Q4 2024 Earnings Call Transcript

Good day, and thank you for standing by. Welcome to the Philip Morris International fourth quarter 2024 and full year results conference call. At this time, all participants After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one one on your telephone.

You will then hear an automated message today's conference is being recorded. I would now like to hand the conference over to your speaker today, James Bushnell, Vice President of Investor Relations and Financial Communications. Please go ahead.

Welcome. Thank you for joining us. Earlier today, we issued a press release containing detailed information on our 2024 fourth quarter and full year results. The press release is available on our website at PMI.com.

A glossary of terms, including the definition for smoke-free products, as well as adjustments, other calculations, and reconciliations to the most directly comparable US GAAP measures for non-GAAP financial measures cited in this presentation are available in exhibit 99.2 for the company's form 8-K dated February 6, 2025, and on our investor relations website. Today's remarks contain forward-looking statements and projections future results, I direct your attention to the forward-looking and cautionary statements disclosure in today's presentation and press release for a review of the various factors that could cause actual results to differ materially from projections or forward-looking statements?

I'm joined today by Jacek Olczak, Chief Executive Officer, and Emmanuel Babeau, Chief Financial Officer. Over to you, Jacek.

Thank you, James, and welcome, everyone. We delivered an outstanding performance in 2024, with all key elements of the business, contributing strongly to deliver best-in-class organic scope, and bottom-line growth. There has resulted in significant acceleration in adjusted diluted earnings per share growth in both currency neutral and, equally importantly, dollar terms as we mitigated substantial currency headwinds. Our business outperformed the industry and consumer packaged goods overall, with growth across all categories, to deliver our fourth consecutive year of positive volumes.

IQOS continued its strong underlying momentum with continued excellent growth in Japan, robust progress in Europe despite the EU characterizing flavor ban and further strong growth in our global markets. Importantly, the growth of IQOS is increasingly profitable as the benefits of scale and pricing more than offset continued substantial growth investments including brand building activities, and innovations on devices and consumables. Then once again delivered strong growth in the US as 2023 demand acceleration continued in 2024. This resulted in short-term supply challenges, which we have progressively addressed throughout the year, working towards our goal of matching existing user demand.

As we unlock further capacity, we will be in a position to explore the full potential of this dynamic Outside the US, shipments grew by 75% as we increased our global presence in nucup and pouches to 37 markets. Any Vyper. VIV is progressively contributing to growth with encouraging volume momentum in closed spots and strengthening market position with a premium offer. Our combustible business performed well on all metrics.

We delivered double-digit gross profit growth in quarter four of last year, and around 7% organically for the year. Led by strong pricing, resilient volumes in certain markets, and ongoing benefits of our Cost actions. Yeah. Overall, our strong performance across all categories and regions drove meaningful operating leverage, notably in our smoke-free business, alongside cost efficiency initiatives across the entire value This enabled us to deliver over deliver operating cash flow and adjusted diluted EPS above our expectations at the start of the year despite ongoing currency and input cost headwind.

Our transformation journey and growth drivers have excellent momentum and we are confident in our ability to deliver sustainable growth and returns in 2025 and beyond. Over the past year, we achieved several key milestones in our smoke-free journey. Including the ten-year anniversary of IQOS and ZYN. Our smoke-free business is large, profitable, and growing fast.

Our total smoke-free net revenues reach almost $15 billion in 2024. Combined with a strong combustible performance our company also surpassed $10 billion in adjusted net earnings for first state. Our smoke-free business reached 40% of total PMI net revenues in the fourth quarter, and around 42% of adjusted gross profit. As our transformation becomes increasingly profitable. In our top five markets, by operating income, around 60% of net revenues were smoke-free.

We have deployed our smoke-free multi-category strategy across almost half of the 95 markets with smoke-free products and we closed the year with over 38.5 million estimated adult users across Kidnodbir, Oral, and e vapor. Our smoke-free business surpassed one billion pounds including 644 million cans of nicotine pouches. The ZYN brand continues to resonate with adult nicotine consumers across the US, where it is the number one smoke-free brand and the fourth biggest nicotine brand and also grows international. We're also very pleased that the robust science and responsible marketing practices behind ZYN were recognized by FDA through the recent marketing authorization of all currently commercial commercialized US invasions.

Making ZYN the first and the only authorized nicotine pouch brand in the United States. We remain at the forefront of the effort to increase understanding of smoke-free products and advanced tobacco harm reductions among consumers and regulators. We are encouraged by the increasing number of governments adopt adopting tobacco reduction policies to incentivize switching to reduce nicotine product instead of containing to smoke. Which is a sound public health policy.

A number of markets also moving favorably with regards to robust regulation of nicotine pouches and evapro. Now regretfully, there is also resistance in many places, often driven by ideology not fact and science and therefore a considerable amount of work it's stealing from the bus. While reaching important milestones is pleasing, after ten years, we are still in the early stages of transformation. With our strong brands and our innovative and commercial capabilities, we have many years of opportunities and growth ahead.

I look forward to sharing more with you at the upcoming CAGNY conference on February nineteenth. I will now hand over to Emmanuel to this discuss our results and outlook in more detail.

Thank you, Jacek. I will start with the headline financials for the year. As Jacek said, this was a truly outstanding year of growth across our business, as the rapid progress of IQOS and USIN was complemented by emerging growth contribution from Veeve and ZYN internationally at a much improved combustible performance. We delivered in line or above our last communicated expectation across KeyMetrix.

Organic net revenue growth of plus 9.8% adjusted IMS and shipments of HTUs, and convertible pricing of plus 8.7% were strong. Excellent total shipment volume growth of plus 2.9%, including zinc and combustible volumes performed at the top end of our expectation. Coupled with accelerated cost efficiencies this led to better than expected plus 14.9% organic operating income growth and plus 15.6% currency neutral adjusted diluted earnings per share growth. Our clear focus on delivering performance in dollar terms was reflected in the plus 9.3% growth in adjusted diluted EPS.

As a result, we achieved record operating cash flow of $12.2 billion which was significantly above both our initial and most recent forecast supported by excellent profit delivery and favorable working capital. Combined with strong adjusted EBITDA, this allowed us to significantly improve our leverage ratio which I'll come back to Later. We closed the year strongly in Q4 with organic net revenue growth of plus 7.3% despite the impact of timing and comparison effect most notably related to red sea disruption the EU characterizing favor ban for HTUs and prelaunch Iluma iDevice shipments. This was driven by total volume growth of plus 2.3% alongside positive smoke-free mix and robust pricing.

Now Combined with the operating leverage and manufacturing efficiencies, we delivered close to plus 12% organic operating income growth and plus 10% currency neutral adjusted diluted EPS growth. In dollar terms, adjusted operating income increased plus 15% and adjusted diluted earnings per share grew plus 14% to $1.55 This includes a positive currency impact of six cents which reflects an unfavorable transactional impact in the prior year in Argentina as well as a move to hyperinflationary accounting in Egypt, which also a negative impact on our organic growth of around one point on net revenues and two points on operating income.

So The noncash impairment of our RBH equity investment had no impact on our adjusted financials. In future, we may benefit from Airbnb's dividend income but we do not include any impact in our 2025 forecast at this time. Let's take a step back and consider 2024 in the context of the last few years. Our organic top line delivery has been consistently strong since the pandemic and further accelerated this year as both smoke-free product and combustible step up than combustible step up their trajectory.

Clearly, 2024 was all also a standout year for adjusted diluted EPS growth. The profitability of our smoke-free business accelerated due to the operating leverage of IQOS increasing scale favorable unit economics, pricing, efficiency, and the impressive accretion from ZYN's rapid growth at superior US margins. We also benefited from a notably robust combustible performance which provide important structural support for our transformation journey. These dynamics are further demonstrated by the organic top line and gross profit growth of both category in the year.

Our smoke-free business accelerated to plus 17% net revenue growth and plus 23% gross profit growth reaching close to $10 billion in gross profit. This drove an impressive plus 330 basis points of organic gross margin expansion fueled by the factors I just mentioned. On the combustible side, net revenue and gross profit grew organically by plus 6% and plus 7% respectively, leading to plus 60 basis point of organic gross margin expansion. Our combustible business is once again contributing positively with pricing and cost efficiency more than compensating for the third year of significant input cost headwinds which we expect to ease in 2025. I would also note that adjusted gross margin for smoke-free product were plus 490 basis points higher than combustible in Q4. And plus 270 basis points higher for the year overall at 66.6%.

While we continue to target gross margin expansion in combustible, we expect this gap to grow over time as we continue to drive profitable growth from smoke-free product, investing in new market Brand building. And innovation. Taking a a closer look now at our volume performance, we delivered our fourth consecutive year of shipment growth up plus 2.3% in the fourth quarter and close to plus 3% for the full year. Including our viv e vapor business in equivalent unit This growth was plus 2.4% and plus 3% respectively.

Our total 2024 smoke-free volume growth including Viiv was plus 13.5% or 19 billion unit equivalent acceleration compared to 2023. For IQOS, we delivered HTU adjusted in market sales growth of close to 13% and shipment volumes of 139.7 billion both broadly in line with our expectation. Adjusted IMS growth accelerated in h two to close to 14%, essentially in line with our target of plus 14% to plus 15%. This includes dynamic growth of close to plus 11% in Europe with strong momentum across the large majority of markets. As I touched on earlier, q four HTU shipment growth includes the impact of additional shipment in the prior year to prepare for the EU characterizing flavor ban and the phasing effect of additional shipment to Japan in h one notably due to retail disruption.

Our oral smoke-free business grew 2024 shipment volume by plus 24.6% including ZYN's US growth of plus 51% to 581 million cans. Snuff and moist snuff volumes were stable. Cigarette shipments grew by plus 0.6% approximately in line with the estimated growth of the international industry. The growth of the cigarette market can be largely attributed to growth in markets where smoke-free products are not permitted such as Turkey, Brazil, and India.

Excluding such markets, we observe a low single digit decline consistent with historic trends. Our strong full year top line growth of almost plus 10% was again achieved through a combination of volume growth, pricing, and the positive mix impact of the shift to smoke-free product. Pricing contributed plus 6.2% reflecting almost plus 9% combustible pricing and plus 2% for smooth free product. Smoke free also drove a positive mix impact of plus 1.9% with with higher net revenue per unit of both IQOS HD overall smoke free product contributed plus 2.2% to overall group top line growth for the year demonstrating Jean's role as a meaningful accelerator As in prior years, geographically, was negative primarily due to combustible, but to a lesser degree given robust networking growth Moving down to adjusted operating margins, we delivered full year organic expansion of plus 180 basis points and plus 100 digits points in dollar terms, comfortably achieving our objective of extension on both basis.

This reflects one q four with OI margin expanding organically by plus 140 basis points, As gross margin expansion, I will create SG and A investment. Full year gross margin increased organically by plus 160 basis points and by plus 120 basis points in dollar term. SG and A grew plus 20 basis points of margin expansion enabled by cost efficiency action despite significant reinvestment commercial support, Vienna was moved to the next and US capabilities. Especially We delivered over $750 million in gross cost efficiency for the year, discuss productivity across more free and combustible, and continue back office savings.

This places us well on track for our twenty four, twenty six target of $2 billion. Focusing on our smoke free business. We grew our estimated user base by over five million people in 2024, Reached approximately 38.6 million legal edge users as of December the first. This includes an estimated certificate of two million IT users five point seven million forward users, and one million users.

I am pleased to report robust iCUSE growth of plus three point four million dollars versus prior year, and plus one point five million during This growth is both based and consistent with recent years, despite limited new market opening and the easy characterizing Facebook bank. Overall, added plus one point five million user year on year driven by this continued strong traction with legalized nicotine consumer in the US, despite the flight concern. Zooming in now on IQOS. Home user momentum is reflected in adjusted IMS volume with 2024 growth of over 16 billion units in line with the prior year despite This growth is also in line with the five year average and more than one billion units above when excluding contributions from markets launched in the current fiscal year.

Importantly, following the rollout of HycoCinema and with increased scale of the business, the profitability of Sycos is growing strongly. In in this way, this here with the index product contribution over time as compared to January. As we've explained before, the outcome cost of the business to consumer operation results in declining in passive per per user over time as the user can grow in the market. This is a dynamic We expect to continue in the future.

Turning to IQOS in Europe. As expected, HTU adjusted IMS growth accelerated strongly in HP to almost plus 11% following h one progression of around 80%. This resulted in robust plus 9% focus on growth overall for the year, despite the significant disruption, of the characterizing This double digit adjusted aims gross image was driven by strong progress, in the last number of markets including growth of around 20% or more in markets such as Bulgaria, Greece, Germany, Romania, and Spain. While growth was less dynamic, in Poland, Czech Republic.

Recovery in Italy is ongoing following the discipline of the paper band. Although at a slightly slower pace than expected, The continued momentum in the region drove q four. I just share growth of plus zero point nine point zero net to ten point six percent with adjusted IMS volume reaching thirteen point five billion units on the fourth quarter moving average. Inflow shipment volume increased by just six percent against prior comparison, which included additional volumes related to the implementation of the standard band notably limited.

The is now receiving all that speech you mark it? This is a generally consistent pattern of short term disruption followed by a return to the prebound growth trajectory. Following an impact of around two billion units in 2024 we expected a 2025 impact of around one billion on goods shipment and IMS including annualization effect is the most prominent effect in the first in the first quarter of 2025. We also continue to roll out the I device and new consumer variants such as Vydia and Vydia to more market providing an increasing test profile and press one button. Looking at the toxicity of textures in Europe, we reached a number of important milestones with Budapest achieving over 40% share, Rome over 30%, and London approaching 10%, and is Madrid not far behind.

Japan delivered outstanding results yet again with adjusted IMS growth of close to plus 13% in both the quarter and the full year to reach an adjusted P4 share of thirty point six Let's three point one point Hi, Eur. Year on year. This was supported by continued schedules of Tera and Thinka, as well as a positive fraction of the IQOS Filima I device as we reach over nine point five million adult users. Cost per share in Tokyo for the overall entertainment category Which fifty two point eight percent in December.

With the addition of cheese vodka and Amamad Suites in the ten cities and five pictures. Exceeding the fifty percent share On the National of Tech Davis, forty seven percent of the total industry is now Outside of Europe and Japan, adjusted in market sales continued to grow slowly in q four. Promising growth in a number of markets will be respected by TCT shares in Saudi Arabia, Indonesia, and Mexico. Continuous innovation is a key driver of these goals, with stereo variant and capsule in Indonesia driving an up list in the quarter and some good initial results from the trial of Wound our lower tie our lower tier offering.

IQOS continues to perform well in payroll, though off the chair performance was impacted by the dynamic of the convertible market, where competitors supply normalize and the very strong prior quarter following the long I will get the free HP of the chair increase Nike. As we start to harness the strength of our multi category portfolio, drive sales of IQOS, v Yeah. That's Coming out to the US where our IQOS would be the first complain campaign in your team is progressing well. And we expect to comment direct sales of device and HPE in our spin around the end of q one.

We are seeing high interest from consumers with over four thousand added smoker on our way. As we learn from this initial consumer engagement, We are planning the rollout of pilot for the city. As you know, Steve, our focus will be on selective adult consumer engagement and giving awareness to category and brand education in the legal edge market community. We do not assume any significant volume from US IQOS before the at the launch of IQOS Illumina.

And we continue to hope for an every authorization in HP 2025. Teaching categories now to ZYN where we continue the where continuous demand supported q four new achievement going growth of plus forty two Sent you on mute. One hundred and sixty five million cap. Despite ongoing production limitation, this reflects an acceleration to a new record sequential increase of plus sixty million ten hundred sixty three. On a full year basis, shipment volumes grew by plus one hundred and ninety six million tons versus 2023. Highlighting both the magnitude of growth and the tremendous effort made to maximize our pollution capacity.

Win category share incrementally improved to the second ad reaching sixty five point nine percent in q four as we progress in increasing production further supported the growth of the category. Indeed. Category goes slow to me considering the summer peak of our supply constraint as shown on this chart. As the situation started to gradually improve, ZYN was again leading and outpacing the category.

I am pleased to share that underlying demand for games from adult continued to grow in q four. And was higher than previously as We continue to experience some out of stock at retail, And while production capacity continues to increase, we now target full normalization sometime in the second half of 2025. We continue to target around nine hundred million tons of for the full year from our Kensington facility And as supply continues to improve, we will look to further extend growth beyond our existing consumer base to other legal entities. Our greenfield site, which is what I do, is due to come online in early twenty And we believe we are well positioned to capture this potential over the coming years.

Responsible regulation of the industry is fundamental in supporting sustainable future growth for the dynamic category. We are therefore encouraged by the recent FDA authorization for the marketing and sale of all the nicotine pouches currently marketed in the US, following extensive As mentioned, this makes them the first and only authorized pet in the market. Among several consideration, we have a substantially lower amount of harmful constituent that's fixed. And all the smokeless tobacco product as well as current low use cigarette lighter.

The FDA's authorization marks an important step in the protection of public health by recognizing the role that Bing can play in providing better alternative direct and other traditional tobacco product or legal edge either. We remain committed to driving industry standard in the twenty one prevention. This policy and initiative designed to help prevent this access. Further, combating trade initiative that co an interesting product remain a core priority and we dedicate a significant level of resources is performed before.

ZYN, also has an exciting future outside of video. While still in its very early stages. International nicotine pulp shipments grew by twenty seven million tons or plus seventy five percent And we already see strong volume momentum in international market which is Pakistan, South Africa, Mexico, the UK, and Google, We launched nicotine vouchers in six new market during the quarter, reached a total of thirty seven worldwide including Italy, Romania, Using e vapor, we continue to see strong consumer traction behind Vibone. The brand holds the top sweet post proposition in thirteen European market, and add the number one position in five including Italy.

V plays an important role within our multi category strategy as an increasingly trusted choice for small group category fully users as a source of incremental growth is improving Our primary focus for the combustible business is to maximize value over time while supporting the growth of the smoothivity. Pricing and cost efficiency are the key leaders, drive performance, while maintaining our category leadership. We delivered another robust volume quarter with growth of plus one point one percent. All regions contributed to twenty four organic net revenue growth, of plus six point two percent is gross profit increasing by ten point eight Full year pricing of plus eight point seven percent includes contributions from Germany, and thirteen.

We expect organic twenty twenty five predictable pricing to normalize to plus five to plus six percent past year reflecting GDP to higher inflationary accounting. In twenty twenty four. Category share was flat in q four with positive contribution from Turkey and India. Offset by decline in Egypt and Indonesia, with continued growth in the below tier one segment.

On a full year basis, we grew category share plus zero point one points. Reaching all time high for both Marlboro and our global brands This brings me to the outlook for 2025. Where we expect another year of strong growth from all categories driving stuff, and bottom line delivery. We anticipate the fifth consecutive year of positive volumes with growth of up to plus two percent notably driven by another year of strong growth in smoke free products, at around plus twelve percent to plus fourteen percent. So I close we expect the continuation of strong momentum with the absolute growth in HPU adjusted IMS volume expected to be at a similar level to 2024, translating

ten percent.

The the expression goes We expect shipping growth to be broadly in line with this double digit trajectory subject to the usual inherent volatility of shipment timing inventory. We expect ongoing strong growth dynamic within the US in cutting pouch category. Despite the supply constraint I mentioned before, we forecast a US in volume shipment range of seven eighty to eight hundred and twenty million tons for the year, supported by capacity expansion. This represents another year of sequential acceleration in volumes with an expected increase of opportunity two hundred to two hundred and forty million cans compared to the one hundred and ninety six million can increase This supports the total TMI forecast of plus six to plus eight percent organic net revenue growth.

This includes a headwind of over a hundred basis points due to higher inflationary accounting energy, and the technical impact of implementing a new financial model in Indonesia below tier one premium. The change in Indonesia has no effect on the. Moving down to the p and l, we expect ongoing small clinic effect operating leverage and cost efficiency, to drive double digit adjusted operating growth, operating the growth. Of plus ten point five and plus twelve point five.

This includes single spot gross With those gross and adjusted operating margin forecast to expand in both organic and adjusted the last term. At seventy six hundred. We expect SG and A cost to increase increase broadly in line with net revenue on an organic basis as we invest behind our small ticket. We forecast currency neutral adjusted, deleted, EPS growth of plus ten point five percent

and plus twelve point five percent.

This factor is in essentially stable net interest expense and an increase in our Corporate tax rate to approximately twenty two point five to twenty two point five percent due to tax increases in language OECD plus the global minimum tax. And the mix of international earnings. In dollar terms. We forecast growth of plus seven plus nine percent to a range of seven that are four to seven the last seventeen.

This includes an unfavorable forecast currency impact of twenty two cents at revenue exchange rate percent, primarily driven by the growth trends of the Bellard mitigated by our AGI For the first quarter of 2025, we expect a strong start to the year with net revenue and operating income growth growing in line with our full year objective despite the leap year comparison. We forecast HTU adjusted INR growth of around plus ten percent which factors in the large annualization impact from the easing weather ban in the quarter with a progressive improvement Goody. We forecast shipment volume of thirty five to thirty six billion for HPUs and one hundred seventy one hundred and eighty million times for USU.

In project q one adjusted diluted EPS of one dollar fifty eight, one dollar including a negative currency values of four cents at the revenue rate, And then if you incorporate tax rate, two to three points higher than the prior year quarter. These are our 2024 delivery and 2025 outlook, we are well positioned to meet or exceed all metrics of the twenty four, twenty six target targets presented at our twenty twenty two investigate. This is especially true at the level of operating income growth. As well as for ECS delivery, where our algorithm assumes instant.

This level of top and bottom line growth reflects the best in class growth profile within the context of flash cap consumer technology. Importantly, we're also well on track to deliver high single digit adjusted diluted EPS growth in dollar term across the twenty twenty four, twenty twenty six period after any Indeed, we measure our cash flows in dollar and after a record delivery in twenty twenty.

Four

we expect to deliver operating cash flow of around eleven billion dollars, fourteen Thank you. Five. This is forty nine with twenty twenty four. Once accounting costs in nonrecurring payments with a total impact of around one billion dollars.

While we continue to achieve the German tax for such space. We have decided to make a zero point eight billion dollar payment this year. And we also anticipate the final transition tax payment rated to the US tax Yes. We anticipate capital expenditure of around one point five billion dollars Is the last portion of this related to you?

As we prioritize the investment behind our most successful. Our sprint twenty twenty four cash flow and EBITDA growth combined with a favorable impact from our euro balance sheet AGI, allowed us to reduce our net debt to adjusted EBITDA ratio by zero point five times point sixty six. Ahead of our expectation. And representing a dramatic of power delivery.

We expect further progress in twenty twenty five placing us on track for our target ratio of around two times by the end of twenty twenty six. I will now send you back to Yaczek for confirming email.

Thank you, Emmanuel. In summary, 2020 was a remarkable year for PMI. Our financial result that comprises this of our strategy and the success of our transformation the underlying momentum it took bolstered by our practice measures and pricing and cost. I remain confident in our position as the global smoke As we continue to identify on our multi category strategy, your premium brand,

I cost I'm Our key strategic priorities for 2025 are clear. As we continue to support a function and development of our smoke to business, what is the UI, and international. We expect continued strong momentum in 2025. And we remain confident in our ability to deliver our our twenty twenty four, twenty twenty six growth target as we progress towards our ambition of becoming substantially smarter by twenty thirty Finally, and importantly, our strong growth output and highly cost generative business enables us to continuously reinvest in our small footprint transformation while returning cash to shareholders.

In September we increased our annual dividend for the seventeenth consecutive year in line with our long term Thank you. And Emmanuel and I, would be happy now to answer your question.

Thank you. As a reminder, to ask a question, please press To withdraw your question, please press star one one again. And our first question today comes from Matt Smith of Stifel. Your line is open.

Yeah. Speaking to Manuel.

Good morning. May I ask who's calling?

The 2025 outlook calls for HTU shipments in

in numbers or in market sales growth fairly in line with what you saw in 2024. But could you talk about the the composition of the growth? If it's overall in line, a different contribution by geography in in your outlook and can you remind us on if there has been any progress in new markets contributing to growth in 2025 or if you've made any progress in those markets as you look out to your 2026 goals.

Now so in the guidance, our financials continue seeing good growth in Japan. And in the you know, number of parts in Europe, I mean, a manual man about the Italy, Czech, Poland, right, when the group is a a bit below what would expect at this stage, especially Italy and Czech following the the flavored ban But we also see that there is some recovery coming in, so I think you know, hopefully, in the second part of the year, we should bring Italy another geography that part to what the rest of the euro Europe is going through. And we have not, in the guidance, assume any significant new market opening in terms of the volume.

As you know, we've you know, we're gonna head into my remarks. Mean, we're dealing with this rational world, fighting with the irrational world. I hope that, you know, the most recent authorizations of FDA following the authorizations of Kid Not Birth, now the vouchers. Will be a good incentive or encouragement by other governments which to be very frank, to be stupidly oppose smoke free products while allowing cigarettes.

But in the guidance, we have not put any significant volume coming from the new geography. So this is all organic growth, and as you could saw it in the for the quarters of this year, Despite the fact even if you look at Japan when almost half of the market is already on a on a smoke free products, the growth continues there.

Thank you, Yasuk. I'll pass it on.

Thank you. Our next question comes from Monica of Goldman Sachs. Your line is open. Alright. Thank you. Hi, Emmanuel and Yancek. I am No. I'm good. Had a question on your margins. You're guiding robust

operating leverage on a currency neutral basis. This year. So hoping you could highlight the, you know, some of the key drivers behind this. Also, so I wanted to verify if your guidance assumes a potential entry of a loom US or you know, just possibly continued investments without, you know, any corresponding Sales.

And then how should we think about the margin contribution from ILUM in the US and how long it might take after your entries in the market for for those margins to really be meaningful.

Yeah. So maybe I start, Bonnie, the good morning. Is that I mean, yes. We're looking for a robust margin, like expansion this year, maybe not precisely to the same level as we had last year, but still it's gonna be robust searching in a hundred basis points of territory, this is what we're looking into.

Is that, you know, combinations of a few factors, we still looking at the pricing contributions, pretty obvious. There's obviously positive Mix, right, between a categories and especially now that we have a free smoke free categories, on the positive to margin path including the vape. So, you know, the recircheated. You know, our strategy of going selectively, but you know, with the right impacts in the geographies that is needed in order receiving money, you know, behind if you like or marching behind.

So this will contribute. And, you know, we've had in the past that you remember quite a headwinds headwinds coming from a COGS. And I think those have I think they are behind us. this base here and there, Okay? Then obviously, this whole, you know, conversations especially coming from the US about the tariffs and so on.

But, you know, the way we organize our supply chain as you know, US on the ZYN is essentially self sufficient. Our supply chains in Europe I mean, we organized our supply chain almost by blocks, so I don't see at this at this stage that they should be on a surprises coming on the tariff side. I think we're pretty confident where we'll land with the COGS for the year. There is obviously ongoing support coming from the scale of IQOS, especially devices.

When the okay. There was a con be of scale. There was a robustness of the device in terms of a quality, etcetera. So we actually don't have this like, in the past, a bit of a pressure on the margins coming from a device sales.

This this we have well stabilized for twenty twenty four towards behind the margin expansion. And I think we we we should expect the same expecting the same in a twenty five. Now your questions with regards to Illuma margins US, okay, maybe one by one, we still expect that hopefully you know, we will get the authorization for I CONSULUMA around the mid of the year. Again, on the one hand, one could read this as encouragement that a As we said, it's total scientific, etcetera, review FDA has gave authorizations for all variants of the I I wouldn't be my wouldn't be myself if I wouldn't comment that obviously, if something takes five years, it must be thorough because otherwise, I cannot fix explain, you know, the length of the process.

But I do hope that, you know, FDA We'll move faster and, you know, already I could do my spending for a while. And by the way, if you have it also authorization, for for Zendesk. So the the margin story, I would repeat my self that, obviously, when we start adding support behind the behind the Lumen, I mean, at the initial period, will be a negative. Right?

But in a scheme of the things, in the PNL size equal, like, of our business in the US, I don't think it should be something which is you know, that much worried. And I believe US will go in the similar path as had on a heat not burning in other places. So two to three years, we should I could should be net net contributor to to the bottom line. Bearing in mind, as always, reminding everyone that we don't really have the headwind of cannibalization.

Right? So we don't really we're we're we're in a better starting position. And we know, we had a growing confidence in the ICOSI Lumen international, but we know where ICONZYLUM are brought us on international over the last three years. And it continues, you know, generating the growth user acquisition.

So I believe it's really a great proposition for for adult smokers in the

Maybe just just to compliment on on the margin side, Bonnie. As you can, you know, judge from our guidance, we have significant ambition in terms of margin improvement in 2025 And what is driving that is the fact that we are flying on several engine here on margin improvement, and everything is coming together put it positively at the same time. So indeed, you know, we have of course, the mix evolution that is very favorable to to to to us with smoke free product coming with a higher margin, and they are growing very fast. Among those multi products, we have the US and ZYN that is growing even faster and which, as we already said, is best in class in terms of margin.

So that's obviously a plus. We're also increasing price. Yes. Of course.

We're not gonna continue to deliver eight percent plus price increase on combustible, but it's gonna remain extremely robust. And we also have the ambition to grow our price, not at the same level, but significantly on our smoke free portfolio. And then when we look at our COGS, we are working on productivity. They are scale effect.

That are delivering positively And as you know, we were facing until now a significant headwind on cost, notably on the combustible business. This is easing. Twenty five should be better. And twenty six could be even better than than twenty five, by the way.

So we are going in the right direction there, and that is making us clearly targeting nice margin improvement both organically and in dollar term for twenty five.

Okay. Super helpful. And actually, I'm just gonna ask a quick follow-up because you kinda touched on this, but you also mentioned this morning about, you know, targeting or you continue to target gross margin expansion in combustibles, And then you did say that you expect the gap to grow relative to your smoke free product gross margin. So, you know, previously, you guys have talked about, I think, a ten point gap.

So know, as your your gross margins expand on, you know, combustibles, I think what I'm hearing you say is that, you know, not only is that an opportunity, but also continued margin expansion on Smokefree is what you just mentioned. So do you foresee that gap expanding? I mean, does it go to fifteen points? Spread or, you know, could it go to twenty?

It's just kinda trying to think through that in the next couple of years.

Look. On on the consumable, we we've already highlighted the fact that there was a ten percentage point gap and and it has been expanding in the last few years. So, indeed, we have the ambition to do better on, the gross margin for combustible, and we explained why. But as we continue to progress also rapidly on smooth free products, and both, you know, with the mix effect coming from from ZYN, but separately on IQOS and and and ZYN, we want to continue to progress.

So we could have indeed a gap that could continue to expand between smoke free product and and combustible in the in the coming years.

Alright. Thank you. I'll pass it on. Thank you. Thank you, Ben.

Our next question comes from Grav Jay of

Good morning. Emmanuel and Jace.

Thank you for asking my questions.

Kevin, I have a couple of questions. One is on Zendesk. So if I look at the scatter data,

the volumes have decelerated to mid teens growth. And your guidance is for thirty four percent to forty one percent growth.

Then you also mentioned that the supply normalization would only happen in two h twenty five.

So, you know, just wanted to understand what gives us the confidence that the sooner we can we'll be accelerating to

This almost forty percent growth rate again.

Yeah. So I I would take it, girl. Good morning, So we look also you know, how the volumes were evolving in a q four of the weeks of the last quarter. We see the growing velocities behind ZEN.

Actually, there was the only brand I think, over the last few weeks which was growing in the velocities, not the rest of the at least the big four other brands or smaller, but big other brands. Look. We all also have to understand that we're reading all this data. We've No full supply of the supply constraint environment.

Right? So it's a bit difficult that you see at the retail. It depends even in which stores you're looking at that something which be significantly different than what we're shipping to the to the trade. But, you know, q four as we predicted, you know, with the increased capacity in Owensboro, We had the first quarter with the significant sequential quarter on quarter growth.

Even if you will take the run rate of what we see the last weeks, etcetera, I think that the the the guidance is somehow reflect what we see there. Now our comments that you know, we should we think that we should be meeting the demand by about mid of this year, I have to make one reservation. Is that it's difficult to actually read what the demand is. Because we know what is the level of out of stock.

We know what is the existing users of Zena demand for the product and knowing that this this purchases or the purchases somehow impact by the fact that, unfortunately, they are confronted with the lack of a bill lack of availability out of stock, and that is the you know, all the positive momentum, which doesn't have. I've also the FDA authorizations, which know, on the one hand, one could read product was in the market, so there is no change. Actually, I think it gives a lot of you know, visibility and stability to all the market participants, including the trade. And I believe also consumers that the product now has the full fledged, you know, my language authorization and all the flavor variants So all of these things I I think, will translate into the volumes which we prefer.

Project of the volumes which will reflected in our in our guidance.

Sure. And and follow-up

Question to that. You know,

to build clearly in supply shortage, retailers have been putting their markups I think you increased prices by thirty cents last year while retail has increased prices by one dollar or

you know, three dollars, five dollars.

How do you control retail price? And is there a way for you to as supply normalizes, to reduce retail price so that that will also have a positive effect on your volume.

Yeah. So, you know, if you have a degree of the out of stock as Zen is experiencing, it's obviously managing the price at the at the retail level is you know, is a little bit more challenging. Right? I mean, it's pretty obvious.

But I believe with the growing demand sorry. With the growing supply of the product, I think this pricing will come to the sum sort naturally to the normalization So I have to also admit that, look, we are very happy with the support we're getting from you know, retailers handling our products and, you know, it's not that easy for them also to be confronted with product which on the one hand has the demand on the other hand, they cannot realize their margins and, you know, they take from a certain price and you know, I hope but again, I think that, you know, the pricing situations in the market will will sort out somehow not surely the moment when the product will be in a full, unconstrained suppliers, as we said.

You know, second half of the twenty five, we should start seeing we should start seeing improvement on this

Sure. And if I could just squeeze in one last question on Zendesk.

Could you just talk about that ELTA, what the product is, and then you think we can see it in the market?

Yeah. So, obviously, as well, as we all know, right, the the authorization came Essentially, last days or hours of the one administration is now I guess we'll have to wait for the for the new author sorry, for the new administration Look. As I said in the You know, in the answers to the questions before that, I do hope that you know, period of four or five years waiting for authorization, Is too much. It's too long.

And I do believe that there will be some I hope there will be some accelerations in the processing because of the authorizations. And you know, we have to also understand that, you know, partially the challenge which the US market has very much on the vape product is by the fact that the legal part of the market has not been created So on the one hand, you know, FDA is doing a lot of right things in terms of law enforcement and chasing the illegal Chinese or whatever import. But on the other hand, there is a demand among the smokers adult nicotine users for this type of a product. And unless we create in a fast manner the legal part of that market, and then, you know, we essentially wasting our time and and money.

So I do believe that the FDA will take this also into considerations that know, this situation shouldn't happen in our product category. And

there is a demand for the product. So let's rest.

For the law enforcement, etcetera, the illicit mark But you cannot just control the illicit market if you haven't provided the legal solutions in the market which are available. So I do believe that, you know, the ICOS sorry, ICOS as well, but ZYN has some

pending

authorizations or applications, I should say. I do believe that they're gonna be processed in a faster in a faster manner than before.

Thank you so much. Thank you, Rob.

Thank you. And as a reminder, if you have a question, please press star one one. And our next question comes from Eric Serrano of Morgan Stanley. Your line is open. Great. Thanks, guys.

Morning, mate. Hoping you could get hopefully, I just give some color in terms of

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

Thank you.

Yeah. So maybe I take the last one. It's the easiest one, and I come back to Italy, which is a bit the longer story. I mean, in a twenty two cents at spot rates right now, I mean, frankly speaking, the biggest contributor to the negative is the Russian ruble.

And that's well above the sixty percent of the variance. The year actually goes in a cent. I guess it was if I recall, about the four cents in our estimate that the spot rate, obviously, As we all know, we're living in the pretty dynamic times. As we speak, but this is what it is.

There was a big and coming from the Egyptian fund, right, when you know, it's we had to take the heat. That obviously will not be repeat re repeated in the will not repeat in the in twenty five. Actually, this will result in a positive currency value, but this is on the currency. So frankly speaking, at this stage, it's a ruble and and as I said, four cents or so on the end, and the rest is just the bag due to our international footprint.

The manual wants to add

add something. I want to add something because I think I mean, you know, the volatility we're seeing on the currency market today be a good touch of trust from, you know, how things are are working for us. I should first remind you that we have a natural important edging in our balance sheet with more than sixty percent of our debt that is in euro. And therefore, when we have a weakness in the euro versus dollar, which is a situation we've seen recently, course, we have a negative impact on our p and l, but we have also a decrease of our debt in dollar terms, and we're also benefiting from lower cost of the debt in euros plus, of course, lower interest rate interest cost in euros translated into dollars.

So that has been certainly helping our trajectory in twenty four. And if there was continued weakness of the euro, that would continue to help us in the future. Probably, what is not fully captured by the market is the fact that indeed on top of that, we have two significant edge position, one on our exposure to the yen for twenty twenty five. We have around sixty percent of our exposure that is covered at a rate of around one hundred and thirty eight yen for one dollar.

So that means that we we we are not impacted by the possible deterioration of the yen for that part of of our exposure. And we have also a lower exposure to a lower aging, sorry, on on euro. Where we have around a bit more than one fifth sorry, one fourth of our exposure to euro, where we are covered at one twelve. Which is also limiting a bit the impact on the PNL when the euro is going down.

So with everything I've been saying, you have all the explanation. What has been showing with you on the forex impact for us today.

Yeah. Now on the on Italy. So I think, yes, the second half was a bit weaker than we would maybe expect. I mean, Tally was going this know, many others, not all, but many other to to member states of the EU for that flavor ban.

I think what we see is that okay, some smokers, some users have a hop temperal. Right? But the return to cigarettes, which always was that risk. So Also explains in the same geography is the cigarette trend are slightly or better than one could you know, expect or could think.

There is some polyols between the vape product very much, and that's, I believe, maybe partially also explains why beef proposition has advanced most in Italy. Right? And this was in a in a in a in a closed system. Very shortly after short period of time, jump to travel to the number one proposition.

I think we need to maybe look at, you know, the category of a smoke free over period of time on a total basis because there will be some poll usage and sometimes driven by the event. Like this by this flavor But we also have a geography in Europe that very shortly after the implementation of the of the of the of the flavors one. I mean, they actually returned to the the growth rates which we had before. So, you know, maybe Tally is our player.

We're looking into this whole pay. But as I said, Part of our multi category strategy is also Should there be any leakage that they keep not burn users, we can capture this with other proposition. Then I guess we need a bit more time to see the stabilization. Poland, you asked me about the Poland.

I don't think Poland has put the stick in the ground which moment they really want to fully implement the bar Right? Later in the week, it will happen. I think somewhere in the twenty five, but it has to be this is not you know, if this speaker has not been put in the ground, It is more towards the end of a of a busy year.

Great. Thanks so much.

Thank you. Thank you. Thank you.

And our next question comes from Hamed of UBS. Your line is open.

Good morning, guys. Thank you for for the questions. Hi, guys. A couple from me as well.

Firstly, on on on ZYN again in the US, We we noticed a couple of your peers have have launched synthetic moist nicotine products. And according to the scanner data, have seen some initial uptake. How how do you see the moist versus dry dynamic in the US and where do you think the consumer may end up in in the future recognizing that in Europe, most products are are moist. And and the second question maybe comes back to your comments around Italy.

But but but just longer term, we see the vapor category continuing to grow quite quite strongly, and we can discuss its flaws around flavors, marketing, underage use, etcetera. But but do you see this as a headwind for for the tobacco industry, or do you believe the total pie can continue to grow with limited impact on tobacco?

Yeah. So maybe the second part, I take it. I think the total price grows despite the fact that, you know, the the movements between the categories within a smoke free you know, there is some dynamics, right, between a heat not burn and an e vape. And the pouch is now depends how market is organized and regulated.

We also know that know, the most difficult actually to read category due to the way the the market is organized currently is the eBay category. Right? Because you have a a a disposables, you have parts. You have open tank systems still, and some products Okay.

You know, under the regulations and properly authorized depends on a jurisdiction. Some products are just popping up in the market, so you could call it the different forms of illicit trade, but I think, you know, you see this in the US, but also in Europe, in the UK, and a few other places. The regulators, governments, taking more a serious look into properly organizing that market. I can't tell you whether this will be completed in the twenty five, but definitely, there is a the moves the movements the moves are in the right direction.

So I believe twenty five, twenty six, the category should be normalized by the five that it's gonna be properly regulated. And then we take it from the I'm not the one to talk about the youth exposure, etcetera, because, you know, we know, follow-up is you know, our policy, you know, with our reviews on this one. But, definitely, it's difficult to control of the discipline in the market. If you're dealing with You know, all of the different emanations of the product coming essentially legal to the marketplace that obviously also enjoys the less distantly in trade channels.

So completely, you know, invisible trade channels, if you like, etcetera. When it comes to your questions about the synthetic vent versus dry, So just to take it from a perspective, the way we look at the data in the US, for example, this whole new things which are coming into the market, there is a quite a long list of different SKUs and you know, the moist flowers and know, This whole market, the debt part of the market, if I'm not miss mistaking, move year on year by barely twenty basis points. In a scheme of these things, there's presumably a lot of dynamic on the on the on the weekly basis, but doesn't seem that it's, you know, has any any major attractions, etcetera.

The insights which we'll have when we talk over consumers, we see and obviously, you know, when you read that consumer insight, it's not a pure mathematical accuracy and the exact number, but I think that the moist products moist pouch products is more appealing to the moist snuff. Type of a users. Right? Like snows, etcetera.

While what we see in the marketplace that the dry product has a more appeal towards the smokers and evapor. Or evapist. That is what I can tell you at this stage.

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

Thank you. Our last question today comes from Phillips

Stein of JPMorgan. Your line is open.

Hi. Good afternoon. Thanks very much for taking my questions. I just had I just had one question, please.

It was just on the HTU guidance. If I look at where the volumes landed at the at the end of twenty four and then I look at the guidance range you've the ten to twelve percent you've guided to for for twenty five. But then just extrapolating that out for twenty six and looking at your guidance there of the hundred and eighty to two hundred million of of of shipment volume. Just trying to get a sense of what gives you confidence in like, my math said implies, you know, we acceleration in the growth in twenty twenty six.

And I just want to understand, I suppose, what gives you that confidence You will see that reacceleration, in twenty twenty six. Thank you.

Yeah. So as I said earlier, I mean, in the guidance for this year for twenty five. We essentially stayed very low into we essentially focus on organic growth in a market that Obviously, if you open the, you know, twenty five and beyond, twenty think it's becoming maybe more prudent of her to assume that there will be some geographies also coming finally and opening the the markets to the new proposition. There is one point which I maybe we haven't articulated well in the in our remarks and that the answers to the questions before is that There is still about the twenty or so percent of the volumes on the heat not burn that we don't really do We would can't really realize the full growth potential.

And I'm referring here to to the geographies of Russia and Ukraine. Now for obvious reasons. But I was just look at the numbers of twenty four I think we have left behind about point six, maybe even more point of a growth which we would normally expect to deliver. If all these markets were you know, subject to the same sort of market conditions as other place Right?

The Zillooma, etcetera. So okay. Let's see how this unwind. I think the the graph which we projected very much focused on organic organic meaning, you know, the geographies which we have today on hand.

I think, is a good growth. Volume terms is essentially the same volume growth as we used to have in the past. But also in a broader sense, we more and more see the potential of the multi category and the total volumes of the smoke through products is just the one category. And as we know very well, the margin from the margin per perspective, they all they all essentially create a great opportunities.

I mean, I think they all greatly accretive to to where we are today and to especially to the combustibles. Second thing is and I think we will zoom a little bit tomorrow. Try to zoom a bit more to this at our CAGNY con at our CAGNY presentations. But from the user's perspective, it's actually pretty nice economic proposition.

Because we're essentially then leveraging all the investments through the user acquisitions, etcetera. And, you know, one of the category of your of of acquiring the user, but all the average product categories are actually very nicely benefit from this whole thing. So you will hear from us more and more talking. Obviously, we'll give you the granularity about the KidNotverbi vaping as in.

But I think in the next few years, the focus will be more and more turning into total of a smoke free rather than just the individual. Because this also somehow reflects the the user directions, the user consumer dynamics.

Thank you very much.

Thank you. Thank you. I'm showing no further questions.

At this time. I would like to turn it back to James for closing remarks.

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

Thank you. Thank you. Speak to you soon.

This concludes today's conference call. Thank you for participating.