Philip Morris International Inc

Good day and thank you for standing by. Welcome to the Philip Morris International fourth quarter 2024 and full year results conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, James Bushnell, Vice President 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 2024 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. gap measures for non-gap financial measures cited in this presentation, are available in Exhibit 99.2 to the Companies Form 8K, dated February 6, 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 Jacek Olczak, Chief Executive Officer, and Emmanuel Babot, Chief Financial Officer. Over to you, Jacek.

Thank you, James, and welcome everyone. We delivered an outstanding performance in 2024 with all key elements of the business, contributing strongly to deliver best-in-class organic top and bottom line growth. This resulted in significant acceleration in adjusted diluted earnings per share growth in both currency neutral and equally importantly dollar terms, as we mitigated substantial currency headwinds. Our business outperformed the industry and consumer packaged goods overall with growth across all categories to deliver our fourth consecutive year of positive volumes. ICOS continued its strong underlying momentum with continued excellent growth in Japan, robust progress in Europe despite the EU characterising flavour ban and further strong growth in other global markets. Importantly, the growth of ICOS is increasingly profitable as the benefits of scale and pricing more than offset continued substantial growth investments, including brand building activities and innovations on devices and consumables. ZIN once again delivers strong growth in the US as 2023 demand acceleration continued in 2024. This resulted in short-term supply challenges, which we have progressively addressed throughout the year, working towards our goal of matching existing user demand. As we unlock further capacity, we will be in a position to explore the full potential of this dynamic category. Outside the U.S., shipments grew by 75% as we increased our global presence in nicotine pouches to 37 markets. In EVAPOR, VIV is progressively contributing to growth with encouraging volume momentum in closed spots and strengthening market position with a premium offer. Our combustible business performed well on all metrics. We delivered double-digit gross profit growth in quarter four of last year and around 7% organically for the year, led by strong pricing, resilient volumes in certain markets, and the ongoing benefits of our cost actions. Overall, our strong performance across all categories and regions drove meaningful operating leverage, notably in our smoke-free business, alongside cost efficiency initiatives across the entire value chain. This enabled us to deliver operating cash flow and adjusted diluted EPS above our expectations at the start of the year, despite ongoing currency and input cost headwinds. Our transformation journey and growth drivers have excellent momentum, and we are confident in our ability to deliver sustainable growth and returns in 2025 and beyond. Over the past year, we achieved several key milestones in our smoke-free journey, including the 10-year anniversary of EICOS and ZIN. Our smoke-free business is large, profitable, and growing fast. Our total smoke-free net revenues reach almost $15 billion in 2024. Combined with a strong combustible performance, our company also surpassed $10 billion in adjusted net earnings for the first time. Our smoke-free business reached 40% of total PMI net revenues in the fourth quarter, and around 42% of adjusted gross profit as our transformation becomes increasingly profitable. In our top five markets by operating income, around 60% of net revenues were smoke-free. We have deployed our smoke-free multi-category strategy across almost half of the 95 markets with smoke-free products and we closed the year with over 38.5 million estimated adult users across heat-not-burn, oral, and evapour. Our smoke-free business surpassed 1 billion cans, including 644 million cans of nicotine pouches. The Zin brand continues to resonate with adult nicotine consumers across the U.S., where it is the number one smoke-free brand and the fourth biggest nicotine brand, and also grows internationally. We are also very pleased that the robust science and responsible marketing practices behind Zyn were recognized by FDA through the recent marketing authorization of all currently commercialized US Zyn variants, making Zyn the first and the only authorized nicotine pouch brand in the United States. We remain at the forefront of the effort to increase understanding of smoke-free products and advance tobacco harm reductions among consumers and regulators. We are encouraged by the increasing number of governments adopting tobacco harm reduction policies to incentivize switching to reduced nicotine products instead of continuing to smoke, which is a sound public health policy. A number of markets are also moving favorably with regards to robust regulation of nicotine pouches and evaporation. Now, regretfully, there is also resistance in many places, often driven by ideology, not fact and science, and therefore a considerable amount of work is still in front of us. While reaching important milestones is pleasing, after 10 years we are still in the early stages of industry transformation. With our strong brands and our innovative and commercial capabilities, we have many years of opportunities and growth ahead. I look forward to sharing more with you at the upcoming Cagney Conference on February 19th. I will now hand over to Emmanuel to discuss our results and outlook in more detail.

Thank you, Jacek. I will start with the headline financials for the year. As Jacek said, this was a truly outstanding year of growth across our business as the rapid progress of ICOS and US ZIN was complemented by emerging growth contribution from VIVE and ZIN internationally, and a much improved combustible performance. We delivered in line or above our last communicated expectation across key metrics. Organic net revenue growth of plus 9.8%, adjusted IMS and shipments of HTUs, and combustible pricing of plus 8.7% were strong. Excellent total shipment volume growth of plus 2.9%, including ZIN and combustible volumes, performed at the top end of our expectation. Coupled with accelerated cost efficiencies, this led to better-than-expected plus 14.9% organic operating income growth and plus 15.6% currency-neutral adjusted diluted earning per share growth. Our clear focus on delivering performance in dollar terms was reflected in the plus 9.3% growth in adjusted diluted EPS. As a result, we achieved record operating cash flow of $12.2 billion, which was significantly above both our initial and most recent forecasts, supported by excellent profit delivery and favorable working capital. Combined with strong adjusted EBITDA, this allowed us to significantly improve our leverage ratio, which I'll come back to later. We closed the year strongly in Q4 with organic net revenue growth of plus 7.3% despite the impact of timing and comparison effect, most notably related to red sea disruption, the EU characterizing favor ban for HTUs, and pre-launch ILUMA iDevice shipments. This was driven by total volume growth of plus 2.3% alongside positive smoke-free mix and robust pricing. Combined with operating leverage and manufacturing efficiencies, we delivered close to plus 12% organic operating income growth and plus 10% currency-neutral adjusted diluted EPS growth. In dollar terms, adjusted operating income increased plus 15% and adjusted diluted earning per share grew plus 14% to $1.55. This includes a positive currency impact of 6 cents, which reflects an unfavorable transactional impact in the prior year in Argentina, as well as the move to hyperinflationary accounting in Egypt, which also had a negative impact on our organic growth of around 1 point on net revenues and 2 points on operating income. The non-cash impairment of our RBH equity investment had no impact on our adjusted financials. In future, we may benefit from FBH dividend income, but we do not include any impact in our 2025 forecast at this time. Let's take a step back and consider 2024 in the context of the last few years. Our organic top line delivery has been consistently strong since the pandemic and further accelerated this year as both smoke-free product and combustible stepped up their trajectory. Clearly, 2024 was also a standout year for adjusted diluted EPS growth. The profitability of our smoke-free business accelerated due to the operating leverage of FICO's increasing scale, favorable unit economics, pricing, efficiency, and the impressive accretion from Zin's rapid growth at superior US margins. We also benefited from a notably robust combustible performance, which provide important structural support for our transformation journey. These dynamics are further demonstrated by the organic top line and gross profit growth of both category in the year. Our smoke-free business accelerated to plus 17% net revenue growth and plus 23% gross profit growth, reaching close to $10 billion in gross profit. This drove an impressive plus 330 basis points of organic gross margin expansion fueled by the factors I just mentioned. On the combustible side, net revenue and gross profit grew organically by plus 6% and plus 7% respectively, leading to plus 60 basis points of organic gross margin expansion. Our combustible business is once again contributing positively with pricing and cost efficiency more than compensating for the third year of significant input cost headwinds, which you expect to ease in 2025. I would also note that adjusted gross margin for smoke-free products were plus 490 basis points higher than combustible in Q4 and plus 270 basis points higher for the year overall at 66.6%. While we continue to target growth margin expansion in combustible, we expect this gap to grow over time as we continue to drive profitable growth from smoke-free product while investing in new market, brand building, and innovation. Taking a closer look now at our volume performance, we delivered our fourth consecutive year of shipment growth, up plus 2.3% in the fourth quarter and close to plus 3% for the full year. Including our VIV EV per business in equivalent unit, this growth was plus 2.4% and plus 3% respectively. Our total 2024 smoke-free volume growth, including VIV, was plus 13.5% or 19 billion unit equivalent, an acceleration compared to 2023. For ICOs, we delivered HTU-adjusted in-market sales growth of close to 13%, and shipment volumes of 139.7 billion, both broadly in line with our expectations. Adjusted IMS growth accelerated in H2 to close to 14%, essentially in line with our target of plus 14% to plus 15%. This includes dynamic growth of close to plus 11% in Europe, with strong momentum across the large majority of markets. As I touched on earlier, Q4 HTU shipment growth includes the impact of additional shipment in the prior year to prepare for the EU characterizing flavor ban and the phasing effect of additional shipment to Japan in H1, notably due to red sea disruption. Our oral smoke-free business grew 2024 shipment volume by plus 24.6%, including Zins US growth of plus 51% to 581 million cans. Snuff and moist snuff volumes were stable. Cigarette shipments grew by plus 0.6%, approximately in line with the estimated growth of the international industry. The growth of the cigarette market can be largely attributed to growth in markets where smoke-free products are not permitted, such as Turkey, Brazil, and India. Excluding such markets, we observe a low single-digit decline consistent with historic trends. Our strong full-year topline growth of almost plus 10% was again achieved through a combination of volume growth, pricing, and the positive mix impact of the shift to smoke-free products. Pricing contributed plus 6.2%, reflecting almost plus 9% combustible pricing and plus 2% for smoke-free product. Smoke-free also drove a positive mix impact of plus 1.9% due to the higher net revenue per unit of both Icos HPUs and Zim.

Overall smoke-free product contributed plus 2.2% to overall group top-line growth for the year, demonstrating Zim's role as a meaningful accelerator to our performance. As in prior years, geographic mix was negative primarily due to combustibles, but to a lesser degree given robust net revenue growth in Europe. Moving down to adjusted operating margins, we delivered full-year organic expansion of plus 180 basis points and plus 100 basis points in dollar terms, comfortably achieving our objective of extension on both basis. This reflects 1Q4 with OI margin expanding organically by plus 140 basis points as gross margin expansion outweighed SG&A investment. Full year gross margins increased organically by plus 150 basis points and by plus 120 basis points in dollar terms. SG&A drove plus 20 basis points of margin expansion enabled by cost efficiency action despite significant reinvestment and commercial support behind our small food business and U.S. capabilities, especially in HP. We delivered over $750 million in gross cost efficiency for the year, with COGS productivity across more free and combustible, and continued back-office savings. This places us well on track for our 2024-2026 target of $2 billion. Focusing on our smoke-free business, we grew our estimated user base by over 5 million people in 2024 to reach approximately 38.6 million legal aid users as of December 31st. This includes an estimated 32.2 million ICS users, 5.7 million oral users, and 1 million digital users. I am pleased to report robust high-cost user growth of plus 3.4 million versus prior year and plus 1.5 million during HPE. This growth is broad-based and consistent with recent years, despite limited new market opening and the easy characterizing for the bank. Overall, added plus 1.5 million users year-on-year driven by Zim's continued strong traction with legal-edge supply concerns. Zooming in now on ICOs. Home user momentum is reflected in adjusted IMS volume with 2024 growth of over 15 billion units, in line with the prior year, despite the impact of the EU level down. This growth is also in line with the five-year average and more than 1 billion units above when excluding contributions from markets launched in the current or preceding year. Importantly, following the rollout of High Cost Illuma and with the increasing scale of the business, the profitability of High Cost is growing strongly. We illustrate this here with the index product contribution over time at constant exchange rates. As we've explained before, the up-come cost of the business to consumer operation results in declining infrastructure cost per user over time, as the user term grows in the market. This is a dynamic we expect to continue in the future. Turning to ICOs in Europe. As expected, HTU-adjusted IMS growth accelerated strongly in H2 to almost plus 11%, following H1 progression of around 8%. This resulted in robust plus 9.4% growth overall for the year despite the significant disruption of the characterizing flavor band. This double-digit adjusted AMS growth in H2 was driven by strong progress in a large number of markets, including growth of around 20% or more in markets such as Bulgaria, Greece, Germany, Romania, and Spain, while growth was less dynamic in Poland, Czech Republic, and Italy. Recovery in Italy is ongoing following the disruption of the flavor band, although at a slightly slower pace than expected in Q4. The continued momentum in the region drove Q4 adjusted share growth of plus 0.9 points year-on-year to 10.6%, with adjusted IMS volume reaching 13.5 billion units on a four-quarter moving average. Q4 shipment volume increased by plus 6% against the target comparison, which included additional volumes related to the implementation of the phaser ban notably in Italy. The phaser ban is now active in all but six EU markets, with a generally consistent pattern of short-term disruption, followed by a return to the pre-ban growth trajectory. Following an impact of around 2 billion units in 2024, we expected a 2025 impact of around 1 billion on both Siemens and IMS, including annualization effects. is the most prominent effect in the first quarter of 2025. We also continue to roll out the IllumaEye device and new consumable variants such as Dilia and Livia to more markets, providing an increasing choice of test profile and price points for this method. Looking at our PCT of tech shares in Europe, we reach a number of important milestones Budapest achieving over 40% share, Rome over 30%, and London approaching 10% with Madrid not far behind. Japan delivered outstanding results yet again with HTU-adjusted IMS growth of close to plus 13% in both the quarter and the full year to reach an adjusted T4 share of 30.6% plus 3.1 points higher year-on-year. This was supported by continuous schedules of Sarah and Cynthia, as well as a positive fraction of the IQOS Kiluma Eye device as we reach over 9.5 million adult users. Offset share in Tokyo for the overall Eat Not Drunk category reached 52.8% in December, With the addition of Shizuoka and Hamamatsu, we make 10 cities and 5 prefectures exceeding the 50% share threshold. On the national off-site basis, 47% of the total industry is now smoke-free. Outside of Europe and Japan, adjusted in-market sales growth continues to grow strongly in P4. Promising growth in a number of markets is illustrated by TCT shares in Saudi Arabia, Indonesia, and Mexico. Continuous innovation is a key driver of these goals, with TerraClub variants and capsules in Indonesia driving an uplift in the quarter and some good initial results from the trial of bonds, our lower-tier offerings. ICOS continues to perform well in Cairo, though offset share performance was impacted by the dynamics of the combustible market, where competitor supply normalized. and a very strong target quarter following the launch of ICO Celuma. Our duty-free HPE offset share increased nicely as we start to harness the strength of our multi-category portfolio to drive sales of ICOs, Veeam, and Veeam together. Turning now to the U.S., where our ICO 3D, the first campaign in Austin, is progressing well, and we expect to commence direct sales of device and HPE in Austin around the end of Q1. We are seeing high interest from consumers with over 4,000 adult smokers on our way here. As we learned from this initial consumer engagement, we are planning the rollout of pilots to other cities. As in Austin, our focus will be on selective adult consumer engagement and building awareness to category and brand education in legal-edged smoker communities. We did not assume any significant volume from U.S. ICOS before the at-scale launch of ICOS Illuma, and we continue to hope for an FDA authorization in H2 2025. Switching categories now to ZIN, where continuous from demand supported Q4 U.S. shipment volume growth of plus 42% year-on-year to 165 million cans. Despite ongoing production limitations, this reflects an acceleration to a near-record sequential increase of plus 16 million per year. On a full year basis, shipment volumes grew by plus 196 million per year since 2023, highlighting both the magnitude of growth and the tremendous effort made to maximize our production capacity. VIN category share incrementally improved to the second half, reaching 65.9% in Q4, as we progress in increasing production further, supported the growth of the category. Indeed, category growth slowed significantly during the summer peak of our supply constraint, as shown on this chart. As the situation started to gradually improve, ZIN was again leading and outstaging the category. I am pleased to share that underlying demand for zinc from adult consumers continued to grow in Q4 and was higher than previously assumed. We continue to experience some out of stock at retail and while production capacity continues to increase, we now target full normalization sometime in the second half of 2025. We continue to target around 900 million cans of capacity For the full year, from our Kentucky facility, and as supply continues to improve, we will look to further extend growth beyond our existing consumer base to other legalized nicotine users. Our Greenfield site in Colorado is due to come online in early 2026, and we believe we are well positioned to capture this potential over the coming years. Responsible regulation of the industry is fundamental in supporting sustainable future growth for this dynamic category. We are therefore encouraged by the recent FDA authorization for the marketing and sale of all the nicotine pouches currently marketed in the U.S., following extensive scientific review by the agency. As mentioned, this magazine is the first and only authorized nicotine pouch in the market. Among several considerations were the substantially lower amount of harmful constituents as to cigarettes and other smokeless tobacco products, as well as current low use levels. The FDA's authorization marks an important step in the protection of public health by recognizing the role that Zinc can play in providing better alternatives to cigarettes and other traditional tobacco products for legal age adults. remain committed to driving industry standards in under 21 prevention, with policy and initiatives designed to help prevent this access. Further, combating trade in illicit tobacco and nicotine products remains a core priority, and we dedicate a significant level of resources to support this effort. Ving also has an exciting future outside of the US. While still in its very early stages, international nicotine pouch shipments grew by 27 million cans, or plus 75%, and we already see strong volume momentum in key international markets, such as Pakistan, South Africa, Mexico, the UK, and Global Duty Free. We launched nicotine pouches in Sydney market during the quarter, to reach a total of 37 worldwide, including Italy, Romania, and Thailand. Within eVapor, we continue to see strong consumer traction behind Viv1. The brand holds the top three close-up position in 13 European markets and has the number one position in five, including Italy. Viv plays an important role within our multi-category strategy as an increasingly trusted choice for small-crude category poly users and a source of incremental growth with improving economy. Our primary focus for the combustible business is to maximize value over time while supporting the growth of the smoke-free business. Pricing and cost efficiency are the key leaders to drive performance while maintaining our category leadership. We delivered another robust volume quarter with growth of plus 1.1%. All regions contributed to Spring 2014 organic net revenue growth of plus 6.2%, with gross profit increasing by plus 10.8%. Full-year pricing of plus 8.7% includes strong contributions from Germany, Egypt, and Turkey. We expect organic 2025 combustible pricing to normalize to plus 5% to plus 6%, partly reflecting Egypt's need to alter inflationary accounting before 2024. Category share was flat in 2004 with positive contributions from Turkey and India, offset by decline in Egypt and Indonesia, with continued growth in the below Tier 1 segment. On a full year basis, we grew category share plus 0.1 points, reaching all-time high for both Marlboro and our global brands overall. This brings me to the outlook for 2025, where we expect another year of strong growth from all categories, driving top and bottom line delivery. We anticipate a fifth consecutive year of positive volumes, with growth of up to plus 2%, notably driven by another year of strong growth in smoke-free products at around plus 12 to plus 14%. For ICOS, We expect a continuation of strong momentum with the absolute growth in H2 adjusted IMS volume expected to be at a similar level to 2024, translating into 12% growth. We expect shipment growth to be broadly in line with this double-digit trajectory, subject to the usual inherent volatility of shipment timing and trade inventory movements. We expect ongoing strong growth dynamic within the U.S. nicotine pouch category. Despite the supply constraints I mentioned before, we forecast a U.S. in volume shipment range of 780 to 820 million cans per year, supported by capacity extension. This represents another year of substantial acceleration in volumes. with an expected increase of approximately 200 to 240 million CAN compared to the 196 million CAN increase in 2024. This supports a total PMI forecast of plus 6 to plus 8% organic net revenue growth. This includes a headwind of over 100 basis points due to hyperinflationary accounting in Egypt, and the technical impact of implementing a new commercial model in the Indonesia below tier 1 segment. The trend in Indonesia has no effect on operating income. Moving down to the P&L, we expect ongoing smoke-free mixed effects, operating leverage, and cost efficiency to drive double-digit adjusted operating income growth of plus 10.5 to plus 12.5. This includes full-growth profit growth, with both growth and adjusted operating margin forecasts to expand in both organic and adjusted dollar terms at prevailing exchange rates. We expect SG&E costs to increase broadly in line with net revenue on an organic basis as we invest behind our small-scale products. We forecast currency-neutral adjusted diluted ETF growth of plus 10.5% to plus 12.5%. This factors in essentially stable net interest expense and an increase in our effective corporate tax rate to approximately 22.5% to 23.5% due to tax increases in line with OECD's global minimum tax and the mix of international earnings. In dollar terms, we forecast growth of plus 7% to plus 9% to a range of $7.04 to $7.17. This includes an unfavorable forecast currency impact of 22 cents at traveling exchange rates, primarily driven by the growth strength of the dollar, mitigated by our hedging activity. For the first quarter of 2025, we expect a strong start to the year with net revenue and operating income growth broadly in line with our full-year objectives despite the mid-year comparisons. We forecast HTU-adjusted IMS growth of around plus 10%, which factors in the large annualization impact from the EU flasher ban in the quarter with a progressive improvement through the year. We forecast shipment volume of 35 to 36 billion for HTUs and 170 to 180 million cans for US zines. We project Q1-adjusted diluted EPS of $1.58 to $1.63, including a negative currency variance of $0.04 at the prevailing rate and an effective corporate tax rate 2 to 3 points higher than the prior year quarter. With our 2024 delivery and 2025 outlook, we are well positioned to meet or exceed all metrics of the 2024-2026 target presented at our 2023 investor base. This is especially true at the level of operating income growth, as well as for EPS delivery, where our algorithm assumes constant 20-20-20 corporate factors. This level of top and bottom line growth reflects a best-in-class growth profile within the context of large-cap consumer packages. Importantly, we are also well on track to deliver high single-digit adjusted volatility growth in dollar terms across the 2024-2026 period at revenue exchange rates. Indeed, we measure our cash flows in dollar, and after a record delivery in 2024, we expect to deliver operating cash flow of around $11 billion for 2025. This is broadly in line with 2024, once accounting for two non-recurring payments with a total impact of around $1 billion. While we continue to appeal the German tax surcharge case, we have decided to make a $0.8 billion payment this year, and we also anticipate a final transition tax payment related to the U.S. tax debt and job tax. We anticipate capital expenditure of around $1.5 billion with a large portion of this related season as we prioritize the investment behind our small-scale projects. Our strong 2024 cash flow and EBITDA growth, combined with the favorable impact from our Euro balance sheet hedging, allowed us to reduce our net debt to adjusted EBITDA ratio by 0.5 times to 2.66, ahead of our expectations and representing a dramatic acceleration of our daily hedging. We expect further progress in 2025, placing us on track for our target ratio of around two times by the end of 2026. I will now turn it back to Jacek for a concluding remark.

Thank you, Emmanuel. In summary, 2024 was a remarkable year for PMI. Our financial results epitomize the strength of our strategy and the success of our transformation. with underlying momentum across categories bolstered by our proactive measures on pricing and cost efficiency. I remain confident in our position as the global smoke potential as we continue to execute on our multi-category strategy with leading premium brands, ICOS, ZIN and ZEE. Our key strategic priorities for 2025 are clear as we continue to support the expansion and development of our smoke-free business both in the U.S. and internationally. We expect continued strong momentum in 2025 and we remain confident in our ability to deliver or exceed our 2024-2026 growth targets as we progress towards our ambition of becoming substantially smoke-free by 2030. Finally, and importantly, our strong growth output and highly cash-generated business enables us to continue to reinvest in our small-scale transformation while returning cash to shareholders. In September, we increased our annual dividend for the 17th consecutive year in line with our long-term commitment. Thank you, and Manuel and I will be happy now to answer your questions.

Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. And our first question today comes from Matt Smith of Stiefel. Your line is open.

Hi, Isaac and Emmanuel. Good morning. The 2025 outlook calls for HTU shipments in numbers or in market sales growth fairly in line with what you saw in 2024. But could you talk about the composition of the growth? If it's overall in line, are you seeing different contribution by geography in your outlook? And Can you remind us on if there has been any progress in new markets contributing to growth in 2025, or if you've made any progress in those markets as you look out to your 2026 goals? Thank you.

Now, so in the guidance, we essentially continue seeing good growth in Japan and in the number of parts in Europe. I mean, Emmanuel mentioned about the Italy, Czech, Poland, right, when the growth is a a bit below what we would expect at this stage, especially in Italy and Czech, following the flavored ban. But we also see that there is some recovery coming in. So I think, you know, hopefully in the second part of the year, we should bring Italy and other geographies as part of what the rest of the EU or Europe is going through. And we have not, in the guidance, assumed a significant new market opening in terms of volume. As you know, and I had it in my remarks, I mean, we're dealing with this rational world, fighting with the irrational world. I hope that, you know, the most recent authorizations of FDA, following the authorizations of Heat Not Bird, now the pouches, will be a good incentive or encouragement by other governments which, to be very frank, stupidly oppose smoke-free products while allowing cigarettes. But in the guidance, we have not put any significant volume coming from the new geography. So this is all organic growth, and as you could see in the quarters of this year, Despite the fact, even if you look at Japan, when almost half of the market is already on a smoke-free product, the growth continues there. Thank you, Yasuke.

I'll pass it on. Thank you. Our next question comes from Bonnie Herzog of Goldman Sachs. Your line is open.

all right thank you hi manuel and yasek i had a question on your margins you're guiding robust operating leverage on a currency neutral basis this year so hoping you could highlight the you know some of the key drivers behind this also sort of wanted to verify if your guidance assumes a potential entry of a loom us or you know, just possibly continued investments without, you know, any corresponding sales. And then how should we think about the margin contribution from Illuma in the U.S. and how long it might take after your entry here in the market for those margins to really be meaningful?

Yeah, so maybe I start, Bonnie, good morning. Is that, I mean, Yes, we're looking for a robust margin expansion this year, maybe not precisely to the same level as we had last year, but still it's going to be robust, I think, in 100 basis points. So territory, this is what we're looking into, is that, you know, combinations of a few factors. We're still looking at the pricing contributions, which is obvious. There's obviously a positive mix, right, between the categories, and especially now that we have a free smoke-free category, it's on the positive margin path, including day vape. So we're very happy that our strategy of going selectively, but with the right impacts in the geographies that is needed, we're not leaving money behind, if you like, margin behind. So this will contribute. And we had in the past, as you remember, quite the headwinds coming from a Cox. And I think those have, I think they are behind us. Okay. Then obviously this whole, you know, conversations these days here and there, especially coming from the U.S. about the tariffs and so on. But, you know, the way we organize our supply chain, as you know, U.S. on the ZIN is essentially self-sufficient. our supply chains in Europe. We organized our supply chain almost by blocks, so I don't see at this stage that there should be any surprises coming on the tariff side. So I think we're pretty confident where we'll land with the COGS through the year. There is obviously ongoing support coming from the scale of ICOS, especially devices, when Okay, there was economy of scale. There was the robustness of the device in terms of equality, et cetera. So we actually don't have this, like in the past, a bit of a pressure on the margins coming from a device. So this we have well stabilized for 2024. It was behind the margin expansion. And I think we should expect the same. We are expecting the same in 2025. Now your questions with regards to ILUMA margins US, okay, maybe one by one. We still expect that hopefully, you know, we will get authorization for ICOS ILUMA around the middle of this year. Again, on the one hand, one could read this as encouragement that after, as we said, it's total scientific, et cetera, review FDA has gave authorizations for all variants of the I wouldn't be myself if I wouldn't comment that obviously something takes five years, it must be thorough because otherwise I cannot explain the length of the process. But I do hope that FDA will move faster and already I could use my spending for a while. And by the way, if you have also authorization for ZEN. The margin story, I would repeat myself, that obviously when we start adding support behind Iluma, I mean, at the initial period, it will be a negative, right? But in a scheme of the things, in the P&L size, if you like, of our business in the U.S., I don't think it should be something which is, you know, that much worried. And I believe U.S. will go in the similar path as we had on a heat not burn in other places. So two to three years, we should ICOS should be net contributor to the bottom line. Bearing in mind, as always, reminding everyone that we don't really have the headwind of cannibalization. So we don't really, we're in a better starting position. And we had a growing confidence in the ICOS Illumon International, but We know where ICOZILUMA brought us on international over the last three years and it continues generating the growth user acquisition. So I believe it's really a great proposition for adult smokers in the US.

Maybe just to compliment on the margin side, Bonnie, as you can judge from our guidance, we have significant ambition in terms of margin improvement in 2025. And what is driving that is the fact that we are flying on several engines here on margin improvement and everything is coming together positively at the same time. So indeed, we have, of course, the mix evolution that is very favorable to us with smoke-free product coming with a higher margin and they are growing very fast. Among the smoke-free products, we have the U.S. and Zin that is growing even faster and which, as we already said, is best in class in terms of margins. So that's obviously a plus. We're also increasing price. Yes, of course, we're not going to continue to deliver 8% plus price increase on combustible, but it's going to remain extremely robust. And we also have the ambition to... grow our price not at the same level, but significantly on our smoke-free portfolio. And then when we look at our COGS, we are working on productivity. They have scale effect that are delivering positively. And as you know, we were facing until now a significant headwind on cost, notably on the combustible business. This is easing. 25 should be better and 26 could be even better than 25, by the way. So we are going in the right direction there. And that is making us clearly targeting nice margin improvement, both organically and in dollar term for 25.

Okay, super helpful. And actually, I'm just going to ask a quick follow up because you kind of touched on this, but you also mentioned this morning that about, you know, targeting or your continue to target gross margin expansion in combustibles. And then you did say that you expect the gap to grow relative to your smoke-free product gross margin. So, you know, previously you guys have talked about, I think, a 10-point gap. So, you know, as your gross margins expand on, you know, combustibles I think what I'm hearing you say is that not only is that an opportunity, but also continued margin expansion on smoke-free is what you just mentioned. So do you foresee that gap expanding? I mean, does it go to 15-point spread, or could it go to 20? Just kind of trying to think through that in the next couple of years.

Look, on the consumable, we've already highlighted the fact that there was a 10-percentage point gap And it has been expanding in the last few years. So indeed, we have the ambition to do better on the gross margin for combustible, and we explain why. But as we continue to progress also rapidly on smoke-free products, And both, you know, with the mixed effect coming from ZIN, but separately on ICOS and ZIN, we want to continue to progress. So we could have, indeed, a gap that could continue to expand between smoke-free product and combustible in the coming years.

All right. Thank you. I'll pass it on.

Thank you. Thank you, Benny.

Thank you. Our next question comes from Garab Jain of Barclays. Your line is open.

Good morning, Emmanuel and Yasig.

Good morning, Garab.

Thank you for asking my questions. I have a couple of questions. One is on ZIN. So if I look at the scatter data, the volumes are decelerated to mid-teens growth, and your guidance is for 34% to 41% growth. And then you also mentioned that the supply normalization would only happen in 2H25s. So, you know, just wanted to understand what gives us the confidence that, you know, suddenly Zen will be accelerating to this almost 40% growth rate again.

Yeah, so I would take a good morning. So we look also on, you know, how the volumes were evolving in Q4 of the weeks of the last quarter. We see the growing velocities behind Zen. And actually, there was the only brand, I think, over the last few weeks, which was growing in the velocities, not the rest of the, at least the big four other brands or smaller, but big other brands. Look, we also have to understand that we're reading all this data with no full supply of the supply constrained environment, right? So it's a bit difficult that you see at the, It depends even on which source you're looking at. That's something which would be significantly different to what we're shipping to the trade. But Q4, as we predicted, with the increased capacity in Owensboro, we had the first quarter with the significant sequential quarter-on-quarter growth. even if you will take the run rate of what we see the last weeks, et cetera, I think that the guidance is somehow reflecting what we see there. Now, our comments that we think that we should be meeting a demand by about mid of this year, I have to make one reservation is that difficult to actually read what the demand is, because we know what is the level of out-of-stock, we know what is the existing users' demand for the product, and knowing that these purchases are somehow impacted by the fact that, unfortunately, they are confronted with the lack of availability out-of-stock, and that is the you know, all the positive momentum which the Zen has. I believe also the FDA authorizations, which, you know, on the one hand, one could read product was in a market, so there is no change. But actually, I think it gives a lot of, you know, visibility and stability to all the market participants, including the trade. And I believe also the consumers that the product now has the full Fletch, you know, my language authorization, you know, the flavor variants. So all of these things I think will translate into the volumes which we, projections of the volumes which will reflect it in our guidance.

Sure. And a follow-up question to that, you know, so Zim clearly in supply shortage retailers have been putting their markups. I think you increased prices by 30 cents last year while retail has increased prices by $1 or you know, $3, $5, how do you control retail price? And is there a way for you to, as supplier normalizers, to reduce retail price so that that will also have a positive effect on your volume?

Yeah, so, you know, if you have a degree of the out-of-stock as Zen is experiencing, it's obviously managing the price at the retail level is a you know, is a little bit more challenging, right? I mean, it's pretty obvious. But I believe with the growing demand, sorry, with the growing supply of the product, I think this pricing will come to some sort naturally to the normalizations. I have to also admit that, look, we are very happy with the support we're getting from, you know, retailers handling our products. And, you know, it's not that easy for them also to be confronted with a, product which on the one hand has the demand on the other hand they cannot realize their margins and you know they take from a ZIN price and you know I hope but again I think that you know this pricing situations in the market will sort out somehow naturally the moment when the product will be in a full air unconstrained suppliers as we said you know second half of a 25 we should start seeing we should start seeing improvement on this

Sure, and if I could just squeeze in one last question on Zynultra, could you just talk about that P&TA, what the product is and when do you think we can see it in the market?

Yeah, so obviously, as well as we all noticed, right, the Zyn authorization came essentially last days or hours of the one administration. Now, I guess we'll have to wait for the new administration. Look, as I said in the answer to the questions before that, I do hope that period of four or five years waiting for authorization is too much. It's too long. And I do believe that there will be some, I hope there will be some accelerations in the processing because of the authorizations. You know, we have to also understand that, you know, partially the challenge which the U.S. market has very much on the evade product is by the fact that the legal part of the market has not been created. So on the one hand, you know, FDA is doing a lot of right things in terms of law enforcement and chasing the illegal Chinese or whatever imports. But on the other hand, there is a demand among the smokers and adult nicotine users for this type of a product. And unless we create in a fast manner the legal part of that market, then we're essentially wasting our time and money. So I do believe that the FDA will take this also into consideration, that this situation shouldn't happen in our product categories.

And if there is a demand for the product to be recognized as a better alternative, We also have a legal part of the market and then a control for the law enforcement, etc., the illicit market.

But you cannot just control the illicit market if you haven't provided the legal solutions in the market which are available. So I do believe that, you know, the ICOS, sorry, ICOS as well, but it has some pending authorizations or applications, I should say. I do believe that they're going to be processed in a faster manner than before.

Thank you so much. Thank you, Laura.

Thank you. And as a reminder, if you have a question, please press star 1-1. And our next question comes from Eric Serrata of Morgan Stanley. Your line is open.

Great. Thanks, guys. Morning, Eric. Morning. Hopefully this gives some color in terms of what you're seeing in Italy. You mentioned that the fourth quarter was a little bit softer than you had anticipated after the nice recovery you saw in the third quarter from the characterizing flavor ban. And then in terms of Poland, can you remind us when you expect to see some disruption from Italy the ban being implemented and what sort of an impact you expect in terms of overall European combustibles business. And then lastly, on FX, it seems like the FX headwind that you called out for the year and the guidance was a bit less than what seems to be implied based on spot rates and your typical yen hedge. Wondering if there's been any change in the hedging policy or if there's any reason why it may be a bit lower than anticipated. Thank you.

Yeah. So maybe I'll take the last one. It's the easiest one. And I come back to Italy, which is a bit longer story. I mean, in a 22 cents at spot rates right now, I mean, frankly speaking, the biggest contributor to the negative is the Russian ruble. And that's well above the 60% of the variance. The yen actually goes in cents. I guess it was, if I recall, about the 4 cents in our estimates at the spot rate. Obviously, as we all know, we're living in the pretty dynamic times as we speak, but this is what it is. There was a big contribution last year coming from the Egyptian pound, when we had to take the heat, that obviously will not be repeated in 25. Actually, this will result in a positive currency variance. But this is on the currency, so frankly speaking, at this stage is the ruble And as I said, 4 cents or so on the end and the rest is just the mixed bag due to our international footprint. Emmanuel wants to add something.

No, I want to add something because I think, I mean, you know, the volatility we're seeing on the currency market today will be a good touch of trust on, you know, how things are working for us. I should first remind you that we have a natural important edging in our balance sheet with more than 60% of our debt that is in euros. And therefore, when we have a weakness in the euro versus dollar, which is a situation we've seen recently, of course, we have a negative impact on our P&L. But we have also a decrease of our debt in dollar terms. And we're also benefiting from lower cost of the debt in euro plus, of course, lower interest rate interest cost. in euro translated into dollar. So that has been certainly helping our trajectory in 24. And if there was continued weakness of the euro, that would continue to help us in the future. Probably what is not fully captured by the market is the fact that, indeed, on top of that, we have two significant edge positions, one on our exposure to the yen for 2025. We have around 60% of our exposure that is covered at a rate of around 138 yen for one dollar. So that means that we are not impacted by the possible deterioration of the yen for that part of our exposure. And we have also a lower exposure to, a lower edging, sorry, on euro. where we have around a bit more than one-fifth, sorry, one-fourth of our exposure to Euro, where we are covered at 1.12, which is also limiting a bit the impact on the P&L when the Euro is going down. So with everything I've been saying, you have all the explanation, plus what Jacek has been sharing with you on the Forex impact for us today.

Yeah, now on Italy. So I think, yes, the second half was a bit weaker than we would maybe expect. Italy was going as many others, not all, but many other member states of the EU for the flavor ban. I think what we see is that some smokers, some users have hope temporarily by the return to cigarettes, which always was at risk. So it also explains in some geographies the cigarette trends are slightly better than one could expect or could think. There is some poly use between the wave products very much. And that, I believe, maybe partially also explains why our VEEF proposition has advanced most in Italy. And this was in a close system very shortly after a short period of time. to travel to the number one proposition. I think we need to maybe look at, you know, the category of a smoke free over period of time on a total basis, because there will be some poly usage and sometimes driven by the events like this, by this flavors. But we also have a geography in Europe that very shortly after the implementation of the of the flavors ban, I mean, they actually return to the growth rate which we had before. So, you know, maybe Italy is outlier. We're looking into this whole thing. But as I said, part of our multi-category strategy is also should there be any leakage at the heat, not burn users, we can capture this with our proposition. And then I guess we need a bit more time to see the stabilization. Poland, you asked about Poland. I don't think Poland has put the stick in the ground at which moment they really want to fully implement the buy. It will happen, I think, somewhere in 2025, but it has to be, if the stick has not been put in the ground, it is more towards the end of this year.

Great. Thanks so much.

Thank you. Thank you.

Thank you. And our next question comes from Pahan Beg of UBS. Your line is open.

Good morning, guys. Thank you for the questions. Hi, guys. A couple from me as well. Firstly, on Zin, again, in the U.S., we noticed a couple of your peers have launched synthetic moist nicotine products, and according to the scanner data have seen some initial uptake. How do you see the moist versus dry dynamic in the U.S., and where do you think the consumer may end up in the future, recognizing that in Europe most products are moist? And the second question maybe comes back to your comments around Italy. But just longer term, we see the vapor category continuing to grow quite strongly and we can discuss its flaws around flavors, marketing, underage use, etc. But do you see this as a headwind for the tobacco industry or do you believe the total pie can continue to grow with limited impact on tobacco?

Yeah, so maybe the second part, I take it, I think the total pie grows despite the fact that the movements between the categories within a smoke-free, there is some dynamics, right? Between a heat not burn and e-vabe and a pouch is now depends how market is organized and regulated. We also know that the most difficult actually to read category due to the way the market is organized currently is the e-vape category, because you have disposables, you have pots, you have open tank systems still, and some products are under the regulations and properly authorized, depends on the jurisdiction. Some products are just popping up in the market, so you could call it the different forms of illicit trade, but I think you see this in the US, but also in Europe, in the UK and a few other places. Regulators, governments are taking a more serious look into properly organising that market. I can't tell you whether this will be completed in 2025, but definitely the moves are in the right direction. I believe 2025, 2026. The category should be normalized by the fact that it's going to be properly regulated. And then we take it from there. I don't want to talk about the youth exposure, etc. Because, you know, our policy, you know, what our views on this one. But definitely it's difficult to control the discipline, the market, if you're dealing with... all of the different emanations of the product coming essentially legally to the marketplace that obviously also enjoys the less disciplined trade channels or completely invisible trade channels, if you like, etc. When it comes to your questions about the synthetic versus dry, just to take it from a perspective, the way we look at the data in the US, for example, these whole new things which are coming into the market, there is quite a long list of different SKUs and, you know, the Moist or others and, you know, this whole market, that part of the market, if I'm not mistaken, move year on year by barely 20 basis points. So in a scheme of these things, there's presumably a lot of dynamics on the weekly basis, but doesn't seem that it, you know, has any major attractions, etc. The insights which we have when we talk about consumers, we see, and obviously, you know, when you read the consumer insight, it's not a pure mathematical accuracy and the exact number. But I think that the moist products, moist pouch products is more appealing to the moist snuff type of users, right? Like snooze, etc., while what we see in the marketplace, the dry product, has more appeal towards the smokers and evapers. That is what I can tell you at this stage.

Thank you, guys. Really appreciate that. Thank you.

Thank you. Our last question today comes from Philip Stane of JP Morgan. Your line is open.

good afternoon thanks very much for taking my questions um i just had just one uh question please it was just on the htu guidance if i look at where the volumes landed at the end of 24 and then i look at the guidance range you've uh the 10 to 12 you've got it here for 25 but then just extrapolating that out for 26 and looking at your guidance there of the 180 to 200 million um of shipment volume Just trying to get a sense of what gives you confidence in, by my maths, that implies, you know, re-acceleration in the growth in 2026. I just wanted to understand, I suppose, what gives you that confidence that you will see that re-acceleration in 2026? Thank you.

Yeah, so as I said earlier, I mean, in the guidance for this year, for 2025, we essentially stayed very low into, we essentially focused on organic growth in the markets, existing markets. Obviously, if you open the 25 and beyond 26, I think it's becoming maybe more prudent or fair to assume that there will be some geographies also coming finally and opening the markets to the new proposition. There is one point which maybe we haven't articulated well in our remarks and the answers to the questions before is that there is still about 20 or so percent of the volumes on the heat not burned that we don't really do, we can't really realize the full growth potential. And I'm referring here to the geographies of Russia and Ukraine, now for obvious reasons. But if I was just look at the numbers of 24, I think we have left behind about 0.6 maybe even more point of a growth, which you would normally expect to deliver if all these markets were, you know, subject to the same sort of market conditions as other places, right, as Illuma, et cetera. So, okay, let's see how this unwind. I think the growth which we projected very much focused on organic, organic meaning, you know, the geographies which we have today on hand, I think is a good growth. volume terms is essentially the same volume growth as we used to have in the past, but also in a broader sense, we more and more see the potential of the multi-category and the total volumes of the smoke-through products is just the one category. And as we know very well, the margin, from the margin perspective, they all essentially create a great opportunities. I mean, they all greatly are creative to where we are today and especially to the combustibles. Second thing is, and I think we will zoom a little bit more or try to zoom a bit more to this at our Cagney presentations, but from the user's perspective is actually pretty nice economic proposition. because we essentially then leveraging all the investments for the user acquisitions, et cetera. And, you know, one of the category obviously takes the burden of acquiring the user, but all the other product categories actually very nicely benefit from this whole thing. So you will hear from us more and more talking, obviously we'll give you the granularity about the Hidnot, Bernie, Vape and as in, but I think, In the next few years, the focus will be more and more turning into total of a smoke-free rather than just the individual, because this also somehow reflects the user directions, the user consumer dynamics. Thank you very much.

Thank you.

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

Thank you. Before closing our call, I'd like to remind you that, as Jacek mentioned, we will be presenting at the Cagney Conference on February 19th, and we hope you'll be able to join us either in person or virtually. Thank you again for joining us today. If you have any follow-up questions, please contact the Investor Relations team, and have a great day. Thank you.

Thank you. Speak to you soon.

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