Philip Morris Stock

Good morning, everyone. Thank you for being here. I'm Pallav Mittal, Head of Global Tobacco at Barclays. I'm thrilled to have Jacek Olczak here with me, CEO of Philip Morris. Thank you so much, Jacek, for giving us this opportunity to host you. We will start with a few comments from Jacek, and then we'll move over to Q&A. Over to you, Jacek.

Thank you. Thank you for having me. The standard slide in the beginning, including the forward-looking and cautionary statements, which as always, we encourage you to read. And earlier today, we issued a press release revising our full year guidance for currency only. So now we're cruising at the spot rate, the favorable currency impact of about $0.24 -- at $0.12 to $0.24. We also give an update how we see the currency impact on the Q3 results. So we're turning into $0.01 the current spot rate favor.

I mean there are a few big ticket items, if you like, which are happening this year, at least for PMI. One is obviously the tax price change situation in Japan. As you remember, the prices taxes, excise tax went up in April 1. Now we're going into second stage of the tax increase and the price increase. The prices has been registered by all the main players, including us. So we have a visibility how it's going on.

I have to admit that, obviously, in a country when the prices is not happening very frequently, the absolute amount of the price increases, I mean, it always create some sort of a shock wave at the market at the consumer level, especially that this time we had -- this year, we had an asymmetry between a heat-not-burn category and the cigarette category. There is one more excise increase in the near term happening as of April 1. This will touch also cigarettes and heated tobacco product. But I think so far, the market is -- category is doing very well if you consider the magnitude of the changes which the consumers have to go through.

So the categories, we're resuming to the growth. Obviously, there was some sort of loading, the loading, pantry loading by consumers level. This whole thing has stabilized what we have seen over the last period before entering into October increase. I think it's all going in the right direction. Okay? There will be for the full year, we're still aiming at on the net adjusted basis, IMS growth in Japan, obviously, at the different levels that we used to have in the past.

I think if the category goes through this magnitude of changes, so April now October and the next April price changes, I think it all goes well for the future of the category. As you remember, about a year ago, the category -- this year, the category has exceeded 50% growth volume in terms of volume terms of the total nicotine market. Japanese market is essentially combustible cigarettes and heated category.

IQOS somehow holds the very high share of the segment despite the fact that there were different pricing strategies, if you like, tactics applied by the competition. And IQOS is at the high end of the market at the premium, but actually, it went very well. So this is an IQOS. Second thing is obviously U.S. And over the last couple of months -- in 2 months, as we announced as we were guiding the market before, we have expanded the portfolio of ZYN and our flagship pouch product into the moist version and the higher nicotine. This goes under the trademark of under the label of ZYN ULTRA.

A short period of time, the market has introduced more than 20 SKUs. So obviously, there is a massive effort on building a distribution, but also a massive effort to communicate this change to the consumer because from one day or another in many accounts, all of a sudden, the portfolio rapidly expanded. So consumers have to find out what is this news in both terms of the nicotine strength, but also the flavors.

There was more things coming into the market as we speak. But our strategy for the U.S. on the pouch market is very clear. We'd like to obtain a sort of asymmetry in the market, our portfolio versus some other products, some other brands, also having in mind that this historical price premium, which the ZYN was carrying from the time, which essentially was by far the only player in the market.

So despite the fact that we believe ZYN can carry the premium, but we need to adjust the premium to something which is more manageable. So we're doing this also while we introducing new products to the market. We're doing a conversion from a 15, which is a traditional pouch count in the U.S. market, we're going to the 20, creating some extra value to the consumers, which I believe is going to help tremendously, already is helping ZYN today what we see from at least the last period's performance, but very much it's going to support the future ZYN growth in the market here.

So we're very pleased with the development. Obviously, we are watching carefully the FDA and how this regulatory environment is playing out. We're getting more and more clarity. Are we in the perfect situation? Yes, we are not. So we happy with what we have today with all the PMTAs which is in our portfolio have received absolutely, yes, because everything adds to our -- adds the clarity, we can construct the plans more solidly going forward.

Now on the combustibles, which are doing on the face value, be better than one could expect from the past. But if you zoom in into which markets, et cetera, the combustible volumes are doing better than expected. I think there is a very strong correlations to the markets which do have some sort of a significant penetration of the smoke-free products versus the markets which do not for very much regulatory reasons, don't enjoy -- the consumers can't enjoy the access to the smoke-free product.

So I mean, clearly, these volumes, better combustible volumes are coming mainly from the markets where SFP, smoke-free products are not allowed or not marketed and not commercialized. And it somehow also reflect the underlying dynamics, the demographics, et cetera, population growth, GDP and some other factors, which we all know. But having said so, yes, the category is doing a bit better than we thought.

It's also nothing from our side, nothing wrong with this one, but our focus was on this and will be on the smoke-free product and opening the new markets. And obviously, U.S., which is a very big, very great opportunity in front of us, but also the markets in which we already have a significant position. I mentioned Japan, but very much Union -- European Union. There's also the pockets of geographies when the unit profitability is more attractive than the rest of the world. And that's for me. I guess you will have some questions.

Sure. That's some very good context, and we will go into the details on IQOS, ZYN and combustibles one by one. But if you could just start high level and as IQOS and ZYN and smoke-free penetration continues to increase, what we have seen over the last few years is you have had low double-digit, low teens EPS growth. Do you think that growth is sustainable over the next few years as you expand in the market?

Yes. That's our midterm algorithm and I believe it's a very -- it's attainable algorithm. And obviously, the quarters may differ, et cetera, but if you take a bit longer outlook for us. I think we can deliver in these ranges. Now this is all based on, I mean, the major shift which has happened at PMI over the last good few years. We started the smoke-free implementation of the smoke-free strategy about 11 years or so ago, as we remember, Japan and Italy. But very important is that we brought the whole company volumes into the growth. And actually, we're shooting for a sixth consecutive year of total volume growth.

So I think we started delivering a much better quality of the revenue growth that we used to have when we were very much the combustible cigarette company. We all know the algorithm in the past. There are a few things which we retained and the current -- past and the current performance proves that we still command quite a pricing power, if you like. So there is a pretty solid pricing coming from combustible cigarettes year-over-year.

But also there is some pricing coming from a smoke-free products very much from the category -- heated tobacco products category. Obviously, to the different extent because the dynamics is different and the strategy is more into go after penetration, grow the segment, maintain leadership or establish a leadership position in the segment. So you need to balance the share aspirations, volume growth aspirations and the price somehow in this equation.

But both categories, combustibles and smoke-free products are contributing to the pricing variance in addition to the positive volumes. So this is very good. So if you look down from the top line, the rest is -- well, we know that this is not the extremely CapEx or COGS, if you like, a heavy category, the margins at the gross level are very attractive. And the rest is essentially the reflection of the strategy of how far we want to go and open or penetrate, as I said earlier, grow the leadership or solidify the leadership in the category.

It's very much, if you like, discretionary marketing type of spend, which depends on the elections we make in a given period, may go up, may go down. So I feel pretty confident that the earnings to the bottom line is going to grow and we're going to hit our algorithm. But also we don't try to be feel that the algorithm is somehow too much of a straight jacket, which would impair the company's ability to react to the market situation opportunities, challenges on a much shorter period of time. And this is how we play this whole thing.

I should mention one more thing because I talk about the pricing, and I spent some time explaining Japan. So we have a tax increase price -- sorry, excise-driven price increases, high magnitude. Japan has changed the system of taxation. We call it the equalizations to the CC, but in -- the combustible cigarettes, but in exchange, actually heated tobacco categories gaining now a price productivity, which is equal to the cigarette because in the past system, despite the fact that the category was enjoying lower taxation per unit, right, than the cigarettes, the price productivity was actually not very incentivizing the addition of the pricing to your growth mix.

So essentially, as of now, the price product -- essentially, it means that for a given unit of the tax changes, we don't have to increase the prices so much. So if we increase more is retained to the company.

Right. So going into some of the details and starting with IQOS, clearly, it is on top of investors' minds in terms of the growth story. In '26, we have seen a couple of transitory headwinds, call it, the flavor ban in Poland, the excise tax increase in Japan, as you were highlighting. So going forward, in the second half of this year and then 2027, do you think it is fair to assume that you get back to the $15 billion sort of incremental sticks every year? Is that a fair expectation to have?

Yes, we try to guide the market more from how we see the total volumes of the company, rather be very specific. As we know, in many countries, we have now the -- what we call the multi-category strategies. We don't stay shy of introducing the electronic cigarette into the IQOS users portfolio. So I think we feel very positive on the total volume trajectory.

Now IQOS, I mean, a few of the -- I mean, there always in the history of IQOS, go back again to what has happened over the last 11, 10 years, there were always some headwinds. okay? There were the flavor bans, majority very much in the European Union. Majority of the countries has gone through this whole thing. I think one of the largest countries when we had the exposure on the flavors was Italy.

And as Italy went through the couple of months or quarters of a bumpy road and you look at the growth rates of Italy today, if you wouldn't know that there was a flavor ban, you wouldn't notice this from the volume performance, both for the category and for IQOS.

So Poland is one of the -- well, large flavor market and the last market from the large market in the EU, which has to go through this transition. I mean, based on what we have observed in other European markets, yes, I mean, there will be some sort of shorter-term headwinds, but I don't think it's going to change the attractiveness of our category in the mid to longer term.

Yes, excise, look, the taxes, we are in the nicotine industry. In the past, we call it just the cigarette or tobacco industry, but we need to broaden this whole thing. It's not that we like the taxes, but the taxes are something which doesn't keep me awake for too long. In a sense, we've seen so many tax changes country by country, year after year. This is something built into the way we're managing the business.

What we always were saying, and I think this is true also in a smoke-free category that there is an ability to manage the taxes for the prices as long as they are becoming a sort of a regular event and some sort of a moderate level of increases. Now from time to time, you always have one country, one government, which tries to do something unorthodox and like Mexico recently and you have a period of years of no tax changes, some price changes driven by manufacturers and no tax changes and all of a sudden, tax doubles. So I mean that's the shocking type of -- is the sticker shock at the consumer level.

And then we need to somehow moderate the impact like maybe partially absorbing or maybe taking some prices -- some price increases ahead and I catch up later on. I mentioned Japan again because that's the most recent event. With this massive tax changes imposed on our heat-not-burn category after our pricing, which we announced as of October 1, we essentially pass through plus there's a margin improvement in the market.

So I think we have that capacity, and I mentioned how IQOS and the category is performing. I think we're going in the right direction. The rest of the market is still, if my numbers are right, in a quite a significant absorption, but we manage through IQOS -- with IQOS, sorry, to pass it through.

So the headwinds are there. I'm not saying that this is -- the waters are flat and they are pretty choppy waters on occasions there. But we operate on a truly global basis. As always you have a market which you -- I think a very nice surprises. the market reactions, the fiscal regulatory and there are some markets which might have some hiccups, and we just have to go through this whole thing.

Right. If I can just ask on the Japanese heat-not-burn market. So I think this year, you're still expecting the market to grow despite the excise tax environment. And then from next year, tax increases for cigarettes and heat-not-burn will be pretty similar. So should -- do you expect strong growth to return to heat-not-burn IQOS in Japan from next year?

Well, there will be some volume impact, right? I mean today, we have this misbalance that heated tobacco products took the price, cigarettes there. So obviously, cigarettes is the only sourcing, if you like, pool of consumers going into the heated tobacco products. So there is a temporary sort of a price disincentive to go and instead of paying whatever JPY per a pack of cigarette, I have to pay more for a pack of TEREA, okay? We have a cent here, 50PM lower, but still it's an upper part of the market.

But I think all these things should somehow wash out iron out once we will have -- assuming whatever pricing right will happen in April. But this is the first time that the cigarettes will go up. So I think the consumer thinking will somehow incorporate this into their decisions. What I'm saying is despite the fact that there was this massive imbalance price increases on a heated products compared to cigarettes.

And I still see how the category is performing so far. I mean, assuming nothing will be broken in the second part of this year. But then the next year, the situation is even better. But from a total overall consumption level, well, I believe the loss of elasticity somehow will kick in. We need to now see how much they're going to impact the heated category versus CC category. But I think, again, from a financial performance perspective, not a volume performance perspective, as Japan has a pretty attractive fiscal multiplier, how much you can retain from a given price increase into the company's margins, I think on the revenue, we should be fine.

Right. Before we move into nicotine pouches, just on IQOS ILUMA in the U.S., is there any update in terms of the PMTA time line? Because last time, I think when you were talking to the market, you said it is pretty close. Any update on that would be great.

No. I made this in the past public events like this one, I make this -- yes, not a mistake, but I was offering a time line and I was always wrong. So I refrain from referring to any fortune telling with regards to when we can hear -- when we can get authorization for ILUMA from FDA. I guess the long weekend was also on the federal level. So I guess the agency was not working over the long weekend. So let's leave it like this.

I think clearly, we are -- in my view, we are -- it's shorter, it's sooner than later. The file is with FDA for the long time. I know that there are the conversations discussion with FDA. But until we have the PMTA, then you can't do anything. But our focus is on executing the ZYN strategy. I mentioned what we have launched into the market over the last 2 months. That's quite an impressive portfolio enhancement.

So we are busy with putting ZYN back to -- on the growth trajectory, recover the share, at least to some extent, and we're busy with this one. I mean, IQOS, we are ready, ready because we have all this international experience, et cetera. So it's more the question as of when we can bring it to the market. I still believe that heated tobacco product, IQOS in particular, as the undisputed global leader has the room to play here.

I still confirm that I see over a period of time, heated tobacco products can take, say, a 10% of the combined cigarettes and the heated product. This is what we see in our market. So it's not that I'm trying to develop here some different unique scenario. I mean it's essentially the average sort of performance IQOS has achieved if I group all the markets in which IQOS is present today.

By the way, I mean, the U.S. is the most developed, if you like, in nicotine market. If you take into consideration all the product categories and emanations which you have, okay, some are so-called illicit, some licit, okay? That's more the issue, which is on the regulatory side, very much on a vape to the much, much lesser extent on the pouches because the legal market is more developed, thanks also to some FDA decisions.

But I think when IQOS would when IQOS will come to U.S., I mean, frankly speaking, IQOS will be category on its own. right? So I think that advantage is still in -- from this opportunity is still in front of IQOS. I think whenever we'll get these authorizations, we are ready to go and introduce IQOS ILUMA to the market. Remember that we have authorization for IQOS, but due to all of this latency of FDA, et cetera, or the long-lasting process, we ended up in that situation is that technology for which we have IQOS version based on the technology, which we have the full-fledged authorization and nothing technically stopped from launches to the market is the technology which we essentially retired on the international.

So normally, in the consumer goods space, you would expect U.S. to be a bit at par or a step ahead on innovations to the market, and now we ended up in a reverse thing. So for us, to be very frank, it doesn't make sense to go to the previous IQOS and got it here if we still have in view that IQOS ILUMA, the latest will come.

By the way, the ILUMA will not -- IQOS ILUMA will also not last forever. And we are already gearing up for -- without disclosing too much of the details, we're gearing up for the next big thing from IQOS. So we cannot afford recycling on a global basis, a very past technology and the latest modern technology. So internally, it's extremely difficult.

So moving to nicotine pouches and starting -- maybe looking at the big picture. I think at Q2 results, you were saying the category growth is 20% to 30%. But when we look at recent data, it has slowed down to mid-teens. How are you looking at the category in terms of the growth rate in the medium to long term, I'm sure people are focused in the very short term. But in the longer term, how do you think about the growth rates in the category?

Yes. So I guess we're looking at the same numbers. So everyone is torturing Nielsen in the similar numbers, left, right and center. I still believe that the category is growing 20-plus percent. The few weeks of different trend doesn't really, I think, changes the fundamentals as you could see more products coming to the market. I talk about our brand, ZYN. But I guess, well, I know there are some other entrant introductions into the market.

Market -- pouch market, unlike -- unfortunately, vape market doesn't -- is not competing with this massive so-called illicit products very much because the legal part of the market is well developed. Products are being introduced on the ladder of the nicotine strength to the upper end and to the lower end. So I think there is more choices for the consumers and some flavors as well. So the market is pretty well structured.

Second thing is if we're looking continuously on the sourcing to what is into the category. I mean the U.S. has the pretty sizable pools of sourcing, which I think are fueling or supporting the category growth. One is something which is obvious, which is other oral tobacco products, not maybe the largest category, but still existing here and this on its own gives the support to the growth. But we know that the e-vape users and obviously combustible cigarette users are coming to the category.

What is different is that each of this sourcing group of consumers will come with a different pattern of consumption. So obviously, for people who are coming from the oral tobacco categories, I mean they will try to convert into pouches at the higher daily consumption rate, right? So the consumer, if you like switching from oral going to the pouches will give you more support into the unit volumes.

Vape and the cigarettes will tend to incorporate pouches as a part of the daily repertoire. And now it's the whole journey, how quickly they will starting 1 or 2 pouches per day, how quickly over a period of time, they will go to 6, 7 or maybe more even pouches per day. I mean the only reference point which we have at this stage, which doesn't matter is a strong or weak point where the only point which we have is the daily consumption in Sweden, okay?

But how Sweden can be replicated in U.S., we don't know. But this is the only data point, right, which the whole industry, the market has, which is well, well above what you have today on a daily consumption here. So again, to sum it up, I still believe it's a strong 20-plus percent growth of the category. Yes, on a weeks or whatever shorter period, they may look like a slowdown or acceleration, I wouldn't -- I mean not that much overly excited. I think oral category has the future for a variety of reasons, okay?

The only bottleneck or headwind, if you like, to the category is that this is extremely different ritual from an inhalation product, doesn't matter smoke-free or combustible. People have to -- consumers have to adjust. But in exchange, they're essentially receiving much, much less restricted freedom of the usage of the product, which I believe is very important for the consumers of our category. Now this takes time. Price is very attractive compared to the other categories in the market. So this is not an affordability, if you like, per se challenge. So I think future or the longer-term future of the oral category, I mean, it's absolutely great. What will happen in the shorter term, I mean there are the variety of different factors, which can play the role.

Just on ULTRA, I mean, it's been now 2 to 3 months since you launched. Anything that you can add in terms of the incremental growth that it is providing and any cannibalization of the flagship ZYN brand?

Yes, it's 2 months, but is a new product in the market. As I said, 20-plus SKUs went into the market. You need to build the distribution, put it on the shelf. And most importantly is that unlike a classical portfolio development that every period or so, consumer is noticing, there is 1 or 2 more SKUs coming into the market. It's 20-plus SKUs is quite a lot to upsell. ULTRA is delivering as we have been assuming in a sense, this gap on the -- above the 6 milligram, which was ZYN -- before ZYN flagship, we used to call it flagship, but this ZYN flagship is 3 milligram and 6 milligram. Now we're going into the 9 milligram and 11 milligram. There will be other additions. We're also looking into extending the portfolio to 1.5 milligram.

So I think now the spectrum of nicotine strength will both addressing people who are coming to the category because they tend to -- obviously, most of them tend to rather go over lower nicotine strength and once they're increasing their daily consumptions and being more familiar with how to use the pouch, they will trend to go up. We also see that some people are going up with the nicotine and over a period of time, if the consumption changes, increasing the number of units per day, they will try to go down with the nicotine.

So I think the ULTRA was well received. We also have extended for the flagship, we added a few flavors, which is somehow, I call it the whole strategy brings into the symmetry as much as possible to what is the dynamic in the marketplace. I mean they start yielding results. But there is this component, which we also are addressing as we speak, which is this price premium and a conversion from 15 to 20 creating that value to the consumer, which I think should be another nice tailwind, if you like, to the ZYN performance.

So majority of the things which we are doing post the FDA now authorization, I mean, we have a strength in our hand, and we can start pulling them accordingly. So there is the increased investment behind the ZYN. By the way, we also start -- we launched now the ZYN campaign, When It Clicks. So we also try to add to the classical support of the brand for the promotional type of events very much at the store level. We're also trying to add more emotional brand building components into this whole thing.

So this all obviously calls for the increased investment. at this period of time in the U.S. and this is what's going to -- is happening. It's going to happen in the second half of the year, but this is all baked into the guidance, et cetera, which we have given to the market.

Right. Just quickly on combustibles, which is still 60% of the business. And in your comments, you highlighted robust volumes over the last few years in Europe and then in some other emerging markets, Turkey, Egypt, Indonesia. Any particular markets that you would call out as we look into 2027?

Look, there are still a lot of, if you like, the white spaces in a sense that category is not allowed. It's not only heat-not-burn, but the sizable market, size meaning the underlying size of the combustible business. There's obviously India, there's obviously Turkey, there's obviously Vietnam, and there are many others. We've been successful in opening the market, very pleased with the performance in Taiwan, volume size, it is much smaller market financially from the unit economics, margin profiles, et cetera, extremely attractive.

And Taiwan for us was this great opportunity that we had a very small presence in a combustible business. So we also don't have this additional sort of a headwind for the cannibalizing cigarettes while going to SFP, but it's doing very well. We have few months ago, opened Argentina, okay? It's also very attractive market. Obviously, the margin profile is different than Taiwan, but white space is white space.

But there's large markets like Turkey, India, Vietnam, I think obviously, it's China, okay? But let's leave China aside. This is in front of us, okay? Now from a white spaces, if I take the size of the market, unit economics, et cetera, by far, I mean, most of our attention is on the U.S.

And we are in this unique situations that unlike companies are going from a U.S. and trying to search for a growth in some other markets outside. I mean, in the case of PMI, we have this particular case that we have a growth on international, but unaddressed still today opportunity to a large extent is the U.S., which is by far in the nicotine space, not only but in the nicotine space. It's the most profitable by unit -- from a unit perspective, but from the absolute size perspective, is the most attractive. So obviously, we're betting that we're assuming that the U.S. is and will be a significant contributor to the growth of PMI.

Right. And just quickly on capital allocation. So on our estimates, you are approaching your leverage target of around 2x by the end of this year. So in terms of your capital allocation priorities, is the share repurchase mix in your list for 2027?

Yes. I mean, look, I mean the focus near term, we'll have discussions with the Board -- next week, actually, sorry, next week. I think the focus will be -- not that I think I know the focus will be on the dividend. And then shortly after that, I guess, we'll be start having conversations about the buyback.

What brought us, I mean, absolutely, we deleverage the company was acquisition, et cetera. But we also entered the territory, which some of you may remember. There was, unfortunately, but it was a period in the PMI performance when underlying business on the underlying basis was doing, my view, extremely well. But unfortunately, because of our exposure to all the different currencies and a continued strength of the dollar, this was eroding on a reported basis, a big chunk of our profitability.

And this obviously sends some shock waves which also we had to adjust our capital allocations in the past and stop the buyback, et cetera, in order to protect dividend. We've been very clear to the market that dividend for us is by far the highest priority when it comes to returning cash to shareholders.

And obviously, absent any other ideas what to invest in to work behind, and I'm not talking OpEx, U.S., et cetera, because this is absolutely manageable for us. I mean, yes, I mean, the buyback is like the next stage of the conversations, what we do and at which moment and how much, et cetera. But nothing for me to confirm or to announce today. But the dividend is our -- is the most preferred form of returning dividend and dividend growth, obviously, the most preferred way of returning cash to shareholders.

Right. I think we're running out of time. So we will call it the day here. Thank you so much, Jacek, for giving us this opportunity.

Thank you.

Good day, and thank you for standing by. Welcome to the Philip Morris International 2026 Second Quarter Results. [Operator Instructions] Please be advised that today's call is being recorded. I would now like to hand it over to our first speaker, James Bushnell, Vice President of Investor Relations and Financial Communications. Please go ahead.

Welcome. Thank you for joining us. Earlier today, we issued a press release containing detailed information on our 2026 2nd 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 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 -- Group Chief Financial Officer; and Massimo Andolina, currently Regional President for Europe, who will succeed Emmanuel as Group CFO in August. Emmanuel, over to you. .

Thank you, James, and welcome, everyone. I am pleased to report a very strong Q2 as we generated plus 8% organic growth in net revenue and plus 11% in operating income, driving plus 14% currency-neutral progression in adjusted dated earnings per share to $2.20 or plus 15% in dollar terms. This better-than-expected delivery contributed to very robust H1 growth despite the tough comparison of the first quarter.

Our Q2 results were once again powered by excellent performance as expected, from our international smoke-free business with high single-digit volume growth, double-digit top line growth and impressive gross margin expansion. IQOS adjusted in-market sales volume increased by plus 5%, including expected transitory headwinds from the April excise increase in Japan and the characterizing flavor ban in Poland.

Excluding these 2 markets, double-digit growth continued, reflecting the broad-based strength of our smoke-free business across markets. Our multi-category commercial approach continues to gain momentum supported by ZYN and VEEV. Our combustible performance was above our expectation in an especially strong quarter with growing volumes, very good pricing stable category share and gross profit growth. While we do not expect this delivery to be repeated to the same magnitude for the full year, such results demonstrate the robustness of our portfolio as we leverage our leadership in cigarettes to support the switching of legal ed smokers to better alternatives.

In the U.S., we posted a significant sequential improvement in net revenues gross profit and operating company income compared to a challenging Q1. While the U.S. nicotine pouch category continued to grow SYN offtake volumes were broadly stable to slightly growing versus the prior year, reflecting the uneven competitive landscape described in recent quarters.

ZYN shipments increased by plus 2% to 2.9 billion pouches despite an inventory tailwind in the prior year, broadly reflecting offtake trends and the initial shipments of new variants including ZYN Ultra. We are excited about this first phase of portfolio expansion with additional initiatives planned in the coming months to enhance and enrich our offering to legge American nicotine consumers, supported by a rich product pipeline and improving regulatory clarity, we believe it is the right moment to accelerate U.S. investment in the second half of the year to support ZYBn brand equity and portfolio expansion and to prepare for the future launch of IQOS ILUMA.

Overall, our strong first half performance reinforces our confidence in our ability to consistently invest behind smoke-free growth opportunities while delivering another year of best-in-class top and bottom line growth. Looking now at our Q2 financials, we delivered very good shipment volume growth of plus 2.5% and underpinned by continued momentum in IQOS and favorable combustible dynamics.

Organic net revenues grew plus 7.6% or more than 10% in dollar terms to reach over $11 billion in quarterly net revenues for the first time. This strong top line performance translated into robust profitability. Adjusted gross profit grew by plus 8.7% organically or plus 11.5% in dollar terms, driven by pricing, volume leverage and favorable smoke-free mix.

Adjusted operating income grew close to plus 11% organically and plus 12% in dollar terms to reach $4.8 billion reflecting the same underlying business drivers and continued growth investments. Adjusted diluted earnings per share grew by an impressive plus 15% to reach $2.20. This includes a $0.03 favorable currency impact, which was notably better than our previous forecast despite ongoing dollar strength.

This was primarily due to a positive impact from unrealized transactional effect from deferred tax liability associated with a weaker Russian ruble. This currency impact represents around 1/3 of the EPS outperformance compared to our prior forecast. The remaining 2/3 reflect a combination of SG&A phasing as certain commercial investment previously anticipated in Q2 are not expected to occur in Q3 and the strong performance of our combustible business, which I'll come back to.

Combining our Q2 and first quarter performance, we delivered a very robust first half despite the comparison headwinds of Q1. Total shipment volumes increased plus 0.4% and as smoke-free growth outweighed combustible declines. Organic net revenues grew by plus 5.3%, while adjusted operating income increased by plus 6.1% organically or plus 11% in dollar terms to reach $8.9 billion.

Adjusted diluted EPS grew by plus 9.4%, excluding currency and by plus 15.6% in dollar terms, reaching a first half record of $4.16. The strength of our International business, which made up 93% of H1 group net revenues was naturally at the core of this remarkable performance. International smoke-free was again outstanding with H1 organic growth of plus 13.7% in net revenue and plus 16.9% in gross profit. driving gross margin expansion of plus 190 basis points to reach 70%.

This primarily reflects continued IQOS growth with further enhancement from our other more category, especially VEEV. Combustible also performed very well, exceeding our midterm trajectory of low single-digit organic top line growth and low to mid-single-digit gross profit growth, an excellent Q2 with organic growth of plus 6.4% in net revenue and plus 8% in gross profit driven by resilient volume and strong pricing enabled us to realize H1 organic net revenue growth of plus 3.8% despite negative geographic mix. gross profit increased by plus 6.1% with margin expansion of plus 150 basis points to 67.7%, and including the benefit of effective cost management.

As a result, total H1 international net revenue grew by plus 7.4% and gross profit by plus 10.1% and with gross margin expansion of plus 160 basis points to 68.6%. In turn, adjusted OCI increased plus 11.7%, all on an organic basis.

Turning now to volumes, where total shipment growth returned to a positive trajectory in the second quarter with an increase of plus 2.5% and resulting in plus 0.4% growth for the first half. Smokefree shipments grew by plus 7.5% in Q2 and plus 8.3% in H1 and mainly fueled by IQOS HTUs with notable contribution from Taiwan, Global Travel Retail and Italy.

E-vapor shipments increased by a remarkable plus 55% in Q2 and plus 72% in H1 with Romania, Greece and Germany among the main drivers. Oral smoke-free volumes declined by 1.2% in the quarter, primarily reflecting industry declines and inventory impact for snus in the Nordics despite a stable category share performance. This was partly offset by continued rapid nicotine port growth in international markets, excluding the Nordics and the return to shipment volume growth for ZYN in the U.S.

Q2 cigarette shipments increased by plus 1.1% ahead of expectation. This reflects a combination of good category share performance, certain timing or comparison factors and more favorable industry dynamic in certain large markets, predominantly where smoke-free products are banned or very small. Notable call-outs include Indonesia, Turkey, Egypt, and relative resilience in India and Mexico. However, with industry volumes declining low to mid-single digit in more developed smoke-free market where the average unit economic of cigarette are more favorable. This generated an unfavorable mix impact on net revenue.

For H1 overall, cigarette volumes declined by 1.9%. Given our Q2 performance and the latest industry dynamics, we now expect a more moderate full year decline in our cigarette volumes of around 2% to 3% versus 3% previously which remain consistent with the structural evolution of the category. Taken together, we now expect total shipment volume to be around stable to slightly positive for the full year. With high single-digit growth in smoke-free product, broadly offsetting the decline in cigarettes.

Turning to our H1 top line growth drivers. Pricing was the largest contributor, adding plus 5.9 points of growth, reflecting strong combustible pricing of plus 9.2% with low single-digit monthly pricing, including around plus 3% and from IQOS. The positive mix impact from international smokefree growth contributed a further plus 2 points as the increasing weight of SSPs continues to enhance our revenue profile.

These drivers were partly offset by the U.S., which had a negative impact of 1 point, mainly due to Q1 comparison as well as international combustible geographic mix and other factors, which reduced growth by 2 points. As a result, H1 organic net revenue growth reached plus 5.3% and while currency provided a tailwind of plus 4.5 points, bringing reported net revenue growth to plus 9.8%.

The composition of our growth, once again, highlight the consistency and sustainability of our model with stable to growing volumes, durable pricing power and superior smoke-free economics continuing to be the primary drivers of our performance.

Moving down to H1 adjusted operating income margin, which expanded by plus 40 basis points organically or plus 60 basis points in dollar terms to reach close to 42%. Gross margin expansion remained a key driver, contributing plus 70 basis points, supported by strong pricing, favorable smokefree mix, scale benefit and manufacturing productivity.

While SG&A costs were lower than expected in Q2 due to phasing, increased year-on-year investment in commercial initiatives, innovation and scale, nonetheless reduced H1 margin by 30 basis points. We now expect higher SG&A costs in the second half than previously anticipated as we made the strategic decision to step up our U.S. growth investments.

As we invest in our top line, we also delivered over $300 million of gross cost savings across COGS and SG&A in H1, keeping us firmly on track to achieve our $2 billion target for the 2024, 2026 period with a cumulative total above $1.8 billion to date. This margin performance underscores the strength of our model as we continue to invest behind our smokefree transformation while expanding profitability.

As implied in our full year forecast, we expect to deliver organic operating income margin expansion for the full year. Focusing now on IQOS the driving force of our smokefree and overall PMI growth trajectory. We continue to generate strong underlying growth despite transitory headwinds in Japan and the final EU flavor band market implementation.

Adjusted in-market sales volume grew by plus 8% in the first half despite these dynamics reflecting broad-based global momentum. The moderation in Q2 growth to plus 5.1% primarily reflect expected volatility in Japan as Q1 pantry loading reversed and consumers adjusted to the excise-driven price increase on April 1. Excluding Japan and Poland, Q2 growth was strong at plus 10.2% or over plus 11% for H1, consistent with recent history.

Strong Q2 performance in more established IQOS markets, such as Italy, Greece and Romania was complemented by continued momentum in newer markets, including Saudi Arabia, the Philippines, Mexico and in Taiwan, which maintained its impressive trajectory with offtake volume growth growing double digit on a sequential basis as we progressively expand distribution. Global Travel Retail also delivered double-digit adjusted IMS growth.

In tandem, we are driving strong commercial execution and ongoing innovation across our device and consumable portfolio with the remix special edition shown on this slide as one example. We also continue to expand our alternative heating technology bonds by IQOS which was launched in Poland, Czech Republic and Morocco this quarter with encouraging early results.

The fundamental of IQOS remains strong. We continue to benefit from formidable brand equity deep consumer connection unparalleled commercial presence across a broad and diversified geographic footprint. And we maintain our global share of the fast-growing heat-not-burn category at approximately 76% in H1. This was further illustrated by the recognition of IQOS for the first time among the top 100 most valuable global brands according to Kantar.

Looking at IQOS offtake share performance, we continue to drive impressive progress across key cities globally, an important lead indicator of broader national adoption. In Q2, we recorded further strong share gains across established IQOS markets, including Greece, Italy, Romania and the U.K. alongside Global Travel Retail. We are also seeing very good momentum in emerging IQOS markets, notably Mexico, Indonesia and Taiwan, with type share of around 8% in a seasonally higher total market for cigarettes.

These results reflect our strong commercial execution as well as the increasing presence and scale of IQOS in more established markets, combined with excellent early adoption in newer markets reinforcing our confidence in the long-term growth trajectory. In e-vapor, VEEV continued to deliver excellent results with H1 shipment growth of plus 72% in and very good progression on financial metrics, including profitability.

This reflects robust growth across the European market, reinforcing VEEV leadership position. VEEV is now the clear #1 brand in Europe, both within close pod and for pads and disposable combined. And the estimated #1 Closeobrand in Global Travel Retail, where VEEV is present all ahead of long established players. This is supported by the structural evolution of the category with close pots now representing the predominant format internationally. -- excluding illicit and open system.

High levels of consumer retention and brand loyalty underpin our performance, supported by responsible innovation and continued portfolio enhancement. This includes the progressive rollout of our latest technology, VEEV 1 plus, which offers an elevated consumer experience through a compact premium design, a swap and store functionality enabling 2 pods in 1 device and a longer-lasting replaceable battery.

For ZYN, international shipment volume grew plus 6% in the first half or plus 32%, excluding the Nordics. ZYN continued to gain share in this small but fast-growing category, reaching more than 17% of the International segment excluding the Nordics in Q2. We are seeing encouraging progress across a broad set of geographies, supported by portfolio expansion and consumer adoption as awareness and availability improve.

This includes markets such as the U.K., Pakistan, Poland and Greece and the Philippines with further footprint and portfolio expansion plan in the second half. Zooming in on Europe, where we are now present in every market with more products following the Q2 launch of IQOS in Malta, which recently established a new regulatory framework for smoke-free product. Our multi-category portfolio drove strong growth with combined IMS up plus 8% in H1 and as ZYN and the strength and complement IQOS, supporting growth, consumer acquisition and long-term value creation.

IQOS remains the core engine of our performance with adjusted IMS volume up by plus 5.1% in Q2 and plus 5.4% for the first half. We achieved this despite ongoing disruption in Ukraine and the impact of recent flavor ban in markets such as Poland and Hungary. Excluding markets where the bank took effect in the prior 12 months, underlying IQOS adjusted IMS growth remained robust at around plus 8% for both Q2 and H1 and reflecting momentum across the region.

This includes excellent growth across a broad set of markets, including Italy, Germany, Romania, Bulgaria, Greece and Spain supported by our innovation and commercial initiatives such as the broader rollout of Dalia, new variants of both Terra and Livia, Special Edition devices and consumables and collaboration with partners that share our commitment to innovation, reinvention and transformation.

While VEEV is a global success, its biggest impact is in Europe where the e-vapor category is highly penetrated. H1 shipments grew plus 81%, and including impressive results in Romania, Greece and Germany. Similar to its total international progression, ZYN displayed dynamic Nordics growth of around plus 33% on as the category continues to gain traction.

In Japan, IQOS fundamentals remain strong despite expected volatility from pricing and timing effects. First half performance was in line with expectations with adjusted IMS growth of plus 3.4%. Following an exceptionally strong first quarter, adjusted IMS declined by 3.4%, reflecting the reversal of consumer pantry loading ahead of the April 1 excise-driven price increase.

Excluding this impact, underlying growth was around plus 1%. While this represented a moderation from recent quarters, the initial impact of consumer adjustment to the price increase was in line with our expectation. The April excise change requires the largest HTU price increase to date in Japan to pass on the tax, while there was no excise change for cigarettes. Despite implementing the largest increase in the market, IQOS adjusted category share held in the high 60s and adjusted IMS recovered nicely through the quarter to essentially match Q1 monthly volume, excluding inventory loading, a further testament to IQOS resilience.

Despite these factors, IQOS adjusted HTU share was stable at 31.8% in Q2 or up plus 0.9 percentage points, excluding pantry loading, supported by our tier portfolio with Cynthia playing an important role in capturing more price-sensitive area consumers. Importantly, underlying demand remained robust. The Inaba category continued to represent more than half of total nicotine offtake, and we expect this to continue growing over time.

While the biggest step is behind us, we expect further category volatility in H2, notably around the excise change in October and would expect similar consumer behavior patterns, including pantry loading and subsequent normalization. We continue to target growth in IQOS adjusted IMS volume for the year overall.

Moving to the U.S., where we delivered a sequential improvement of plus 38% in net revenue and plus 46% in adjusted gross profit compared to a challenging Q1. This largely reflects the plus 25% sequential growth in ZYN shipment and reduced sales promotion as we prepared for new product launches. On a year-on-year basis, segment net revenue declined by close to 1%, reflecting a decline in cigars and unfavorable phasing dynamic in the wellness business, while ZYN net revenue were broadly flat.

Gross profit was impacted by higher manufacturing costs mainly related to the ramp-up of new ZYN capacity in Colorado, where full-scale commercial production began this month reflecting our continued investment to support future growth. ZYN shipments returned to growth with an increase of plus 2% year-on-year to 2.9 billion pouches despite an inventory restocking tailwind of around 150 million pouches in the prior year.

This growth is broadly in line with stable to slightly growing offtake volume and include some initial shipments of new variants in June, including the ZYN range, which contains 20 pouches per can. Looking to the second half, we expect the dynamism of ZYN to be enhanced by our expanding portfolio and increased commercial activity, which I'll come back to shortly. However, it is important to note that volume comparison in Q3 will be impacted by the one-off promotional activity in September of last year, which accounted for around 250 million pouches.

Importantly, ZYN remains the clear premium leader of the nicotine pouch category with a retail value share of around 57%. As discussed in prior disclosures, recent category recent share performance has been impacted by both competitive gaps in the growing higher strength segment, including most product and in certain flavor segment as well as an elevated price premium.

With improving regulatory clarity and operational readiness, we have now taken the first step to address this with additional variants. This started with the launch of ZYN Ultra in 9 and 11-milligram most variance at a lower per pouch price than the ZYN flaxsip range of dry pouches, reducing the price premium to the closest competitor while maintaining a clear premium position alongside targeted addition to our flagship flavor range.

These new variants are rapidly building distribution. And while early days, we are pleased by promising initial offtake trends and positive consumer feedback. As a related side, I would note that while cannot data typically provide a good directional indication of volume trend, it does not always fully capture the effective consumer price.

We plan further extension in the coming months, including the introduction of 1.5 milligram and 8-milligram dry format in Q3. Together, these launches will broaden our offering with an expanded range of strength and test profile, enabling us to better address the spectrum of legal edge consumer preferences and further strengthen our competitive positioning across segments.

With such an exciting lineup of new products to complement the existing portfolio, we plan to accelerate our U.S. investment in the second half. This includes a comprehensive commercial program across marketing, distribution and in-store execution with the rollout of our major new brand campaign when it clicks starting this month to support brand engagement and consumer relevance.

We are also implementing commercial initiatives to optimize ZYN's premium positioning and enhanced consumer value perception. In addition, our U.S. investment include preparation for the future launch of subject to FDA action. We also believe ZYN is well positioned from a regulatory standpoint, notably following the modified risk tobacco product authorization of 20 SKUs making it the only nicotine pouch product with the designation and allowing us to market the claim using ZYN instead of cigarettes, puts you at a lower risk of mouth cancer, a disease lung cancer, stroke emphysema and chronic bronchitis.

This further reinforces its differentiated and sustainable positioning supporting consumer trust and long-term growth potential. Overall, we remain confident in the long-term trajectory of ZYN and the U.S. nicotine pouch category, supported by strong legal edge consumer demand and the investment we are making in responsibly commercializing a significantly enhanced product range for long-term leadership.

Finally, moving to combustible, where our business delivered a particularly strong Q2 performance. In addition to the favorable volume trajectory I described earlier, this was driven by a pricing variance of plus 9.2% on in the first half or almost plus 10% in Q2 with notable contribution from markets, including Turkey, Indonesia, the Philippines and Mexico.

While we expect some moderation in H2 due to planning factors and annualization, we now forecast a pricing variance of more than 7% for the full year, although we expect this additional benefit will be largely offset by a more adverse geographic mix as volumes skew more to market with lower per unit revenues.

Despite such strong pricing, our portfolio maintained its international category share at 25.3% in Q2 with Marlboro, again, demonstrating the strength of its premium brand equity matching its record high of 11%. This combination of pricing power, brand leadership and disciplined execution translated into robust profitability with international convertible gross profit growing by plus 6.1% in organic terms and by an impressive plus 8% in Q2.

Our combustible business continues to demonstrate the strength of its model, delivering solid top and bottom line growth while supporting the ongoing expansion and increasing profitability of our smoke-free portfolio. This brings me to our outlook for the full year.

With our international smokefree business growing very strongly as expected and the combustible business outperforming our prior expectations, we have additional capacity to invest while maintaining a best-in-class growth performance. The success of PMI is built on investing in the short term for long-term growth, just as we have with IQOS and indicates past Marlboro.

The defining characteristic of our company over the last 15 years is that as we invest, we also deliver strong growth and cash generation. For 2026, we continue to target organic net revenue growth of plus 5% to plus 7%. Organic operating income growth of plus 7% to plus 9%; and currency-neutral adjusted diluted EPS growth of plus 7.5% to plus 9.5%.

In dollar terms, we now forecast a currency tailwind of around $0.15 at prevailing rates, translating into an adjusted diluted EPS range of $8.26 to $8.41, an increase of 9.5% to plus 11.5%. With an expectation of broadly stable to slightly growing volumes we are also aiming for our sixth consecutive year of total volume growth.

For the second half, this implies a continued strong top line and an acceleration in organic operating income growth. Further robust international progression should be complemented by U.S. momentum, notwithstanding a fairly even phasing of international HTU shipments through the 4 quarters with shipment broadly in line with adjusted IMS for the full year.

We also expect robust progress at the EPS level, while noting challenging H2 comparison on net finance costs and the effective tax rate. For Q3, specifically, we expect HTU shipment volume of around 41 billion units against a strong Q3 '25 when HTU shipment grew by 15.5%, we thus expect mid-single-digit international smokefree organic net revenue and gross profit growth.

For PMI, overall, we forecast mid-single-digit Q3 organic top line growth with modest organic margin expansion. We target adjusted diluted EPS of $2.20 to $2.25, including an unfavorable currency impact of $0.08 at prevailing exchange rate. This also reflects the challenging tax rate comparison from Q3 last year.

Finally, we continue to expect operating cash flow generation of around $13.5 billion providing further flexibility to support both investment and continued attractive shareholder return. I will now conclude today's presentation with a few key takeaways.

We delivered an excellent first half, underscoring the quality of our business model and placing us firmly on track for another year of strong performance. Our results reflect the powerful combination of smoke-free growth and strong combustible execution with profitability of our smoke-free portfolio continuing to improve as IQOS, ZYN and VEEV gain scale and drive synergies across markets. This performance, together with effective cost management provide us with the flexibility to reinvest behind our smoke future while sustaining best-in-class growth.

We also remain a highly cash-generative business with an unwavering commitment to our progressive dividend policy and to returning value to shareholders. Looking ahead, we approach the remainder of 2026 with confidence, well positioned to deliver superior and sustainable growth. On a more personal note, this is my last earnings call as Group CFO of PMI.

And I would like to thank our shareholders and analysts for your support, engagement and constructive challenge over the past 6 years, a period of strong performance and shareholder returns. As I look at the business today, I am confident PMI will continue to represent a standout performer within CPG over the coming years. And I leave you in the very talented end of my successor, Massimo and Delina, who will transition from his current role as regional President for Europe in August.

Thank you, Emmanuel. Good morning and good afternoon to everyone. Emmanuel, I would first like to pay tribute to your significant contribution to the performance of our company over the last few years. And to the great collaboration, the T&I have personally enjoyed both in my previous roles and in the process of this transition. Emmanuel, I am fully aware that you leave behind big shoes to fill. And I will continue to count on your support in the coming months to do so effectively. Thank you.

I am very much looking forward to serving as the group CFO of for the Mortgage International and continuing our relentless focus on delivering superior shareholder returns over the long term. We have a very robust business model built on investing for sustainable smoke-free growth and a strong and talented organization with an excellent track record of delivering for shareholders.

I look forward to engaging with our investors, our analysts and all other stakeholders over the coming months and beyond.

Thank you, Massimo. Thank you, Emmanuel. The team are now happy to answer your questions.

[Operator Instructions] Our first question comes from the line of Bonnie Hero with Goldman.

All right. Emmanuel, it's been great working with you, and I do wish you all the best in the future. My first question is on your guidance. despite 2 quarters of better-than-expected performance and strength. You did maintain your full year underlying growth guidance. So I did just want to verify, this is primarily due to your strategic decision to step up investments in the U.S. in the second half? Or is there something else we should be mindful of?

And then your guidance still does imply faster income growth in 2H versus 1H. So I wanted to understand how much flexibility you have with this greater spending? And then could you maybe just give us a little more color on these planned investments. For instance, should we anticipate a big step-up in promotional spend behind ZYN?

Thank you, Bonnie. So I mean H1, you've seen it is great. And the fact that after a great H1 indeed, with some very good news in Q2 globally and notably with the confirmation of a strong smoke-free business. CC that is doing better than expected. The reason why today we are not revising the guidance is indeed the fact that we also are facing a very exciting moment in the U.S.

We have an alignment of planet that is of course, great. We have, as we've been explaining, now a much broader portfolio of variants. We are coming with more flavor on our dry offering, and you've seen that. We talk about pitch Dragon Berry and Black Cherry. We are coming with Non-ZYN Ultra. So with 9 and 11, we are announcing that we are coming with 1.5 and 8 milligrams.

So we are really putting together now a portfolio that is really, I would say, nicely matching consumer demand and the evolution of the market. On top of that, we have our new marketing campaign, 1 click. I think we are very, very enthused by the potential of this campaign to build further the emotion around the ZYN brand and develop the brand franchise.

I would say the MRTP is almost coming as a nice thing on the cake. We were confident this would come. We were confident about the quality of the product, but it's great that we are able now to have this authorization to market the product with reduce risk I mentioned and have been elaborating on that. So that's really a great moment in the U.S. to accelerate and I would say we're going to go 360.

So it's going to be -- every lever we can pull to accelerate the growth of in and leveraging this new situation, and that's going to come, of course, with a lot of marketing, commercial activity at the point of sales that's going to be really important. I think you were questioning, okay, what does it mean in terms of promotional activity? Well, you've seen that Q2 has been more reduced in terms of promotional activity. That's why we are close to flat year-on-year in terms of revenue with volume slightly up.

I think we'll see. I'm not going, of course, to comment in advance that would be anticompetitive, any kind of price action. There is one starting point, which is absolutely intangible. ZYN is a leading premium brand of the market and it's going to stay as the leading premium brand of the market. And then everything we will be doing in that respect will be to optimize volume growth and the bottom line growth.

And once I've said that, I've said everything I can say in that respect. But it's illustrating how we are looking at things. But that's certainly, in the U.S., after several quarters of frustration, it's a great moment. And it's great that obviously, we have the capacity to deliver a very strong growth while accelerating our investment in the U.S.

Okay. That was super helpful. And just maybe a quick follow-up on ZYN. Just hoping for a little more color on the rollout of Ultra early feedback you've been hearing from retailers and consumers, space games, how incremental do you expect it to be? And then you mentioned this morning, that you have plans to rollout the lower nicotines ZYN. So I just love to hear how you expect to position that within broader ZYN portfolio and how incremental that can be?

Yes. So on the ZYN Ultra, I don't think we want to be overplaying the first 2 weeks. I mean, you have seen this first 2 weeks of Nissan as we did. It's very nice. We have sequential growth, we are growing our share. We are capturing, I think, a large part of the vision of the category over these 2 weeks period. We have a number of positive consumer feedback. I think here, we want to stay cautious because we talk about 2 weeks, a lot to come.

But I would say the first data and first feedback are certainly encouraging. Let's have a bit more week and I'm not sure after the summer, we'll be able to have a much better understanding of what ZYN Ultra is bringing. On your question on the low nicotine, I think we've always said, and it's not specific to the U.S., generally on the nicotine pouch category that we see the 1.5 milligram as particularly relevant to convince smokers to switch to this better alternative.

And we know that too high and nicotine content can actually create a bad experience and discourage some of them to be moving to this product. So we -- we hope that this 1.5 milligram is going to be helping really millions of American to really taste the category, I would say, in the most favorable possible condition and with the best possible experience.

Now of course, I will stay silent on our plan in terms of rollout and what we want to do because that sensitive information. But that's really the philosophy that we have behind this 1.5 milligram.

Next question coming from the line of Matt Smith with Stifel.

I wanted to dig in a little bit further on the Japan dynamics during the quarter, and more importantly, the progression, both from a category growth standpoint in IMS as well as sorry, IQOS growth during the quarter. The overall IQOS HTU share was resilient, but any more detail on the share trends within IQOS, the mix between the IQOS consumable portfolio and expectations in the second half given another excise tax increase in October, whether you think that has another impact on the third quarter versus fourth quarter phasing?

Yes, Matt. Happy to do that. So again, maybe let me start by repeating that what we've been experiencing in Japan is in line with our expectations. So we knew it would be a bit cart to read between Q1, pantry loading, Q2 with, of course, negative impact at the beginning and then a recovery. If you take a kind of macro approach on what has been happening in Japan, yes, the category has been slowing in terms of growth. But what else would you expect?

I mean it's a significant increase for the consumer in a country where the consumer is not, I would say, used to have a very significant price increase. So there is a kind of cultural shock here that is happening. So that is, of course, something that is a disruption, but that's what we're expected to the category. So that has meant that the category has been slowing down, but it's still growing. And we -- as we see the data through Q2, we see things that are regularly improving and if -- now I focus on IQOS, we have been certainly more impacted on TEREA, which is the most expensive consumable brand.

And there was a very nice SENTIA safety net, I would say, for the consumer. So without giving the precise number, what we've seen is that SENTIA is probably above where it was when Terry has not fully recovered yet because of this move from TEREA to SENTIA. But overall, I mean, we finished at 68%. We are 69% in the quarter before. So Frankly, I don't even know whether this is really significant.

We have been the one, and I've been saying it again in my remarks with the biggest increase with our JPY 40, and we've gone through the work for us because this first increase was the worst. And the pass on -- I'm not going to say what we're going to do in H2, but the passion is lower. It's closer to JPY 20 in the second half. So -- we've been going through the worst. And we know that the competition, if they want to absorb their excise duty increase. They have to increase more than us or they will have to have significant adverse consequences.

So that's really what we can say on Japan. So we're not totally with this adjustment behind us. As we flagged, there will be more disruption in H2. But I would say we're quite confident that we've been going through the most difficult moment. It reacted as expected and I think it's a tribute to the IQOS strength in the country. And now we go for H2, as I said, with a lower impact in terms of Pason.

Now just let me say about what's going to happen next because it's important to have in mind, and this one, I think, is going to play positively. You know that in '26, there is no increase on combustible. In '27, there is already planned, and I think it's '27, '29, 3 years of excise duty increase at a much more limited level, of course, but both equally for CC and for Inetburn.

And as we've been moving to fixed right, that is going to open the window probably for a favorable environment where -- as a leading brand in terms of price, we are less impacted proportionally than others. That is creating window to increase price, which was not always obvious in the past. The pattern, I think, is around JPY 12 for the coming years. And probably after what was a difficult moment to absorb in '26, I think that is going to translate into a much more favorable landscape '27 and beyond.

Our next question in queue coming from the line of Eric Serotta with Morgan Stanley.

First of all, thank you, Emmanuel. It's been a pleasure working with you. Looking forward to working with you ahead Massimo and best to look Emmanuel in your next

Thank you very much.

Turning to -- coming back to Japan, -- can you comment a bit about the competitive environment there? We definitely saw a pickup in promotional activity over the past year from some of your competitors. Starting to cycle the beginning of that? How are you seeing that? Or how have you seen that evolve in recent months? I know it's certainly noisy given the excise pass-through?

Yes, Eric. So in Japan, as you can imagine, I would say, it's probably all hands on deck for every player given this very strong pass on in 2 steps. So people are probably no longer playing with trying to make a promotion here. I'm going to try to play a kind of strange game here and there. I think everybody is saying, how do I absorb to the best possible of my capacity, what is a big increase. And when you don't have the best image in the market, it's more difficult for you to convince the consumer that your product deserves a significant price increase.

So I believe everybody is a little bit in the middle of that. I think we've been flying in the fact that before this excise duty alignment or equalization happened, Japan Tobacco had been gaining share. I'm not going to comment on the trend on H1 and even sure that it's at that moment, easy to read what's going on. But the fact that we are maintaining our share broadly, I mean $68 million versus $69 million is just showing that, yes, you can have between competitor #2, competitor #3, you can have some move. But at the end of the day, we stay largely ahead of the competition.

I think we will need to have the dust settling a little bit towards the end of the year to see what's going to be the -- and with a further price or exit increase I mentioned, what is the new game of the competitor. But I think today, everybody is trying to really work on absorbing this significant excise duty.

Great. Very helpful. And then just a quick follow-up on that. I have seen that Japan Tobacco applied to the Ministry of Finance for the October price increase. It looks like it was very slightly below the full pass-through of the excise. Is that consistent with your read on it based on pricing in the marketplace? And have you guys applied to the ministry in terms of October pricing yet?

So look, I'm not going to comment on what the competitor has been doing. I think it's public what they've been granted by the Ministry of Finance. I'm not going to comment either on their strategy. I think we've been saying that globally, I'm not being specific to the competition, the excise duty equalization meant a significantly higher price increase for us.

You remember that for us, altogether, it's around 10%. For the competitor, it could go up to 20%. So it's a much bigger price increase if they want to fully pass on, but I don't know what they're going to do. And for us, for application because this is your question. This is not public yet. So I'm not going to comment on what we've been doing or not doing. But if you can be bearing with us a little bit, I'm sure you learn soon.

[Operator Instructions] Next question coming from the line of Faham Baig with UBS.

II've got 2, if that's okay. The first one is a clarification, Emmanuel. When you suggest optimizing ZYN's price premium positioning, I know you've introduced in Ultra, which sort of helps with that. But are you also referring to ZYN flagship? And I know you're sort of conscious about market share rightly so. But if that is the case, could this also help reaccelerate category growth, which is currently running around 20%. That's my first question.

My second question, and I appreciate pricing is a highly sensitive topic, and I'm not here looking for forward-looking guidance. But is it reasonable to assume that pricing is likely to be a greater part of the IQOS growth algorithm going forward? And is that a lever that could further drive gross margin expansion at IQOS?

Sure. Thank you for your question. So on optimizing, I think I'm going to go back to what I've been saying, which is for us, optimizing means to put ZYN globally. And you will allow me, of course, not to elaborate between ZYN dry or ZYN Ultra or whatever is in the future is to position our ZYN variance at a price point where we are maximizing volume growth and bottom line growth. I'm going to repeat it. ZYN is and will remain the premium leader of the market. And of course, it's a very exciting market. That is the fastest-growing category in the U.S.

We want to take our fair share of the growth of the category and to do it in a profitable manner. So that's what we mean by optimizing the price. And I'm not going to elaborate more on that. Now on IQOS you've seen that it's 3%, okay, in this first part of the year, the price increase on IQOS. To be clear, the name of the game today is more to optimize volume and I don't need to repeat here that IQOS consumables are coming with more dollar per stick revenue even more in terms of gross profit because the gross margin is higher.

So really optimizing volume is the name of the game. It doesn't prevent us from, of course, tactically when we can and without damaging the volume increasing price. But for the timing, that's really the priority. Now on the long term, of course, there will be a moment where IQOS is becoming bigger. The market will mature at a point in time in the future and at that time, we are building a brand that is second to none. I mean, the fact -- I'm not sure that people noted the fact that we are knowing the counter list of the top 100 bond.

I mean, that's quite an event, and that's quite remarkable. The brand is 10-year-old. And I think we're building something very strong in terms of brand. And we all know that a strong brand in the future will mean our capacity to increase price because the consumer will see value in the brand. So we are preparing the ground for indeed the capacity to accelerate price in the future. But today, the priority, as I said, is on optimizing volumes.

Thank you. Our next question in the queue coming from the line Pallav Mittal with Barclays. .

I've got 2. So firstly, a question on iQOS in Europe. Clearly, in the second quarter, for an impact from liver band in the remaining market, you highlighted Poland, Hungary, et cetera. What gives you the confidence that IQOS IMS can accelerate again in Europe? And what in your view is a sustainable level, underlying say growth rate in the near term and Europe? That's the first one.

So I'm going to hand over to to Massimo on that one on Europe. .

Thank you. Thank you for the question. Look, if you eliminate the impact that we have had during this year from Poland and anger in particular, there are markets that have been hit by characterizing flavor ban and 2 markets where we had a high percentage of flavor propositions in the market, you will see that the underlying growth trend in Europe has not substantially changed. And I think the confidence comes for me from a couple of things. Number one, we have already gone through this in a variety of other markets. And we have seen that after the first couple of quarters, in which we take the hit, obviously, from -- in terms of volume from the flavor ban, then we reestablished the growth trajectory that we had before that occurred, which is a testament to the commercial engine that we have in place and the strength of the portfolio.

The second thing is that we have been expanding the portfolio in order to be able to prepare for this. And therefore, at this point, the portfolio is both tiered vertically with the introduction of Delia. That is playing more and more a significant role for us. both in terms of acquisition, but also in certain markets where there have been significant tax increases also in allowing consumers a more affordable proposition.

But more importantly, I would say, a lot of consumers have found in Delia an opportunity in specialty CC smokers, an opportunity that they understand better and that they find that test profile adopts better to their needs. Together with that, you have seen that we have launched Leva in a variety of markets. That is a nontobacco flavor proposition. It's obviously still early days for that proposition. It's a different type of products. But we have seen that in many markets, and Hungary is certainly one of those.

We have rapidly achieved double-digit percentage of our portfolio. Last but not least, I would bring the fact that our playground is at this point, not only IQOS. You have seen that in the course of the past 24 months, we have made a significant pivot to a multi-category commercial engine in which we also play significantly with VEEV in the e-vape category. And as Emmanuel said before, in the space of a couple of years, we have reached the #1 position in Europe in closed pods and disposables, but also more recently and from a small base, also with oral where the early signals in market like Poland, for instance, or the U.K. or Austria are extremely encouraging.

We have been outperforming the category in growth in the markets, and therefore, gaining share pretty much everywhere where we have launched. So I think these are all the reasons why we remain confident despite the fact the characterizing flavor ban is obviously a very disruptive option.

Sure. That's very helpful. And just 1 question on your full year group revenue guidance, I understand higher investments and which is why you're not increasing your EBIT guidance after a strong H1. But you are talking of a better cigarette volume numbers, also better cigarette pricing with some adverse mix. but there's no change in the group revenue guidance. Can you just talk about what is offsetting that in terms of smoke-free volumes and pricing?

Yes. So of course, we have a nice growth in H1, and we are 5.3% in terms of organic growth. So it's dynamic despite Japan. And for the full year, we are targeting actually to be 5% to 7%. So it's giving us ample headroom to be within the guidance while having a very dynamic H2.

So I think it is based on that, that we are comfortable keeping the guidance. Indeed, as we said, we expect a better volume on CC. And there is more price. But as we said, there is a negative mix. So this one is probably largely offset as we've been explaining. So that explains why we are comfortable keeping the guidance, again, based on H1 and on the overall trajectory.

For Smokefree, I should also emphasize the fact that in H1, you have a shipment that are a bit above IMS when for the full year, we expect shipment and IMS to be broadly aligned. So that means that we expect the reverse. So we expect IMS to be a bit above shipment in the second part of the year. And that also will have an impact on the growth of our revenue. But as I said, if you look at the guidance and what we are seeing in H1, we are pointing to another 6 months, I mean, H2 of very dynamic growth for revenue, and we are targeting an acceleration on the growth of the operating income. So it's not as if we are expecting a slowdown in H2 actually quite the contrary.

Our next question in queue coming from the line of Gerald Pascarelli with Needham & Company.

I'd like to just go back to combustibles. Given the outperformance that you delivered in volumes this quarter. Are you able to provide any color on whether that momentum is maybe sustained over the first part of July, just looking at the comparisons, the volume comparisons look very favorable in 3Q and really in the back half of the year more broadly. Just curious if there may be some conservatism in your full year volume outlook or if there are any, I don't know, regional headwinds or timing considerations for us to be mindful of as we model the...

No, nothing to flag, and you will allow me not to start commenting the Q3 numbers in July. But indeed, I mean, what is behind the strength of combustible in Q2, are countries with no smoke-free product presence or limited smoke-free product presence, and we talk about Turkey, India, Egypt, Indonesia has been doing well as well. And these are countries we know where you have big demographics. So the legal age cohorts are growing every year. .

There is a trend on smoking. India for me is a perfect example. You know how powerful, the demographics are over there. smoke-free products are banned, and therefore, combustible products are fully benefiting from that. So that's the trend in Q2. Okay. It doesn't mean that the rest of the year is going to be at the same level. But nevertheless, this is why we have been revising a bit the volume outlook from around minus 3% to -- 2% to 3% decline. But that's what we can say for the time being.

Once again, we see a big, big difference between countries where people have largely access to smoke-free products and other countries.

I'm showing no further questions in the queue at this time. I will now turn the call back over to management for any closing remarks.

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

Thank you all. Bye-bye. warm Bye.

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

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.