Philip Morris International Inc

Good day and thank you for standing by. Welcome to the Philip Morris International 2025 First Quarter 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 2025 first 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 8K, dated April 23, 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 Barbot, Chief Financial Officer. Over to you, Emmanuel.

Thank you, James, and welcome, everyone. In Q1, we delivered a very strong start to the year with all key elements of the business contributing strongly to deliver double-digit increases in organic net revenue, operating income, and adjusted deleted EPS in both constant currency and dollar terms. Our smoke-free business performed exceptionally well across all areas with shipment volumes up plus 14.4% year-on-year, organic net revenue growth of plus 20%, and outstanding organic growth profit growth of plus 33%, as all three smoke-free categories expanded gross margin. This was especially fueled by the rapid growth of ZIN and the continued volume momentum, operating leverage, and scale benefit of ICOS. Our smoke-free business now accounts for 44% of total gross profit as we continue to deploy our multi-category strategy across markets and broaden our growth opportunities. ICOS delivered close to plus 10% HTU-adjusted IMS growth with continued strong performance both in Japan and Europe. despite the annualization impact of the EU characterizing flavor ban. We expect double-digit growth for the rest of the year. Zin, once again, delivered strong growth in the US with shipments increasing by an impressive plus 53% to reach 202 million cans, exceeding our initial expectations as demand remains strong and production capacity increase ahead of schedule in the latter part of March, enabling some initial replenishment of trade inventories. International nicotine pouch count volumes also grew by plus 53% or by plus 182%, excluding the Nordics, demonstrating the global dynamism of this emerging category. In eVapor, the Q1 performance was impressive. demonstrating its increasing contribution within our multi-category offering. Shipments more than doubled year on year and gross margin further expanded, driven by strong pot growth in Europe as we increase our distribution and commercial activities. Within combustible, overall volume growth, coupled with strong pricing and ongoing cost initiatives, drove a robust performance despite notably negative geographic mix from increased volumes in lower margin markets. Overall, the very strong and increasingly profitable underlying growth of our smoke-free business was coupled with very solid combustible results and the added benefit of favorable shipment timing. This allowed us to deliver plus 16% organic operating income growth and plus 250 basis point of expansion in adjusted OI margin to reach 40.7% and resulted in strong double-digit adjusted diluted EPS growth in both currency neutral and dollar terms, despite currency headwinds. While it is early in the year and there are a number of uncertainty in the global economic outlook, we remain confident that we will achieve another year of super growth. As such, We now forecast double-digit adjusted diluted EPS growth at prevailing exchange rates. Turning to the headline numbers, we delivered volume growth of plus 3.9%, reflecting the very strong dynamism of our smoke-free business. Combined with strong pricing and despite unfavorable combustible mix, we delivered double-digit organic net revenue growth of plus 10.2%, reaching $9.3 billion in total. There was also a technical impact from the change in commercial model for the Indonesia below tier one cigarette segment, where we now act as a handling agent. This results in lower net revenue and cost of goods sold, but has no meaningful impact on gross profit or operating income. Excluding this effect, which will notably affect the first three quarters of the year, organic net revenues grew by around plus 12%. And as I mentioned, our smoke-free business was the primary driver behind our organic adjusted OI growth of plus 16% or plus 12.8% in dollar terms. Q1 adjusted deleted EPS grew by plus 17.3% in constant currency, and by plus 12.7% in dollar terms to $1.69. This includes a $0.07 unfavorable currency variance, notably due to non-recurring transactional losses in the quarter linked to currency volatility. This stronger than expected performance was primarily driven by the top line and gross margin result of our smoke-free business. ZIN performance was further enhanced by the great work of our manufacturing team in accelerating capacity initiative. Strong high-cost HTU shipment growth includes a robust performance in Europe and around 1 billion units in favorable shipment timing, which we expect to reverse in H2. This was complemented by the resilience of our combustible business. Looking at category performance in more detail, our smoke-free business grew net revenue by plus 20.4% and gross profit by plus 33.1%. This led to an impressive plus 670 basis point of organic gross margin expansion to surpass 70%, more than five points above the gross margin of combustible at the current category and geographic mix of SFPs. As I mentioned, this reflects an acceleration in gross margin expansion for all three smoke-free categories, notably combined with the positive mixed impact of ZIN's accretive unit economics and pricing on both HTUs and ZIN. Very strong high-cost gross margin expansion reflects the powerful growth and scale effect of this large and growing business, manufacturing productivities, and a comparison benefit from higher device shipment in the prior year when IllumaEye was launched in Japan. On an organic basis, combustible net revenues and gross profit grew by plus 3.8 and plus 5.3% respectively. While pricing was strong and volume were positive, there was a notably negative geographic mix this quarter due to growth in markets such as Turkey and Egypt, in addition to the technical impact from Indonesia. We expect both pricing and negative geographic mix to moderate over the rest of the year and target combustible gross margin expansion organically and in dollar terms. As expected, input cost headwinds eased compared to recent years, and based on current assumption, we expect this to further improve in 2026. Taking a closer look at our volumes, shipment growth of plus 3.9% was primarily driven by our smoke-free business, with all categories contributing positively and placing us on track for a fifth consecutive year of total volume growth. Smoke-free volumes grew by plus 14.4%, above our full-year target range of plus 12% to plus 14%. reflecting very positive contribution from Icos, Zin, and Viv. In addition to the growth of these three brands, which I covered earlier, I would also note that our all-smoke-free business includes U.S. Moist Snuff and Scandinavian Snooze, which declined modestly in the quarter. Despite this, all-smoke-free product shipment growth accelerated versus the prior quarter to plus 27%. Cigarette volumes were positive for the fourth consecutive quarter as we grew share in a modestly declining industry with continued growth in markets where smoke-free products are not permitted, such as Turkey and India. You have heard us talk recently about our multi-category strategy for smoke-free products. as we leverage on the strengths of the ICO's brand and commercial infrastructure in international markets to accelerate incremental growth from ZIN and VIVE. This is evidenced by our strong smoke-free portfolio results in Q1, with visible accretion across regions and markets. We have 46 markets with multiple smoke-free offerings, including 16 with all three PMI categories on offer. The execution of this three-pronged strategy is generating positive results in markets such as the Czech Republic, Romania, Switzerland, and our global travel retail business, in addition to promising starts in the UK and Italy. It is also helping to bolster our position as a global smoke-free champion. Double-digit Q1 organic net revenue growth was again driven by all three key elements of our structural growth model, namely volumes, pricing, and smoke-free mix. Pricing contributed plus 6 points, reflecting over plus 8% combustible pricing and around plus 3% for smoke-free excluding devices. The positive mix impact of the shift to smoke-free product, including US smoke-free mix, drove a further positive contribution of plus 3.1 points. Overall, combustible geographic mix and other factors had an unfavorable impact of 2.7 points. This was more negative than in prior quarters, reflecting the technical Indonesia impact and combustible market mix dynamics I explained earlier. Currency had a negative impact of 3.9 points with a further 0.5 points from acquisition and divestiture, which include the divestment of Vectura. Turning now to gross margin, we delivered very strong expansion of 340 basis points on an organic basis and plus 360 basis points, including currency acquisition and divestitures. This comprised plus 180 basis points from pricing, more than offsetting an 80 basis point unfavorable impact from cost inflation, net of productivities, and other cost items. Smoke-free growth delivered an excellent plus 230 basis point with a flat contribution from combustible excluding pricing, but including the Indonesia impact. This excellent gross margin performance supported a strong adjusted operating income margin expansion of 250 basis points or plus 200 basis points organically after accounting for the currency mix of our costs, the divestiture of Victoria and other scope effects. This impressive margin expansion was delivered despite a 140 basis point impact of higher SG&A costs driven by continued investment in our small pre-growth including US investments, a low-cost comparison in the prior year, and the impact of 2025 investment phases. As we continue to invest in top-line growth, we target organic SG&A growth broadly in line with net revenue growth for the year. We continue to drive manufacturing and back-office efficiency. and delivered over $180 million in gross cost savings in Q1 across both cost of goods sold and SG&A. After more than $750 million of savings in 2024, this places us nicely on track to achieve our $2 billion target over 2024-2026. Focusing now on our high-cost business. As expected, calendar effects and EU flavour ban annualisation impacted Q1-adjusted IMS. However, the delivery of plus 9.4% growth despite these factors marks continued strong underlying momentum. We expect double-digit progress in the balance of the year, in line with our target of plus 10% to plus 12% growth. Supporting this are commercial initiatives around brand building and continuous innovation on devices and consumables as we progressively roll out Illuma Eye and new consumable variants of Terria, Livia, and Delia. Over the longer term, we have a rich high-cost innovation pipeline to further enhance the breadth and quality of the user experience with the iconic brand. As disclosed in our latest integrated report, Over 99% of our 2024 adjusted R&D spend was on smoke-free products, consistent with the last four years, as we continue to drive consumer-centered product development. Turning to Europe, where we are building on the strengths of our high-cost business to create an integrated multi-category portfolio to accelerate consumer switching and value creation. Total shipments of our flagship smoke-free brand advanced by plus 17.5% into one, with an increasing contribution from both Zin and Vive. ICO's HTU shipments grew more than 15%, including a positive comparison impact from the prior year. Our investment in brand building initiatives are exemplified by the recent partnership with renowned Italian designer Celletti, at Milan Design Week as part of the IQOS Curious X campaign. For IQOS, Q1 HTU adjusted IMS grew by plus 7.4% as we further accelerated our share of cigarettes and HTUs to a record 11.4%. Many markets in the region grew adjusted IMS by double digits, including ITIN growth or more in Spain, Germany, Bulgaria, and Greece.

This dynamism, more than compensated for pleasure band annualization, which has flagged last quarter, was especially pronounced in Q1, and most notably in Italy. I am particularly pleased to report that the control market here in Italy is spending well, with a record high of 18.4% for Q1, and progressive increases through the quarter. Overall, regional Q1 adjusted IMS growth was in line with our expectations, and we expect another robust quarter in Q2, followed by an acceleration in the second half. Our experience of the flavor ban impact remains unchanged, with a broadly consistent pattern of recovery across markets following implementation. We continue to expect an impact of around 1 billion units in 2025, primarily due to annualization with only Hungary and Slovakia implementing the ban so far this year. The most notable remaining market is Poland, where the team shares debt will be in early 2022. We also continue to roll out new and improved variants of our tobacco-free consumable, Lidia, which is driving promising results. This is well illustrated by Hungary, where Lidia reached a double-digit share of semi-ex-use less than three months from launch. Our fundamental progress in the region is highlighted by the consistent growth in CCT of hotel. This also includes Hungary, where Budapest share is almost 42%, over 4 points higher than Turkey. Impressively, 24 of the 34 markets where ICOs is present in Europe have crossed the 10% CCCR mark, with 6 above 30%. Notable fallouts across the region include London, Vienna, Zurich, Lisbon, and Athens. The regulatory landscape is an important determinant of smoke-free progress, and we are encouraged by recent policy development in a number of markets which recognize the role of tobacco harm reduction in policy measures. This includes Greece, which introduced dedicated legislation supporting science-based claims on smoke-free products, and Hungary, where factual and science-based communication to consumers on smoke-free products is allowed, versus a total advertising ban for combustibles. In Ukraine, an excise tax differential on FCU versus cigarettes was reintroduced following a period of equal treatment. In Japan, we deliver FCU-adjusted IMS growth of plus 9.3%, effectively marking the tenth quarter of double this growth after accounting for the least year. HTU adjusted share increased by 3% a point year-on-year and plus 1.6 points sequentially to reach 32.2%, further highlighting the dynamism of the innovative ICOAT brand and product portfolio in this new market. ICOAT HTU captured more than three courses of category growth in 2021, and combined with our cigarette business, TMI is now the market leader by volume, of which approximately 75% are SPUs. The overall small pre-category continues its progress, reaching almost 48% on the national offset basis in March, with 13 cities and 8 prefectures now sourcing the 50% threshold. Globally, we continue to see very strong high-cost performance, as illustrated by TCT effects here. Highlights include impressive year-on-year growth in the capital of Indonesia and Mexico, with so far 5% share, robust progress in the Middle East and North Africa, and strong growth in Belgrade, with 17.7% share, despite increased competitive activities. iQuote reached a new high in South Korea, with a 14.1% share in Seoul, supported by the loss of Illumai in a highly competitive market. Offset share performance in Seoul continues to be optically impacted by the growth of the combustible market, where competitors supply has normalized. Also worth highlighting is the excellent growth of our global server retail business, which is a leading space for our multi-category offerings. We record a strong HTU growth across all regions, with a share of over 18% in airports where ICOS is present. In the U.S., as planned, we commence direct sales of ICOS-3 devices and HTUs in Austin, Texas, at the end of March, following targeted engagements with legalized nicotine consumers over recent months. While intentionally small-scale, we have received strong interest with further IQOS-3 pilot plans in the coming months as we prepare for the at-scale launch of IQOS-Luma. As a reminder, we are not assuming any significant HTU volumes from the US in our full effort. Switching to Zyn, which continues to resonate strongly with adult nicotine users as a superior product with premium brand equity and deliver excellent results. Continued strong demand and increased production capacity enabled shipment volume growth of plus 53% to reach over 200 million cans for the quarter. This plus 70 million year-on-year increase is impressive, though we should note the prior year first quarter featured notable depreciation of retail and distributed stock levels, and therefore, the sellout volume higher than shipment, and this quarter included the beginning of replenishment. As we continue to expand production at our Owensboro plant, we accelerated one plant step in this process to the latter part of March. This enabled increased shipment at quarter end, and a pull forward of initial distributed restocking. With very limited flow-through of this additional shipment to retail in the quarter, this did not yet have a meaningful impact on install availability. We target full normalization of the supply situation in Q3 this year. This will continue to perform very robustly at retail given the circumstances with strong double-digit offset growth. According to Nielsen, Q1 offset volume grew by around 15% year-on-year, with category value share remaining strong at over 70% despite heavy competitor discounting. While Nielsen data is based on only a small sample of stores, it also shows our off-tech volume shares have been held back by availability and declined by 1.45 points sequentially to 61.5%. We already observe our share on MSC data, which measures shipment from distributor to retail, recover to almost 66% in March on the limited flow-through I just mentioned. With category of tech growing at around plus 30 to plus 35%, while the leading brand is supply constrained, we expect VNORSEC to gradually accelerate in the coming months. as in-store availability improves and we reactivate commercial and marketing initiatives. We remain excited about the growth prospects of this dynamic category and its potential to switch legal-edge consumers from cigarettes and other traditional forms of tobacco. VIN remains the only nicotine-powered product authorized by the FDA and this includes all variants in both 3 and 6 mg strength currently commercialized in the U.S. As outlined at CAGNI, there is a large addressable market in the millions of legal-edged nicotine users in the U.S., and we plan to engage more actively beyond our existing consumer base to other legal-edged nicotine users. Indeed, with strong latent demand and capacity extension ahead of target, We now raise our shipment forecast to 800 to 840 million cans per year. With the outstanding efforts of our team on the ground, we continue to work on increasing capacity in our Kentucky facilities. Construction of our second U.S. manufacturing site in Colorado is well underway, with production due to commence in early 2026. as we have been since until the U.S., committed to investing in U.S. manufacturing. The substantial investments we have made in the U.S. are expected to continue to result in significant job creation and economic contribution to the country. Outside the U.S. now, we continue to roll out Zines, leveraging our presence with ICOS and Zines, to drive awareness and trial with legal aid in getting users. The total international market import category is nation in almost all geographies and stand at around half the size of the U.S. in volume terms. We are now in 38 markets globally, following 2-1 launches in the UAE and Colombia, and ultimately see all addressable markets as meaningful opportunities given the unique characteristics of the categories. Using the plus 53% growth of our international post-cams volume, shipments almost settled outside of the Nordics, including promising momentum in European markets such as Austria, Switzerland, and the UK, where we cement a national share count rollout. In emerging markets, strong progress continues in Pakistan, Mexico, and South Africa. TMI Global Travel Retail is a notable standout as it also increases global visibility and awareness of ZIM within our multi-category affairs. Finally, closing our smoke-free performance with EVATER. ZIM plays an increasingly important role within our multi-category universe with growing volumes and growth margins. Treatment volume doubled year-on-year to 0.6 billion on an equivalent unit basis, driven by very good performance in Europe, where the pot segment continues to grow strongly, partially at the expense of disposables given increased bans and restrictions for this format. We observe increasing V1 adoption rates and low abandonment across key markets, which is testament to the quality and presentation of this premium product to legal entities. Turning to combustible, our business performed robustly in Q1 with organic net revenue growth of plus 2.8% or closer to plus 7% excluding the Indonesia technical impact. This was driven by strong pricing of plus 8.3% with notable contributions from Turkey, Poland and Germany. With less favorable timing dynamic in Q2, we continue to expect truly a combustible pricing of plus 5% to plus 6%. The cigarette industry declined by 1.3% in 2001 due to growth in geography where smoke-free products are nascent or not present, more than offset by accelerated cigarette declines elsewhere. Where SFCs are not permitted, such as in Turkey or India, We expect this divergence to continue, supported in some cases by demographic trends. Nonetheless, we continue to expect a low single-digit cigarette industry decline for the year. Category share was strong, growing 0.4 points into one, partly due to service-free marketing. Both Marlboro and our global grant portfolio reached four-time first quarter highs. We continue to target broadly stable category share over time, with our main priorities being maximizing value and supporting the growth of small-scale products. Most importantly, combustible organic growth profits continue to grow robustly, at just 5.3% following the recovery of 2024. This brings us to our outlook for 2025. We delivered a very strong cross-quarter, including better-than-expected margins, and we remain confident we will achieve another year of secure growth. As such, we are reconfirming the currency mutual growth outlook we provided in February, despite the backdrop of increased uncertainty in the global macroeconomic environment. As a global company with broadly diversified adoption, and a worldwide supplier network, including an established US and European base, we believe we are well positioned to mitigate potential supply chain challenges. While the situation is volatile, we do not currently anticipate a material impact on our business from recently introduced or discussed tariffs. We expect a continuation of the momentum from our smoke-free business including the benefit of further multi-category deployment. As I explained, we are raising our forecast for US in-shipment to 800, 300, and 1,400 million cans. This further supports our forecast of plus 12% to plus 14% SFC shipment growth, which incorporates ancient stone growth assumptions for high cost. We also continue to expect Total CMI organic net revenue growth in the range of plus 6 to plus 8 percent per percent. Organic operating income growth of plus 10.5 to plus 12.5 percent. And currency neutral adjusted diluted EPS growth of plus 10.5 percent to plus 12.5 percent. As announced in this morning's press release, we are raising our 2025 adjusted diluted EPS forecast to $7.36 to $7.49. This now reflects the 12 to plus 14% growth in dollar terms and includes a favorable estimated currency impact of $0.10 at prevailing exchange rates. This reflects recent strength in the Euro, Japanese Yen, and Russian Ruble, partly offset by a single . For Q2, we assume HPU shipment volume of 37.5 to 38.5 billion, with another strong quarter of HPU-adjusted IMS growth of around plus 10%. For U.S. ZIN, we expect shipment to be at a similar level to Q1, as trade restocking continues and off-tech gradually accelerates. We forecast adjusted deleted EPS of $1.80 to $1.85, including a favorable currency volume of $0.06 at prevailing rates. We expect a strong H1 overall, with organic net revenue growth around the IM of our target rent for this year, and organic OI growth slightly above. With regard to our balance sheet, deleveraging remains a key priority, and we continue to target further reduction in 2025, placing us on track for our target ratio of around two times by the end of 2026. We believe our growth profile is best in class within large-cap consumer goods, as shown by our three-year target, which we are well on track to meet or exceed. Adjustability EPS growth in dollar terms is a key priority, and as demonstrated in 2024, we are committed to taking proactive steps to manage potential currency volatility, including through our hedging activities. Behind the delivery of our growth lies the enormous effort we have made to transform our business over the last 10 years. and the continued drive towards our ambition to become substantially more free. This quarter coincides with the publication of the sixth edition of our annual Integrated Report, which provides a comprehensive view of our company's performance across both financial and non-financial dimensions. Highlights include the important effort and action we are taking with regard to youth access prevention, as well as the progress we have made on our operational efficiency, strengthening our resilience, driving innovation, and ultimately future-proofing our business. As explained in the report, our approach to sustainability is fundamentally business-driven, with the objective of both sustaining and enhancing the growth of our smoke pre-conformation to drive continued value creation. I would encourage anyone with an interest in how and why we are performing to read it. I will now conclude today's presentation with some key messages. Following an excellent start to the year, we are now on track for another year of strong performance in 2025. While no company is immune to macroeconomic volatility, we believe we are well-positioned to navigate external dynamics. We have three powerful growth drivers, with pricing power and positive smoke-free category on top of volume growth, where we target our fifth consecutive year of extension, led by Icos, Zing, and Zee. As we continue to invest strongly behind our smoke-free brand, These drivers are also profit-accretive, and combined with our proactive measures on pricing and cost, we have great confidence in sustainable adjusted diluted ECS growth in both currency mutuals and dollar funds. Finally, we remain a highly scale-generative business with an unwavering commitment to our progressive dividend policy. We look forward to further rewarding our shareholders as our transformation delivers a sustainable growth. Thank you, and we are now very happy 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, and please stand by while we compile our Q&A roster. And our first question comes from Bonnie Herzog of Goldman Sachs. Your line is open. All right. Thank you.

Hi, Emmanuel and everyone. Hi. I had a few questions on Zin. Could you maybe give us some more color on the auto stock issues you might still be experiencing in the U.S.? I know you touched on this, but then just curious how long you think it will take for retailers to rebuild their inventories and And I know you raised your shipment guidance for ZIN for the year, but it does still imply that growth will decelerate year over year to around, I think, 35% for the rest of the year. This is at the low end of your range versus, I guess, the 53% you reported this quarter. So just hoping you could talk through the thinking behind this, maybe just the phasing. Thank you.

Sure, Bonnie, happy to do that. So, of course, we are facing a particular year in 2025 within the US because it's going to be a mix of continuation of strong growth and strong consumer of tech growth. Of course, when you look at the shipment, be careful, and I flag that in my remarks because last year we had clearly consumer of tech in Q1, which was much, much stronger than our shipment. That was the time when the consumer started to empty the shelves. So we need to be cautious when we look at the shipment, if they are now reflecting the consumer of tech, and take that into account. And next to this strong growth that we expect from consumer of tech, and we have a very dynamic category, 30 to 35% growth, despite the fact that the leader Zin was constrained, we're going to add on top of that, this replenishment, this restocking, I'm not going to speculate on exactly what it is, but it's certainly a few tens of millions can. And we have started, because of this good performance on production that I explained, to send more product to, first of all, all sellers, distributors, and themselves, they're going to start to ship to retailers. So it's going to be a very gradual process. There are still, of course, very... I would say, material situation of out of stock. We're going to continue the replenishment in the second quarter, maybe part of the third quarter as well. And we've been explaining that we are expecting to be back to a normalized situation, if I may say. Therefore, no more material out of stock situation in the third quarter of 2025. So in terms of shipment, that's going to be this profile through the year of an accelerating growth for our shipment. That's what we expect, which is going to reflect first the consumer of tech that is going to accelerate, and then, of course, replenishment impact that is going to decrease as we fulfill this replenishment, if you want. So it's a particular profile, and the replenishment, if you want, to some extent, is going to hide the fact that there is a growth in the consumer of tech that we're going to experience through the year.

Okay. That's helpful. I appreciate it. And then just maybe a second question from me on margins. You delivered robust margin expansion in the quarter. So how should we think about the drivers of continued margin expansion for the remaining of the year? I guess especially in the context of what you mentioned as it relates to continued SG&A growth and the investments, et cetera. And then how On the back of that, I know we've talked about this before, but how should we also think about the margin gap you're seeing between your combustible business and then smoke-free products today and then possibly key drivers of further expansion of that gap over the next couple of years? Thank you.

Look, Bonnie, obviously, we are very pleased with our margin expansion. That's something we are targeting for 2025, and we are very positive about our expectation. We have a clear illustration in Q1 of the strong performance in terms of margin expansion. Clearly, our smoke-free products are here driving this, first and foremost, this margin expansion. You have an impressive 670 basis point organic expansion in Q1 for our smoke-free business. Don't take that as a reference for the full year, but that means that we are now above 70% gross margin rate for the smoke-free business. It's 5 percentage point higher than combustible. So as we are growing, of course, very fast, our smoke-free business and faster than combustible, that means that we are benefiting at the margin level of a very positive mix evolution. And we believe that the difference through 2025 should stay between smoke-free and combustible. I'm not saying it's going to stay exactly at the same level, but we're going to keep a very material difference between the two, and we're going to continue to benefit from this positive mix effect. I think for the future, there are a number of drivers that will continue to play on the margin for our Smoky portfolio. There is, of course, the mix coming from Zin. Zin in the US is the best-in-class gross profit margin. So when we grow Zin fast in the US, that has a positive impact. You have all the scale impact that we are generating on ICOS. And if you look at the last two to three years, you've seen on a very consistent basis a gradual improvement on the margin on ICOs. This is certainly magnified in the first quarter because we have less sale of device. Last year, we had big device sale in Japan as we were launching Illumai. So that is helping the margin. But fundamentally, we are benefiting from scale impact, productivity, and a better performance on device. And then we have some pricing that you have seen 3% on consumable for our smoke-free business. So we are increasing price as well. And last element, which is more marginal today, but we are also improving the margin on Ziv. So that is also helping. So as you can see, we have many positive drivers behind our smoke-free business. And smoke-free business is the driver for, or the first driver for margin improvements.

Okay, perfect. Thank you so much. I'll pass it on.

Thank you.

Thank you. And our next question comes from Matt Smith of Stiefel. Your line is open.

Hi, Emmanuel. Thank you for the question. Good morning, Matt. If we could first talk about the guidance outlook. With the strong first quarter and now the second quarter guidance, the first half EPS growth on a constant currency basis is a few points above the high end of the full year outlook. Can you talk about the factors in the second half that we should take into consideration with the constant current TPS growth outlook implied to be a couple of points below the full year average by MyMath, just the shape of the year there?

Sure, Matt. Happy to take that one. So, yes, we are saying that we expect to be well positioned versus the overall bracket for the year in terms of revenue growth. We expect to be a bit above Now, you know that these are the traditional difference that you can see during a year between H1 and H2. You may have some comparison basis that can play. There is potentially some phasing on how we're going to position SG&A. So there is here nothing to be read, I think, in terms of change in the underlying business between H1 and H2. These are more how a number of things are positioned in terms of shipment through the year in terms of investment. But I would say we expect a strong year as we go through the quarters. And we've been flagging the fact, for instance, that we expect in some area an acceleration for ICOS in the second half in terms of IMS, but that's not going to necessarily translate into as the phasing for shipment can be a bit different. So again, I think we expect strong momentum through the year for our smoke-free portfolio. We've been flagging the fact that on combustible, we are positive in volume in Q1, but for the year, we expect a low single-digit decline. So that could mean that the second part of the year will have more negative volume for our combustible. But clearly, we expect strengths through the year.

Thank you for that. And as a follow-up, I wanted to talk about the IMS growth you referenced for ICOS. You had nice growth in the first quarter. I think it was above 9%. But if we look back to the fourth quarter, it was around 13%. Now you're expecting a reacceleration in those IMS, in ICOS IMS growth across the remainder of 2025. So can you talk about some of the underlying benefits to IMS growth re-accelerating across the rest of 2025. Thank you.

I'll leave it there Yeah, so in the 94 percent was was in line with our expectation They are you know, and Europe was below the average. So there are always a turbulence coming from the flavor ban implementation in Europe We believe that the impact will be lower in in H2 as we go through annualization, and therefore we expect in H2 an acceleration as I mentioned in the IMS growth in the second half in Europe. But otherwise we are expecting this 10 to 12% adjusted IMS growth through the year, so we expect Overall, a continuation of a nice double-jit growth. Q4 was very strong after a few quarters that had been weaker last year, so you can have some phasing through the year. But after this Q1, which was in line with expectation, we expect continuation of very good growth in Europe, in Japan. And I took some time in my remarks to talk about the other markets where we see also some very promising growth in several markets.

Thank you. And our next question comes from Eric Serrata of Morgan Stanley. Your line is open.

Great. Thanks for the question. In terms of the full year guidance, you did raise the ZIN shipment volumes. And obviously, that's a very high margin product. You kept the the constant currency EPS guidance the same. You delivered some very robust margin expansion in the first half. Are there any specific offsets that you could point to that cause you to reiterate the guidance rather than flow some more through to the full year? Or is it more of a factor that we're early in the year and there's obviously a lot of macro and geopolitical uncertainty.

Thank you, Eric, for the question. So, indeed, we were targeting a year of very strong growth and performance, and I think Q1 is flagging the fact that we are well on track to deliver a year of strong growth. So we are confirming that we expect a year of very strong growth across the board for PMI. What we've seen in Q1 is indeed very reassuring on the fact that we're going to deliver this from here. We are raising the guidance for the volume for Zin in the US by, on average, 20 million cans. So yes, it is a very profitable brand, but not to the extent to dramatically change the outlook for the year. that goes into various scenarios with which we are planning to give the guidance for the year. And obviously, after only one quarter and in this uncertain, volatile environment, we need to, of course, be cautious and say this is the beginning of the year. and we are happy to confirm the guidance. Again, I think Q1 is showing that we are well on track to deliver a very good 2025.

Great. And then a quick follow-up. How are you guys thinking about what the unconstrained growth for what the unconstrained offtake growth for ZIN theoretically looks like? Obviously, you can't observe it you could estimate it but how are you thinking about how that evolves you know where it is today and sort of how it evolves as you get into the second half and next year where you know the business is obviously a lot larger than when you bought it so um really you can't give a precise answer but any color there would be helpful

Eric, frankly, we don't know, of course, what is the unconstrained demand because the demand is still constrained. So I'm not able to provide an answer. What I can say is that certainly as we are removing the limitation and the out-of-stock situation, we expect an acceleration in the consumer offtake. And we are very much encouraged by the very nice dynamism of the category which shows the appeal, the attraction for the consumer and all these legal edge nicotine users that are discovering the category and understand the benefits. So we expect the acceleration. We're going to be gradually back to normal life because it's true we've been mentioning that we had very limited commercial marketing activities. So we were trying to service the existing ZIN consumer and we knew that it was not reasonable to try to acquire new consumer at that time that we could not serve and supply. So obviously that's going to be also another leg of the growth in the coming quarter and I guess that's certainly something you include in unconstrained demand. But frankly I don't want to speculate on what this unconstrained demand is going to be. we are expecting a gradual acceleration of the consumer of tech for ZIN in the coming months.

Fair enough. And then just one quick last one. You did cite the Nielsen data in terms of ZIN. Are you seeing different trends or diverging trends when you look at some of the non-track channels that you would have a better read on than we would?

Well, I mean, I certainly don't want to say that Nielsen is not an interesting data point, but of course, it's 3,000 sales points and, you know, in the universe, that probably is close to 200,000. And when you are in an out-of-stock situation, you can create some distortion on the perception of the consumer of tech. So I'm not able to say whether the 15%, I mean, we know it's an estimate. What I was reporting is the MSA, so the very nice acceleration towards the end of March of the sales from wholesaler and distributor to the retailers. But that's the other data point that we have. But we don't have any other, I would say, reliable data we could share with you. We can sense in the market the very strong underlying demand for ZIN. That's very clear. And I also flag the fact that the consumer of tech, so what Nielsen measured last year for first quarter, then probably significantly higher than the 130 million can that we reported for the quarter, the first quarter of 2024. So that was the basis on which you should apply the 15% if the 15% is accurate to have an idea of the consumer of tech today.

Terrific. Thank you so much. I'll pass it on.

Thank you. Thank you. And as a reminder, if you have a question, please press star 1-1. Our next question comes from Faham Beg of UBS. Your line is open.

Good morning, guys. Thanks for taking the question. Hey, Emmanuel. A couple of questions from me as well. Just coming back to the growth ads and the offtake, are you in a position to potentially share what the MSA data highlights is the growth rate for ZIN and how it really compares to this sort of 30% to 35% growth you highlight for the category. The second question, sticking with the US and ICOS, I just wanted to get your views on the recent movements at the CTP and how that impacts the timing of Illuma's launch in the market or whether it does impact the timing of the launch would be helpful. And the final question is really housekeeping. Net interest guidance for the year would be helpful.

Sorry, I missed the last question, Fam.

The net interest cost guidance for the year would be helpful, please.

Yeah, so taking your question in the order, I think we said that the share was close to 66% on MSA in March. It's probably a growth around or close to 30%, but take that with a pinch of salt. I'm not sure I have a very precise data, but clearly the MSA was showing this acceleration as more product was coming. So that's one thing. On the new situation of the CTP and what it means for ICOS, no, it's too early to say. So we have nothing to report, and I don't know what is going to happen. I think we are still hoping for an efficient process to be put in place and for the FDA to comply with with the mandate which was to give answer after six months. But I have nothing at that stage new to report on this situation. And on the net interest for the year, I think you have the performance in Q1. I don't have at that stage nothing specific to tell you for the full year. We're not providing any additional data for the full year. We started well the year, nevertheless, with some positive impact coming from mark to market on some of our hedging.

Thanks, Emmanuel. Thank you.

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

Thank you. That concludes our call today. Please be aware that the script from the call is posted on our website for any of you that may have had some sound issues partway through the webcast broadcast. Thank you very much for joining us. If you have any follow-up questions, please do contact the Investor Relations team. Thank you again and have a nice day.

Thank you all and speak to you soon. Thank you. This concludes today's conference call. Thank you for participating and you may now disconnect.