impact going into the 2026. The number which you had on the slide, the number which you had on the release and the number which Emmanuel has quoted at the right numbers, apologies for this inconvenience, but this is the best proof that there was a live conference, not a digital conference. See you all at CAGNY. Thank you very much.

See you soon. Thank you for your time. Thank you.

Thank you for joining us. Please do contact the Investor Relations team if you have any follow-ups, and have a good day.

This concludes today's conference call. Thank you for participating. You may now disconnect.

Good morning, everyone. I'm Eric Serotta from Morgan Stanley's Beverages, Tobacco and Household Products team, and I'm very pleased to welcome Philip Morris International back to Morgan Stanley's Global Consumer & Retail Conference.

Before we begin, please see the Morgan Stanley research website at www.morganstanley.com/researchdisclosures for important disclosures. And if you have any questions, you could reach out to your MS sales rep.

PMI is a leading global tobacco company, which is actively driving a transition to reduce risk smoke-free products. It's smoke-free products are now available in over 100 markets globally. And account for over 40% of PMI sales at accretive margins to its legacy cigarette business.

Joining us today is CEO, Jacek Olczak. Jacek, thank you for being here.

Always a pleasure.

I'm going to turn it over to Jacek for a couple of big-picture comments, and then we'll get into some Q&A.

Yes. So small picture comment is that we just -- couple of hours ago, we issued a press release reaffirming our guidance from Q3.

Now big picture, Yes, we are present now with 100-plus markets, but importantly, in 30-plus markets, we have more than one proposition of a smoke-free product. I think one of the key questions that investors, but many other audiences also would like to know which of these product platforms will prevail or which one is going to take it all. Is it a heat-not-burn with our flagship vehicles? Is it pouches with ZYN? Or is it the e-vape product?

I actually think that from a smoker's perspective, target audience, adult smoker's perspective, you actually need to have all 3 platforms because all of these 3 platforms are delivering a different usage occasions for smokers. And in aggregate, they offer them this almost -- giving them no reasons to stay with smoking actually, further incentivizing them to quit and move to the new proposition.

I mean the pouches, as you know, can be used in a very discrete manner. They have a different nicotine release, different nicotine profile. Vape is more of the path on the demand of smoking on the demand. IQOS is replicating as much as possible. Obviously, the ritual of smoking. And if you look at what is happening at the smoker levels, and we have run a number of tests. And actually, this is the backbone of our commercialization philosophy today, that our objective is to equip the smoker with all 3 platforms.

Because this is the best way to keep them away from smoking. There is obviously also element that the some of the parts of the consumption moments during the day is higher than the individual basis. Because remember, smokers are in many places in the world, including very much this market, the U.S. market. for many decades has been thrown into the corner, kick out of the bars, kick out of the offices and despite the fact that they pay extremely high price for the habit, I mean, they're not really treated by the society. And there is a lot ostracizing, a lot of finger pointing, et cetera. So I think smokers are actually regaining the freedom and each of these products offer them something.

Net-net what you see in the market when the smoke-free products are available, cigarette sales accelerated decline. And this is, to me, something which is essentially one-way street. I mean a very rarely we see smokers coming back from a smoke-free products to smoking. It only will happen if you have a temporary setbacks in terms of some adverse regulatory intervention, sometimes not really based on the science and the fact. And very quickly, the flow of the demand from a smoker, adult smokers to the smoke-free product is very strong.

The smoke-free product will grow somewhere in the double digit around 10% on a global basis. I mean Philip Morris growth of a smoke-free product will be somewhere in the range 10% to 12%. So we are by a notch or two notches above the industry trend. And we see the different accelerations, the accelerations across the different category.

We have carried with us all the positive elements of the past tobacco model. In a sense of a strong prices, brand loyalty, high gross margins and the high bottom margins still we have the room to improve, which we have demonstrated. Over the -- especially over the last few years.

And if you consider the demand which is coming from smokers and say there is 1 billion-plus smokers in the world, differently distributed in the different geographies and where the smoke-free category stays today still early days of the smoke-free categories despite the fact that you already see that not only volume but also financial results coming from those who strongly participate in this category.

We have also carried with us the strong cash conversion, which was one of the characteristics of the tobacco industry in the past. So the business model is like from an investment perspective is very much similar, but with the one difference, you have a different volume outlook. And Philip Morris, in particular, we are now about to close our fifth year in a row with the total positive volumes. That is smoke-free products are offsetting -- more than offsetting declines on the cigarette market.

We still have a number of geographies, which the products for a variety of very much irrational reasons are not open, and they are like big, big cherries on the cake, which is in front of Philip Morris in the industry because if I take the markets like India, Vietnam, Turkey and a few others and just focus on the markets, which are about 100-plus billion units cigarette sales, which at a certain moment will should be converted into the smoke-free product, you have a quite a room for growth. So this is the high level picture.

Eric, back to you.

Great. So good overview.

Let's start with U.S. then 6% to 7% of revenue, but clearly, an outsized driver of your multiple on the stock. Starting off, going back to the third quarter, did the $100 million investment to jump start the commercial engine, did that have the impact that you expected to drive trial? And then how has your retail takeaway volumes been trending versus your expectations as we've moved into October, November and sort of gotten past that investment?

So this was a hard landing from a helicopter view to the quarter, $100 million. Appreciate it. Look, ZYN had, as many of you, I guess, know, I mean ZYN was in a permanent out of stock, undersupply situation for about the fourth quarter. We obviously did a lot of adjustments in terms of the spend behind the brand. There was no point activating many of the programs if you couldn't supply the market.

That situation is going to resolve a little bit faster than we initially thought, which is good. In a sense that we ramp up the capacity faster and they could start fulfilling all the orders earlier than initially we anticipated in a year.

Now what has happened in the Q3, we essentially gave the brand, all the different elements of the marketing mix, I know that everyone is focused on the price promotion and especially the -- one cannot ZYN free for purchase of any tobacco products. So there was like a culmination or concentration, maybe is better word of all the activities in 1 quarter, and I think we've been very clear, transparent in the earnings release after Q3. This this is not something which we should or one should expect going forward.

Having said so, brand of ZYN, of its magnitude obviously deserves a variety of their support, and we will not stay shy in standing behind the brand and supporting this. If you look what has happened in the Q3 and the -- okay. Q4 is still in a making. But if you look at the sequential evolution of the offtake, et cetera, it is obviously, we had an acceleration of the ZYN volumes, but the sequential growth continue. Category somewhere growth, U.S. pouches grow somewhere in the range of 30%.

ZYN is presumably taking today 50-plus percent of the growth over the category despite the fact that ZYN commands a much higher price than a main competitors or other product in the market, which is good for us. But there will be a support going on for ZYN, but I wouldn't look into this Q3 as something which is to become a normal, frequently repeated, et cetera.

There was a silence for ZYN for a long period of time. And the moment when we felt very comfortable with increasing the shipments, et cetera, we just put a lot of marketing, including price promotional effort behind the brand.

One thing which came as the positive surprise in terms of the frequency of the consumer response, how much equity parameters of ZYN has shoot up very shortly after the Q3 acceleration of the marketing spend because we knew that this is not just about the price and rewarding existing, but also incentivizing the new consumers to join the category to join the brand.

But in my history when I sold the brand, which is increasing its equity parameter. So it's beyond just the price by the double-digit number in a short period of time. It's reconfirmed that the silent period around the ZYN when we have not done much, when we've been in the supply constrained situations was actually the right way to do because it's not just the price, it is about talking about the brands, brands all of a sudden is being visible at the retail but not only -- and this is what the consumers of a premium proposition like ZYN, which is our positioning of the brand expects from the brand.

And then not to harp on price too much, but you did call out back in September that ZYN was at about a 60%, 65% premium on a per pouch basis to the leading competitor and a short-term goal of sort of volume share stabilization. Is holding volume share still the shorter-term goal? And are your price gaps today, which are probably in the 30s, are in the right place?

Maybe talk about the price gaps and the target price gaps in the public for obvious reasons. But look then was is and will be the premium proposition in the market. Obviously, there was a moment at the beginning of the year, maybe towards the end of previous year that in a shortage situation, retailers tend to price the product up and competitions were accelerating their presence in the market and also was supporting this with some pricing activities. So obviously, the price gap tend to go higher than it normally should be.

But if I look at the evolutions where we are today, I don't think anything is special as again. If category grows 30-something percent, around 30%, if the ZYN capture strong 50-plus percent of the category growth despite the fact that we have that pricing in the market. I don't think I should be that much sure. We have a few -- what is very important is how quickly we'll have a response or action taken by FDA with regardless of the couple of still pending important PMTAs, which will further complement the portfolio line up of the brand, both in terms of a nicotine strengths and the formulation, maybe a few flavors.

As you know, that FDA has made the commitment that they are few PMTAs, which we want to put on a fast track. And initially, I think the promise was that this -- we should hear from them before the year-end -- we still before the year-end. But I think somewhere in '26 in the next year, we should see some additions to the portfolio to the brand, which will further support the growth.

So then as you take a step back, nicotine pouches, modern oral, it's 6%, 7% share in the U.S. today of total tobacco on a spend basis in track channels. Where do you think that can go and over what time frame?

Yes, This is -- by the way, I guess the pouch category is in -- but the pouch category is the fastest-growing category, I believe, in the many channels today. Ahead of the energy drinks and many others. But there is a robust growth, and I don't see it today, okay that I look very positively into '26, right, which of the strengths in terms of the category growth in performance kind of will continue for the next year. We're not in a guidance, a session for the next year, but the outlook looks positive.

Also, what gives me the reason for being positive that not many people have noticed this one, it's the first time in the history of various regulatory bodies in the U.S., but not only, let's stay with the focus on the U.S. that I haven't heard anything this [structure] being with regards to the conversations around the nicotine unlike it was in the past.

I mean you will remember there were some controversy earned under the modern -- around the vape. There was the whole controversy around EVALI and who was -- and which product should be blamed for what and which products were blamed. But if I look at the alignment from the Health Secretary, that going very much with the FDA, including the office of Tobacco, et cetera was actually desire to straighten the conversations around the nicotine because a lot of harm in terms of equipping adult smokers with the ability to make the right decisions has been done by the -- all these information, which is around the nicotine.

And this administration is on the health side. I mean it's pretty clear in their views and there is a strong science. Very well it's not the nicotine which causes the problems caused by the smoking. Yes, it is addictive. Yes, it is a stimulant works on a certain cognitive skills, et cetera. But the substance deserves the normal conversations and other conversations, which is borrowed from 20 or 30 years ago when the only product in a consumption were the combustible cigarette.

So that's another important element. And I wish, obviously, this translate into faster turnaround at FDA in terms of processing the application. But I believe it is more -- the process itself is pretty heavy and many administrations can be lost in this process. But if I look at the mindset, what is the thinking, et cetera, it's further support there is there is quite a room to grow, quite a lot of room to grow.

So you mentioned pouches are not even the double digit of the total nicotine in the U.S., okay -- speaking for ZYN, how about ZYN and ZYN sources, initially sourced a lot from the oral tobacco, more traditional oral tobacco, but very quickly start sourcing from the e-vape and start sourcing, obviously, from a cigarette.

Okay, it depends on the time frame in which you measure this whole thing, but as a rule of thumb. It's like 1/3 is coming from each of these main nicotine categories in the market. And this is what supports the growth, and I believe this thing is going to stay. So you have e-vape product and I know that e-vape product has quite a lot of challenges on the regulatory side and what is the legal, illegal market.

But the most important is there is the demand for these products. I believe category is going to stay. There is a demand growing demand for the oral product pouches, and it's going to continue, that's going to stay. And okay, we're also waiting for one day, hopefully, next year, we'll bring a heat-not-burn with IQOS to the U.S. territory and all 3 boxes will be ticked in the sense that U.S. will be brought to the full multi-category smoke-free proposition for smokers.

Great. Well, I'll come back to IQOS in the U.S. But moving on from ZYN to the other 94% of your business, starting with the international IQOS. Your guidance is 10% to 12% HTU IMS volumes this year in terms of growth, realizing you aren't giving guidance yet for next year, but can you discuss the puts and takes for IQOS volume growth next year? You have the characterizing flavor ban in Poland, excise tax equalization in Japan, some competitive activity there.

So okay, we're repeating again that the IQOS, heat-not-burn category was very much IQOS, which is lion's share of the category and it's holding its share, is in the 11th consecutive year of the growth. Some of you may remember, there was some slowdown of the growth in Japan, some many years ago. Some people were immediately predicting, this is the end of the heat-not-burn. If you look at from today's perspective, it was just a blip on the graph.

So there is a growing demand despite the fact that there are price increases. There's also some excise tax-driven price increases, also manufacturers price increases and a variety of the different regulatory frameworks in which these products can reach the adult smokers. Some are much more open, i.e., the communications with adult smoker is -- can be more broader, deeper. Take Japan, there half of the market. I think that this year, Japan will turn the mark of a 50% combustible product volume, not value and 50% smoke-free products.

Yes. So at the level of 50% is Japan is -- seems that they're going to implement the stage type of tax increases with the closing the gap of equalization of the smoke-free product taxations to CC. There will be as per the latest version of the plan about the 2 -- well, not about 2 tax interventions on the heat-not-burn in '26 and then goes in the multiyear price -- sorry, tax changes for CC and heat-not-burn in next 3 years, '27, '28 and '29, I believe.

Now the magnitude is that for IQOS, which occupies the higher end of the price ladder, actually its on the top of the price ladder. The TEREA would have a pass on somewhere in the range of the JPY 40, SENTIA which is our second propositions under IQOS umbrella is about the JPY 60 and the rest of the market is in JPY 100 territory.

So as you see, there will be a lot of pressure assuming that this is a pass on type of a scenario to roll this fully in the market in one or more steps. I don't want to go into the detail. Then obviously, we'll have some impact in '26 on the volume evolution in Japan. But that will take a little bit broader or longer view of what's going to happen. There is a continuous growth of category in IQOS. And this is also despite a very intense competition in terms of the new products coming into the market from our 2 major competitors, right, in the Japanese market. And there is also quite a strong and very aggressive price competition, but IQOS holds the share and they participate fully in the growth of the category. So yes, we'll have that sort of a headwind coming from Japan, okay? We still have a few months to fine-tune the details how we're going to play, what the market customer response is going to be.

But look, we went with IQOS, heat-not-burn with IQOS for the flavor ban in most of the European Union countries, the last country, which we have in front of us is Poland. And you remember, in Italy, we had a couple of quarters of a slowdown growth. If you look at the growth of Italy today, post the ban in -- post the flavor ban implementation like just another blip which happened in the past and the story continues. We had some various tax events in Germany this year, which we had to manage for the pricing and the Germany IQOS keeps on growing.

So you always will have -- they are the same things are happening on e-vape category that different countries are coming with some regulatory tax and regulatory ideas. If I look at the longer period of any of the smoke-free category, we only have one conclusion. They can slow you down on a quarter. It doesn't change the trajectory or the direction of the longer-term growth. And I believe work for Philip Morris in particular, but I believe also for the industry is a good problem to have...

Great...

I was supposed to sound optimistic.

So looking around the world and leaving aside the U.S. for a moment and leaving aside some of the markets that you mentioned like the Vietnams and India is where tobacco isn't authorized, where do you see the greatest opportunity for IQOS over the next 3 to 5 years or 5 to 10 years? And then looking back, ILUMA rollout was a major driver of smoker conversion, real step change in user experience. I guess what are the drivers of the next leg of growth for IQOS...

Well, you may remember when we started the whole journey of IQOS, 10, 11 years ago. The first model was called actually the market never saw that model was 2.0, when we went to the market with 2.4, 2.4 plus, 3.0, 3 point something, 4.0. Now we enter 4 1. And I guess there is the reasons where we put this -- the real numbers in the like there will be IQOS, there will be next IQOS in the market.

I mean, there is still the room of innovation, you're also tapping to the -- this audience which may be a more conservative or more attached to cigarettes. So you need to design the product slightly different. Okay. IQOS ILUMA, as you remember, was the step change in the user experience. So you get rid of the blade and all the associated challenges cleaning, breakage, et cetera. You go to the seamless experience. I think that's going to stay, but there is the room for the innovation.

I don't think we should be assuming that -- I know the ideal scenario would be that what is the next mile burn, can we produce the same product for another 50 years and enjoying the attractive economics.

But the way we look at this is the category still serve us very well so far but the category is still at the very early stages. They are still vastly more smokers out there than those who have converted to this product. And there is a learning curve on our side. There is also a technology, et cetera, which allows you to improve further the user experience, make the products better, et cetera, and address still some unmet, unsatisfied needs at the consumer level. So IQOS 5 years from now will be looking different. And I just may not know exactly what it is, but I'm also thinking that 10 years from now, pouches will look different.

There is innovations which is supporting by the attractiveness of the category by the growing demand. Obviously, people have -- consumers have their own individual type of expectations. I think there is a room for innovation going beyond the flavors, which we also know that on occasions may trigger some unintended consequence in terms of the usage profile, and the age what I believe where there is quite a discipline in execution from a marketing perspective, not to trigger this undesired type of a situation, but there is still a room for innovation.

We are well equipped. I mean, we have been on the front foot of innovations around the heat-not-burn. The innovation is not just on the product level, but the whole ecosystem model, which we have behind the integrations between the digital brand retail, we've never been in a brand retail. We own the majority of the relations with the consumers, maybe, not the transactions, but it was not our desire, and it serves very well that every time we go now to the market with another proposition either from IQOS or P4 or the, sorry, electronic cigarettes or other pouches we somehow benefiting from everything which we have installed already before, very much on the back of IQOS.

And as you know, as I mentioned at the very beginning, with 100-plus markets in which the smoke-free products are present, gives you quite a room to play.

Great. So then turning back to the U.S. How are you framing the potential for IQOS ILUMA once it's authorized. Huge market, 28 million smokers, also a large e-vapor market, but a lot of poly use, is 10 share and 5 years from launch still how you think about the targets? And then are there new learnings from the IQOS 3.0...

We -- yes, I volunteer that number, but it's not today pick up any number. If I look where the most of the international markets were in the year 5, whatever of penetration of IQOS. This is -- my view is very attainable number. Now you can add to this that U.S. will start with the latest version of IQOS international markets who are going to have the history of the blade and early problems of the device and usability of the proposition. So this should further enforce that sort of a number is attainable.

Now even here when IQOS, it's not from the -- U.S. is not in isolation. People travel and there is a quite a few IQOS users, at least judging who is working on the streets here. So the awareness of the product is there. So the starting point is much better as you would really open U.S. as a green market, right, the greenfield market that nothing has been done.

Now we have -- we're conducting as we speak, some tiny commercial operations or test on the previous versions on IQOS, which would rather go and switch to the latest version because it completely allows us to deploy the different commercialization model, less labor and also financially less intensive than the supporting previous versions of IQOS. Judging how people react, I'm very positive.

There is definitely a room for the proposition like IQOS in the U.S. market.

Great. And then zooming back out to the group level, you have a powerful margin tailwind from smoke-free growing faster than combustibles. Within that, ZYN growing faster than IQOS. And you've also spoken about PMI being very early in the journey of optimizing the cost structure for IQOS. We've also seen some more normalization in margins for ZYN with, as you said, some of the promotional levels normalizing.

So taking all these moving pieces together, how do you frame the margin improvement potential for PMI over the next few years? And can you really start to get at the IQOS cost efficiencies where you're still really driving growth worldwide?

Well, on the gross margin level, okay, then obviously, where all the economies of scale in terms of manufacturing, et cetera, presence in a number of markets, et cetera, kick in. I mean as a smoke-free products are offering you by a notch even better margins than the figures. And we know that the cigarettes had a very strong margin.

Now there's different drivers of the room for growth both on CC, which is more the combustible cigarette sorry, which is more driven by the pricing and this pricing remains strong and you saw within our results it is a significant contributor to the growth of a combustible from a financial perspective of the combustible category. The smoke-free products, we position them all in the upper parts of the market.

So definitely, we're taking an advantage of the premium underlying rate margins amplified by the fact that you're in the premium part of this market, it's the case of -- IQOS model. So our electronic cigarettes that we discussed. And there is the room to grow because ZYN in the U.S., it has scaled. Yes, it's a tiny category, but already you can play it, you can leverage the scale in terms of the capacity, et cetera. Before electronic cigarettes are coming to the same level and IQOS just continues enjoying its scale.

So net-net, I believe there is a room for a growth of CC, of the combustible cigarette margin. There's definitely the room to grow on the margins on SFP. And when I mean the margins, don't only focus on the gross margin, but also what stays in operating income level. And if you see this year and the past year, despite the fact that there was continuous investments behind the R&D and the commercial support, et cetera, we will still have the room to grow the market. Okay? Sometimes you can accelerate that growth, sometimes it depends on the timing of the event, opening the markets and some marketing initiatives very positive on the margins.

Now we had the period over -- going back to the -- I think the U.S., obviously, we scaled back the marketing, commercial allowance, that promotional support obviously, margins will shoot up higher.

That's not the level which normally the brand should have. But once you normalize, I think there is room for growth of the margin. Pricing is very strong. We're taking pricing on a smoke-free product. And obviously, we're taking the pricing on a combustible as everyone knows, and I believe that's going to stay.

Great. So then with third quarter results, you announced a new organizational structure, 2 business units, U.S. and international. 3 reporting segments, international smoke-free, the combustibles and then the U.S. So what's the rationale behind this? And what do you see as the expected benefit of the new structure?

Well, that's the way as we -- us and as a management and us as the board -- with the board, looking at the business and our conversations about the international U.S. and our conversations are about the smoke-free and CC and we somehow have that structure, which we designed in 2008, right, when we when we left the U.S. at that time, the original structure, frankly speaking, these regions for us, which are reportable segment. We didn't really run the business like this, but it created a lot of work to be done, or if anybody talk with the investors engagement. I don't remember when was the last time I go to my CFO or our CFO got the questions about the specific region. The questions are U.S., Japan, Germany, Italy, this is where the P&L, this is where the business is. And that level of consolidation was not really important to anybody. So we clarify the structure.

Now if you look at the history of Philip Morris International, our longer history, we're essentially coming back to the structure that we -- when we were with the U.S. before 2008. So you remember, you have the Philip Morris USA, Philip Morris International, okay, at the time was a craft and [Miller beer] and a few other units. And you have this corporate type of overlay, which was some central functions, which are providing services to both parts of the business.

So we just wanted to clarify from a governance, et cetera, and the way the management looks perspective, the design because otherwise, we would have to take a U.S. reporting to international, which I also spent quite a lot of time talking with some other companies, which has a similar type of setup. And I believe keeping U.S. and international, some have at the parallel level and letting them -- it is one company, but let them run these businesses is not only more efficient. It's actually more effective.

So in a couple of minutes we have left, maybe we could talk a bit about capital allocation priorities from here. You're well on the way to getting back to your 2x leverage target post Swedish Match and the IQOS U.S. rights acquisitions. Do you foresee any sizable M&A opportunities? Are there any portfolio or capability gaps that would be easier to fill inorganically?

Well, I mean most of our growth is based for the organic growth. Obviously, there was a Swedish Match acquisition, but still in totality of the smoke-free this all came from organic. I mean will it continue? I mean the future will tell. I mean, from a capital notation is, I think the deleveraging of the company post the acquisition of Swedish Match is well on its -- progressing on target with $11.5 billion cash flow target for this year. I think we're coming into the desired level of the leverage, which is 2 points or 2 around the 2 for the next year.

And we have said that at this moment, we'll be looking with the board what to do in a sense. I mean you know our views on the dividend and the last increase of the dividend was a reconfirmation how Philip Morris strongly thinks about the rewarding the shareholders for the dividend, dividend growth.

But obviously, absent other allocations, we'll have conversations with the Board, what are the other potential ways of returning cash to shareholders. This is not the CapEx. When we talk about the investments behind the smoke-free products and continuous growth, double-digit and as in the U.S. but the whole business on a global basis, this is -- we are not running a very CapEx-intensive business. So for us to, from time to time, add extra capacity, you're talking investment in a range of a few hundred -- a couple of hundred, few hundred million dollars. So from a totality of our cash generation capacity of PMI, this is not really that much of a disturbing factor.

Great. Well, in the last few seconds that we have, I just want to wrap up. Are there any parts of the PMI story that you think are sort of misunderstood by investors here?

No. I mean, look, this is all smoke-free products at the very beginning in a sense yes, there is some longer or shorter history and you've asked that the natural desire to like extrapolate for what it is. The reality is that, as I said at the beginning, I have more than 1 billion smokers in the global basis. And in each of the countries, even in Japan, which is well progressed with heat-not-burn, there is still a lot of smokers out there. That's the one thing. So this is -- this supports the continuous strong demand for the smoke-free products.

The second thing is, I believe the worst in terms of conversations around this category, smoke-free products and the nicotine from regulatory type of the risk, I think that this is more behind us than in front of us because the people who are smokers who have adopted these products. I mean they have their own observations. They know that these products did the job for them, tremendous job for them, they managed to quit smoking. There is a more and more mature type of conversations around the nicotine, which I believe it all goes in the right direction.

So actually the last second, it was one of your predecessors, which I remember, David Adelman was [indiscernible]...

Yes [indiscernible]

And sometimes, you have -- the audience have a free time on a weekend or whatever to read. There was an interview with David Adelman from 2005, which I think was titled, Forbes or Fortune, one of those, okay? Title was, Marlboro Man. And the way he predicted what the industry can be, I don't think he should be called analyst. He was closer to fortuneteller. Thank you.

Great. Thanks so much, Jacek. And with that, we'll wrap up here.

Thank you.

Good day, and thank you for standing by. Welcome to the Philip Morris International 2025 Third Quarter Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I'd now like to hand the conference over to your speaker today, James Bushnell, Vice President of Investor Relations. Please go ahead.

Welcome. Thank you for joining us. Earlier today, we issued a press release containing detailed information on our 2025 3rd 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 Exhibit 99.2 to the Form 8-K dated October 21, 2025, 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'm joined today by Emmanuel Babeau, Chief Financial Officer. Over to you, Emmanuel.

Thank you, James, and welcome, everyone. Following an excellent first half, we delivered very strong results in Q3. We are especially pleased with the performance of our global smoke-free business, with outstanding volume growth for all 3 of our flagship brands: IQOS, ZYN and VEEV, which together outgrew the global smoke-free industry by a clear margin on year-to-date IMS.

Continued double-digit smoke-free top line momentum and further scale and cost benefits enable us to achieve more than $3 billion in quarterly smoke-free gross profit for the first time, and an adjusted group operating income margin of over 43%, the highest in almost 4 years. This drove plus 17% growth in adjusted diluted earnings per share to a record $2.24. These impressive results were also delivered in a quarter with elevated commercial spending as we invest in the future growth of our brands.

Our growth investments include geographic expansion and our smoke-free products are now commercialized in 100 markets, including the launch of IQOS in Taiwan this month. We are increasingly deploying our multi-category strategy to enhance growth with all smoke-free brands now commercialized together in 25 markets.

IQOS delivered excellent performance, including a very strong gross margin contribution, with Q3 HTU adjusted in-market sales growth of plus 9% against a high prior year comparison, and plus 15.5% heated tobacco unit shipment growth. This reflects continued strong momentum in Europe, Japan and Global Markets.

The relaunch of ZYN's commercial activities supported a significant Q3 acceleration in U.S. offtake growth to plus 39%, as estimated by Nielsen. Enhanced marketing and promotional intensity supported increased trial among legal age nicotine users, with promising level of repurchase intent. Driven by the strong performance in the fast-growing nicotine pouch category, U.S. shipments grew by plus 37% to 205 million cans, ahead of expectation. International can volumes increased by plus 27% or by over plus 100%, excluding Nordic country.

In e-vapor, strong VEEV momentum saw total shipments more than doubling on a year-to-date basis. VEEV is now the #1 closed pod brand in 8 markets, with notably strong performances in Germany, Romania and Greece. Combustibles delivered a good Q3 with better-than-expected volumes in both Turkey and Egypt, combining with further strong pricing to deliver a robust top and bottom line performance.

Our Q3 performance reflects our position as the global category leader, with the ability to drive strong growth and prioritize resources to invest significantly in our leading brands. The increasing overall profitability of our smoke-free business, coupled with cost efficiency measures and combustible resilience, places us well on track for another year of double-digit adjusted operating income and earnings per share growth in currency-neutral terms, and even stronger dollar growth at prevailing exchange rates.

Turning to the headline financials for Q3. Positive shipment volumes, strong smoke-free category mix and pricing resulted in organic top line growth of plus 5.9% or approximately plus 7.3%, excluding the Indonesia technical impact explained earlier this year, within the high end of our plus 6% to plus 8% midterm growth algorithm. Adjusted OI grew by plus 7.5% organically and plus 12.4% in dollar terms to $4.7 billion, with increasing profitability across smoke-free and combustibles, enabling good adjusted OI margin expansion of plus 120 basis points.

Adjusted diluted EPS of $2.24 reflect adjusted net income of $3.5 billion and growth of plus 17.3%, including a currency tailwind of $0.08, which includes around $0.03 of favorable transactional impact in the quarter. This better-than-expected delivery reflects the strength of our financial model, with both IQOS and ZYN performing at the high end of our expectation, further supported by the resilience of combustible and a more favorable tax rate.

Our progress on a year-to-date basis was outstanding, with comparable growth above our midterm targets on all metrics. Organic net revenue growth of plus 7.5%, or around plus 9%, excluding the Indonesia technical impact, was driven by the same factor as the quarter. Adjusted operating income grew by plus 12.5% organically and close to plus 14% in dollar terms to $12.7 billion, enabling EPS growth of plus 16%, both including and excluding currency impact. Our year-to-date adjusted effective tax rate was 1% lower than our forecast of around 22% rate for the year, with a higher rate expected in Q4.

Turning to shipment volumes, where we again delivered positive growth of plus 0.7% in Q3 or plus 1.8% on a year-to-date basis. Q3 smoke-free volume growth of plus 16.6% was underpinned by the strong fundamentals of IQOS, where HTU shipments grew plus 15.5% to 41 billion units, above our prior expectation even when excluding a shipment timing benefit of around 1 billion units. On a year-to-date basis, HTU shipment grew plus 12%. The excellent volume trajectory of both ZYN and VEEV was again accretive to smoke-free product growth in both Q3 and year-to-date, notably including U.S. ZYN. Cigarette volumes declined by 3.2% in Q3, close to the more favorable end of our 3% to 4% forecast decline for H2, and reflecting better-than-expected dynamics in Turkey and Egypt.

Turning to Q3 net revenues in more detail. Growth of plus 7.3%, excluding the technical Indonesia impact, reflects the strong smoke-free performance described, alongside robust pricing. Total pricing contributed plus 3.1 points, with convertible pricing of over plus 8% and a positive IQOS HTU variance, partly offset by the impact of the relaunch promotion in the U.S. The positive mix impact from smoke-free growth drove a further plus 4.7 points.

Combustible geographic mix and other factors had an unfavorable impact of 1.2 points. Currency and scope effect had a positive impact of plus 3.5 points. The same dynamic drove strong year-to-date top line growth as our 3 pillars of growth: volumes, pricing, and mix continue to deliver sustainably.

Looking at the Q3 performance by category, both smoke-free and combustibles delivered strong gross margin expansion. Q3 smoke-free net revenues grew organically by plus 13.9% and gross profit by plus 14.8%, including the short-term impact of heightened U.S. promotions.

Gross margin expanded by plus 60 basis points to 70% in Q3, exceeding combustible by 3.5 points at the current category and geographic mix. This performance was powered by IQOS, with a combination of strong volumes, pricing scale and cost efficiency outdoing the dilutive impact of higher device sales in the quarter.

While combustible volumes declined by 3%, the business delivered another strong quarter, with organic net revenue growth of plus 1% or around plus 3%, excluding the technical impact in Indonesia, and gross profit growing strongly by plus 4.8%. This performance epitomized the continued resilience of our combustible business model with a combination of low single-digit volume decline, robust pricing and efficiency driving top line and gross profit growth over time. We are well on track to deliver our target of combustible gross margin expansion organically and in dollar terms for the year.

The combination of sustained smoke-free momentum and combustible resilience drove plus 170 basis points of gross margin expansion overall to reach 67.9%, a record quarterly level since the pandemic recovery of 2021.

Our year-to-date performance was outstanding, with the accretive impact of smoke-free growth clearly evident. Smoke-free gross margin expanded by plus 360 basis points, with IQOS, again a significant contributor, in addition to ZYN's superior U.S. margin and a growing contribution from VEEV. Combined with strong combustible performance, we delivered plus 260 basis points of gross margin expansion for total PMI.

Moving down the P&L to OI margin. We delivered a plus 60 basis points of organic expansion in Q3 or plus 120 basis points in dollar terms to reach an excellent 43.1%. This reflects the plus 170 basis point gross margin expansion I just covered, partly offset by elevated SG&A costs as flagged last quarter. This includes a substantial planned commercial investment in international markets beyond the expansion and brand equity of IQOS, ZYN and VEEV. It also includes stepped-up marketing and brand investment behind ZYN in the U.S., following the return to full availability and further investment in our U.S. capabilities to support the future growth of ZYN and IQOS. We anticipate SG&A costs will increase slightly more than underlying net revenue for the year, excluding currency, reflecting this strong reinvestment.

Ongoing cost efficiency in both cost of goods sold and SG&A partially offset increased investments, and we remain well on track to deliver our planned $2 billion cost-saving objective over 2024-2026.

Focusing now on our global smoke-free business, our portfolio is outpacing the industry in the 100 markets where we are present, with over plus 12% estimated IMS volume growth year-to-date compared to less than 10% for the industry. We estimate our volume share of smoke-free product in this market is around 60%, and our year-to-date share of category growth is more than 10 points higher than this. With our portfolio of leading premium brands, our share of smoke-free in value term is notably higher than this 60%.

Our multi-category portfolio is a key strength as we leverage the equity and reach of IQOS to convert more legal age nicotine users. IQOS generated more than $11 billion in net revenue last year, and its 75% plus share of the growing global tobacco category remained stable despite intensifying competition. ZYN, while still small in comparison, is growing notably faster than the category as we benefit from a strong leadership position in the U.S. and rapid progress in international market, supported by a differentiated and long-term oriented portfolio. The same is true in e-vapor, where brand loyalty and repeat purchase for VEEV is accelerating growth.

IQOS delivered a strong Q3, with plus 9% adjusted IMS growth against a strong prior year comparison, resulting in plus 10% growth year-to-date. As flagged last quarter, we expect double-digit growth in H2 and plus 10% to plus 12% growth in adjusted IMS for the year, including an acceleration in the fourth quarter. This is supported by continuous innovation on devices and consumables, including a high focus on brand engagement, with an example being the rollout of the limited edition Seletti device in Japan, followed by other markets as part of our Curious X campaign.

Turning to ZYN. Can shipment grew by plus 36% on a global basis, with a presence now in 47 markets. This includes the Q3 launch in Spain as well as the rollout of small-scale pilot in Japan with ZYN by IQOS building on the strong brand equity and commercial presence of the world's leading smoke-free brand.

In the U.S., can shipment grew by plus 37% with a strong acceleration in offtake, which I will come back to. Outside the U.S., can shipment grew plus 27% or over plus 100% excluding the Nordics, with rapid growth from the U.K., Pakistan, Poland and South Africa.

We continue to enrich our ZYN product offering, including the progressive rollout of lower strength variant as part of our dry-led portfolio, where we observe a substantial increase in repeat purchase for legal aged smokers new to the oral category versus higher strength product.

Moving to e-vapor. This strong momentum continued, with the brand now holding the #1 closed pod position in 8 markets. We delivered excellent Q3 volume growth of plus 91% despite unfavorable regulatory development in Poland. Strong year-to-date volume momentum, including an improved pods-to-kit ratio driven by repeat purchase, drove increasing operating leverage and scale benefit, enhancing profitability.

Reviewing now by geography, Europe is the most developed multicategory region, with markets such as Italy, Greece, Spain and Romania posting excellent growth within all 3 smoke-free categories. IQOS continued its strong growth trajectory in Q3, with adjusted IMS up plus 7.3% against a tougher comparison, notably driven by Italy and supported by innovation on new TEREA variants and LEVIA capsules.

PMI HTU shares of the combined cigarette and HTU industry increased by plus 1.2 points to 10.7%, with key cities such as Munich, Rome and Madrid, all posting very strong growth. We expect a nice acceleration in adjusted IMS growth in Q4. After numerous launches and expansions across the region in the last 1 to 2 years, this excellent early traction continued with share gains across markets, including Poland, Switzerland, Greece and the U.K. Within e-vapor, the consumer shift to close pod continue to underpin growth. These volumes doubled, with the brand now holding the #1 pod position in 7 European markets.

In Japan, IQOS continues to grow very robustly, with Q3 adjusted IMS growth of plus 6%, again, against a strong plus 14% in Q3 last year and plus 7.6% on a year-to-date basis. This primarily reflects the category growth rate, with 12-month segment share stable at around 70%, notwithstanding a very significant step-up in competitive commercial investment and intensity, and as in similar periods in the past, some increased trial of discounted competitor product.

As mentioned last quarter, IQOS delivered truly exceptional growth in 2023 and 2024, especially considering the size of the category is approaching half of total nicotine offtake volume nationally, and more than half in 14 of the top 20 cities. The growth that our business has delivered so far in '25 is essentially in line with the trend in the years prior. Q3 adjusted IQOS HTU share increased 1.8 points year-on-year to reach 31.7% as we continue to innovate on IQOS and plant the first seeds of multi-category deployment, with the introduction of ZYN in select channels and location.

Turning now to the U.S., which made up around 7% of our global net revenues and 9% of our adjusted operating income year-to-date. Q3 ZYN volume performance was remarkable, with an acceleration to plus 39% of the growth according to Nielsen, the fastest growth in the last 5 quarters. As the fastest-growing category in the world's highest value nicotine market, excluding China, we are naturally investing in ZYN and the category's future growth, where the brands continue to hold over 60% share of volume and 2/3 of value.

After posting plus 31% offtake growth across July and August according to Nielsen, our Q3 growth was amplified in September to plus 58% by the reacceleration of marketing and promotional support after several quarters of supplied constraint. With the growth of ZYN now close to that of the industry, ZYN captured the majority of Q3 category growth in both volume and value terms despite a markedly lower average price for the quarter.

Indeed, ZYN was the fastest-growing brand by dollar retail value across all categories in the U.S. convenience channel on both the Q3 and year-to-date basis as measured by Nielsen, with PMI U.S. also the same on a manufacturer level as shown here. This emphasized the strength and power of ZYN franchise with both our retail partners and legal age nicotine users, providing an excellent platform from which to drive further growth.

As mentioned, we recently implemented a strong step-up in overall marketing and brand-building activities to support ZYN's presence at point of sale, brand visibility, brand equity and relative price positioning. In Q3, this had a notable skew to promotions. In the supply constrained first half of 2025, only around 20% of ZYN volumes were sold on promotion according to Nielsen, with competitors closer to 50%.

With our return to full commercial activity, we expect to maintain a higher level of promotion than H1 as we continue to adapt our marketing mix to provide the appropriate level of support for the brand and the growth of the category. We naturally intend to maintain a clear premium positioning for ZYN as the leading premium brand. We also look forward to reporting back on future commercial initiatives, with one example being limited edition variants based on our authorized product range.

As part of our reintensified activities, we also decided to launch a special September promotion to mark ZYN's return to full availability. This offered a free ZYN can for legal edge consumer purchasing other nicotine products in select location, and was designed to target legal aged smoker and other nicotine users to increase awareness and trial. This is in line with ZYN's mission to grow the nicotine pouch category over the coming years, and we are very happy with the result. The vast majority of those accessing the offer were smokers or vapors with improved brand perception and promising level of repurchase intent. This offer accounted for a single-digit percentage of our Q3 shipment.

Essentially, all the promotional cost of activating the special free can offer, including retail incentives, were booked in net revenues in the quarter. This largely explains the lower Americas top line when volumes were growing. With accumulation of relaunch activities, this was an exceptional quarter of investment, with around $100 million of Q3 specific investment and reduced revenues linked to restarting our commercial engine.

The U.S. nicotine pouch category has been growing at more than 40% over the last 18 months, and today represents a high single-digit percentage of the nicotine market by volume. We believe it has the capacity to become one of the largest category in the U.S. over the coming years, where we estimate cigarettes are more than 40% of the market, and e-vapor in the region of 30%.

ZYN is America's #1 smoke-free brand by value with a franchise which is second to none. We are investing to support ZYN's momentum, both within and outside the U.S. We also hope for a positive outcome from FDA's recently announced plan to streamline the review process for nicotine pouches, which should help clarify and level the playing field. As a reminder, the FDA has only authorized 20 nicotine pouch product to date, all of which are under the ZYN brand, and we expect the TPSAC hearing from ZYN's MRTP application in the first quarter of 2026.

Altogether, we expect ZYN will continue to be an important growth driver of PMI net revenue and operating income. While the absence of a full commercial program in the first half of this year drove an exceptional level of U.S. profitability, we expect ZYN to continue delivering best-in-class margins within PMI.

On a more short-term basis, we continue to expect H2 shipment volume growth broadly in line with offtake growth before channel inventory movement. We anticipate a 20 million to 30 million can inventory reduction in the coming months. This impact being effectively delayed from Q3, given strong September promotional activity.

We also continue to await the FDA authorization of IQOS ILUMA, which represent, by far, the most successful product globally in switching cigarette user completely away from smoking. In the meantime, we are continuing with IQOS 3 pilots including the latest location of Jackson, Mississippi as we also await the renewal of our IQOS 3 MRTP, following the TPSAC meeting earlier this month.

Outside of the U.S., Japan and Europe, all 3 of our smoke-free category are delivering dynamic growth, with Q3 shipments up plus 23% to over 12 billion units. This includes continued strong IQOS performance in South Korea, rapid in growth in Pakistan and South Africa and very dynamic multicat growth in Global Travel Retail and Indonesia. We include further IQOS key city offtake shares in the appendix.

Moving to combustibles. Our cigar portfolio continued to demonstrate its resilience, with a strong performance from Marlboro gaining plus 0.4 points to reach a historic high share of 10.9%. International category share declined in the quarter, largely driven by Turkey, following supply chain disruption earlier in the year. However, our share is recovering well sequentially, and was essentially stable year-to-date.

Q3 pricing of plus 8.3% came in better than expected, with contribution from all regions and notably from Indonesia Australia, Turkey and Germany. While this was partially offset by unfavorable geographic mix, we now forecast full year pricing a little above plus 7%, with a slowdown in Q3 as expected due to timing factors. Most importantly, and as covered earlier, our combustible business continues to deliver a very robust contribution, with close to plus 5% year-to-date gross profit growth. This is fully in line with our objective of maximizing value over time and supporting the growth of our smoke-free business.

This brings me to our outlook for the full year. We are on track for a very strong performance with another year of double-digit growth in adjusted operating income and adjusted diluted earnings per share. This starts with shipments where we continue to target total PMI growth of around plus 1%. Our fifth consecutive year of volume growth, including a cigarette decline of around 2% and smoke-free volume growth of plus 12% to plus 14%. Smoke-free shipment growth is more likely to be in the lower half of this range, factoring in the potential inventory adjustment for ZYN I described and expected IQOS HTU shipments of close to 38 billion units in Q4. This Q4 HTU forecast includes modestly lower channel inventory and a reversal of around 2 billion units due to timing impact, with HTU shipment growth thus broadly in line with our plus 10 to plus 12 adjusted IMS growth forecast for 2025 overall.

We continue to forecast organic net revenue growth of plus 6% to plus 8%, driven by positive volumes, smoke-free mix and pricing. Consistent with smoke-free volumes and given the top line impact of U.S. investment, the lower half of this range is also more likely. Excluding the technical impact of Indonesia, our forecast growth would be at or above the high end of our 3-year growth algorithm.

We expect another year of double-digit organic operating income progression, where we now forecast plus 10% to plus 11.5% growth for the year, including the same factor as net revenues. We expect this growth to drive strong adjusted OI margin expansion to land firmly back above 40%. This above algorithm growth in a year of strong investment clearly demonstrate the dynamism of our global growth model.

We are raising our adjusted diluted earnings per share forecast to the mid- to upper end of our previous currency-neutral growth range at plus 12% to plus 13.5%, which translate into plus 13.5% to plus 15.1% in dollar term. This includes an estimated $0.10 currency tailwind, and we would expect a similar sized tailwind for 2026, all at prevailing exchange rates. The 2025 forecast includes an adjusted effective tax rate of around 22% for the year based on the latest assessment of tax dynamic and market mix.

In Q4, we expect a continued strong performance from our smoke-free business, including an acceleration in IQOS adjusted in-market sales growth. In terms of financial performance, as expected, we anticipate a slower quarter given the dynamic I covered on shipments of IQOS and potentially ZYN, the timing of pricing and declining volume in combustible and a higher tax rate. Taking these factors, continued brand investment and comparison effect into account, we forecast a slower quarter of top line growth, single-digit organic OI growth and up to 6% currency-neutral adjusted diluted EPS growth.

In addition, we are upgrading our full year operating cash flow forecast to more than $11.5 billion at prevailing exchange rates and subject to year-end working capital requirements. This reflects strong full year profit delivery and cash conversion and now includes a Q3 dividend payment from our deconsolidated Canadian affiliate.

In terms of our balance sheet, we continue to target further deleveraging in 2025 with Euro-dollar currency movement, of course, having a potential influence on our ultimate year-end leverage ratio given our Euro debt position. Importantly, we remain on track for our target ratio of around 2x net debt to EBITDA by the end of 2026.

Given our strong year-to-date and expected full year performance, we are well on track to exceed our 2024-2026 CAGR targets, which already represent a best-in-class growth profile within consumer packaged goods. With such strong progress already delivered and an exciting growth outlook over the coming years, we look forward with confidence to 2026 and beyond.

In summary, our year-to-date performance reflects the strength and momentum of our global smoke-free business, combined with the resilience of combustible. Our smoke-free business is increasingly profitable, with IQOS and ZYN leading the way. We remain excited about our future growth potential as we continue to deploy our multi-category strategy and invest in our category leading premium brands.

Our financial model is built on strength across all categories, complemented by proactive measures on pricing and cost efficiencies. This drives our confidence in strong and sustainable adjusted diluted EPS growth in both currency neutral and dollar terms.

Our focused capital allocation strategy allows us to not only reinvest at the optimal level to support and elevate our smoke-free portfolio, but also to reward our shareholders. In September, we raised our dividend for the 18th consecutive year to $5.88 per share, with growth of plus 8.9%, the largest increase since 2013, reflecting our strong year-to-date performance and confidence in our outlook. We look forward to further rewarding our shareholders as our transformation continues.

Thank you, and we are now very happy to answer your questions.

[Operator Instructions] Our first question comes from Eric Serotta with Morgan Stanley.

Great. Hoping to start off with ZYN. I believe previously, you said the goal there was to, in the short term, grow in line with the category. I presume that's in volume terms. Could you clarify that? And basically, with sort of the extraordinary promos of September having eased a bit in October, we've seen the scanner data at least week in October, not all that surprising, but maybe a little bit surprising in magnitude. So I guess, how are things tracking in October versus plan?

And then on the IQOS business, could you provide some additional color on the mismatch between HTU shipments and IMS? I know there was a pretty tough comp on the IMS side of close to 15%. But any additional color there would be helpful into what's driving the overshipment in the quarter.

Eric, thank you for your 2 questions. So I'm going to start with ZYN, and thank you, maybe for allowing me to precise or repeat some of what I've been saying.

Yes, of course, ZYN is the arch leader of nicotine pouch in the U.S., more than 60% market share in volume, 2/3 in value. It is our role, it is our mission to grow the category, to develop the category, to create the awareness of the category. And of course, as a leader, we will benefit from that. And as I flagged in my remarks, we see a tremendous potential for the category, which, over the last quarters, have been growing between 30% and 40%. And the dynamism is still there.

So indeed, with our special promotion, and I'm going to come back to this special promotion in a second, we've been further accelerating, I would say, the growth of the category. But the dynamism of the category is absolutely tremendous. And of course, we are very happy as we said, we capture the majority of this growth, both in terms of volume and in terms of value.

I think what we've seen during this Q3, and that's the way I would summarize things is, on one side, a normalization that I'm going to explain. And on the other side, let's be clear. I think we wanted to have a kind of blast effect because we were back with full availability. And when the leader is back in full force, you just want to let it know. And that was a special promotion on the free can.

But first of all, let me comment on back to normal. I think people probably did not fully get it, but during a year of limitation in terms of availability for ZYN, we've been, I would say, flying at the level of profitability that was abnormal because the level of promotion was very low. We flagged the fact that in H1, level of promotion was around 20% on price, when the rest of the category and the standard of the category is more around 50%. It doesn't mean that we're going to go to 50%, but it's just to show the difference.

But if I look at actually Q3 '24, we were with a single-digit percentage of promotion. So almost no promotion. And what has been happening in Q3 is just now that we are back to full availability, we want, of course, to capture our fair share of the growth. We are a premium brand, we're still a premium brand.

But as I think Jacek flagged a few weeks ago, there was a big level of difference because of this low level of promotional activity and the very, I would say, aggressive discount activity from competition. And it was important for us to go to a more normal level of promotional activity, certainly not to close the gap, but just to reduce the gap to a more acceptable level in terms of premium, but remain and will remain a premium brand. So this is what I call normalization that happened in Q3. We are going to a normal promotional activity, which is one, not the only, but one of the element of the mix in order to develop in the future.

And then next to that, there was this blast effect I've been mentioning, which is way back, way back big time. And yes, it's true that we see a mission in ensuring that the category is known, understood, create the awareness, which is still low in many instances. And I think we can say that around 80% of this free can promotion went to smokers and vapers. And we know that the future growth will come notably from converting the smokers, these vapers to nicotine pouch. And we were happy to do that. And we are very, very pleased with feedback we are getting from this promotion.

Now we acknowledge that this is coming at a cost. And I've been flagging in my remarks, the fact that restarting this promotion and all this, I would say, restart of the machine of pushing ZYN at the right level has been costing around $100 million of reduction in sales. And I would say this one, of course, is more exceptional by nature.

So I think really 2 elements. One, we are now in a normal situation when in the past quarters, we were not in a normal situation in terms of net price positioning. And this kind of one-off special, not necessarily repeatable promotion that happened in Q3.

So that's for explaining what happened in Q3. Now you were asking, okay, what has been happening in terms of consumer offtake? So frankly, the first 2 weeks, I think, have been above 30% or a bit below 30% in terms of consumer offtake, we stay with a very strong growth. And actually, if you look at Q3 without the special free can promotion, we were at 3% -- sorry, 30% plus growth. So it seems that we are starting the last quarter on the same strong note as the third quarter in terms of evolution of consumer offtake.

Your second question was on IQOS and the difference between shipment and IMS. So yes, at the end of September, we are north of 12%, in fact, in terms of HTU shipment growth, so IQOS consumables shipment growth when we are much closer to 10% in terms of IMS growth. So we expect an acceleration of IMS growth in Q4.

But nevertheless, in Q4, we are also expecting to align clearly shipment and IMS. And even -- I'm not excluding the possibility to have -- as you know, we manage inventory level here and there to have shipment a bit below IMS for the year. So that's what is going to happen in Q4. And of course, that is having an impact on the financial performance in Q4, but we are very pleased with the IQOS performance in terms of IMS, which is really the long-term driver and many markets where the brand is doing superbly well. Thank you.

Our next question comes from Matt Smith with Stifel.

I wanted to follow up on your commentary regarding the U.S. ZYN business and better understand the comments in the release about expecting ZYN to maintain best-in-class or best in group margin structure relative to the performance we saw here in the third quarter. When you think about the $100 million of investment that took place in the quarter, is that a sustained level of investment or I should say, a normalized level of investment that you face a tough comparison against until this time next year? Or are there other considerations we should take into account?

Sure, Matt. Let me clarify again. The $100 million is a one-off, okay? So this is all the cost of this special promotion on one side and relaunching the machine. So this is a one-off and nonrepeatable, so that's one element. And then the other element, as I said, is the fact that with a new level of promotion activity that's going to be a normal one. Again, I'm not saying we're going to go to the rest of the category and the competition that is extremely aggressive, but we will have a significantly higher level of promotional activity versus as I said, 20% in H1 and single digit in Q3 '24. And this is what you should expect in the future. But taking that into account, I'm happy to repeat that we expect ZYN in this new normal or in this normal, I would say, situation to remain very nicely the best-in-class margin in the group.

And you talked about the single-digit operating profit growth on an underlying basis in the fourth quarter. Can you provide a little bit more detail behind the drivers behind that? How much of it is related to inventory related timing for IQOS and ZYN versus investment levels remaining high in the U.S. or other considerations?

Sure, Matt. I mean the message, if I was to simplify it is the momentum for the business is going to continue in Q4. So in terms of smoke-free portfolio, we expect even IQOS to accelerate. We expect ZYN to continue to grow very fast. Of course, we expect a good performance in the U.S., but it goes beyond the U.S., and we also expect VEEV to continue to grow very nicely.

So in terms of underlying consumer of their growth, everything is the same. All the elements in terms of margin are exactly the same, and that there is nothing changed. So this is really what is going to impact the number and the reason why Q4 is going to be lower than the first 9 months that, of course, are impressive in terms of growth. I would say at all levels in terms of operating income and adjusted EPS growth is really this move on inventory. Nothing has changed in the momentum.

When it comes to combustible, I know it's still 50% plus of the group. We expect to be, again, between 3% to 4% decline in volume. So nothing has changed in our vision of H2. Was going to be a bit less favorable is price increase because indeed, we expect, due to phasing of pricing and so on, a lower Q4. So that's going to impact the quarter. So I'm not saying it's going to be huge because we still have nice price increase expected in Q4, but that would be a bit less favorable than the first 9 months. Then below that, expect us to continue to invest at a significant pace behind our portfolio. The growth -- the potential of growth is outstanding, we want to maximize, of course, it's coming with investments.

And then I also flagged in my remarks that the tax rate will be significantly higher to [ lend ] us around 20%, which is our vision today. So that's going to be significantly higher in Q4 than for the first 9 months to lend us on the 22%. And that is also a negative impact for the Q4. But to be clear, we're not expecting a change of momentum in the business. You have all this technical impact I've just been describing.

Our next question comes from Bonnie Herzog with Goldman Sachs.

All right. Emmanuel, I wanted to ask on guidance. You touched on this, but I guess I wanted to clarify a few things. The stepped up investments in the U.S., is this all ZYN related? Or are you also accelerating spend behind IQOS or the full planned rollout of ILUMA? And is this, in any way, a pull forward from next year? Or should we expect continued stepped-up spending in the U.S. next year as well?

And then as it relates to guidance, I guess, I also want to understand the drivers behind your full year dollar EPS growth guidance raise despite the lower operating income growth guidance. What are the drivers below the line? And I think I know, but how did those factors change since the beginning of the year?

Sure, Bonnie. So on the U.S. step-up of investment, I mean, U.S. is a growth market for us. Thank you for giving me the opportunity to repeat that.

In the U.S., we are in a unique opportunity. This is a market where we are smoke-free, basically. We have today, the leading brand of the most dynamic category. And hopefully, we are getting close to be able to launch IQOS ILUMA, that is an incredibly successful product, everywhere in the world. And we are convinced that it will be very appealing for the still close to 30 million smokers in this market. So this is a market that is incredibly attractive and where we see a lot of growth in the future.

And of course, in line with the potential that we see for this market, we are investing significantly in the country. We are, of course, supporting the ZYN potential and the ZYN growth. We continue to build the team to be at the right level to promote and develop this very exciting portfolio. That is clearly, you're right, impacting 2025, but that is also certainly something we will continue in the future. So it's not that the investments are stopping in '25. That will, of course, in all dimension, commercial presence, marketing investment, but of course, also presence in the country when it comes to capacity to work at the state level with the right people. These are investments that we are making gradually. And we are indeed continuing to invest behind IQOS to prepare the launch in the future. So all that is absolutely playing in the U.S. and impacting the U.S.

On the full year guidance, so yes, obviously, everybody understands if you take the $100 million and the [indiscernible], which is really the new element of this Q3 and the revision of the guidance, everybody understand where the revision of the guidance is coming. Can I just nevertheless say that there is still a possibility that we finish above 11%, which was the previous guidance. So we'll see how Q4 unfold. And we are raising EPS because let's be clear, we continue, nevertheless, we expect a very strong growth of OI. And we are also having some, as we explained, slightly positive or better views on the tax rate.

And I should probably add that interest costs are not evolving in an unfavorable manner, but rather in a favorable manner. So we could be a bit better than what we thought initially. But fundamentally, let's be clear, the EPS growth, the strong double digit, that is coming from the OI growth, okay? That is a powerful engine that we have, and that is powering very [ nicely ] the company. Well, an icing on the cake on top of that, indeed, tax seems to be evolving in the right direction.

Okay. That's helpful. And maybe a quick follow-up question on the free can promo in ZYN. Emmanuel, you touched on it, you said it was a success. Did it actually bring in new consumers to the brand? And if so, I mean, can you give us a sense of what percentage of the free can promo resulted in new consumers to the brand? And then I am curious to hear why you chose to run the promo the way you did versus a BOGO. I guess I'm asking because did -- it results in some of the competitive brands seeing some volume left given your promo, the way it was run.

Look, I'm not going to discuss how relevant is our commercial policy. And I think we're showing a lot, frankly, versus that remark, I was having the other day as investors was reading what others are saying about what they do, I think we are sharing a lot.

So on the positive, it is -- clearly, we will need some time to have probably the full impact. But clearly, in terms of creating the awareness of the category and of the ZYN brand, the understanding, first testing, we have some feedback. And remember, we stopped the promotion many weeks ago, that are extremely positive. And clearly, we are building new customer for ZYN. I'm not able to get at that stage maybe, [indiscernible] there are positive impacts.

On the BOGO versus what we've been doing, we could have a discussion, but let's be back to what was here, the objective of this free can objective. That was really -- let's make a big splash, let's create the blast. We want people to have a first, I would say, connection with this category. When you do a buy one, get one free, I mean you are applying to your consumer, you're not recruiting, you're not creating awareness for new possible customers.

I said, but I'm really happy to repeat the potential of the nicotine pouch category is enormous. The category is growing very fast. That is a category that has a potential to be one day, as big as vaping, why not as big as combustible. As a leader, it is our role, it is our mission to make it in known, to make it understood and to contribute to the growth of the category.

Are we contributing to other because they're also selling nicotine pouch when we go to the nicotine pouch category? Yes, probably. But as the [indiscernible] leader of the category, we are the first beneficial of this promotion. Again, I'm not saying we're going to repeat it every quarter. I'm sure you understood that. It was a kind of exceptional moment, but I think we are very pleased with the results.

[Operator Instructions] Our next question comes from Faham Baig with UBS.

The first one from me will start from heated tobacco, and you called out some intensifying competitive activity. I presume you're referring to the 2 product launches in Japan over the past couple of months that are being supported by heavy promotional activity. I guess the question is, historically, these competitor launches have had a limited impact on IQOS' performance. Do you think it will be similar this time, and that IQOS can maintain its high single-digit growth in Japan?

Thank you for the question, Faham. Look, this is not the first time that we see competition, of course, trying things and coming with innovation and more investment. But I think I have to acknowledge that this time, it's probably in some areas, taking even more intensity, which, frankly, and that will be my first comment, we are happy to see because we've been during a long period of time, the only one in the industry giving the feeling that we saw that it [ not burn ] was a fantastic category innovation for smokers, with the capacity really to convert smokers and become a big part of the market amongst smoke-free products. And really probably the best solution to convert smokers.

So it seems that a growing number of players are getting there. They are improving their product. They work on innovation. We always thought that it's a normal development in a category, competition would improve and increase their investment. This is happening.

But at the same time, it's interesting to see that we are, in Japan, like in other countries, I mean, we remain extremely stable in terms of overall share of this category. We are north of 75%, and we have been there for the last 5, 6 years, which is quite incredible because when you have a new segment, innovation, normally the leader, stay the leader for a long period of time at a high level, but normally losing a bit of share as there is other offering and also because a lot of this offering is coming at a discounted price and trying to fish at a low price positioning. Well, we're very stable.

And actually, Japan is making no exception. You see, and I think we've been showing the data. We are very, very stable in terms of share of the category, which obviously is a tribute to the strength of IQOS to the quality of what we offer, which I believe is a unique experience for the consumer. And therefore, I don't want to be complacent, but we certainly believe that we have the capacity to continue to be a strong leader and maintaining very strong leadership in Japan and in other markets. So there is certainly, for us, the vision that Japan will continue to be a market where we can grow very nicely. I'm not going to give a guidance now for '26, but we, certainly Japan as a growth market for the future.

And I just want to conclude my comment again saying it's really good to see that the industry seems to be putting much more resources behind smoke-free globally. And it [indiscernible] in particular. And again, as a leader of this category, we think it's very good news for us.

And our last question comes from Damian McNeela with Deutsche Numis.

Just 2 quick ones from me, please. Just what degree of visibility do you have on the inventory adjustment that you're expecting in Q4? What's the confidence behind that, is the first question.

And then the second question is, what do you see is the sort of a long-term sustainable price premium for ZYN in the U.S., please?

Thank you for your question, Damian. First on inventory adjustments. So again, on -- I guess your question was both on IQOS and on ZYN. On IQOS, as I said, we are expecting to align our shipments broadly with our in-market sales. We expect acceleration in in-market sales in Q4. We are close to 10%, a bit above at the end of September. So that will drive the level of adjustment. Plus, as I said, the fact that notably in Japan and depending on the situation on logistics and how things evolve, but we may want to reduce a bit more the level of inventory. I'm not saying it's going to be very material, but that means that we could have shipment even slightly below adjusted in-market sales for the year, we'll see. And in my remarks, I said that we expect around 2 billion [ stick ] adjustment for Q4. So that's for IQOS.

When it comes to ZYN, we flagged the fact that in this market coming back to normal, there was a higher level than normal of inventory at the level of wholesaler and distributor notably that we probably expect to adjust in the coming months, 20 million to 30 million can. We were actually expecting that to happen at the end of September. But given the fact that we were in high promotional activities, this did not happen. So I would tend to believe that this is going to happen in Q4, but what happened in September is pushing me to be a bit more cautious on the certainty that this adjustment that will happen ultimately is going, with 100% certain to take place in Q4. But that would be, nevertheless, my expectation.

On the ZYN premium level, I mean, of course, I mean, that's something very sensitive. You don't expect me to give a number. But I think today's growth of ZYN and the price positioning of ZYN is certainly confirming that ZYN deserve and justify given the franchise, the strength of the brand, the emotional connection with the U.S. consumer that is unique, deserves a very nice premium, and we intend to keep a very nice premium in the future. Of course, I won't elaborate on what it is precisely.

And we do have a follow-up from Faham Baig with UBS.

Sorry, Emmanuel, I did have one more question. I do appreciate the operator, bringing me back in. My second question was on the potential launch of ZYN [ ultra ] in the U.S. So as you sort of highlighted in your remarks, the FDA confirmed plans to more efficiently review nicotine pouch applications. My question would be, when do you expect this process to potentially conclude? Or could you consider launching the product ahead of an approval? It seems like some of your peers are. And I just wanted to confirm that this product that is going to be launched, and [ ultra ] corresponds to the 2021 application covering the 6-milligram and 9-milligram strengths and the 10 flavors.

Well, I'm not going to speculate. I think that FDA has been communicating on their program to accelerate and give clarity on some of applications that it could accelerate. So I'm not going to speculate on what's going to happen. But certainly, we are hoping for the FDA to create a level playing field and ensure that all competitors can come with their product and not be at a disadvantage because some would be on the market and other will not be allowed. So that's something that we hope to happen as soon as possible and, of course, in the coming months.

We are monitoring the situation. We see what other competitors are doing we are considering all options. But at that stage, I don't have anything else to add. Again, for us, expectation of the FDA creating a level playing field is really our ask and our priority. I don't think we ever comment on the characteristics of the ZYN [ ultra ] PMTA. But certainly, these are products that would come with some differentiation versus the ZYN [ dry ] that today enjoy already a PMTA.

This concludes the question-and-answer session. I would now like to turn it back to management for closing remarks.

Thank you very much. That concludes our call today. Thank you for joining us. And if you have any follow-up questions, please contact the Investor Relations team. Thank you again, and have a great day.

Thank you. Speak to you soon.

This concludes today's conference call. Thank you for participating. You may now disconnect.

Good morning, everyone. Thank you for being here. I'm Gaurav Jain, Barclays Head of Global Tobacco. I'm thrilled to have Jacek Olczak here with me, CEO of Philip Morris. Thank you, Jacek, for giving us the opportunity to host you.

Good morning.

We will start with a few comments from Jacek, and then we will move over to Q&A.

Yes. I will not take much of the time because Gaurav has the long list of questions here. So we may need to have a day to go through all. But just a quick one, as always, the forward-looking cautionary statement, you are supposed to read and get familiar with those. We -- earlier today, we issued a press release reaffirming the guidance. So we will -- we're shooting at the closing of the year and 13% to 15% growth on EPS level. I think just as a retrospect because we are in this smoke-free transformation for more than 10 years with the results, which I guess most of you are well familiar with. This is our strongest growth since 2011 when obviously, you take out the post-pandemic COVID recovery.

There is a strong [indiscernible] continue. I mean we're shooting into the figure on the positive volumes for the total business. And this is despite, obviously, that we're putting ourselves a combustible business under pressure by pushing and being focused on a smoke-free product. It's a matter however, this is a heat-not-burn pouches, so they vape. But this yields the results. I think in the tobacco and nicotine industry, having 5 years in a row of the continuous positive volumes, obviously, that's to the quality of the revenue as the strong pricing very much on the combustible cigarettes continue, and we're looking into another year of strong prices -- strong pricing.

And it is also supported by the relatively good tax or fiscal environment, and we don't have any disruptive tax increases and outlook. Even this day, somebody can talk about an outlook, but seems that -- there is nothing as a significant headwind at all coming there. So this obviously gives this quality of revenue in this industry and for us very much where you have a volume mix which is coming from the product. You know very well that the smoke-free products are much more accretive both on the top line, but very much on the gross margin level and at the bottom line. And obviously, our recent reentry to the -- or come back to the U.S., obviously multiply the margin profile and -- the unit revenue and the margin profile. So this is how we aim at closing the year.

Just from the last update, which we gave at the second quarter earnings release, we continue to see a strong IQOS growth, very good international volume growth and the geographical expansion. I think ZYN is already in 47 markets. So we're adding a few markets per month per quarter. Obviously, the category is still very small, but we all know that it has a great prospect, and we're very pleased that our entry into electronic cigarettes, and this is the third year and we're going to the e-vape product is still yielding the right results. We have mentioned in the Q2 that we might have some issues around the combustibles, mainly we quoted 2 geographies, Turkey and Egypt. And the way I think with -- so far, we're going for the Q3, I think we will be, as is written here, better than expected. So with all things together, we may actually come with a stronger total PMI volumes that we have highlighted at the end of the Q2.

ZYN. So obviously, all eyes and the attention is on the ZYN in the U.S. as is obviously, in Philip Morris. There are 2 dynamics which we observed there. One is something which is not really very much strategic, but we just have to go through this whole thing, which is to normalize the inventory levels post the very long period of the out of stock and the limitations on the supply driven by our undercapacity. You know very well, capacity now is in the right shape. We have a ton of room to grow. But I guess the inventory at the trade level will somehow have to normalize, and I expect that we expect that somewhere in the Q3, the final is going to be behind us.

Now inventories obviously are the result of what is happening on the back end in defense what is in offtake. So obviously very closely happening the market situations at the retail level and what I can say, and I think it was even in my quote -- we put it in my quote on the press release. I mean, we do observe intensified level of competition when we talk about the ZYN U.S. I can talk later on about other places where the competition is intensified. And this resulted that somewhere when we've been at the end of addressing out of stock and start shipping more products to the market, the price gap between ZYN and the second or the third competitor in the market has opened to the very high level because we're talking today about the price situations when the ZYN is 65-plus percent on a per pouch basis, higher price than the next competitor. So you can read it.

So obviously, our reaction is that now having a full supply of the market, we're giving up the marketing and the promotional support to put ZYN on the track of growth, which would meet our ambitions, our expectations. But there is another way, if you want to look into this whole thing that the ZYN has survived the last 2 or so quarters with this intensive competition opening that price premium. This actually, from my perspective, tells quite a lot how strong ZYN as the brand is because if I use the parallel to the premium propositions, which we have on the cigarette category by Star, Marlboro, which is a great blend globally, not ours, but it's a great brand in the U.S.

I mean, Marlboro would not be available to attain such a price premium versus the key competitors as we have with the ZYN. And by the way, we have IQOS and International. So it tells me that we're doing an excellent job, a very good job in a brand building because that's the brand which gives you this pricing power, price premium. However, some of these price gaps have to be addressed, which we're doing as we speak in Q3. I mean, the rest, I mentioned. I talked about the pricing. The smoke-free, obviously, for the mix contributes positively further enhance the margin profile. There will be margin expansion this year.

So I think a couple -- some time ago, we had a bit of a hiccup with the margins. And I know there was a point of attention by some of investors, but I think these things are behind us. Needless to say, but that's somehow a common thing in this industry. There is a good cash conversion, cash flow generation which obviously helps a lot because this creates the platform for a continuous investment for the product development and a lot is still needed, but also generates a good platform for the investors, for the shareholders' returns. There are a couple of other things which happen. You know that we still have a few markets when the smoke-free products in total or heat-not-burn category are banned. We had a couple of good developments.

Finally, Taiwan is opening the market to heat-not-burn. There was Malta in Europe and a few other geographies. So it's like every quarter, despite the fact that some regulators are not really following the science and the logic, if you like, but they're finally getting on our side and opening the market. So this is net positive. It presumably will wait more '26 than '25. But every time when we achieve another milestone is important to us. So that's from me. We can go to your Q&A.

Sure. Thank you so much, Jacek. And let's just get into some of the details on ZYN because that clearly is a big question in investors' minds. So 2H '24, PMI shipped, if I remember correctly, 314 million cans of ZYN. And assuming that shipment was the same as sell-through in 2H '24, then essentially what you are suggesting is that whatever our assumptions are on sell-through growth rate for 2H '25, we should apply it on 314 million, and we will come to the 2H '25 shipment number. Is that the right way to think?

Yes, it is with the difference that -- sorry, with one comment that this is the assumption, right? So things may summer this year, and I think in Q3, we'll have to clean up and now everyone guesses that we have excess of 1 or maybe 2 weeks of inventory. So if you take this and now calculate the total annual shipments or sell-through, you're talking 20 million, 30 million, maybe 35 sort of million cans. This is not that much of [indiscernible]. This is assuming that the trade here would target, say, about 3 to 4 weeks of inventories. Now different trades has different policies on the working capital, et cetera.

But this we know that we are a little bit still on the high end in the earlier situations, we should clean it up. The more important is how much the marketing and promotional activity will now give the boost to the brand at the retail offtake level because this is the more important question because the inventory is a washout, okay, Q3 for the remaining months of the year. But you little can do about this next year, right? It's a retail trend, which is going to flow to the next year, and this is what's going to translate to our financials.

Right. And you mentioned that ZYN is at a price premium of 65% and ZYN on a per pouch basis?

On a per pouch. You remember ZYN, we're selling ZYN at the cans of 15 pouches per can, the market is under 20. So when you see the prices at the retail, obviously, premium on a per can basis, but the premium per pouch basis is even higher. And there is -- my reading, our reading of the situation is that coverage of the intensity of the promotional activity by competitors is about 60% -- 50%, close to 60% of the volume is covered by the different sort of promotions. When we started Q3, ZYN was at a much, much lower level, right? So now we're gearing this up to start matching what is the market situation. But as I said, ZYN has had a great growth rate from the Q1, Q2, which also tells me that there is much more into -- behind ZYN which can withstand such a challenging pricing environment. But it is what it is. We just have to go and fight for our presence and for our share, nobody said that our return to U.S. will be walking apart.

Is there a price premium in mind that you have, which is...

No. Well, then I would start disclosing the things which I don't think I should even if you torture me. So I will not go into this territory. But definitely, ZYN is the premium as is IQOS, et cetera, but in other places, right? But I mean, the 65% is on an extremely high end, okay, it is also realistic. We also have to take that the more people go into -- more smokers, adult smokers or consumers go into the category. Obviously, if people are acting -- are looking at the value equations into the whole things, I guess, and the product has some limits in terms of relative pricing, which you need to take into consideration. But we -- I know there is a lot of interest. There's a lot of, obviously, focus and attention at PMI.

But I just want to remind everyone that all smoke-free is extremely exciting and oral, which is oral category, especially pouches, right, nicotine pouches are extremely exciting because this is like a new thing on the block. But U.S., which is the most developed nicotine pouch market, I mean, the total nicotine pouches market in the U.S., it's say, 6%, maybe 7%, depends what statistics you start using. I think a big question is what is happening to the 94% of the market, okay? Plus/minus less than 0.5% is cigarette. There is still a lot of other smoke-free products in the market. And if you remember from one of our presentations before, we said from a data we had on ZYN and is taking from oral, the classical oral, which is relatively logical and obvious, but it's taking from a vape, it's taking from a cigarette.

So I'm trying -- also at PMI, obviously, you need to focus on what you have with the 6% category today. But the big question is, can category be 12%, 24% or 48% because that's the prospect. I think direction which this category is showing that people consider oral vis-a-vis inhalables, including combustibles inhalables, is extremely highly encouraged. I mean, we have a few markets in international. I'm not talking Nordics, which was the whole tradition, which also have a very promising, exciting development. But if I take the U.K., which is presumably in Europe other than Nordics, Sweden, the most developed market, I mean, the barrel has been scratched up to, I don't know, 1.5% of the total market.

But if we see now the insights from the consumers, the level of attractions, the growing awareness, trial and so on, I think more exciting is what is left, what is not still in the category, what is in the category. I understand you need to build your base and hold you -- build your positions from what you have today. But I think the smoke-free in general is the phenomenal opportunity which happened in front of this industry. And you can put, obviously, Philip Morris as the leader into this whole thing. But I think the industry is on the path for growth as long as you really start following the consumer, which is a smoke-free product and also understand one thing that the products that we have today, whether IQOS heat-not-burn or e-vape, which has its own problems, challenges or pouches, 5, 10 years from now may look completely different.

But the common denominator is people want to continue to inhale the products, but with a different risk profile and the adults wants to enjoy the oral nicotine. And whether this is a pouch or anything else, this is the territory in which you play. There will be a lot of innovations. And remember, when we started IQOS 10 or whatever years, 11 years ago, how many innovations we had to roll through the IQOS, and this is just 10 years. And I always was saying that if I compare it to the innovation level, which you used to have on a cigarette when in the span of 60 years of the industry, you had 2.5 innovations, flip-top box pack and the filter, which you see the innovations which are going into this category, which, by the way, triggers materially important response from the consumer level is a phenomenal opportunity.

Now ZYN is a product which was created, you could argue before August 8, 2016, which was the deeming date while your competitors like BAT's Velo Plus, it's a product which has been recently created because it's a synthetic nicotine product. And Altria just announced 2 weeks ago that they will launch on! PLUS even though they don't have a PMTA. So your competition is launching -- one would argue the latest flavors, the latest products, while you are waiting still for the PMTA for ZYN Ultra, which nobody knows when it will come. So how do you navigate this competitive dynamic? And do you think you would want to follow Altria and launch ZYN Ultra?

There are all options on the table for these reasons, I will not talk about [ELYSEE] and which configurations will launch. I mean behind the ZYN, we had quite a number of pending PMTAs on the moist, on the dry different nicotine strengths and the flavors. And they are -- I mean, the most important or critical strategic post any date when the FDA issued in the normal course of the business rule on these things, but I will not comment whether we will wait for FDA or what I'm just reading following the footsteps of one of our competitors. I just think that this is another example to demonstrate how attractive this category is to anybody and how rational the market may go at this stage because, look, I think Philip Morris did a phenomenal job in a smoke-free when we opened the concept of harm reductions and smoke-free.

We demonstrated and we continue to have a leadership in a heat-not-burn. E-vape has its own thing. Oral nicotine pouches is the third category, smallest, very dynamic partially because it is also smallest. And I don't think anybody can afford not trying at least to win in this category. So the level of competition will be there. But again, I think as ZYN has the first-mover advantage, I think as ZYN is the brand, we talk about the price and a few other aspects as is IQOS. It's a long term -- it's a long battle, but I think we're very well equipped to go for this battle. I'm not talking about the e-vape because there's a little bit more of the complicated situations, but I do believe that the demand for the e-vape is well grounded and will stay.

The market will have to go and clean up a lot of things, illicit regulatory. There's a lot of misperceptions. I think 5 years from now, the situations will look different. The important thing is that cigarette smokers, adult cigarette smokers, there is a myth that they will migrate to the one category or the one product emanation. This monochromatic type of a category, which was one cigarette and [indiscernible] cigarette looked the same, branding was differentiating, now will be split into what we have today in the marketplace, which is heat-not burn e-vape and oral. There will be more innovations. There might be other ways of delivering the nicotine. It's all open and consumers will go and navigate into this one. And hence, we have been for the last some time talking that it is not just betting on one category.

Actually, I think very smart is to play what we call the multi-category, and you need to have that presence. Because if you start taking -- first the game, I don't think the consumer will just jump to one. There always will be segment, very sizable segment. For heat-not-burn, there will be a sizable segment for e-vape and will have to be -- and there will be [indiscernible] in some places about to be a sizable segment for the pouches. And that's going to stay. And now obviously, if you operate at scale, it's one of the building block to your margin profile because obviously, the scale gives you the better view from a cost perspective. But also you have a lot of synergies because at the end of the day, you're talking to the same consumer. Your target audience is the same. It's a smoker. So you have synergies middleway through the P&L, but actually you have a lot of synergies at the top level.

Sure. Now moving on to IQOS. And I think investors have focused a lot on ZYN in the last 2 years and also cigarettes, while IQOS clearly had a flavor ban in Europe, which decelerated the growth rate and also Taiwan, which people were expecting would have come probably a year ago, hasn't come in yet. Now IQOS is adding about 15 billion sticks per annum for the last 2 years, and that is your guidance for this year as well. But if we say that the flavor ban in Europe is now largely through except for maybe Poland, one of the large markets and Taiwan comes in at some point of time, I don't know which month or year if you want to put when it will come, then does that suggest that FY '26 volume growth for IQOS could accelerate from this 15 billion per stick?

Yes. I mean, from the flavor ban in Europe, I recall it's still about 6 markets to go. The most sizable is Poland. You might have some -- again, some transitory type of headwind. But as you could see what is happening as we speak in Italy and other places, which went for the flavor ban. Over a period of time, there is a wash in this whole thing. So the consumer is adjusting and IQOS is going back to its past growth trajectory. I mean, 15 billion without going into any guidance for '26, right? This is still too early. I think 50 billion is a nice number throughout the geographies of everything, which will be open.

Right. And any date on Taiwan, like when will they start?

As we speak about it.

Okay. Also, there is a big topic around EU Tobacco Excise Directive and what they are saying on different product categories. So would you be willing to share more details on what the EU is saying and how it could impact?

Yes. So they are -- I guess the audience is familiar with the process of adopting excise tax directive, so essentially, all member states have to agree, which, as you can imagine, in the current political type of environment and not only to have more than 5 people to agree on something, it's getting challenging. I think more than 20 states, which will have to go and agree and everyone has its own interest. Remember that smoke-free products also well invested in certain points of Europe. So member states have reduced. The good thing is there is a recognition of a smoke-free product with regards to the tax differentiation. How that thing is going to settle remains to be seen, but the starting point is very good.

I think EU is coming with this absolute notion of increasing the total burden of the taxation on cigarettes and then obviously, it's going to travel through all our products. And that creates a lot of tensions and the discomfort between different member states. So we'll see how that's going to unfold. The good thing is also that they recognize or they plan to recognize for tax purposes nicotine pouches. Remember, the status of the nicotine pouches in Europe has to be more solidly reflected in the regulations legislation. So I think it's a good part. So net-net, it is positive. But until we have the final drafts and see different concessions, different member states will put on the table how it's going to unfold, we'll have to see.

Another good thing in the draft of the commission proposal is the derogations period. And you're really talking not something which has an impact now or '26 '27, actually the derogation period depends on the category. They're talking about 2030 or 2032. So it also gives you a lot of time to adjust, to prepare, et cetera. So this will not be -- I don't think -- at this stage, I don't think it looks like anything which is creating a major disruption, which will change, for example, the trajectory important to us, which is a smoke-free support -- smoke-free product support from a fiscal perspective.

Sure. On the IQOS launch in U.S., we haven't -- you're clearly awaiting the CMTA?

Yes. So that's a bit of a -- we had the expectations that with the new administrations and FDA definitely more open for conversations than the previous administration, I have to admit. But still the output outcomes, I should say, I mean, is not there. I mean, obviously, with the remaining period of this year, it's becoming highly unlikely, but we're also living in the times when the things tend to happen very fast. I believe that this is presumably more '26 event than a '25 event. But we have already told on the ILUMA, and we still think that our strategy of don't go to U.S. with your second technology and technology, which, by the way, we already retired except one country, we better go with the current technology. So then again, you have economies of scales and all the other attributes, which really is the key to tap it.

Sure. Now moving to the cigarette business, which is still 60% of the company, and it has done pretty well. Over the last few years, volumes have been pretty strong, including in 1H and there seems like the markets you mentioned, Turkey and Egypt, which are high volume but low-end value markets, we're seeing some volume step down which now it seems that it is running better...

Yes. But those markets are very important to us because I think eventually -- well, Egypt already is going smoke-free in a sense, the regulations allowed. So we're also interested that the cigarette market is in the sort of a stability because this is our base to build a smoke-free business of converting smokers there. The margin is always the factor of time. If I look at the history even of the cigarette market in the past, we always start somewhere low and this margin always tends to increase, improve, et cetera. So I'm less of the world. Turkey is a very important market size-wise, number of consumers, number of smokers. And I think a venture, which has banned today on a smoke-free product, but I think that's going to be resolved. So that's the reason why we're also paying attention to some of the important big pockets on a smoke-free CC combustible market because they are the base also for the future growth for smoke-free.

Sure. Now just one specific question on Japan, which is one of your biggest country. Now if I remember correctly, when you guide, and whenever you set your FY '26 guidance in Feb, you never assume pricing in Japan because the market pricing in Japan, it follows a very strange pattern depending on excise tax hikes. But Japan will increase excise tax on cigarettes next year in October. And the last time they increased it was in 2021. So you almost have had 5 years of no pricing in Japan. So how should one think about pricing in Japan next year because clearly...

Well, there will be -- I have to be very careful talking about the future pricing. But yes, in this scenario of the excise adjustments and there are a few steps when the excise will be moved initially for a smoke-free, which is heat-not-burn only in Japan, but also for a combustible. So I mean, it's fair to assume that it will result in the price changes in the market. So you will have a pricing. There is -- I mentioned Japan is one of these markets I had in mind when I talk about the intensified competition, okay? This is different, okay? So U.S. is ZYN and Japan is heat-not-burn. And -- but again, I mean, IQOS pulls it through and still is doing very well, but the level of competition is very high.

Sure. Now just coming to some of the financial numbers and leverage. So the target that you have said is you will start share repurchases when leverage is below 2x or would you take advantage if you have a line of sight to leverage?

No, I think our communication was that -- well, we have to have -- or be confident that we are on the trajectory to get to the moment when we see that this is about to happen, then obviously, it creates the space for us for the Board to start talking, does this deserve -- can we consider or should we consider what's our approach to dividend, what's our approach to a buyback. I mean, it's pretty obvious. I think so far, I mean, with these numbers, because remember, it's another thing which has happened or is happening maybe not to the level as one would expect it, but definitely supports the financial is the currency, which unlike in many, many years in the past, currency starts playing into our hands. So in this guidance, we have $0.10 positive currency.

So I think that knowing where is the dollar going, et cetera, there will be support from a currency, which further reinforces our trajectory on the deleveraging because remember, in the past, part of the problem with our leverage was created by the fact that the dollar cash flows were eroded by the fact that the dollar was on a stronger side. Now we have a reverse of the trend. The underlying business is doing very well. But in addition, you have this extra, okay, tailwind, if you like, coming from the currency. So this further reinforces the case. But I think it's more '27, it's not '25, it's a '26 type of conversations we have.

Sure. And on M&A, so you clearly did a big acquisition with Swedish Match a few years ago. Is there anything in your product portfolio where you feel that there is a gap and you might need to do M&A to fill that product gap?

No. I think we have quite a strong capability, which we have developed over time. Obviously, capability on the product development. And I think we're still on the very much very, very strong front foot when it comes to heat-not-burn. Obviously, the competition is trying to get something, but I think we're pretty strong, and there is a pipeline of this whole thing. Okay. Then I know there is these conversations around the moist versus dry and the synthetic. Synthetic, by the way, at the consumer level doesn't play any role. It's more driven by the regulatory things, very much specific to U.S., maybe in a few countries, but has no value in terms of the cost or consumer preference or anything of this nature.

Actually, I would argue that some people are a bit more open to the nicotine, which is naturally derived than a synthetic, but this is not the end way. It's not a factor to play with or be worried about. But all of these things are attainable to us. So you never say never, but you also screen the market and you see what is in the market. I think we -- so far, other than acquisition of Swedish Match, which I think everyone agrees was a great strategic move for us and serves us very well. I think we're self-sufficient for the time being.

Sure. And one last question on IQOS. So I think you have mentioned over time that every few years, you have a major platform innovation at IQOS and then every year, you have a minor innovation. So IQOS ILUMA, next year, it will be probably 3 years or 4 years that IQOS ILUMA would have been in the market. So should we expect a major platform innovation at IQOS?

I'm not confirming, but directionally, I like your thinking because we said -- Yes. So there will be -- look, there's -- look, the audience -- look, there are consumers, millions, millions of consumers who are using the product for 10 years. And their expectations are evolving, the user experience, the user interface with regards to device or maybe some other characteristic of the taste directions, et cetera, maybe duration and this is a number of the things which you need to watch for existing audience, but also remember that audience, which is left behind is a bad word, but smokers. So even if you take Japan, which is most advanced, still a bit less than 50%, but still half of the market is on the smoking.

Now that audience, which is left with a cigarette smoking have also a different expectations. I mean, create the product as they are, didn't make them jumping into this whole thing and the reasons they stay on a cigarette. So you have these 2 vectors of innovation was the product for the remaining smokers and those who already are in that heat-not-burn whatever expectations they have is the one thing which we don't talk that often is, but there is an adult initiation to smoke-free category. I know big volumes and big movements in the markets are happening smokers to alternatives. But also over a period of time, you have more and more relatively audience, which they don't remember cigarettes or they never engage with the cigarettes. And their expectations of how this [indiscernible] and the experience should look like is different.

Sure. I think we are out of time. Thank you so much, Jacek. We have a breakout in the other room, so please do join us there. Thank you so much.

Thank you.

Good day, and thank you for standing by. Welcome to the Philip Morris International 2025 Second Quarter Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, James Bushnell, Vice President, Investor Relations. Please go ahead.

Welcome, and good morning. Thank you for joining us. Earlier today, we issued a press release containing detailed information on our 2025 2nd quarter results. The press release is available on our website at pmi.com.

A glossary of terms, including the definition of 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 Exhibit 99.2 to the company's 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'm joined today by Emmanuel Babeau, Chief Financial Officer.

Over to you, Emmanuel.

Thank you, James, and welcome, everyone. We delivered an excellent set of H1 results following another very strong performance in the second quarter of 2025. Top line dynamism from our smoke-free portfolio, which a record $4 billion in net revenues, coupled with margin improvements across our business drove strong double-digit adjusted diluted earnings per share growth in both constant currency and dollar terms. The multi-category momentum of our smoke-free business accelerated with the Q2 step-up in offtake growth for IQOS, ZYN and VEEV.

As expected, IQOS delivered another strong performance with heated tobacco unit adjusted in-market sales growth accelerating to plus 11.4% in Q2. This reflects broad-based growth both globally and in Europe as markets such as Italy past the transitory disruption of the characterizing flavor ban.

ZYN confirm its upward trajectory with a significant acceleration in U.S. consumer offtake growth to plus 26% for Q2 and plus 36% in June as in-store availability improved. Internationally, Q2 nicotine pouch volumes increased plus 65% and almost tripled outside the Nordics.

In e-vapor, VEEV continued its remarkable trajectory with shipments more than doubling year-on-year, driving further gross margin expansion. For combustibles, despite an expected return to modest volume declines, our business delivered robust top and bottom line performance, reflecting its resilient model, led by strong pricing.

We continue to generate best-in-class growth across the P&L with high single-digit organic H1 top line growth and mid-teens adjusted OI growth to reach a margin of over 41%. This high-quality performance reflects the increasing profitability of our 3 smoke-free categories at scale, operating leverage and efficiencies combined. These results provide an excellent platform for another year of superior growth. We expect strong smoke-free momentum to continue in H2, while we factor in the exceptional H2 prior year comparison, notably on growing combustible volumes and certain timing factors. With strong business fundamentals and a slightly more favorable expected tax rate, we are raising our adjusted diluted EPS full year forecast to plus 13% to plus 15% growth or plus 11.5% to plus 13.5%, excluding currency.

Looking at our Q2 financials. We delivered another quarter of shipment volume growth of plus 1.2% and organic top line growth of plus 6.8% or plus 7.1% in dollar terms to reach over $10 billion in quarterly net revenues for the first time. Excluding the Indonesia technical impact explained last quarter, organic net revenues grew by more than plus 8%. Adjusted OI grew by plus 14.9% organically with growing profitability in all categories, positive small free margin mix and ongoing cost efficiencies. Adjusted diluted EPS of $1.91 reflects growth of plus 20%, including a favorable currency variance of $0.02, $0.04 lower than previously guided, mainly due to intercompany transactional impact from currency volatility at period-end, including on the Swiss franc. This better-than-expected EPS delivery notably reflect strong top line momentum, positive margin evolution in our smoke-free product business and robust combustible pricing.

Combining this excellent Q2 with a strong first quarter, we achieved one of our strongest ever H1 performances. Total shipment volumes grew by plus 2.5% and organic net revenues by plus 8.4% or approximately plus 10%, excluding the Indonesia technical impact. Strong performance from both smoke-free and combustibles drove adjusted operating income growth of circa plus 15% in both organic and USD terms to reach $8 billion in total. H1 adjusted diluted EPS was up by plus 17.7% in constant currency and by plus 16.1% in dollar terms.

Turning to shipment volumes. We delivered Q2 growth of plus 1.2% and plus 2.5% for the first half, driven by more than plus 13% growth from our smoke-free business. While adjusted in-market sales growth accelerated, Q2 HTU shipment volume grew plus 9.2% to 38.8 billion units including robust growth in Europe and Japan as well as promising growth from global markets such as Indonesia, South Korea and Global Travel Retail. HTU shipments increased by plus 10.5%, broadly in line with adjusted in-market sales growth. As mentioned last quarter, our H1 shipments include a Q1 shipment timing benefit of around 1 billion units, which we expect to reverse in the fourth quarter. Oral and e-vapor shipments again, grew significantly.

Cigarette volumes declined modestly in Q2 following the exceptional growth of recent quarters. This was primarily due to contraction in Indonesia and in Turkey, where we experienced supply chain issues following a change in regulatory requirements. This resulted in a temporary loss of volume and share with some associated inventory write-downs. We expect gradual recovery through the remainder of the year, though H2 year-on-year comparison are still likely to be affected. In Indonesia, despite a good share performance, a growing illicit segment is impacting both the legal industry and our volumes within it, and this is also likely to extend into H2.

We expect our cigarette volumes to decline around 2% for the year, more in line with the historic underlying trend. This includes a forecast decline of 3% to 4% in H2 against the high prior year comparison I mentioned with Turkey accounting for close to half of this decline. This also factored the continuation of decline in Europe and Japan as smoke-free products grow strongly and the dynamic in Indonesia and in Egypt, where the recovery of the main local competitor is ongoing after previous supply constraints.

As a testament to the resilience of our combustible model, we are still targeting combustible gross profit growth in H2 supported by pricing and cost efficiencies. For smoke-free products, we anticipate continued double-digit volume growth in H2, including the expected reversal of H1 phasing benefits on IQOS. However, given cigarette dynamic, it is possible that H2 may see modest decline for total PMI volumes. Importantly, with the forecast full year increase of around plus 1%, we continue to target our fifth consecutive year of total volume growth as we do for future years as our smoke-free portfolio continues to drive performance.

Breaking the performance down by category, exceptional gross margin and OI growth in Q2 resulted in impressive first half results, powered by our increasingly profitable smoke-free business. H1's smoke-free net revenue grew organically by plus 17.3% to $8.1 billion and gross profit by plus 27% to $5.6 billion with plus 530 basis points of organic expansion to reach over 70% gross margin. This is around 4.5 points above the gross margin of combustible at the current category and geographic mix. As in 2024, this reflects continued margin expansion for all 3 smoke-free categories, notably combined with the positive mix impact of ZYN's accretive unit economic and pricing on both HTUs and ZYN.

Very strong IQOS gross margin expansion reflects the powerful growth and scale effect of this large and growing business, manufacturing productivities and a comparison benefit from higher device shipments in the prior year when ILUMA I was launched in Japan and other markets. We expect strong margin to continue in H2, albeit without the device year-on-year comparison benefit as we also further expand the presence of ILUMA I across markets and BONDS in Indonesia.

Compostable net revenues increased by plus 2.9% or more than 5%, excluding the Indonesia technical impact. Gross profit grew by plus 5%, driving plus 140 basis points of margin expansion despite the financial impact of the Turkey disruption. This includes a robust Q2 with organic net revenue growth of plus 2% and gross profit growth of plus 4.8%. This performance epitomized the resilience of our ongoing combustible business model with low single-digit volume declines, robust pricing and efficiencies, combining to deliver top line and gross profit growth over time.

We continue to target combustible gross margin expansion organically and in dollar terms for the year despite slower pricing and weaker volume in H2. The combination of sustained smoke-free momentum and combustible resilience led to plus 15.4% H1 organic OI growth at total PMI level resulting in plus 250 basis points of operating income margin expansion to surpass 41%.

H1 net revenue growth of plus 8.4% was again fueled by the 3 engines of our top line growth model with positive volumes, robust pricing and favorable smoke-free mix. Pricing contributed plus 5.2 points driven by convertible pricing of plus 7.7% and low single-digit smoke-free pricing, excluding devices. The positive mix impact of rapid SFP growth drove a further contribution of plus 3.1 points. Combustible geographic mix and other factors had an unfavorable impact of 2.4 points, including the Indonesia technical impact of around 1.5 points. Currency had a negative impact of 1.5 points with a further 0.4 points from acquisition and divestitures, which include the divestment of Vectura.

Turning now to gross margins. We delivered H1 organic expansion of plus 300 basis points and plus 320 basis points, including currency, acquisition and divestitures. Pricing made a plus 160 basis point contribution, more than offsetting the 60 basis point unfavorable impact from cost inflation, net of productivity and other cost items. Smoke-free growth drove an excellent plus 190 basis points, reflecting the factors I covered earlier. The impact of combustible was broadly flat, excluding pricing, but including the Indonesia impact.

Below gross profit, we continue to invest strongly in the future growth of our smoke-free brands, including in the U.S. with SG&A organic growth of plus 10.6% for H1 marginally above net revenue growth, excluding the technical impact of Indonesia. We achieved more than $500 million in gross cost savings year-to-date, through our manufacturing and back office efficiency initiatives. Now at the midpoint of our target '24, '26 period, we have delivered over $1.2 billion placing us well on track towards our $2 billion objective. Altogether, with gross margin expansion more than compensating for higher year-on-year commercial investments. We delivered plus 290 basis points of adjusted operating income margin expansion in H1 or plus 250 basis points organically. Q2 organic OI margin expansion of plus 300 basis points was even stronger than the plus 200 basis points in our first quarter.

Focusing now on our smoke-free business where our multi-category strategy is facilitating the continuous growth of our smoke-free user base. Estimated legal age consumer of our SFPs grew by approximately 5 million versus 1 year ago, reaching around 41.5 million as of June 30. Our smoke-free products are now available in 97 markets following the Q2 launch of ZYN in Ireland and Cambodia. Almost half of these markets now have a multi-category offer with at least 2 of IQOS, ZYN and VEEV on sell to legal age nicotine users. As shown this slide, we now have all 3 categories deployed in 20 markets as we continue to broaden our multicategory presence.

The regulatory environment is a key enabler of smoke-free growth, and I'm pleased to report some more example of positive progress such as legislation providing new market access for one or more SFP category across several Middle East markets. We also note the recently published proposal to revise the EU Tobacco Excise Directive, which marked the start of a formal legislative process that will require unanimous approval by all member states and subsequent transposition into national law. Many member states have already adopted risk proportionate regulation and taxation frameworks for smoke-free product, which can serve as a valuable foundation and benchmark for shaping the final directive.

While we note the clear differentiation for smoke-free products relative to combustible in the proposed minimum rate, we are also disappointed to observe the lack of a plan to counter the threat of illicit trade, which accounted for 9.2% of total EU cigarette consumption in 2024, with government losing over EUR 14 billion in tax revenue at a time when many countries face intense economic pressure.

Our multi-category approach is built on the strength of the brand and commercial presence of IQOS, which remains our core smoke-free product growth engine. We continue to be laser-focused on maximizing the growth of IQOS over time with the deployment of ZYN and VEEV under its umbrella offering complementary opportunities to fully transition legal age nicotine users from cigarettes to SFPs. In this context, I'm especially pleased to confirm the acceleration in IQOS HTU adjusted in-market sales growth to plus 11.4% in Q2, notably driven by Europe, and including excellent progress in its largest market of Italy as the impact of the characterizing flavor ban recedes and our commercial initiatives bear fruit. Japan also delivered another robust quarter of growth and other global markets accelerated nicely.

While competitive activity is increasing, we see this as positive for category growth over time, and we expect continued strong IQOS progress in H2. We continue to target plus 10% to plus 12% HTU adjusted IMS growth for the year. Continuous IQOS innovation on devices and consumables, combined with investments in brand equity, are fundamental pillars of our growth. The rollout of the ILUMA I technology now present in over 30 markets remains ongoing. We are expanding the portfolio of LEVIA tobacco-free consumable with promising initial results from recently launched new test variants and flavor capsules.

We also commenced the rollout of a revamped pack design on our core premium TEREA HTUs as well as the expansion of our mainstream price offering DELIA with excellent results in markets such as Germany and Poland. In the U.S., we continue with small-scale IQOS 3 pilots which are generating considerable adult consumer interest. As we progress our commercial pilot in Austin, we also launched a second pilot in Fort Lauderdale, during quarter with further initiatives planned in the coming months as we prepare for the at-scale launch of IQOS ILUMA once authorized by the FDA.

Our second flagship premium smoke-free brand, ZYN, leads a category which has a potential to fundamentally reshape the consumption of nicotine for the substantial net benefit of Global Public Health as adult smokers increasingly switched to smoke-free products. Q2 can shipments grew by plus 43% on a global basis, and offtake reaccelerated strongly in the U.S., which I'll come back to in more detail. Building on ZYN U.S. strength, our global rollout continued to advance with Q2 international can volume up plus 65% year-on-year or a remarkable plus 179%, excluding the Nordics.

The growth of our international business reflects both market expansion and strong offtake growth supported by expanding production capacity in new geographies. Notable strong performances include our Global Travel Retail business with close to plus 200% volume, excluding the U.S. as well as the U.K., Pakistan, Poland, South Africa and Mexico. As covered in our recent Europe focus event, our focus is on growing the category by switching legal age smokers rather than sourcing from the small existing category. It is also notable that ZYN holds the #1 position in Mexico and South Africa, where we launched our predominantly mini dry portfolio at the same time as competitor brands.

Dry pouches already make up the majority of our pouch volumes in more than 3/4 of the market, and we believe this format is especially relevant for legal age smokers. ZYN is now present in 44 markets globally, following additional launches in Q2.

Our smoke-free trilogy is completed by VEEV. H1 shipment volumes more than doubled to reach almost 1.5 billion equivalent unit with increasingly profitable growth driven by Europe where VEEV now hold the #1 closed pod position in 6 markets, including Italy and Greece. Outside Europe, we see significant potential for the brand with nice results in diverse markets, such as Indonesia, Canada and Colombia and further rollout plan. Increasing repeat purchase rates and consumer loyalty are especially promising as we seek to leverage our multi-category infrastructure under the IQOS umbrella of quality, premiumness and superior technology.

In this vein, we recently launched our latest innovation, VEEV inPRIME, in the Czech Republic. InPRIME offers an upgraded premium user experience with higher intensity of flavors, a larger cloud size and higher battery capacity with an optimized pod cost profile.

The most developed multi-category consumer landscape is in Europe, and we now have 30 markets with at least 2 categories on offer. Of course, IQOS remains the core driver of our performance in the region and delighted to report a meaningful Q2 acceleration of HTU adjusted in-market sales growth to plus 9.1%. Adjusted market share grew by plus 1.2 points year-on-year to 10.9% in the seasonally higher period for combustible. As explained at our recent Europe event, IQOS has a very strong brand platform across the region, and this performance reflects our innovation and commercial initiatives including those on ILUMA I, LEVIA and DELIA. This helped drive strong double-digit adjusted IMS growth across markets, including Germany, Spain, Romania, Greece and Bulgaria.

The significant Q2 callout is Italy, Europe's largest IQOS market by volume, which delivered a very welcome uptick in both sequential and year-on-year growth. With the exception of Poland, Australia, Estonia and Croatia, the impact of the EU characterizing flavor ban is now behind us and our absolute regional growth in HTU adjusted IMS now getting closer to pre-ban levels. While quarterly comparison from 2024 have some volatility from flavor ban dynamics, sequential trends are very positive, and we look forward to the remainder of the year with confidence in further strong IQOS growth.

On top of this IQOS progression, the accretion from our multi-category strategy is evident in our total volume of IQOS, ZYN and VEEV with shipment growth of plus 13.5% in Q2 compared to HTUs alone at plus 10.5%. ZYN and VEEV are still very early in their development but are demonstrating exceptional growth. The number you see here are for Europe overall. And I would also note that where we are present with all 3 brands such as Italy, Greece, Poland and Romania, we see several points higher SFP volume growth.

In Japan, we achieved a significant milestone of 10 million estimated users and Q2 adjusted HTU shares increased plus 2.3 percentage points year-on-year to 31.7% despite increased competitive intensity. IQOS continues to deliver strong progress with Q2 adjusted IMS growth of plus 7.8% against the prior year period, which included the full launch of ILUMA I. As shown on the slide, IQOS delivered truly exceptional growth in '23 and '24, especially considering the size of the category now stands at almost half of total nicotine offtake volume nationally and more than half in 13 cities. The high single-digit growth that our business delivered in H1 2025 remains very healthy and is essentially in line with the trend in the years prior. We expect further strong adjusted IMS growth in the remainder of the year.

We are pleased to see our competitors embrace the heat-not-burn category as -- while our category share was sequentially stable at around 70% in Q2, our biggest focus is on accelerating the size of smoke-free products overall to maximize the growth of our leading proposition and convert more smokers.

Switching now to the U.S. The strong reacceleration in ZYN offtake growth is a clear highlight of our Q2 performance and testament to the strength of the brand as in-store availability improves and legal age consumers regain access to the full ZYN portfolio offering. The supply constraint of previous quarters had limited the growth in sellout volumes and meant ZYN was growing less than the overall category.

With manufacturing capacity now in very good shape, the recovery to around plus 36% offtake volume growth in June, as measured by Nielsen and plus 26% in Q2 overall, marked the return of ZYN to its category driving position in terms of growth and market share.

On a sequential basis, ZYN offtake volume accelerated to around plus 12% growth versus Q1 in line with the total category with a number of commercial program restarting at the end of the quarter, this is clearly very promising as we increasingly focus on legal age smokers and vapers who have not yet switched to the category.

Q2 shipments increased 41% year-on-year, reaching 190 million cans. As with any out-of-stock situation, quarterly shipments are subject to volatility. Restocking of the value chain was effectively completed in H1 with the majority of this taking place in the first quarter. We estimate the total net impact at broadly 14 million cans for the year, slightly below our initial expectation. This factors in the good news that retail availability is now approaching normalized level with the lower scarcity premium in retail prices narrowing the price gap to competition. Importantly, sales velocity are accelerating and with 36% of the growth in June. This bodes well for the second half of the year.

With shipments now primarily driven by consumer offtake, we expect a broadly similar level of shipment in Q3 as in Q2, factoring in the possibility of a few days adjustment to wholesaler and distributor inventory as the situation fully normalize. We continue to target full year U.S. shipment of 800 million to 840 million cans, including a sequential step-up in Q4. With our U.S. production capacity increase ahead of plan and now well-set for this year and beyond, we are incredibly excited to drive in and the overall nicotine pouch category to its full potential over the coming years.

Having covered Europe, Japan and the U.S. in some detail, let's look at the rest of the world. In most markets, both the nicotine pouch category and our multi-category presence are nascent. Both ZYN and VEEV will leverage on the strength of IQOS where Q2 adjusted in-market sales accelerated to plus 19.3% growth with broad-based progress, including Egypt, the Philippines and Indonesia. While pouch and e-vapor volumes are naturally very small across this market at this stage, we can measure their Q2 growth in multiple rather than percentages. This impressive IQOS growth is exemplified by offtake share gains in global key cities.

Strong presence in South Korea and Malaysia, is more than matched by key city in Mexico, Serbia, the Middle East and North Africa. Global Travel Retail, where multicategory is increasingly prominent also continues to grow strongly. The world's largest cigarette market by volume outside China is Indonesia, where Jakarta offtake share grew by plus 2.5 points year-on-year to 7.5%. Following promising results from the pilot launch of our full flavor heat-not-burn technology BONDS, which is tailored to local kretek taste preferences, we have recently commenced a broader rollout. BONDS is also progressing well in Lebanon.

Turning to combustible. Our business delivered robust organic net revenue growth of 2% in Q2 and plus 2.9% for H1 with Marlboro reaching a post-spin category share high of 10.7% in Q2. Strong Q2 pricing of plus 7.2% included notable contribution from Indonesia, Germany and Italy, yielding plus 7.7% in H1 overall. While we continue to expect a moderation in H2 pricing due to timing and comparison dynamic, we now forecast plus 6% to plus 7% for the full year. Our strategy is to take pricing action to optimize the financial contribution to the business over time, which can naturally impact volume and share performance on a quarterly basis.

Our combustible business is resilient and the combination of pricing, category leadership and ongoing efficiencies drove very good gross profit growth as covered earlier. This performance is in line with our objective of maximizing value over time and supporting the growth of our smoke-free business.

This brings me to our revised outlook for a remarkable 2025, where we are raising our adjusted diluted EPS forecast for the year in both currency neutral and dollar terms. As expected, we delivered a strong H1 organic performance compared to our target ranges for the full year. While combustible volume dynamic and the phasing of comparison and costs are less favorable in H2, our fundamental outlook remains very good. We expect continued strong momentum on both IQOS and ZYN alongside robust pricing and meaningful margin improvement. We expect further double-digit HTU adjusted IMS progression with growth skewed to the fourth quarter, given a strong comparison in Q3. We forecast Q3 HTU shipment of 38.5 billion to 39.5 billion and dynamic growth in adjusted diluted EPS to $2.08 to $2.13, including strong investment and a favorable currency variance of $0.05 at prevailing rates.

For the full year, we continue to expect very strong organic net revenue growth in the range of plus 6% to plus 8%. Following excellent H1 top line dynamism and margin progression, we are raising our forecast range for organic operating income growth to plus 11% to plus 12.5%. We are also raising our currency-neutral adjusted diluted EPS growth to plus 11.5% to plus 13.5%. This includes a slightly improved effective corporate tax rate of approximately 22% to 23% based on the latest assessment of tax dynamic and market mix. We are still reviewing the implication of the OBBB Act U.S. tax reform. In dollar terms, we expect adjusted diluted EPS growth to plus 15%. This includes an estimated $0.10 favorable currency impact at prevailing exchange rate with favorable earnings translation from a broadly weaker dollar, partly offset by transactional impact due to currency volatility which I covered earlier.

Given our expectation for a strong full year profit delivery and cash conversion, we are raising our forecast for operating cash flow to around $11.5 billion at prevailing exchange rate and subject to year-end working capital requirements. We project capital expenditures slightly above our prior forecast at around $1.6 billion, primarily due to further international ZYN capacity investment with CapEx spend almost entirely focused on supporting the growth of smoke-free.

With regard to our balance sheet, we continue to target further deleveraging in 2025 placing us on track for our target ratio of around 2x by the end of 2026. As mentioned last quarter, we are a global company with broadly diversified production and a worldwide supplier network, including an established U.S. manufacturing base, and we believe we are well positioned to mitigate potential supply chain challenges. While the situation is volatile, we do not currently anticipate a material impact on our business from recently introduced or discussed tariffs.

Our financial growth model is driving a continuous improvement in the quality of our business with smoke-free accretion and combustible resilience driving considerable bottom line growth. We are well on track to meet or exceed our 3-year CAGR target, demonstrating our ability to deliver what we believe to be best-in-class CPG growth. Adjusted diluted EPS growth in dollar terms is a key objective, and we are pleased to see this delivered in H1 as well as in our outlook for the year.

I will now conclude today's presentation with some closing remarks. We delivered an exceptional first half of the year, placing us well on track for another year of strong performance. Our smoke-free growth is increasingly profitable as IQOS, ZYN and VEEV gain scale and drive synergies at the consumer and commercial level. Our best-in-class financial performance is bolstered by underlying strength across all categories, including the resilience of our combustible business in addition to our proactive measures on pricing and cost efficiencies. This drives our confidence in strong and sustainable adjusted diluted EPS growth in both currency neutral and dollar terms.

Finally, we remain a highly cash-generative business with an unwavering commitment to our progressive dividend policy. We look forward to further rewarding our shareholders as our transformation delivers continued growth. Thank you, and we are now very happy to answer your questions.

[Operator Instructions] Our first question comes from Gaurav Jain with Barclays.

A few questions from me. One is on ZYN. So you are saying that restock was less than what you had expected. So how should one read it that your expectations for future growth they were higher earlier and now they are lower and not only us but the market expectations were higher and now they are lower, and that's why the need for restock is lower? And in that context, if I look at your then volume guide, if I say 3Q is flat versus 2Q. And in 4Q, you need to do 219 million to 259 million cans for that 800 to 840 guide range, which will imply almost 15% to 36% growth on a Q-o-Q basis. And I remember from covering Swedish Match a few years ago that Q4 actually used to have lesser shipping days for them, so they didn't really used to grow Q4 over Q3. Can you just help me understand all the moving parts from ZYN?

Sure, Gaurav, with great pleasure. So first of all, on the impact of the restocking, well, let's be a bit humble here. We talk about a brand that we're targeting to deliver for the year, 800 million to 840 million can. There are several weeks of inventory between wholesaler, distributor and the retailers. I'm not able to tell you a precise number is probably anywhere between, let's say, 6 to 7 weeks altogether. And here, we are talking when you say it's a bit lower. I mean it's clear that, for instance, at the retailer level, we had no precise idea of the level of inventory. So we are a bit below our expectation. If I was to give a number, it's probably maybe 10 million, 20 million can below. Frankly, I'm not able to be more specific than that.

We are talking about a few days of sales, so it's really small. So that's really what we're talking about. And again, we've been facing this significant out-of-stock situation. We had the exercise of reloading the good news that it's behind us. We made a few assumptions on what it would mean in terms of restocking. Okay, we've been probably a bit higher versus what was really needed, but this is it. So I don't think there is anything else to be read there. And at the end of the day, I think we should focus on what is really important, which is a great dynamism that ZYN is facing now that there is full availability. Indeed, June was growing 36% in terms of consumer offtake according to Nielsen.

If I look at the first 2 weeks of July, we are north of 37%. I think the market is a bit above 39%. So basically, we are growing now in line with the market. So it just shows that we have absolutely resumed a strong momentum. And that, of course, bodes very well for the future as at the same time, as I mentioned, we are really restarting promotional advertising, commercial activity in a 360-degree matters, I would say. So that's really what I think is important.

On the sequence, so in my remarks, I noted the fact that there may be some adjustments as people have been maybe buying ZYN in a kind of mindset of shortages. And we think there could be some adjustment on the volume here and there in Q3 so that can impact the Q3 performance. And then we said there is a step-up in Q4. At the end of the day, we are now in a dynamic where our quarter-on-quarter growing nicely. I think the growth in the second quarter, 12% versus Q1 was, by far, the biggest sequential growth quarter-on-quarter since the first quarter of 2024. So we are absolutely back to renewed dynamism. And we are growing fast year-on-year, and that's what is driving our expectation for volume growth in the next month.

Sure. And my second question is just on EU TPD, like you referenced a few comments, but could you help us understand in more detail like what exactly are the proposals in terms of different tax rates on NGP products and there is any update on EU TPD as well?

Gaurav, I'm not going to elaborate on the initial proposal. We are at the beginning of a long process. Last time, it was 2010, 2011, it took 2 years, I think, from the beginning to the end. A lot of discussion will happen. I reminded everybody that it requires unanimity from the parties. So I'm not going to comment on things until there is more clarity on what's going to happen. The process has started, there will be several steps. As I said last time, it took almost 2 years. And of course, when we have more clarity on what is really likely to happen, then, of course, at that moment, we'll comment the implication. In my remarks, I noted the 2 points which are important for us for the time being.

One is the fact that the initial proposal is indeed coming with differentiation between smoke-free and combustible when it comes to minimum taxation. So that's an important element. And the second that as an element which we hope will be improved Obviously, there is nothing when it comes to illicit, which is, I think, a real question for the European Union to tackle. That's what we can say for the time being.

Our next question comes from Eric Serotta with Morgan Stanley.

A couple of questions. First, in terms of IQOS ILUMA U.S. approval timing, I think you said you mentioned launch once authorized by the FDA, are you guys still sticking to your expectation of a second half authorization, realizing it's not something you have control over? And then second, when you look at international IQOS, can you talk a bit about some of the drivers of the reacceleration in IMS and sort of the sustainability for the second half of the year?

Sure, Eric. So first, on the U.S., so I mean, we don't have anything new to report on the potential PMTA for IQOS ILUMA. I think everybody can see that FDA is resuming activity on PMTA, and that's good news. As far as we are concerned, and this is public information, there is now -- for the renewal of the MRTP on IQOS 3, there is a tobacco product scientific advisory committee that has been scheduled. They have also opened a docket for ZYN MRTP. So a number of things are happening. And that's what we know for the time being. So I have nothing new to report on the PMTA for IQOS ILUMA. We are still hoping for an approval in H2. But we are also, at the same time, acknowledging the fact that the agenda and the workload for the FDA is very heavy. And therefore, it is clear that we don't have a certainty that we will get this PMTA in '25 and that could move, of course, to 2026.

On the second question on the reason for the acceleration of IQOS. I mentioned, I think, many of them. I think it's really Europe where you have now the effect of the characterizing flavor ban that are waning and a number of markets reaccelerating. Some markets you're doing really very strong performance. I mentioned some of them like Spain, Germany, Romania, Bulgaria. It's great to see Italy reaccelerating as well. So I would say, momentum is rebuilding. Now there will be some phasing last year on the performance in Europe, but I think we are expecting a nice performance overall for H2. And outside Europe, we expect continued very nice performance from Japan and have been elaborating on the trend there, where we continue to do very well.

And there are all these new growth markets that are super exciting. And of course, Global Travel Retail is one of them. But Indonesia, many countries in the Gulf region, Mexico, Philippines, I mean, these are plenty of markets where we see very nice growth trajectory and growth potential for IQOS. And in this new growth market, the momentum, I would say, is progressively building up.

Great. And just one follow-up on combustibles. Your volumes down 1.5% or I should say only 1.5% despite the headwinds you called out of Turkey and Indonesia. Was that actually a little bit better than you expected since you guys have been pretty upfront really since last year that you expect combustible volumes to resume their declines in 2025?

So you're right. Globally today, when we say that for the year, we are targeting to be around minus 2% in terms of shipments. That's something that I had the opportunity to say in previous instances very clearly, the fact that we believe we are going to be back to what we think is a long-term trend for the combustible business, which is a low single-digit decrease. I'm not able to specifically say exactly which kind of low single digit, but that is a trend for sure, that we expect in the future. Yes, of course, a country where there is ban on smoke-free can have some impact on this low single-digit decline, but nevertheless, that is the trend. That's what we have seen in Q2. Largely in line with our expectation, and that's what we expect for H2 with this impact of Turkey that is a kind of transitional thing that is going to impact H2 more specifically. But otherwise, I think we are progressively going back to what we described as a normal long-term trend for combustible.

Our next question comes from Matt Smith with Stifel.

Emmanuel, I wanted to ask about the increase in the underlying guidance. The constant currency range is up about 1 point from the mid -- from the previous midpoint and that reflects the stronger second quarter and some favorability on the tax rate. Is it fair to say the second half is more or less in line with your previous expectations? And can you provide a little more detail on the considerations in the second half. You called out phasing and comparisons and costs and the impact on margins from those and the timing of those when they become lapped in the base?

Yes. I think when you look at -- there are, of course, a number of elements that can distort the vision quarter-on-quarter H2 versus H1. What we wanted to ensure that everybody understands is that, in fact, the momentum in Q2 on smoke-free is, in fact, even better than in Q1. And Q1 was already very good. But in fact, in Q2, we've seen an acceleration of the IQOS in market sales. And we are back to a nice double-digit growth, very nice and very powerful resolution of ZYN the U.S. Of course, elsewhere ZYN and VEEV are growing very fast. But Q2, in fact, is a very nice acceleration on our smoke-free business and this is absolutely visible in our numbers.

When we look at H2, in fact, we expect the continuation of this very strong momentum that we've seen in H2 on smoke-free. So we expect IQOS to continue to grow double digit in terms of adjusted IMS. We expect now that we have availability, which is no longer an issue for ZYN in the U.S. We expect the continuation of this very strong acceleration of ZYN the U.S. Again, I reported 7% growth for the first 2 weeks of July. So H2 is starting on a good note for ZYN in the U.S. So this momentum is unchanged, and we expect it to remain very strong.

Certainly, what is going to be less favorable is the trend on combustible. We were almost flat, minus 0.3% in volume in H1, and we expect 3% to 4% decline have been explaining the driver for that. Despite that, we expect a growth on gross profit for combustible, but nevertheless, at a lower level, of course, than in H1. So this is one of the reasons for the differentiated performance in H2 versus H1 for what we can expect. And then you have a number of phasing element on smoke-free, which have nothing to do with performance but which are due to basis of comparison or a number of one-off events.

If I look at IQOS, there was this 1 billion stick shipment in Q1 that we're going to compensate in Q4 and of course, that is favoring H1 and penalizing H2. We had super favorable comps in H1 because of accelerated sales of device last year that has been growing profit and margin. We're not going to have that in the second part of the year. So that's another element. And then you have the ZYN restocking that has been benefiting H1. And of course, will not be benefiting H2. But I think it's really -- that's really what is behind the guidance. And I think if you take all the elements I've just been sharing, you have the right understanding of the dynamic. I hope this is helpful.

Very helpful. And as a follow-up, pricing for heated tobacco units was up, I think, low single digits again in the quarter. You're about a year into realizing a nice contribution from pricing in that business. In the markets where you are taking pricing, how is that impacting volume in new user acquisition relative to your expectations? And has that changed the way you think about the pricing potential in the HTU business over time? And I'll leave it there.

Yes. Sure, Matt. I think we're really trying to make sure we don't penalize volume with price increase when it comes to IQOS and ZYN because we described how positive the volume growth is because we have higher revenue per unit. We have higher margins. So the name of the game is, of course, to absolutely optimize the volume. But there is, obviously, as we are growing the franchise of the brand, the strength of the brand, there is opportunity to increase price without impacting the volume. And I think that is the right balance we're looking for, which is we increase volume, but we certainly don't want to change trajectory on volume because of that. So price, yes, but provided it does not impact in a meaningful manner, the volume trajectory. That is the strategy, and that is what we will continue to do.

Our next question comes from Bonnie Herzog with Goldman Sachs.

I had a few follow-up questions on ZYN. Based on everything you discussed and what you're seeing in the market, should we assume the lower end of your full year shipment guidance ranges more realistic? I guess I'm trying to understand if the high end is even possible in your mind. And then can you update us on your capacity and where it stands today and when it will increase?

Sure. So of course, if we give this bracket because we believe that we can finish the year within the -- at every point of the bracket, we give the 800 million to 840 million. Clearly, the fact that this 10 million to 20 million lower restocking than what maybe we thought, I mean, that is having an impact. But at the end of the day, you can see that the restart of IQOS can be very powerful. I mean 36%, 37%. We are restarting commercial activity, advertising. So we don't know what's going to be the growth profile for H2. So that's why we are still comfortable with the 800 million to 840 million can bracket. On the capacity, we can say that today, we have been building a comfortable capacity to face all kind of very dynamic growth scenario for the future, and therefore, we are comfortable for the coming quarters.

Okay. And then maybe just another follow-up because you just touched on something that I also wanted to ask, which is now that you're, I guess, essentially back in the stock or you can ship to demand, how does that change your strategy as it relates to your pricing, promotions, are you going to, I guess, get a little bit more aggressive in an attempt to possibly grow in faster and take more market share? Just how are you thinking about that?

Yes. Yes, of course, Bonnie. So you're right. As I said, we go for putting all levers to maximize the growth of ZYN and all that in a very different environment because now we have full availability. So during many months, many quarters, we've been refraining ourselves from acquiring new users because we knew that we were not really able to supply the need for new users. So that means limited activity I would say across the board, so in terms of pricing, in terms of marketing activities. So we're going to restart normal activity, and that will certainly include more promotion. We have a much lower level of promotion than any of the brand, and I think it probably will stay like that. But it doesn't mean that we cannot increase the level of promotion as well. That will be certainly advertising and commercial activity on the point of sales where we need to step up now that the product is available and that will be the continuation of building the brand franchise and all this iconic element of the ZYN brand and the fine using campaign. So we're going to pull all levers to make sure that we give the best support to ZYN.

[Operator Instructions] Our next question comes from Faham Baig with UBS.

To be honest, your answers have been very thorough. So I don't have many more. But I'll take 2. I noticed in the second quarter, the gross margin gap between combustibles and smoke-free narrowed. And maybe smoke-free even gross margin slightly reduced to Q2 on Q1. Maybe if you could expand on some of the dynamics around that and maybe what you expect for gross margin, the gross margin gap over the next couple of quarters? And the second question is probably simple, but if you could please remind us your FX hedge rates for the year, both euro, Japanese yen and any other currencies that you may hedge.

Yes, Faham. So on the gross margin evolution, so you are really looking after the [ coma ] because, in fact, we are both in Q1 and Q2 around 70% gross margin rate. So of course, the mix of ZYN or the importance of the device can have an impact. But globally, in line with what we said after Q1, we have a smoke-free business that is around, doesn't mean that it can be a bit below, but around 70% gross margin. And I would expect H2 not to be very materially different, okay? So I'm not saying it's going to be in a steady at 70%. But I think we are ballpark in this area where there is very nice gross margin rate for smoke-free higher than combustible. And you noted that the gap has been narrowing a bit. It's still significant, I mean, 4.5% for the full H1. And it's because CC has been improving a bit which is price and mix of the combustible sales in the quarter.

So when I look at the second part of the year, I think I would really insist on the fact that the improvement of margin on the smoke-free business was very important on H1 as we were facing easy comps because of a lot of ILUMA device sales last year as we were launching ILUMA I. Fundamentally, this is not the case again in H2. So we don't have the same easy comps. And therefore, as I said, expect margin on smoke-free to stay high and expect, of course, the progress year-on-year to be reduced because we are facing higher margin last year on the smoke-free business. For combustible, I think we said that we have the ambition to increase the gross margin as well, and that is valid for H2. I'm not going to repeat on ForEx, first of all, because I have to admit, I haven't been looking at exactly the latest position. I've been giving it because after -- I think after Q1, we wanted to illustrate where we were in terms of ForEx hedging, but that's not something I intend to do each time to be clear.

Our next question comes from Callum Elliott with Bernstein.

So my first question is on VEEV, if that's okay. As for a number of years, I think as a company, you guys were quite reluctant to expand too much into the e-vapor space citing lower loyalty in that category and sort of the result in gross margins that came from that lower loyalty and we obviously heard a bit at your Europe event a month ago about this increasing emphasis on the 3 category approach and the sort of the synergies for all 3 categories when you sort of play in all 3 areas at the same time. I guess my question is, what's changed over the past year or 2 to drive this increasing 3 category approach? And in particular, I think you called out in the release the improving gross margin that you're seeing for vapor in particular. I wonder just anything -- I doubt you're going to quantify it for me, but anything sort of qualitative you can share about what that means?

Sure, Callum. So yes, I guess it has been explained with a great deal of details during our European day. So I'm sure I'm not going to come with the same granularity. But my first comment will be to say be assured that we know what our priorities are. So our priority is, first and foremost, to grow IQOS, okay? This is the leading star brand. This is the one where we see the biggest potential. This is the one where we have the best profitability. Yes, ZYN could be one day at the same level. But of course, in terms of volume, it's really small today when it comes to most of the markets. So that's something for the future.

You should see VEEV as an ailing brand to our portfolio. Yes, there is an interest in the multi-category play. I'm not going to repeat everything we presented in Europe, the fact that we -- some consumers clearly prefer to be only in one category and one brand. Other, and sometimes they are also smokers that you want to fully exit from smoking. They will only do that if they move to several smoke-free products. And that's when we want to be able to offer several smoke-free category, and this is having a role to play in these circumstances. We are, of course, putting priority on VEEV where we believe we can develop a profitable business. And that's, of course, a very, very important condition to develop these.

I'm not going to exactly quantify the gross margin of these, but I can tell you that it improved by more than 10 percentage points on the beginning of 2025. So it's profitability is improving very rapidly. And we believe that with the right loyalty, the VEEV business has a possibility to have a similar profitability as the combustible business. To get there, you need to have the right loyalty, but element that we see today on the market where we develop this, seem to show that we can generate this level of repurchase and loyalty. So it's a bit short as a summary, but these are the conditions for us to develop VEEV. And that's what is behind our VEEV progression.

Just as a clarifying question. When you say a similar level of profitability to cigarettes, do you mean percentage margin or unit margin?

Well, in terms of gross margin on revenue.

Gross margin as a percentage. Okay. Perfect. And then my second question is on ZYN, or of the intersection of Gaurav and Bonnie's 2 questions earlier where obviously, what you've spoken about is sort of a cadence of growth that in Q3 is something like 27% year-on-year growth but maybe a little bit impacted by -- it seems to be you're suggesting some destocking. And then the full year guide implying a reacceleration again in Q4. And I guess my question is, I wonder how the commercial activities sort of flow into that reacceleration that you're forecasting for Q4? And how confident that you are that as you lean back into those activities, as you have done in the past, right, when you took over this business from Swedish Match, that drove an acceleration back then. But as you lean into these activities again that you sort of stepped away from when you had the supply chain problems that you have this ability to redrive the acceleration, how confident are you in that? And does the cadence of these activities explain that sort of cadence between Q3 and Q4?

Look, I think I've been -- Callum already giving the answer I could give. So yes, indeed, that is pointing to a very dynamic second part of the year. Again, the level of growth in the consumer offtake in June and at the beginning of July is pointing to a direction that is broadly in line with this growth. And it is at a point in time where we haven't yet as I said, fully restarted all the commercial/marketing activities. So we are hopeful that this will provide further boost to the growth, but I don't have much to add at that stage. I think that the data are there on the table public and everybody can understand the objective that we have.

Maybe I can follow up then. Like how quickly can you turn these commercial activities back on? It seems clear that you were taken a bit by surprise with how quickly you were restocking. So how quickly can you turn it back on?

Well, yes, it does not, of course, happen in a few weeks. It's gradual. It's not everything at the same time. So the team are very busy in the U.S. today restarting gradually everything. But you're right, that is like reshaping an engine. And to get to full speed on the engine, it's going to take some time. I'm not going to elaborate further, of course, as you will understand but that's something that is going to happen gradually in the course of the third quarter.

Our next question comes from Gerald Pascarelli with Needham & Company.

Most of them have been answered, but I just -- I wanted to go back to currency. If you could just -- can you provide some color on exactly what transpired in the quarter? You didn't get the benefit that you have been guiding for in 2Q and that really is despite the fact that the dollar weakened further over the course of the quarter. So I think the expectation was that maybe in addition to an underlying EPS raise, we would have seen an even bigger benefit to your adjusted EPS just due to a more favorable outlook on currency. So not looking for detail on your exact hedges or anything like that, but maybe just some color or thoughts on how we should think about the currency tailwind in the event that we continue to see this dollar weaken over the back half of the year? Any color there would be great.

Sure, Gerald. In fact, what probably people are not always capturing I think versus the $0.10 we're coming up with, we are around $0.04 versus consensus below what the consensus was expecting. I think it's largely the Swiss franc, both in the negative impact that it has because we have a strong exposure in terms of cost to Switzerland. As you all know, but also because the intercompany flows mean that when there is a lot of volatility and there has been a lot of surge in the Swiss franc versus other currency at the end of the period, that is generating some transactional losses. So that's a significant impact. And actually, when I look at what is driving this $0.10 estimated impact at the prevailing rate. In fact, the Swiss franc is to a large extent offsetting the benefit we have on the euro just for people to understand. So it's a very significant negative impact.

And our last question comes from Priya Ohri-Gupta with Barclays.

Emmanuel, I was just wondering if you could walk us through the working capital piece on free cash flow. It looks like based on the numbers that might have been seasonally a bit weaker than what we normally see in the second quarter. Is that largely attributable to the IQOS dynamics or what else is going on there? And then should we expect most of that to reverse as we get through the back half of the year.

Yes. So really, I think when you look at the end of H1 on the differences versus last year, I mean, indeed, the cash flow generation is lower. Most of it is the payment of duty that we made in Germany and the final payment of the Job Act in the U.S. I think that the accumulated impact is largely north of $1 billion and that is really the biggest impact. Otherwise, yes, we may have had on a temporary basis, some inventory building, I mean, supply chain, of course, playing here and there, you may have some regulatory constraints. But I don't think that for the year in terms of working capital beyond the 2 elements I mentioned, you should expect anything special.

Okay. That's helpful. And just one housekeeping item. What was your CapEx in the quarter?

I'm not sure we're disclosing it by quarter. So I'm not going to give you the number. I think we said $1.6 billion for the year, but we don't split that by quarter.

This concludes the question-and-answer session. I would now like to turn it back to James Bushnell for closing remarks.

Thank you. That concludes our call today. Thank you all for joining us. If you have any follow-up questions, please contact the Investor Relations team. Thank you again, and have a great day.

Thank you. Speak to you soon.

This concludes today's conference call. Thank you for participating. You may now disconnect.

Good morning, everybody. I think we will make a start. I've got the pleasure of welcoming Emmanuel Babeau, CFO of Philip Morris International to the stage this morning. I have been chatting with Emmanuel. He's been here from the start, and this is my first time interviewing him or having a chat with him.

Everything is going to be fine.

Everything is going to be fine. So but I think you would like to make some opening remarks, Emmanuel?

Yes. Sure. Thank you, Damian, for hosting us. Good morning, everybody. As always, a great pleasure to be in Paris at the beginning of June and being Parisian, but no longer living in Paris, I particularly enjoy that. So I call your attention on the forward-looking and cautionary statements as always. And as a summary and introduction, what I will say is that we are on track for another year of strong growth at the level of revenue, operating income and adjusted EPS before ForEx. That is, of course, first and foremost, boosted by the very strong growth that we experienced on our smoke-free portfolio.

All our brands are performing extremely well and strongly. We have, of course, the continuation of the growth of IQOS. You've seen that in Q1, we were close to a 10% adjusted in-market sales progression with Japan that is close to 10% growth. Europe a bit above 7% despite the fact that Europe is still impacted by the flavor ban and that will have an impact of around 1 billion stick in 2025. But we expect Europe to continue to recover gradually as we progress through 2025.

We see also for IQOS, many other growth countries, region growth relays, I would say. It comes from the Gulf countries to Indonesia to Mexico. Global travel retail is very good as well. So a number of countries where we see a lot of nice dynamism for IQOS. ZYN, of course, has been also performing very strongly in Q1, and we expect a very strong performance from ZYN in 2025. You've seen the growth in Q1 in the U.S. above 50%. What we are seeing is a combination of, first, of course, the continuation of strong traction from consumer demand.

This has been, of course, slowed down by some out-of-stock situation, as you know. But starting at the end of Q1, we started to accelerate significantly the production of ZYN. And therefore, we expect that gradually in the coming months, we are going to ease this out-of-stock situation to get to what we call the normal situation, so no longer material out-of-stock situation in the course of the third quarter. And we believe that this is going to trigger, I would say, a further acceleration of the consumer offtake, which start to be visible. It's going to take some time, but it starts to be visible in the Nielsen data for as much as they are reliable.

We are around 15%. And in the last data we are now above 20%, and it's growing. So we have this positive phenomenon. And on top of that, of course, we will have the restocking in '25 because remember, '24 has been a year with significant out-of-stock situation. A number of distributor retailers will restock. So we have the accumulation of these 2 elements, and we expect a year of strong growth for ZYN in the U.S. ZYN has also tremendous potential outside the U.S. We see clearly, beside the Nordics market, which has been traditional market for nicotine pouches, good performance in countries such as Austria, Poland, U.K., Switzerland. There is clearly here potential for ZYN in Europe. Outside Europe, we see countries such as South Africa, Pakistan, Philippines and Travel Retail, Global Travel Retail is also a very good market for ZYN. So not exhaustive here, but clearly plenty of great opportunity.

And actually, ZYN in Q1 outside U.S. and Nordics, were growing triple digits. And then concluding the family of our smoke-free product, we have VEEV, our vaping product. As you know, it is not our first priority. We are developing it more tactically, but there is a lot of traction behind VEEV. We have a very good product, and we've reached already #1 position in 5 markets in the EU and among them, significant markets such as Italy, Czech Republic or Romania and Greece. And we see here a clear play where we develop VEEV when we are able to develop this business in a profitable manner.

And that brings me to what I think should be to your understanding of what is the future about smoke-free product, which is what we call the multi-category play, which we really see as the future and a very strong driver. What does it mean? Well, it means that at the end of the day, we see increasingly our smoke-free product consumer wanting to have a repertoire of brands and wanting to be able to, some time, even if very often, they will have a core consumption, but to be able to also have different experiences, different pleasure in the way they consume nicotine.

So you could have someone who most of the time will be using IQOS. But when the person is going to be between 2 meetings, he may go with VEEV with perform demand or when he will be working very hard in the office, he has no time for a break, he will be taking a ZYN. And when we play the team together, what we are seeing and we are already with the 3 brands playing together in 16 markets, we are actually seeing that they are not cannibalizing each other, but they are actually strengthening mutually because we introduced this consumer to the family and they will build loyalty to our brand, and that's the strength, of course, of having great brand in smoke-free, and that will further accelerate our progression.

What is also super important to note is that our smoke-free portfolio is coming with superior financial metrics. You know that the revenue per unit is higher. The gross margin rate is higher as well. We've been seeing a fantastic improvement. Well, that was already a great improvement in the 2024 globally. In the first quarter of 2025, 670 basis point organic margin improvement for gross margin on smoke-free products. You have, of course, ZYN, that is the best-in-class margin for us in the U.S. coming with a strong year contribution. But IQOS as well is improving its margin because we are increasing price because we are reducing cost but also because we are more efficient on the device, which is globally improving the margin.

So that means that today, so in Q1, we had a gross margin rate of around 70%, and smoke-free products are around 5 percentage points higher than combustible product. So when we grow fast and we grow very fast on smoke-free, you've seen Q1 volume above 14%, revenue above 20% organically, gross profit, more than 30% growth, and we are improving the margin very nicely. And it is, of course, very positive to the mix.

Now next to this very strong performance on the smoke-free portfolio. We have our combustible business that is doing well. So it's true that over the last 15 months, we have even been experiencing growth in volume. Don't take that as a new normal. We believe that the market for combustible outside U.S. and China continue to be experiencing a trend of low single-digit decline. That's what we expect for '25, by the way, but we managed to increase price. We managed to work on our cost. We have a lower level of headwind on input cost. We improved the margin on CC in '24. And we also improved it in the first quarter of '25, and that bodes very well for the rest of the year.

So when you combine this very strong growth, very positively coming from smoke-free, good resilience on combustible where we are able to grow revenue, improve margin. That is allowing us to confirm the guidance for a strong growth in 2025. We are targeting an organic growth of revenue from 6% to 8% and organic OI growth, operating income from 10.5% to 12.5%. and we are targeting a growth of adjusted EPS before ForEx also of 10.5% to 12.5%. This is before ForEx.

One of our big, big ambition is to grow in dollar term, the profit of the company. Last year, in '24, the ForEx was negative, but despite that, we grew in dollar terms more than 9% the adjusted EPS. This year at the prevailing rate on the 23rd of April, the ForEx is positive. And the guidance we gave at that time was a positive $0.10 impact on the currency, and that will mean at that FX 12% to 14% growth in dollar term of the adjusted EPS. Damian, that's what I wanted to say in introduction. Thank you.

Thank you very much, Emmanuel. I think if we start back with your sort of -- you're clearly the leader in smoke-free products, and you've got the ambition of having 2/3 of revenue by 2030 coming from these products versus where you were when you set the target. What's the degree of conviction that you've got in achieving that ambition.

Well, I think that there is plenty of things clearly pointing to the fact that it is a nice ambition to have and a reasonable one. Look at the growth in '24, 17% organic growth for revenue in our smoke-free business. Q1 was north of 20%. And there is, of course, a very strong differential with combustible. So that is what is driving this ambition of going towards the 2/3. Now we know that we have the U.S. where with IQOS, we're going to further accelerate on smoke-free. And we are, of course, extremely impatient to deliver that. And there are also a number of markets which are close today to smoke-free products and some of them are very big if you look at markets such as Turkey, Brazil, Argentina, India, Vietnam.

These are markets where when they're going to open, and we believe that common sense will prevail, we're going to further accelerate, if you want, the potential for smoke-free. And that is how we see our journey toward this more than 2/3 in 2030 today.

Okay. And I think you've talked about or started to increasingly talk about the multi-category approach that you have. And I think Philip Morris is well known for IQOS and more recently ZYN to the acquisition, Swedish Match. But you've also sort of started to talk about VEEV and vape a bit more. Can you just give an example of how it works on the ground with all 3 together. And are there any good examples where you've got multi-category working well in some markets?

Sure. So the first example of that is certainly the one that illustrates the interesting of the play, but it's very specific, is Global Travel Retail. So typically, you will have duty-free space, consumer is coming, it's an Italian traveler who wants to buy his IQOS for when he's returning to Italy because, of course, he's going to get a good price for it. And then he has a long-haul flight. So you know that it's going to be 10 hours in the plane, and he entered the duty-free shop. And of course, we have a team here to introduce ZYN and say, you're an IQOS user. You're not going to be able to use it during the flight. Have you been trying ZYN and also you build the understanding of the knowledge, you ask about, okay, which kind of strength of nicotine do you enjoy, which kind of flavor, you can offer a ZYN that is going to correspond to that. And so you introduce him to a new category.

And then very often you tell, by the way, it's not for now, but if you are also sometime using vape, have you tried VEEV and you can have that. The fact that people are very often coming from 1 strong brand that they trust, that they enjoy is, of course, creating a great entry to the other because they know that these are great brands, great quality, reliable, and they know that this universe of brand, this portfolio of brand is delivering great, pleasurable moment. So there is clearly a very big strength for me in having this, what I call the dream team together and pulling the 3 brands together.

But outside Global Travel Retail, we could mention today Poland, Greece, Romania, where we see an acceleration, I mean, for instance, on VEEV but also on ZYN, that is directly coming from this multi-category play. So 16 markets, as I said, where we have today, the 3 brands, 20 where we have only 2. But the idea is everywhere we can, it's going to be to play. Of course, each brand will have a different share in each country. depending on the specifics of the country. But there is a very, very strong play coming from playing it as a team.

And given the sort of the long-term ambition for the nicotine space, everybody is sort of interested in which particular category is going to be the biggest. Do you have a particular view or is it too early to say?

Yes. I think it's very difficult to say today. I think each category has a role to play. You still have 1 billion smoker on the planet. And nothing can replicate the smoking experience better than IQOS. So it's absolutely great in terms of feeling, in terms of mimicking, repeating the experience of smoking, the very rich flavor of tobacco. So I believe that this heat-not-burn category in general and of course, IQOS owning around 75% of the category as the arch leader has a tremendous potential because this is a category that is going to clearly resonate with a billion smokers, and of course, with different products, different positioning in order to reach the maximum number of people.

Vaping has a role to play without any doubt. But as you know, Damian, we are calling for a much more responsible regulation of this category. One of the difficulty that I think smoke-free products are still facing in a number of countries is coming from the fact that vaping has been during a long period of time, the wild, wild west and a lot of people going for unacceptable commercial and marketing behavior, clearly targeting underaged people with high nicotine content to pit flavor. And if you go to lollypop flavors or bubblegum, I mean do we seriously believe that we are targeting legal age consumer? The answer is no.

Where can you sell and also on taxation because today, very often people say, "Yes, you enjoy on IQOS a significant discount in terms of excise duty versus combustible. Yes, of course, because it's much less risky than combustible. But actually, IQOS for a very similar impact in terms of exposure to toxic and versus a good vaping product because all vaping products are not good, is much more taxed today.

So I think that there should be also some reflection on, okay, what is the right positioning for tax. But vaping has a role to play. I would say for me, it's perform demand and it's for people who say, I don't necessarily love tobacco and liquid with nicotine is fine by me. And then you have nicotine pouch, which I believe has the potential to be a game changer to be very clear. Because this is a product that is, of course, going to offer to people who enjoy nicotine, a way to consume nicotine with a lot of freedom, you can consume ZYN wherever you are which is regaining the ground lost for the last 40 years on combustible cigarette. You can also enjoy your ZYN being active. So that's not by coincidence that truck driver, military forces, I mean office people, you can enjoy it indoor and you can be active doing something else, sportsman as well.

So that's a product that is just opening new movement, and I would say, unchartered territory in terms of consumption. But what we find for ZYN in the U.S., which I think is really interesting is that a lot of people consume ZYN as a lifestyle product. It's an energizer. It's a stimulant. Sometimes they see that as a supplement. Some of them even tell us, "You know what, I used to take a lot of energy drink. And today, I take less energy drink but I take ZYN as a stimulant. And when I take my ZYN, I feel sharper, less stress, more focused, better at what I'm doing, which is due to the impact of nicotine on the brand." And I think also, ZYN, because you are no longer inhaling anything is also allowing to maybe better understand what nicotine is about.

The drama of nicotine has been the entangling with combustible cigarette for 1 century. So people associate nicotine with the bad coming from the smoke that is carcinogenic and creating the disease attached with smoking. Nicotine is not without risk. It's a stimulant like caffeine. So of course, it can have like a stimulant if you have cardiovascular condition, you should not be consuming nicotine, but it's not carcinogenic. It's not function impairing, it's not intoxicating. And at the end of the day, the reason why people get addicted to it, it's because it increase the level of dopamine in your brain. That's why people feel less stress, less anxious and just more focused, sharper in their mind.

And you have studied today, not done by PMI, so we can mention it in Sweden showing, for instance, that if you've been consuming nicotine in your life, you have a lower risk to have Parkinson's disease. You have a study in the U.S. on the benefit for cognitive processes of nicotine and can it slow down the development of Alzheimer, as an example. So there is also some positive that needs to be understood on nicotine. And I think that ZYN maybe is allowing to have a more pacified debate on that because it's no longer an inhalable product. So I think all category will have a big role to play, and it's impossible to say that they will be a winner. I think all of them are going to win at the end of the day.

Just on that point around the sort of the benefits of nicotine, do you think we will ever get to a place where you can make those positive claims about the brands? Or is that too far in the future.

Well, we're a consumer good company. So we are not yet to make today a kind of claim of take that and you will have this kind of benefit. And we hear a lot of expected or believed benefit that, of course, we are not making any claim on them from many different horizon. I think we just want to make sure that nicotine is not demonized because if it is the case, that means that you have people who prefer to keep people smoking than explaining what nicotine is about and having the right tobacco harm reduction policy to bring people who are smoking towards other nicotine products that are much better than smoking.

So for me, it's not about having any kind of healthy or positive claim, but it's ensuring that we have the right debate and the right action to drive the right behavior for the positive impact on public health.

Okay. So if we sort of move into some of the new product brands that you've got, IQOS has clearly been a great success. Japan was one of the first markets it's launched into. It's now sort of over 50% share. I think you've talked about what heated tobacco does on one level, but what is it about the Japanese market that has allowed you and IQOS to sort of take such market share, do you think?

I think that -- so first of all, Japan is where we started first, more than 10 years ago now. And there was this conjunction of people open to technology innovation in Japan, which was very important. And the fact that quickly the consumer realized that with this product, they have a lower impact on their environment, and they can use it with less lower level of secondhand impact. I'm sure that this has been played.

And then I think it has been the fantastic job done by the team, where in Japan, and I don't know whether some of you have been traveling to Japan recently, but IQOS is a lifestyle brand. So we are developing IQOS, of course, for the benefit of the smokers. They know that they have this better alternative and they see their impact on their daily life. But it's not coming as a kind of, yes, it's just a product I'm using, and I have my pleasure, and that's it. It's really entering into that's part of my life. It's related with sometimes my passions, what I love. We connect the brand with cuisine, with decoration, with design, with fashion. And I think it's really entering a lifestyle. And that's, I think, a big reason for the strong success of the brand.

And I think it's also because we kept innovating on the product, so several generation of device. We've been innovating a lot on the consumable as well. And gradually, we convinced even the most entrenched smokers that IQOS is for them as well. I was in Japan not that long ago when we had some customer interview. And for the first time, there was a number of people significantly above 50, still very young, but above 50. And they were saying during a long period of time, I thought IQOS was for the young adults. It was not for me. But now I feel proximity with the brand, and I believe, yes, it's for me as well, and I understand the benefit of it. So I think this is the kind of thing that is happening in Japan and explain the success.

So if we then look at one of the markets where you're kind of only really just touching the surface in the U.S. Can you sort of give us an update on where you are currently with the regulatory process? And also, you've recently expanded into a second city running the trials. Are there any insights that you've sort of gained from Texas or Florida yet that give you conviction?

Sure, Damian. Look, so far, to test. So of course, let's be cautious, but everything we've been seeing both in Austin and in Florida, where we're doing the second pilot in Fort Lauderdale is the confirmation of the fact that you still have almost 30 million smokers in the U.S. and they are not all in rural traditional area. You have a lot of people living in the big cities, open to innovation. By the way, the U.S. consumer love new things. They love new trends who love things that are different, new, sophisticated. And I think the 2 tests are confirming that IQOS resonate with these people. So they love the ritual, they love the look and feel. They rapidly see the difference versus smoking and what they can feel with IQOS in terms of no longer smelling tobacco.

You know that to feel the impact on the way you breathe, it's very short. I mean, in a few weeks, you're going to feel the big difference between smoking and IQOS. And therefore, when you put all that together, yes, you have the ingredient of a brand that is creating trend that is, again, beginning of a connection with lifestyle. So this population of people who are from various community in the U.S., okay? So clearly, there is not one community that we believe will be more quickly adopting. But we clearly see that strong resonance in the cities people with certain purchasing power, of course. And again, I think that this test for new things, innovation and the capacity that we will have in most states in the U.S. to communicate, we believe, are the ingredient for success for IQOS in the U.S.

Okay. And then so sticking with the U.S., ZYN has been a huge source of excitement for lots of people. You're starting to see capacity sort of recover when you recently upgraded that outlook for this year. Can you sort of just talk about where you are in the journey of getting capacity back to where you'd like it to be? And perhaps the new capacity that's coming on stream next year.

Sure. So quite a while ago, we said that we would be having around 900 million can capacity for the year. I think if anything, we have some good news of anticipation of putting in place some new capacity at the end of Q1. So we did not revise the expectation for the year. But that means that we believe that we have for the whole '25 what we need to deliver our guidance. But then, of course, in terms of putting an end to the out-of-stock situation, it takes some time.

Remember, we start to ship first our product to wholesaler and distributor. And then themselves, they're going to ship the ZYN can to more than 200,000 sales points. So that takes time to really feed the whole pipe. So that's a gradual process that will take a few months. We said that in Q3, we should be back to normal and we expect to see already some of that materializing in Q2, but it's going to be very, very gradual. But people should expect, therefore, for '25 to have, again, the combination of consumer offtake growth and we'll have on top of that the restocking, which will make '25 relatively special year, I would say.

Yes. And in terms of -- there's quite a lot of competition coming into the category in the U.S. How do you see the category evolving from a competitive point of view?

So you're right, Damian, there is a lot of competition, but I think you should expect that talking about the competition category that, sorry, has already a multibillion dollar value, growing still around 30%. So everybody wants to take piece of the cake, as you would imagine. And that is driving a lot of behaviors.

I'm not here to say which brand are I would say, legal or according to regulation in the market, I think a lot of people are trying to play with the regulation. We are still today the only brand with PMTAs for all our range actually. But of course, many other people are here. And what we can see is that in order to try to grab part of the cake, everybody is incredibly aggressive on price. So discounting across the board is the name of the game for everyone.

So because of scarcity for us, we've seen actually our average retail sales point above what we think is normal because we had some distributor who took benefit of the out-of-stock situation. But let's say, a can of ZYN in the U.S. today should be on average around $6 in the U.S. Most of the competitor is around $4, if not below, and all the big names that you have in mind, you're going to find them at 3 for $6 too. You buy them in promotion at $2 for a can.

So that's -- and you have many competitors doing that, to be very clear. So that's what is happening today. And that means that we've been creating because maybe apart from Rogue that is a bit closer to us. But we are the only one with our price positioning and the rest of the competition is very low. So we clearly have been setting the bar high. We are the leader in term of market share. We are the leader in terms of image, premium mass. And of course, there is a whole pop culture that is developing around ZYN and at the same time, receiving the PMTAs for -- by the FDA for the full ZYN range, which, as you have been noting, not only include mint, menthol product, but also lemon, citrus, cinnamon and coffee.

When on vaping, the FDA has not been giving apart from 1 reference, any flavor product. So it's a recognition by the FDA that they believe that we are marketing our product in a very responsible manner. I think the strength of the can is also important, 3 and 6 milligram. You could expect maybe the FDA to look at what is the maximum nicotine content that is acceptable. So I think it's still a landscape that has to evolve, but we are between our leadership, the PMTA that we have, quite ahead of the competition.

And I think you mentioned in your comments that sort of you think that the category or the pouches can be a game changer. There's been some debate about how easy the consumer transitions into pouches where there isn't a traditional use of all nicotine. What's the experience of ZYN in those markets where there hasn't been a...

Look, I think you're right. It is obvious that Nordics, U.S., you have this traditional of oral product, and that makes the growth of the nicotine pouch category faster at the beginning. But let's be clear, we are today in a world that is still largely global. So people see the trend developing. ZYN, which was outside U.S. and Nordic, not really a brand. I mean, we've seen when we have launched in the U.K. that there was already a pretty nice franchise being the brand, which is just coming from the U.S., to be very clear, due to the connection.

And I believe that the legal edge adult until 39, which maybe are the one who are going to look at this product first. I think they're going to learn fast. They're going to see rapidly friends coming from other countries using it. So yes, it's going to take a bit more time, but the product is so convenient, so different and again, probably quite different or additional in what it brings to the consumer that I don't think that we're going to need years and years to see some nice growth and the category becoming also a material one in many countries.

If we switch to the sort of the combustible side of the business. Now I think you mentioned in your opening remarks that you've had some decent volume growth over the last couple of quarters, but we shouldn't expect that to continue. Can you just sort of provide a little bit of color around what's contributed to that growth recently and why we shouldn't be expecting that to continue?

Sure. So the fact that during 15 months, we've been growing volume in the combustible is due to several factors. First of all, you had a number of countries with positive demographics. Sometimes we've seen from Western country, it's difficult to see that. But you have actually legal age 29 population, growing pretty fast. So you have potentially new nicotine users. And in many of these countries, you have a ban on smoke-free product. So this young legal age adult, the only option is to go for smoking, and that is triggering -- I mean, that's what we see in Turkey, in India, in Vietnam, that is triggering a growth in the smoking consumption. So that's one element, and that can be significant on volume.

Second, you had a market that have been disrupted, and we very nicely benefited from that. And I'm thinking about Egypt, notably where the big local producer because the economic turmoil has been limited in its capacity to produce. So we've been increasing in a big market in terms of combustible, our market share, and we're going to go down to a normal situation gradually because the local player is gradually also going back to normal in terms of capacity of production.

And then the geopolitical situation has also been playing because when you have war conflict, issues between country, you have the borders being closed. And you see then the illicit trade decreasing. And this is, of course, favorable for the legal real product trade, and we've been benefiting from that. I think this one as well, it's a one-off effect. It's not contributing every year. So you have a positive contribution. And then, of course, you lose that. So I think gradually, we're going to be back to the normal trend again of the combustible business, which is low single digit. And we actually believe that is going to be the case for us in '25.

I think you sort of made a very strong reduction in gearing last year, I know you did, but you said not to expect the sort of the same level of sort of de-gearing this year. Can you just sort of talk about the pace of de-gearing towards 2026 and then capital allocation plans after that when you get to sort of your target.

Sure. So as you know, Damian, we have the objective to be around 2x at the end of 2026 of net debt to EBITDA. We are on track for this objective. We signaled that in '25, after a very strong deleveraging, you're right, in '24. I mean today, but it depends -- it's very volatile because it depends on the currency. We're not necessarily expecting the same kind of speed of deleveraging, but we expect some deleveraging. And we believe that we are on track towards this around 2x for 2026.

What we said is that once we are there, or that we see that we are clearly going to get there, the topic of the buyback will be rediscussed with the Board that only once we are there, I think that before this question of the buyback, if the ForEx stay where it is today, which means that not only are we growing fast before ForEx, but ForEx is even adding, potentially some extra growth. I think the question will be the speed of the growth of the dividend. You know that we have a policy on dividend, which is very clear. It's progressive. There is only one way for the dividend that is up. It is true that in the past years, because we're investing and because ForEx was most of the time negative, we've been growing dividend but at a more reduced pace. It was 3.8%, I think about that in the last increase of dividend. I think the Board will say, okay, what does it mean for the dividend progression to have such a strong growth on the adjusted EPS?

Yes. I mean my last topic of conversation probably could take the entire duration. So I'm conscious we've only got a few minutes left. But on regulation, clearly, there's a heterogeneous approach to regulation, and you've touched on some of those markets, where sort of next are banned. Where do you see good progress in terms of regulation? And where is it you sort of think other things could be improved.

Look, let's start with the positive. You have many countries and many important countries that are firmly engaged on tobacco harm reduction. I mean the U.S., okay, FDA has been too slow and is too slow in granting the PMTA, but they have a very clear and neat strategy to go for tobacco harm reduction, say, yes, we need to promote this product, and they have this mechanism between PMTA and MRTP. But they have, of course, some frame in which they want to put that.

Now if they can accelerate to clarify the landscape that would be good, but they have a plan. Many European markets have a plan. I mean if you look at Italy, Greece, Czech Republic. I mean, you're going to find many countries put tobacco harm reduction sometime in the law as a big objective for their public health policy. Outside Europe, you're going to find Philippines, you're going to find markets such as New Zealand, among many other once again, who are also firmly engaged on that front. So there is a lot of things going in the right direction.

Now unfortunately, it's true that it's not the case everywhere. And you still have a number of NGOs, organizations such as WHO that are more obsessed by sometime underage protection than by pushing smoker to go to a smoke-free product. And we believe that it is perfectly doable to do both, to protect and really have a very strong policy to avoid underage consumption but clearly oriented 1 billion smoker towards better product. And I think today, this obscurantism, the fact that they don't want to look at science, the fact that they are more in dogma than in really looking at science on fact and being pragmatic is terrible for hundreds of millions of smokers.

So hopefully, things are going to continue to progress. But certainly, and I mentioned all the bans that we are still facing in a number of countries. It's not going as fast as we would like and as it could.

And on that sort of the U.S. has sort of been a hot topic of debate in terms of changing sort of government changes at the FDA. Have you seen anything that gives you sort of encouragement from what either the new government or the incoming sort of ahead of the CTP has said?

So you said it. Damian, there is a new head of the CTP, his name is Bret Koplow. He is not a newcomer, 20 years at the FDA from what I have been told. So he's not starting from a blank page where you would have to redefine everything. I think he has been participating to the work already. So for the time being, he's acting as director. So I think it will need to be confirmed. But if you read of some of the things that he may have been saying and so on, I mean, it gives a feeling that it's about pushing tobacco harm reduction, ensuring the smoker understand the benefit of a better product versus combustible and also, of course, fighting very, very fiercely against underage. So I mean he needs to come with certainly his view and the road map. But the good thing is that it's not someone coming and we will need months to understand what the tobacco space is about and what should be the policy.

Well, I think with that sort of hopefully positive outlook for regulation in general, but the U.S. in particular, we'll leave it there. Thank you very much, everybody.

Thank you everybody. Thank you, Damian. Thank you very much.