Philip Morris International Inc

Good day and thank you for standing by. Welcome to the Philip Morris International Inc. 2025 Fourth 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 1-1 on your telephone. You will then hear an automated message advising your hand is raised. to withdraw your questions, 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, VP of Investor Relations and Financial Communication. Please go ahead.

Welcome. Thank you for joining us. Earlier today, we issued a press release containing detailed information on our 2025 fourth quarter and full year results. The press release is available on our website at pmi.com. A glossary of terms including the definition for smoke-free products as well as adjustments, other calculations and reconciliations to the most directly comparable US GAAP measures for non-GAAP financial measures cited in this presentation are available in the company's Form 8K dated today's date and on our IR website. Today's remarks contain forward-looking statements and projections of future results. I direct your attention to the forward-looking and cautionary statements disclosure in today's presentation and press release for a review of the various factors that could cause actual results to differ materially from projections or forward-looking statements. I'm joined today by Jacek Olczak, Group CEO of PMI, and Emmanuel Bavou, Chief Financial Officer. Over to you, Jacek.

Thank you, James, and welcome, everyone. was another outstanding year for PMI. The shift of adult smokers to better alternatives is a lasting structural movement, one that we continue to lead and from which we are generating strong sustained growth. Our leading global position in smoke-free products enabled us to deliver a fifth consecutive year of positive volumes with rapid top-line progress and significant margin expansion. We grew our smoke-free products volumes by an excellent 12.8% with the increasing profitability of the portfolio reflected in organic smoke-free gross profit growth of 18.7%. ICOS remains the core driver with both shipment and adjusted IMS growing around 11%. This includes an impressive acceleration in the fourth quarter with a return to strong double-digit growth in Italy and a very promising start in Taiwan, just two examples of the broad growth across geographies. This performance also reflects the success of our multi-category strategy with Bonzin, ExNordic, Zenvive more than doubling shipment volumes in international markets. Our strong brand offering which includes high-quality science-backed products in all three smoke-free products categories, allows us to better serve consumers and enhance our financial performance. While the nicotine pouch category remains nascent in most geographies, ZEN gained significant international share as we expanded the product portfolio and market reach. The more established evapour category VIV is the fastest growing brand of any major player in international closed pots and holds the number one position in eight markets with a substantial increase in gross profit. Although our performance continues to be fueled by the international business, we generated the vast majority of total PMI organic net revenue of growth left by SFPs. We have a substantial opportunity in the U.S. where ZIN grew shipments by 37% despite supply constraints in the first half, a significant price premium, and the competitive portfolio gaps. Our Aspire Wellness business also grew organic net revenue strongly. Combustibles delivered robust top and bottom line performance, notwithstanding a more normalized industry volume decline and supply chain issues in Turkey. We accomplished this through strong pricing, portfolio resilience, and disciplined execution, with Malbro reaching a historic high share. Managing this business responsibly enables us to invest boldly in better alternatives and sustain our smoke-free momentum. Together, these factors enabled us to deliver 15% adjusted diluted EPS growth in dollar terms, the strongest growth since 2011, excluding the pandemic recovery year of 2021. This reflects currency neutral growth of 14%, well above our expectations at the start of the year and the second year of mid-teens progress. Indeed, we have successfully achieved our three-year CAGR targets for organic OI and currency-neutral EPS in two years. With another strong performance expected in 2026, despite some transitory headwinds, we are today renewing these growth targets for the next three years, further validating our Basin-class growth profile within a consumer packaged goods. Importantly, This is accompanied by strong and increasing cash generation, and we target a leverage ratio of close to 2x by the end of 2026 at prevailing exchange rates. With our dividend payout now close to our objective of around 75% of adjusted diluted EPS, this provides capacity for strong returns to shareholders. Before I turn it over to Emmanuel, I would like to highlight the achievement of several important milestones as we entered the second decade of our smoke-free journey. Our total net revenues reached over $40 billion in 2025, with 41.5% or close to $17 billion generated by our smoke-free business. Even more impressive is the smoke-free gross profit contribution, which has essentially doubled in five years to 43% of total PMI. Our adjusted operating margin also returns to above 40% this year as our transformation expands profitably. Our business is increasingly smoke-free, with 27 markets exceeding the 50% net revenue milestone, including South Korea, Poland, Italy, Romania, and of course the U.S., which is also one of eight markets exceeding 75%. In the last quarter of 2025, the Europe region also surpassed 50%, making three out of four regional segments majority smoke-free. We continued to scale our global smoke-free presence, reaching 106 markets, 52 of which have already deployed a multi-category strategy, which is a critical accelerator of consumer adoption and long-term growth. As adult nicotine consumers search for better alternatives to smoking, we continue to lead the broader industry transformation. A prime example is Japan, where the heat-not-burn category crossed the 50% total industry threshold in December, driven by the undiminished strength of ICOS. Across our 106 smoke-free markets, our double-digit adjusted IMS volume growth continues to outpace the industry, demonstrating the collective strength of our leading brands. While we are proud of what we have accomplished so far, our focus remains sharply on the future with an exciting pipeline of initiatives and innovations over the next three years. This is supported by increasing digitalization and our new organizational model. With that, I will hand over to Emmanuel to discuss our results and outlook in more detail, and I will come back at the end of this presentation.

Thank you, Jacek. I will begin with the headline financial for the year, which were indeed impressive. Organic top line and operating income growth were in line with our forecast ranges set at the start of 2025, and currency neutral adjusted deleted EPS growth exceeded those expectations by 1.7 points. Positive shipment volume, strong smoke-free category mix, and pricing drove organic top-line growth of plus 6.5% or plus 7.9%, excluding the technical Indonesia impact, positioning us at the high end of our plus 6 to plus 8% mid-term CAGR targets. We delivered another year of double-digit organic operating income growth at plus 10.6% above our mid-term target range and reflecting plus 140 basis points of organic margin expansion. In dollar terms, adjusted operating income grew by plus 11.8% to $16.4 billion. Excellent currency-neutral adjusted deleted EPS growth of plus 14.2% was ahead of our expectations. This was driven by strong underlying business performance, notably in international multi-category and in combustible, coupled with a more favorable effective tax rate and lower net financing costs. In dollar terms, adjusted deleted EPS of $7.54 was at the high end of our last guidance range, despite a lower than expected currency tailwind of 4 cents, due to non-recurring transactional losses in Q4, largely related to the Russian ruble and the Swiss franc. Robust cash generation enabled us to deliver operating cash flow of $12.2 billion, matching the record delivery of 2024. Now, looking at Q4 specifically, while growth rates were below the overall year, partly due to the shipment and phasing factors outlined last quarter, underlying performance was ahead of our expectation. This enabled us to deliver almost plus 10% in adjusted deleted earning partial growth to $1.70 or plus 9% excluding a one cent currency tailwind. I will now cover our 2025 performance in more detail, starting with volumes. As Jacek mentioned, we delivered our fifth consecutive year of positive volumes with total shipment growth of plus 1.4%. This was driven by the continued dynamism of our smoke-free business, which generated more than 100 billion incremental units over the past five years, combined with a very resilient cigarette performance. In 2025, smoke-free shipment grew plus 12.8% or plus 20 billion units to 179 billion, more than offsetting the 1.5% decline in cigarette shipments. All smoke-free categories grew strongly with high-cost HTU shipment growth of plus 11% to 155 billion units. These plus 102% to 3.3 billion equivalent units and all smoke-free products plus 18.5% to 20.7 billion units. Notably, this includes plus 37% growth from US-in to 11.9 billion pouches making up close to 7% of total smoke-free product volumes. As expected, adjusted IMS growth for ICO's HTU accelerated in Q4 to plus 12%, while shipment volumes were impacted by the dynamic flag last quarter and grew by plus 7.5%. Notwithstanding this impact, total Q4 smoke-free product volumes increased by a healthy plus 8.5%. The four-year cigarette volume decline of 1.5% was slightly better than our expectation of around 2%, with our category share performance in the second half proving resilient in several markets, including Egypt and India. The total international cigarette industry, excluding China, declined by an estimated 1.1%, with continued divergence between markets where smoke-free products are available, which declined by around 3%, and markets where smoke-free products are not permitted, or still at low levels of penetration, which were broadly flat. The composition of our 2025 TELPLAN performance was extremely consistent with the five-year average of each key component, demonstrating the sustainability of these dynamic drivers. Continued volume growth is the first pillar of our growth model. The second is pricing, which contributed plus 4.1 points. The 2025 impact reflect plus 7.6% pricing from combustible and low single digit pricing on ICOs, partly offset by the H2 normalization of US ZIN promotional activities. The third pillar of growth is smoke-free mix, which contributed plus 3.5 points in 2025. Combustible geographic mix and other factors add an unfavorable impact of 1.1 points, whereas currency and scope effect added plus 0.8 points. Breaking down now our full year performance by category. Both smoke-free and combustible contributed to our strong net revenue and gross profit delivery, with gross margin expanding organically by plus 220 basis points to over 67%. Smoke-free net revenue grew organically by plus 14.1%, while gross profit advanced by plus 18.7%. As a result, adjusted gross margin increased by 270 basis points to reach 69.5%, further widening the gap to combustible to four points for the year. ICOS was again the primary driver of this performance, combining global top-line momentum with increasing scale and cost efficiencies. VIV's improving profitability also contributed positively, and while the normalization of ULZ in commercial activity in H2 had a dilutive year-over-year impact, its growth margins remained best-in-class, above the average of our ICOS business, including in Q4. As mentioned last quarter, we expect this to be an enduring positive mixed driver. Combustible performed well in 2025 with low single-digit top-line growth and low to mid-single-digit growth profit growth, a proxy of what we expect this business to deliver over time. Strong pricing, more than offset volume decline, and unfavorable mix with disciplined cost management supporting growth margin expansion of plus 160 basis points to reach 65.5%. Moving to operating margins, we delivered full-year organic expansion of plus 140 basis points and plus 160 basis points in dollar term to reach an adjusted operating income margin of 40.4%. We achieved this in a year of strong investment in commercial, marketing, and brand building behind our smoke-free portfolio, including international multi-category deployment and US ZIN. We also continue to invest in expanding our U.S. capabilities to capture the substantial growth opportunities ahead. This performance was supported by a relentless focus on both cost of goods sold and back-office efficiency, enabling meaningful margin expansion even as we continue to invest for growth. We have delivered around $1.5 billion in growth cost savings since 2024, placing us firmly on track to achieve our $2 billion objective for the 2024-2026 period. Focusing now on our smoke-free business, where all categories have an important role to play. Our global presence continues to grow with PMI smoke-free products now available in 106 markets. This includes the recent launch of Zin in Argentina and Icos in Taiwan. We increased the number of markets with all three categories to 26, compared with nine markets three years ago. We continue to outpace the smoke-free markets. Measured in the categories where we are present across these 106 markets, we delivered over plus 12% estimated in-market sales volume growth for the year, compared to over 9% for the industry. We estimate our volume share of smoke-free products on this basis is around 60%, and our 2025 share of category growth is over 70%. With our portfolio of leading premium brands, our share of smoke-free in value term is notably higher than 60%. As we expanded our portfolio and geographic reach, the number of legal edge consumers of our smoke-free products reached an estimated 43.5 million as of December 31st, an increase of around 10 million users in two years, with broad-based growth across categories. ICOS adjusted IMS growth accelerated to an outstanding plus 12% in the fourth quarter, reflecting strong momentum across the globe and a presence now in 79 markets. All regions contributed as illustrated by exceptional performance in key cities such as Mexico City, Manila, Riyadh, Rome, London, Madrid, and Munich. You can find further key city and European share data in the appendix to this slide. This enables us to achieve full year growth of plus 10.5% within our target range. Annual adjusted IMS again increased by around 15 billion units despite the continued headwind of the EU characterizing flavor ban and a step up in competitive intensity. Our global share of the heat not burn category remains impressively resilient at approximately 76%. is supported by brand engagement initiative and continuous innovation across devices and consumables, including the continued introduction of IllumaEye to reach a total of 55 markets. Importantly, high-cost profitability continues to increase significantly, driven by pricing, scale, and product improvement on consumables and device costs. This is illustrated by a substantial increase in product contribution over time. Turning to nicotine pouches, Zin is the global number one brand with a 2025 PMI category share of around 40% in pouch terms. The US represents approximately two-thirds of the category today, while international markets, though still relatively small, are growing rapidly. We made excellent progress this year, expanding Zin's presence by plus 19 markets to 56, and delivering plus 36% shipment growth to 13.6 billion pouches, or 880 million cans, achieving our 2026 target one year early. U.S. shipments grew plus 37%, while international volume grew plus 31%, or plus 112%, excluding the more mature Nordic market, where Q4 performance was impacted by a demanding shipment comparison. We are focused on the future growth of the category, broadening our portfolio to address the need of legal-edge smokers looking to switch. This includes new strengths and flavor variants, including Zin-X Low, 1.5 mg, which was successfully rolled out to around two-thirds of the Zin market, driving a significant improvement in first-experience acceptance among adult nicotine consumers. While we are in the early stage of developing the category, which makes up only a low single-digit share of total nicotine in most markets, it's very encouraging to see Zin's share of international poachers, excluding the Nordics, rise by around plus 60% in 2025 to reach 16% following the launches and relaunches of the past one to two years. In eVaper, Vive is the fastest-growing international vape brand of any major player within closed pods. The pod segment is growing rapidly as disposables decline, and Vive is gaining significant volume share in the fragmented landscape, sourcing primarily from legal-edge consumers of other vaping products and adult smokers. As covered earlier, shipments dabbled for the year with a meaningful improvement in profitability. VIV is now present in 47 markets and grew notably well in Italy, Romania, Greece, the UK, Germany, and Indonesia. Reviewing the smoke-free portfolio now by geography, starting with Europe, where, as Jacek mentioned, smoke-free products now represent more than 50% of regional net revenues. Total ICOS, ZIN, and VIV volume grew by an impressive plus 13% for the year, with significant further growth potential given the overall penetration of SSP remained low compared to Japan or the U.S. ICOS delivered another strong quarter with an acceleration in adjusted IMS growth to plus 10.3%. This was led by an exceptional performance in Italy, where we successfully navigated the impact of the flavor ban, supported by recent innovation. With an acceleration through the quarter of 2025 to deliver double-digit in-market sales growth for the year, quarterly market share passed 20% for the first time. Other notable call-outs with strong double-digit growth include Bulgaria, Germany, Greece, Spain, and Romania. VIN pouch shipment volumes grew plus 9% for the year, and while the Nordics make up close to 60% of regional volume, shipments more than doubled elsewhere with good progress in the UK, Poland, Italy, and Austria. As noted earlier, excellent VIN momentum continued with shipment growth of plus 110%. In Japan. We reached an impressive milestone in December as the heat nut burn category surpassed 50% of total industry of tech volumes driven by the continued strength of ICOS. The path to 50% has not been linear and following two years of very strong expansion in 23 and 24, category growth moderated in 2025. The adjusted in-market growth of ICOS HTUs as reflected this trend, with a healthy plus 7% in 2025, representing very robust absolute growth. In Q4, the Japanese nicotine industry and the heat nut burn category grew slightly below the full year trend, with some impact from inflationary pressures on consumer purchasing power. Nonetheless, ICO's HTU-adjusted IMS grew plus 5.8%, while Q4-adjusted share grew plus 2 points year-on-year to 32.6%. While competitive intensity increased markedly this year, ICO's category share was broadly stable with most movements occurring among other players. We are encouraged by early signs that the increase in category activity is generating higher interest among more traditional adult smokers, a positive indicator for category growth. Looking forward, the upcoming excise tax increases on heat not burned in April and October make 2026 an atypical year. As discussed at the Morgan Stanley Conference in December, the level of pass-on makes this a headwind for the category, representing about 50 to 100 Japanese yen per pack, which translates to 2 to 10 to 20% of current retail prices, with the greatest impact for product at lower price points. As announced recently, we have submitted an application to increase our prices in April. We anticipate these price increases will impact category growth and volume for 2026, despite the fact that heat-not-burn consumers have demonstrated higher price resilience than cigarette smokers in the past. Shipment volatility in 2026 is also possible, driven by in-market sales trends around the April and October excise increase. Importantly, we do not expect the underlying category growth trend to change, and we target substantial further growth from ICOs in Japan in the years to come. We are also pleased to report the successful pilot launch in Tokyo. Outside of the U.S., Japan, and Europe, all three of our small free categories are delivering strong broad-based growth with full year shipment up plus 17%. This includes ICO's strong start in Taiwan during Q4, where we exited the year with around 4% of tech share and rapid progress in markets such as South Korea, Malaysia, and the Philippines. Zin Momentum was notably strong in Pakistan and Mexico. In eVapor, we've achieved excellent results, particularly in Asia. Our global travel retail business further supports all three brands and continues to deliver impressive multi-category performance, serving as a powerful platform to showcase our portfolio. Turning now to the US, which made up around 7% of our global net revenues and around 8% of our adjusted operating income in 2025. Nicotine pouches remain the fastest growing US segment, representing a high single-digit percentage of total nicotine industry volume. Despite supply constraints, commercial normalization and portfolio gap, ZIN continued to lead the category in 2025 with its premium offer capturing around 50% of category growth, 61.5% count volume share and a value share of over 67%. ZIN off-peg volume also grew strongly by plus 25% for the year as estimated by Nielsen. Shipment grew by plus 37% or 230 million can to 794 million. The gap between shipment and off-tech reflect a next channel inventory rebuild and we estimate the underlying 2025 shipment base corresponding to consumer off-tech was around 740 to 750 million can. This was notably concentrated in the first quarter of 2025 And we estimate the underlying shipment base by quarter for 2025 was around 160 million can in Q1, 180 million can in Q2, 205 million in Q3, and 200 million in Q4. Indeed, Q4 saw a lower than expected destocking of about 5 million can as we deployed promotion, limited time offers, and announced a general list price increase of 10 cents per can in December. Looking ahead to 2026, we expect ZIN shipment volume to broadly reflect off-take growth from this underlying base before any further channel inventory movement. We estimate there remain around 25 million can of surplus inventory in the downstream supply chain, which we assume will normalize in due course, most likely in the first quarter. The level of off-tech growth for Zin in 2026 will be influenced by three key factors in which we are investing. The most critical over the mid to long term is Zin's brand equity as we strengthen marketing in a responsible manner, enhance point-of-sale visibility, and deepen the connection with our legal-edge consumers. Accessing all segments of the US nicotine posh category, will require us to navigate a dynamic and uncertain regulatory environment. We have developed and are preparing to launch innovation to address a broad spectrum of consumer preferences. We have a number of pending ZIN submissions before the FDA, including ZIN Ultra, which is included in FDA's pilot program. ZIN Ultra offers higher strength and an expected range of adult-oriented flavors. we are taking steps to prepare for the launch of Zyn Ultra as soon as possible, pending FDA action. We also believe IKO's ILUMA strong application and demonstrated track record, convincing smokers to better alternatives, warrants expeditious FDA action. We also continue to optimize Zyn's premium price position. Despite elevated promotional intensity across the category, Zin remains the leading premium brand by a clear margin, fully aligned with our strategy for sustainable long-term growth. We have a comprehensive commercial program planned for 2026. And as a reminder, commercial activities, including promotions, were unusually low in the first half of 2025. As I mentioned before, we continue to expect Zin to deliver best-in-class growth margin within PMI, above the average of ICOS. We are very excited about the significant growth potential of the brand over the coming years, which fully justify the above-mentioned investment. One example of our enhanced brand building effort is the recently announced global partnership between Zinn and Ferrari, which reignites our longstanding heritage in Formula One. We smoke-free product now at the forefront. Formula One's overwhelmingly adult audience provides a highly impact platform to engage consumers responsibly and reinforce Zin's premium equity. Finally, moving to combustible, which delivered another robust year of pricing of plus 7.6%, including plus 6.8% in Q4, and very good growth, profit growth. Our full-year cigarette share declined by 0.2 points to 25.3%, mainly due to Turkey, and was otherwise stable, including record high for Marlboro, both for the full year and in Q4, where its share reached 11% of the international category, excluding China. For 2026, we forecast a combustible pricing variance of around plus 6%, reflecting continued dynamic performance. With that, I will now hand it back to Jacek.

Thank you, Emmanuel. This brings me to our outlook for 2026, where we expect another year of a strong and profitable growth despite several transitory headwinds. Starting with volumes, we expect continued strong underlying momentum in our smoke-free business for all three categories. Both shipments and adjusted IMS volumes are projected to grow in a high single digit after factoring in the headwinds from Japan excise taxes and U.S. ZIN inventory comparisons described earlier. For combustibles with forecast, a cigarette decline of around 3%. with weaker industry volumes in India and Mexico following recent excise tax increases and our ongoing recovery in Turkey likely to impact comparisons in the first half. Altogether, these results in a broadly stable outlook for total shipment growth, subject to the usual variability in shipment timing and trade inventory movement, as compared to a forecast total industry decline of around 2% for cigarettes and HDUs. We expect another strong year overall for pricing led by combustibles, notwithstanding the impact of a U.S. first-half comparison. and a four continued positive smoke-free mix. Taking all these elements into account, we forecast 2026 organic net revenue growth of 5% to 7%. We expect the same factors in addition to operating leverage and ongoing cost efficiencies to drive further robust margin expansion with projected organic operating income growth of 7% to 9%. This includes continued strong investment behind our smoke-free portfolio. We are forecasting currency-neutral adjusted diluted EPS growth of 7.5% to 9.5%, factoring in broadly stable net finance costs and an effective corporate tax rate approximately in line with 2025 at around 21.5%. including an estimated $0.28 currency benefit at prevailing exchange rates. This translates to 11.3% to 13.3% growth to a range of $8.39 to $8.54, which would mark another year of double-digit EPS growth in dollar terms. We expect a significant acceleration in operating cash flow growth at around 13.5 billion at prevailing exchange rates and subject to year-end working capital requirements. The strong cash generation is expected to support further meaningful deleveraging in 2026, which I will come back to shortly. On a quarterly basis, we expect the first quarter to be the softest quarter of the year, reflecting demanding year-on-year comparisons and investment phases. We expect first quarter combustible volumes to decline by up to 5% as we lap a prior year quarter of volume growth, whilst having the highest expected impact of the dynamics in Turkey, India, and Mexico, which I mentioned, for the full year. Smoke-free product shipments will also be impacted by the US ZIN shipment dynamics explained by Emmanuel and the strong HTO comparator. With low levels of commercial activity on ZIN in prior year impacting the net revenue per can comparison and a higher quarter of investment globally behind our smoke-free due to phasing, we anticipate broadly flat year-on-year first quarter organic net revenue and operating income. With Forecast, high single digit adjusted diluted EPS growth of $1.80 to $1.85, including a 14 cents tailwind at prevailing rates, supported by a favorable comparison to transactional currency impacts in the prior year. As I mentioned earlier, we have delivered our three-year CAGR targets on operating income and EPS in just two years. Combining our 2026 forecast with the strong results of 2024 and 2025, we expect to meet or exceed all of our 2024-2026 CAGR targets presented at our 2023 Investors' Day. This is especially the case for operating income and EPS growth, despite our algorithm assuming a more favorable corporate tax rate. In addition, our expected adjusted EPS CAGR in dollar term to represent a strong double-digit delivery. This brings me to the 2026-2028 outlook, where we are renewing our medium-term growth targets in the next three years. We continue to target positive total shipment volumes with the growth of smoke-free products more than offsetting cigarette volume declines. While our 2026 forecast ranges are marginally lower due to the specific factors we explain, for the three-year period to 2028, we continue to target compound annual growth rate of 6% to 8% in organic net revenues 8% to 10% in organic operating income as margins expand, and 9% to 11% in adjusted diluted EPS at constant currency. These renewed targets reflect our confidence in sustaining the strong pace of top and bottom line growth over time. They also reaffirm our business class growth profile within the large-cap consumer packaged goods sector. We target smoke-free product shipment and adjusted IMS volume growth of high single digits to low teens. Our multi-category strategy in international markets will continue to be the dominant driver of smoke-free products growth, further amplified by the substantial opportunity in the U.S. As we progress through the period, we expect this to be bolstered by the new market openings and an active innovation pipeline. The US launch of ICO Ziluma is included in this target, including initial commercial investment with the precise cabin subject to the timing of launch. Meanwhile, the resilience of our combustible portfolio provides a critical backbone, providing the infrastructure, financial firepower, and consumer connection to accelerate smoke-free growth. We look forward to sharing more with you on this topic at the CACNE conference on February 18. We remain a highly cash generated business which is based on the strength of our brands and reinforced by disciplined management of cost and cash. This gives us the financial capacity to invest strongly behind our smoke-free business, maintain superior shareholder returns, and optimize our balance sheet. Over the next three years, we target aggregate operating cash flow of around $45 billion at prevailing exchange rates. We anticipate capital expenditures of approximately 1.3 to $1.5 billion per annum on average, with the potential for lower amounts beyond 2026. And the lion's share of investments, again, focus on smoke-free products. Alongside superior business results, we are committed to delivering superior shareholder value. Having essentially reached our target dividend payout ratio of around 75% of adjusted diluted EPS, we have the capacity to pursue dividend growth closer to the level of earnings growth as demonstrated by the 8.9% increase announced in September last year. Strong cash flow and EBITDA growth enables the leveraging. We close 2025 with an adjusted leverage ratio of 2.5x, reflecting solid progress despite the unsavorable impact of year-end currency movements on our net debt. We expect further improvements in 2026, targeting close to the 2x by year-end at prevailing exchange rate. providing increased flexibility for capital allocation. In summary, our full-year performance underscores the strength and momentum of our global smoke-free business, supported by investment in our premium brands and continued resilience of combustibles. Despite the complex operating environment, shaped by economic uncertainty, geopolitical tensions and evolving regulations, we continued to make significant progress towards our vision of a smoke-free future. As we delivered consistent, best-in-class growth, we are reinvesting in our leading brands, innovation, and the critical capabilities which support long-term performance. This allows us to generate significant value for our shareholders, including the largest dividend increase in over a decade. We look forward with confidence to 2026 and beyond. Thank you, Emmanuel, and I will be happy now to answer your questions.

As a reminder, as a question, please press star 11 on your telephone, and your name will be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from Matt Smith with Stifel.

Your line is open. Hi. Thank you, Jessica and Emmanuel, for taking my question.

Good morning, Matt.

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

Yes, the acceleration of Beyond 26 is at this stage we mainly see coming from all the implementations of the tax changes or price or excise driven price changes in Japan, as you may recall. Japan has the multi-step excise tobacco, nicotine products, excise tax changes. It starts with the asymmetry of heated tobacco products, increasing the taxes first, and then followed by the cigarette price increases as of 27. So I believe, I will believe at this stage there will be some headwinds or maybe some headwinds on the category growth and obviously ICOs growth in a 26, but once we start moving to the 27 and beyond, more symmetry with regards to the fiscal policy and treatment between a cigarette and heat not burn, I mean, ICOs of the category should be returning or resuming growth. So that's the one factor. And second factor, obviously, is that, you know, as we highlighted in our remarks, I mean, there is a highly, you know, competitive environment in the U.S. And despite, you know, U.S. in the total small crew volumes maybe doesn't have that much of a weight, but for a growth is very opportunities and a growth is very important to us. There are some asymmetries on the portfolio versus what is presumably the most dynamic part in the total market. And we believe with pending authorization with FDA, once we will start moving hopefully through 26, but definitely 27, et cetera, we're going to put the portfolio into the symmetry of what are the consumer market expectations. Now, obviously, the other factors which we mentioned, they are more on the combustible side, I mean, and not on the smoke-free products. I mean, we mentioned India, Mexico, maybe a couple of other smaller places which have some quite outsized, I would characterize excise increases, which obviously will drive the quite outsized, the normal price increases. So I believe once we don't think it's going to be recurring type of events, 27, 28, so we can come back and resume the strong top bottom line growth in the outer years. I think I just highlighted the key driver. There was obviously the factor of innovations, but, you know, you will ask me the questions, what exactly is the innovation for competitive reason. I will not be able to disclose, but this will be the main drivers coming or starting from a 26. The XI is Japan, XI is in a few other places, and a ZIM portfolio asymmetry and bringing this to the symmetry.

Very clear. Thank you for that. I look forward to seeing you at the CAGNI conference, and I'll pass it on.

Thank you.

Our next question comes from Eric Sirota with Morgan Stanley. Your line is open.

Great. Thanks so much. Good morning, Eric. Oh, good morning. In terms of a 26 guide for smoke-free volumes up in that high single digits to low teens range, how are you thinking, broad strokes, I know you're not adding specifically, but how are you thinking in terms of ICOs, HTU shipments, and IMS? Obviously, there's some of the specific headwinds you called out in terms of the excise in Japan. And then, you know, in terms of the competitive environment in Japan, I believe it sort of started to step up around the second quarter of last year with some competitor product launches. How has that been kind of evolving on a sequential basis, particularly heading in now to the season where, you know, competitors have have filed with the finance ministry for their price increases.

Yes, I start maybe with the second part of the second question. I mean, yes, this year and the year before, there was an increase in competitive activity in Japan. Judging by how strongly ICOS holds the share in Japan and continuing its growth, I think it all goes well. I think, look, we have 10 years of ICOS brand built in Japan and, you know, a number of steps of smaller but also the big innovations, including ICOS Iruma. So I think, you know, ICOS is entering this bit challenging from a price exercise perspective period, I think, you know, relatively strong. Now, i think there are very legitimate questions how we see daikos in japan but we know we try to stand away from giving a very precise volume and other outlooks for the ones for specific geographies that you know as you will appreciate there was a you know there is a competition and we don't want to highlight too much um to reveal, you know, what our plans with regards to the price and, you know, share expectations of volume expectations. But when we come up with the guidance for the total smoke-free product volume evolution next year, I mean, all of these factors are baked in, if you like.

And maybe, Eric, on your first question globally on the high-cost outlook among these high single-digit markets, growth for our SFP volume in 26. We're very pleased with the growth of ICOS. I mean, we finished 25 very strongly, more than 12% adjusted in market sales growth. Yes, Japan has been slowing down a bit, as we mentioned, but the number of markets reaccelerated. Italy is one of them. Europe is showing a number of markets which are I would say accelerating like Germany, like Spain. You still have markets such as Romania, Bulgaria that are very nice complement to the growth. So the picture is very nice for ICOS. And, of course, we expect that to continue in 26. And then you have all these new markets in new economies that are being very successful. We have Indonesia, Philippines, the Gulf, Mexico. I mean, you have plenty of markets where ICOS is accelerating. And last but not least, we are super pleased with the launch in Taiwan. I mean, 4% in only a few weeks. It's quite an achievement, and we're excited about the outlook. So that is globally giving a nice picture for the continuation of a very good growth for ICOs in 2026.

Great. And just one clarification question, just to be explicit in terms of the midterm or 2026 to 2028 guidance, is 2026, correct me if I'm wrong, but 26 does not include anything for Illuma in the U.S., but there is something included for the, you know, sort of 27, 28 timeframe. Is that fair or correct me if I'm wrong, please?

It is broadly fair. Well, as you know. I'll pass it on. No, no, no, no, I'm serious. No, sorry. I'm serious, not, you know. We have a number of discussions over the last two years with regards to the estimated or expected timing of this long overdue authorization from FDA. But we have somehow made the assumptions for ICOs entering the U.S. market in a planned period. but I don't think the algorithm which we lay down in front of you today is heavily or materially dependent on the ICOS in the U.S. But ICOS is including there both from the investment and some expected volumes.

Got it. Thanks so much. I'll pass it on.

Thank you, Ike. Thank you.

Thank you. Our next question comes from Bonnie Herzog with Goldman Sachs. Your line is open.

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

Yes. Hi. Okay. will start being impacted. We'll start seeing the prices as of April 1. So this is still a little bit in front of us. There obviously will be some IMS shipment type of distortions. Consumers can do some buying ahead or maybe not. I mean, all of these things will somehow wash out through the year. Now there are two steps of excise increases for heated tobacco products in 2026, one which again will kick the, sort of will hit the consumers in April one and another in October, okay? The amount or the size of the excise increase may not immediately warrant that will, and I don't want to now talk about the pricing strategy, et cetera, may not immediately depend on which strategies that play on the margin expansion, but I do believe you know what is our approach to passing on prices and continuously working on the margin expansion. I think over a bit longer period of time we will get where we wanted to get. But I cannot comment more, Bonnie, for various reasons. Yes.

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

Look, I mean, obviously, there is some degree of assumptions which we're taking on FDA. And, okay, let me answer this. If we talk specifically about the Zin and Zin Ultra, our pending application, which is very much in the higher nicotine strength, obviously moist version, you know, some flavors, et cetera. We have a readiness. to launch the product essentially as, well, essentially as we speak. So it all depends now how quickly we can get an answer from FDA. And I will stay from any fortune telling if I may precise timing of FDA. I mean, I didn't have a great track record of forecasting FDA in the past, so I have to give up a little more. But I think it's going to happen, okay? Summer this year, I think the plan is well balanced. And obviously we will be, I mean, sorry, ZEN is growing in the US, but it's not growing at our expectations. You know, if you measure the category growth versus ZEN growth, at least the recent year, et cetera, I mean, this will have to be addressed. ZYCO, as I said, is somehow baked in the plans, and the way we did this algorithm, provides a good balance between timing, volume, expectations, and investment. Now, we need to remember that when we talk about the ZIN and VIF, for example, on international, I mean, at least the product categories are vastly enjoying the infrastructure, which we have built over time on ICOS. And I believe the longer we wait, also in the U.S., we may end up in the a similar but reversed thing. It is a ZIN and it's infrastructure, back office capabilities, etc., which will start being later on shared for ICOS. So I remember you always were asking these questions about how much you will invest behind an ICOS, but everything depends about what other investments until this date we have been making and so on. Obviously, there will be some variable investment. You need to build awareness and so on. but it's not that heavy maybe structure, long-lasting investments, which are already built because we continue investing behind it.

Bonnie, just to maybe complement, there is no rupture in 2026 versus the trend of the past years. So the fundamental drivers remain exactly the same. You have a powerful smoke-free portfolio, which is continued to be dynamic. Yes, you have this Japanese situation, which is a one-off. You have the high base of comparison in the US, which will have an impact in terms of growth versus what is real underlying growth. So that is something we are taking into account. But fundamentally, the dynamism is there. It's coming with a very nice positive mix impact on the margin, and that is playing. And on combustible, we have this resilient business model. Yes, in 26, we are expecting slightly more decrease, which is coming from, first of all, Turkey, where we still have an H1 of comparison, even if things are gradually improving. But mainly to market India and Mexico, where you have massive excise duty increase that are going to happen. In India, you talk about 40% plus increase. price increase for the consumer. So it's going to have a huge impact on the market. So this is impacting the volume. But even with that, we are targeting towards this resilient model where with a decline in volume, we believe we can grow low single digit the revenue and low to mid single digit the gross profit. So as you can see, the 26 objective is not very far from the CAGR of the midterm growth algorithm. The fundamentals remain exactly the same. We have a couple of special events we're going to overcome and offset, and that is really what is driving the difference. But fundamentally, the powerful dynamic behind the business remains exactly the same.

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

Thank you. Our next question comes from Faham Baik. With UBS, your line is open.

Good morning, guys. Thanks for taking the question. I've got a couple as well. I do want to push you on innovation a bit as we approach the five-year mark since the launch of iCosaluma, and we look forward to the next evolution. What technical or functional attributes do you see could further improve consumer experience? conversion, particularly in the emerging markets. And the second question goes back to Xen. We've observed a notable absence of Xen promotions over the last two months in the U.S. Can you clarify, is this a deliberate shift as you await the offering of Xen Ultra and which is a higher moist product, which you mentioned, or is there a shift between how aggressive you want to currently drive trial versus looking to capture the 50% category growth you've alluded to historically?

Okay, so Ziacek, I take the question. Okay, starting with your first question, I'm very pleased and honored to you know, representative of PMI that you're tracking the innovation engine of PMI. You're absolutely right. We're plus minus in the plan period approaching the five years of ICO Ziluma. So I think your predictions are pretty good, but I will not answer second part of that question, what the innovation is going to be for the reasons which I guess are understandable. Now, when it comes to promotions, I actually think it's the two months. There was obviously the difference in which promotions and intensity of promotions U.S. market has deployed in Q3 and Q4. There were a couple of schemes which we didn't repeat it for, you know, it was our decisions. But I wouldn't just conclude that... from a shorter period of time about the promotional intensity of activity. We have it in a plan. I cannot, again, talk about this. But the way to look at this, and I think what's been very transparent in our remarks, there are three aspects of what will make long-term success of our pouch business in the U.S. And we're repeating what we always were doing on so far on the international one is the brand and the will has there has to be a quite a degree of the support from a brand building activity there is obviously the component of a portfolio which is meeting at least the current trends we can have a separate conversations which of these trends we think may be longer lasting which of this can be longer lasting but the fact is that you know, Xena is doing okay within a day group of 3-6 mg, but clearly is missing a higher nicotine strength. Okay, particularly maybe 9, maybe others. Okay, so that's the thing which we'll have to address and here we need to deal or work with FDA. And there is a third component into this thing, which is obviously price and a price premium. which, you know, consumer is willing to pay for Zen in exchange for having a reputable, vibrant, dynamic brand and the right product. So there will be element of, it's almost like we're going to the, you know, textbook of old, maybe forgotten marketing mix and to have the right price, right product, right place, right promotions. and we will be diligently deploying all of those components together. I hope I answered at least partially your question.

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

Sure.

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

Yeah, so probably, I mean, the reason why is that we are going to benefit from some significant negative transactional impact in 2025, which are not going to repeat based on the current Forex in 2026. So when I look at the 27 cents, guidance, you have two-thirds that is coming from translation, but around one-third is coming from a transaction. So I believe that is probably what the street doesn't have, of course, because it's difficult to have. I'm not going to share precisely the edging, but yes, we continue to have some edging that are helping us a little bit, notably on the yen, because the euro has been going up so the hedging on the euro are no longer making a big difference. So we still enjoy a slightly better rate than the spot you can see on your screen. And that is limiting a little bit the negative impact. But let's be clear, in 25, the yen had a negative impact. And we're expecting in 26, another negative impact coming from the Japanese yen.

Thank you. Appreciate it.

Thank you.

Thank you. Our next question comes from Gerald with Union Company. Your line is open.

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

Yeah, well, we're aware of this proposal. I mean, the comment I can make at this stage that this is counterproductive health benefit for nicotine or smokers this product provides. So I think the legislator there is taking everything into consideration. Look, states in the U.S. as you know very well are driven by their own thinking process and not necessary one state actions are translating to other state actions. But let's see how it's going to unfold. Again, I repeat, because for me, for us, it's very important that, you know, short-sighted approach to the excise on a product which are vastly better than cigarettes undermines real public health objectives. So I think it's just a wrong idea.

Thank you.

Thank you. Our final question comes from Damian McNeill with Deutsche Bank. Your line is open.

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

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

Okay, thank you.

Thank you.

Thank you. I'm showing no further questions at this time. I would not like to turn it back to management for closing remarks.

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

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

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

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