Philip Morris International Inc. (PM) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Philip Morris International Fourth Quarter 2024 and Full Year Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, James Bushnell, Vice President of Investor Relations and Financial Communications. Please go ahead.

Welcome. Thanks 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. I'll go through the terms, including the definition for smoke-free products as well as adjustments, other calculations and reconciliations to the most directly comparable U.S. GAAP measures for non-GAAP financial measures cited in this presentation are available Exhibit 99.2 to 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 of future results. I direct your attention to the forward-looking and cautionary statements disclosure in today's presentation and press release for a review of the various factors that could cause actual results to differ materially from projections or forward-looking statements. I'm joined today by Jacek Olczak, Chief Executive Officer; and Emmanuel 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 top and bottom line growth. This resulted in significant acceleration in adjusted diluted earnings per share growth in both currency neutral and equally importantly, dollar terms as we mitigated substantial currency headwinds. Our business outperformed the industry and consumer packaged goods overall with grow across -- 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 other 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. ZYN once again delivered strong growth in the U.S. as 2023 demand acceleration continued in 2024. This resulted in short-term supply challenges, which we have progressively addressed throughout the year, working towards our goal of matching existing user demand. As we unlock further capacity, we will be in a position to explore the full potential of this dynamic category. Outside the U.S., shipments grew by 75% as we increased our global presence in nicotine pouches to 37 markets. In e-vapor, vape 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 4 of last year and around 7% organically for the year, led by strong pricing, resilient volumes in certain markets and the ongoing benefits of our cost actions. Overall, our strong performance across all categories and regions drove meaningful operating leverage, notably in our smoke-free business alongside cost efficiency initiatives across the entire value chain. This enabled us to deliver operating cash flow and adjusted diluted EPS above our expectations at the start of the year despite ongoing currency and input cost headwinds. Our transformation journey and growth drivers have excellent momentum, and we are confident in our ability to deliver sustainable growth and returns in 2025 and beyond. Over the past year, we achieved several key milestones in our smoke-free journey, including the 10-year anniversary of 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 the first time. Our smoke-free business reached 40% of total PMI net revenues in the fourth quarter and around 42% of adjusted gross profit as our transformation becomes intrinsically profitable. In our top 5 markets by operating income, around 60% of net revenues were smoke-free. We have deployed our smoke-free multi-category strategy across almost half of the 95 markets with smoke-free products and we closed the year with over 38.5 million estimated adult users across heat-not-burn, oral and e-vapor. Our smoke-free business surpassed 1 billion cans including 644 million cans of nicotine pouches. The ZYN brand continues to resonate with adult nicotine consumers across the U.S., where it is the #1 smoke-free brand and the fourth biggest nicotine brand and also grows Internationally. We're also very pleased that the robust science and responsible marketing practices behind ZYN were recognized by FDA for the recent marketing authorization of all currently commercialized U.S. ZYN variants, making ZYN the first and the only authorized nicotine pouch brand in the United States. We remain at the forefront of the effort to increase understanding of smoke-free products and advanced tobacco harm reductions among consumers and regulators. We are encouraged by the increasing number of governments adopting tobacco harm reduction policies to incentivize switching to reduce nicotine product instead of continuing to smoke, which is a sound public health policy. A number of markets are also moving favorably with regards the robust regulation of nicotine pouches and e-vapor. Now regretfully, there is also resistance in many places, often driven by ideology not facts and science, and therefore, a considerable amount of work is still in front of us. While reaching important milestones is pleasing after 10 years, we are still in the early stages of industry transformation. With our strong brands and our innovative and commercial capabilities, we have many years of opportunities and growth ahead. I look forward to sharing more with you at the upcoming CAGNY Conference on February 19. I will now hand over to Emmanuel to discuss our results and outlook in more detail.

Thank you, Jacek. I will start with the headline financials for the year. As Jacek said, this was a truly outstanding year of growth across our business as the rapid progress of IQOS and U.S. ZYN was complemented by emerging growth contribution from VEEV and ZYN internationally and a much improved combustible performance. We delivered in line or above our last communicated expectation across key metrics. Organic net revenue growth of plus 9.8%, adjusted IMS and shipments of HTUs and combustible pricing of plus 8.7% were strong. Excellent total shipment volume growth of plus 2.9%, including ZYN 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 flavor ban for HTUs and prelaunch ILUMA i device shipments. This was driven by total volume growth of plus 2.3% alongside positive smoke-free mix and robust pricing. Combined with operating leverage and manufacturing efficiencies, we delivered close to plus 12% organic operating income growth and plus 10% currency-neutral adjusted diluted EPS growth. In dollar terms, adjusted operating income increased plus 15% and adjusted diluted earnings per share grew plus 14% to $1.55. This includes a positive currency impact of $0.06, which reflects an unfavorable transactional impact in the prior year in Argentina as well as the move to hyperinflationary accounting in Egypt which also had a negative impact on our organic growth of around 1 point on net revenues and 2 points on operating income. The noncash impairment of our RBH equity investment had no impact on our adjusted financials. In future, we may benefit from RBH 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 text 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 their trajectory. Clearly, 2024 was also a standout year for adjusted diluted EPS growth. The profitability of our smoke-free business accelerated due to the operating leverage of IQOS increasing scale, favorable unit economics, pricing efficiency and the impressive accretion from ZYN's rapid growth at superior U.S. 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 categories in the year. Our smoke-free business accelerated to plus 17% net revenue growth and plus 23% gross profit growth, reaching close to $10 billion in gross profit. This drove an impressive plus 330 basis points of organic gross margin expansion fueled by the factors I just mentioned. On the combustible side, net revenue and gross profit grew organically by plus 6% and plus 7%, respectively, leading to plus 60 basis points of organic gross margin expansion. Our combustible business is once again contributing positively with pricing and cost efficiency more than compensating for the third year of significant input cost headwinds, which you expect to ease in 2025. I would also note that adjusted gross margin for smoke-free products were plus 490 basis points higher than combustible in Q4 and plus 270 basis points higher for the year overall at 66.6%. While we continue to target gross margin expansion in combustible, we expect this gap to grow over time as we continue to drive profitable growth from smoke-free product while investing in new market, brand building and innovation. Taking a closer look now at our volume performance. We delivered our fourth consecutive year of shipment growth, up plus 2.3% in the fourth quarter and close to plus 3% for the full year. Including our VEEV e-vapor business in equivalent unit, this growth was plus 2.4% and plus 3%, respectively. Our total 2024 smoke-free volume growth, including VEEV was plus 13.5% or 19 billion unit equivalents, an 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 expectations. Adjusted IMS growth accelerated in H2 to close to 14%, essentially in line with our target of plus 14% to plus 15%. This includes dynamic growth of close to plus 11% in Europe, with strong momentum across the large majority of markets. As I touched on earlier, Q4 HTU shipment growth includes the impact of additional shipments in the prior year to prepare for the EU characterizing flavor ban and the phasing effect of additional shipment to Japan in H1, notably due to Red Sea disruption. Our oral smoke-free business grew 2024 shipment volume by plus 24.6%, including ZYN's U.S. 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 observed 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% convertible pricing and plus 2% for smoke-free product. Smoke-free also drove a positive mix impact of plus 1.9% due to the higher net revenue per unit of both IQOS HTUs and ZYN. Oral smoke-free product contributed plus 2.2% overall group top line growth for the year, demonstrating ZYN's role as a meaningful accelerator to our performance. As in prior years, geographical was negative primarily due to combustible, but to a lesser degree, given robust net revenue growth in Europe. Moving down to adjusted operating margins. We delivered full year organic expansion of plus 180 basis points and plus 100 basis points in dollar terms, comfortably achieving our objective of extension on both basis. This reflects on Q4 with OI margin expanding organically by plus 140 basis points as gross margin expansion outweighed SG&A investment. Full year gross margin increased organically by plus 160 basis points and by plus 120 basis points in dollar terms. SG&A grew plus 20 basis points of margin expansion, enabled by cost efficiency action despite significant reinvestment and commercial support behind our smoke-free business and U.S. capabilities, especially in H2. We delivered over $750 million in gross cost efficiency for the year with cost productivity across smoke-free and combustible and continued back-office savings. This places us well on track for our '24, '26 target of $3 billion. Focusing on our smoke-free business. We grew our estimated user base by over 5 million people in 2024 to reach approximately 38.6 million legal age users as of December 31. This includes an estimated 32.3 million active users, 5.7 million oral users and 1 million ZYN users. I am pleased to report robust IQOS user growth of plus 3.4 million versus prior year and plus 1.5 million during H2. This growth is broad-based and consistent with recent years, despite limited new market opening and the EU characterizing flavor ban. Overall, added plus 1.5 million users year-on-year driven by ZYN continued strong traction with legal age nicotine consumer in the U.S. despite supply constraints. Zooming in now on IQOS. Strong user momentum is reflected in adjusted IMS volume with 2024 growth of over 15 billion units, in line with the prior year despite the impact of the EU flavor ban. This growth is also in line with the 5-year average and more than 1 billion units above when excluding contributions from markets launched in the current fiscal year. Importantly, following the rollout of IQOS ILUMA and with the increasing scale of the business, the profitability of IQOS is growing strongly. We illustrate this here with the index product contribution over time at constant exchange rate. As we've explained before, the upfront cost of the business-to-consumer operation results in declining infrastructure cost per user over time as the user count grows 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 H2 to almost plus 11%, following H1 progression of around 8%. This resulted in robust plus 9.4% growth overall for the year despite the significant restriction of the characterizing flavor ban. This double-digit adjusted IMS growth in H2 was driven by strong progress in a large number of markets, including growth of around 20% or more in markets such as Bulgaria, Greece, Germany, Romania and Spain, while growth was less dynamic in Poland, Czech Republic and Italy. Recovery in Italy is ongoing following the disruption of the flavor ban, although at a slightly slower pace than expected in Q4. The continued momentum in the region drove Q4 adjusted share growth of plus 0.9 points year-on-year to 10.6% with adjusted IMS volume reaching 13.5 billion units on a 4-quarter moving average. Q4 shipment volume increased by plus 6% against the prior year comparison, which included additional volumes related to the implementation of the flavor ban notably in Italy. The flavor ban is now active in all but 6 EU markets. This generally consistent pattern of short-term disruption followed by a return to the pre-ban growth trajectory. Following an impact of around 2 billion units in 2024. We expected a 2025 impact of around 1 billion on both segments and IMS, including annualization effect with the most prominent effect in the first quarter of 2025. We also continue to roll out the ILUMA i device and new consumable variants such as DELIA and LEVIA to more markets, providing an increasing choice of taste profile and price points to adult smokers. Looking at our PCT offtake shares in Europe. We reached a number of important milestones with Budapest achieving over 40% share, Rome over 30% and London approaching 10% with Madrid not far behind. Japan delivered outstanding results yet again with HTU adjusted IMS growth of close to plus 13% in both the quarter and the full year to reach an adjusted Q4 share of 30.6%, plus 3.1 points higher year-on-year. This was supported by continuous share growth of TEREA and SENTIA as well as the positive traction of the IQOS ILUMA i device as we reached over 9.5 million adult users. Offtake share in Tokyo for the overall heat-not-burn category, reached 52.8% in December with the addition of Shizuoka and Hamamatsu to make 10 cities and 5 prefectures, exceeding the 50% share ratio. On a national offtake basis, 47% of the total industry is now smoke-free. Outside of Europe and Japan, adjusted in-market sales growth continues to grow strongly in Q4, promising growth in a number of markets is illustrated by TCP shares in Saudi Arabia, Indonesia and Mexico. Continuous innovation is a key driver of this growth with TEREA clove variants and capsules in Indonesia driving an uplift in the quarter and some good initial results from the trial BONDS, our low tier offering. IQOS continues to perform well in Cairo, though offtake share performance was impacted by the dynamics of the combustible market, where competitors supply normalized and a very strong prior quarter following the launch of IQOS ILUMA. Our Duty Free HTU offtake share increased nicely as we start to harness the strength of our multi-category portfolio to drive sales of IQOS, ZYN and VEEV together. Turning now to the U.S., where our IQOS 3 'Be The First' campaign in Austin is progressing well, and we expect to commence direct sales of device and HPUs in Austin around the end of Q1. We are seeing high interest from consumers with over 4,000 adult smokers on our wait list. As we learned from this initial consumer engagement, we are planning the rollout of pilot to other cities. As in Austin, our focus will be on selective adult consumer engagement and building awareness to category and brand education in legal age smoker communities. We do not assume any significant volume from U.S. IQOS before the at-scale launch of IQOS ILUMA, and we continue to hope for an FDA authorization in H2 2025. Switching categories now to ZYN, where we continued -- where continued strong demand supported Q4 U.S. shipment volume growth of plus 42% year-on-year to 165 million cans. Despite ongoing production limitation, this reflects an acceleration to a near record sequential increase of plus 60 million cans versus Q2. On a full year basis, shipment volumes grew by plus 196 million cans versus 2023, highlighting both the magnitude of growth and the tremendous efforts made to maximize our production capacity. ZYN category share incrementally improved through the second half, reaching 65.9% in Q4 as we progress in increasing production further, supported the growth of the category. Indeed, category growth slowed significantly during the summer peak of our supply constraint as shown on this chart. As the situation started to gradually improve, ZYN was again leading and outpacing the category. I am pleased to share that underlying demand for ZYN from adult consumers continued to grow in Q4 and was higher than previously assumed. We continue to experience some out of stock at retail. And while production capacity continues to increase, we now target full normalization sometime in the second half of 2025. We continue to target around 900 million cans of capacity for the full year from our Kent City facility. And as supply continues to improve, we will look to further extend growth beyond our existing consumer base to other legalized nicotine users. Our greenfield site in Colorado is due to come online in early 2026, and we believe we are well positioned to capture this potential over the coming years. Responsible regulation of the industry is fundamental in supporting sustainable future growth for this dynamic category. We are, therefore, encouraged by the recent FDA authorization for the marketing and sale of all ZYN nicotine pouches currently marketed in the U.S. following extensive scientific review by the agency. As mentioned, this make ZYN the first and only authorizing nicotine pouch in the market. Among several considerations, we have a substantially lower amount of harmful constituent versus cigarettes and other smoke-free tobacco products as well as current low use usage levels. The FDA's authorization marks an important step in the protection of public health by recognizing the role that ZYN can play in providing better alternatives to cigarettes and other traditional tobacco products for legal age adult. We remain committed driving industry standard in under 21 prevention with policy and initiatives designed to help prevent it's access. Further, combating trade initiative tobacco and nicotine products remain a core priority, and we dedicate a significant level of resources to support this effort. ZYN also has an exciting future outside of the U.S. While still in its very early stages, international nicotine pouch shipment grew by 27 million cans or plus 75%. And we already see strong volume momentum in key international markets, such as Pakistan, South Africa, Mexico, the U.K. and global duty free. We launched nicotine pouches in 6 new markets during the quarter to reach a total of 37 worldwide, including Italy, Romania and Thailand. Within e-vapor, we continue to see strong consumer traction behind VEEV ONE. The brand holds the top 3 forceful position in 13 European market and as the #1 position in 5, including Italy. VEEV plays an important role within our multi-category strategy as an increasingly trusted choice for smoke-free category poly users and a source of incremental growth with improving economy. Our primary focus for the combustible business is to maximize value over time while supporting the growth of the smoke-free business. Pricing and cost efficiency are the key levers to drive performance while maintaining our category leadership. We delivered another robust volume quarter with growth of plus 1.1%. All regions contributed to strong Q4 organic net revenue growth of plus 6.2%, with gross profit increasing by 10.8%. Full year pricing of plus 8.7% include a strong contribution from Germany, Egypt and Turkey. We expect organic 2025 combustible pricing to normalize to plus 5% to plus 6%, partly reflecting Egypt move to hyperinflationary accounting in Q4 2024. Category share was flat in Q4 with positive contribution from Turkey and India, offset by decline in Egypt and Indonesia with continued growth in the below Tier 1 segment. On a full year basis, we grew category share plus 0.1 points, reaching all-time high for both Marlboro and our global brands overall. This brings me to the outlook for 2025, where we expect another year of strong growth from all categories, driving stock and bottom line delivery. We anticipate the fifth consecutive year of positive volumes with growth of up to plus 2%, notably driven by another year of strong growth in smoke-free products at around plus 12% to plus 14%. Fot IQOS, we expect the continuation of strong momentum with the absolute growth in HTU adjusted IMS volume expected to be at a similar level to 2024, translating into plus 10% to plus 12 growth -- 12% growth. We expect shipment growth to be broadly in line with this double-digit trajectory subject to the usual inherent volatility of shipment timing and trade inventory movements. We expect ongoing strong growth dynamic within the U.S. nicotine pouch category. Despite the supply constraints I mentioned before, we forecast a U.S. ZYN volume shipment range of 780 million to 820 million cans for the year, supported by capacity expansion. This represents another year of substantial acceleration in volumes, with an expected increase of approximately 200 million to 240 million cans compared to the 196 million cans increase in 2024. This supports the total PMI forecast of plus 6% to plus 8% organic net revenue growth. This includes a headwind of over 100 basis points due to hyperinflationary accounting in Egypt and the technical impact of implementing a new commercial model in the Indonesia below Tier 1 segment. The change in Indonesia has no effect on operating income. Moving down to the P&L. We expect ongoing smoke-free mix effect, operating leverage and cost efficiency to drive double-digit adjusted operating growth -- operating income growth of plus 10.5% to plus 12.5%. This includes strong gross profit growth with both gross and adjusted operating margin forecast to expand in both organic and adjusted dollar terms at prevailing exchange rates. We expect SG&A costs to increase broadly in line with net revenue on an organic basis as we invest behind our smoke-free products. We forecast currency-neutral adjusted diluted EPS growth of plus 10.5% to plus 12.5%. This factors in essentially stable net interest expense and an increase in our effective corporate tax rate to approximately 22.5% to 23.5% due to tax increases in line with OECD global minimum tax and the mix of international earnings. In dollar terms, we forecast growth of plus 7% to plus 9% to a range of $7.04 to $7.17. This includes an unfavorable forecast currency impact of $0.22 at prevailing exchange rate, primarily driven by the broad strength of the dollar mitigated by our hedging activity. For the first quarter of 2025, we expect a strong start to the year with net revenue and operating income growth, broadly in line with our full year objectives despite the leap year comparison. We forecast HTU adjusted IMS growth of around plus 10%, which factors in the large annualization impact from the EU flavor ban in the quarter with a progressive improvement through the year. We forecast shipment volume of 35 billion to 36 billion for HTUs and 170 million to 180 million cans for US ZYN. We project Q1 adjusted diluted EPS of $1.58 to $1.63, including a negative currency variance of $0.04 at prevailing rates and an effective corporate tax rate 2 to 3 points higher than the prior year quarter. With our 2024 delivery and 2025 outlook, we are well positioned to meet or exceed all metrics of the '24, '26 CAGR targets presented at our 2023 Investor Day. This is especially true at the level of operating income growth as well as for EPS delivery where our algorithm assumed constant 2023 corporate tax rates. This level of top and bottom line growth reflects the best-in-class growth profile within the context of large-cap consumer facility. Importantly, we are also well on track to deliver high single-digit adjusted diluted EPS growth in dollar terms across the 2024, 2026 period at prevailing exchanging rate. Indeed, we measure our cash flows in dollars and after a record delivery in 2024, we expect to deliver operating cash flow of around $11 billion for 2025. This is broadly in line with 2024, once accounting for 2 nonrecurring payments with a total impact of around $1 billion. While we continue to appeal the German tax surcharge case, we have decided to make a $0.8 billion payment this year, and we also anticipate the final transition tax payment related to the U.S. Tax Cuts and Jobs Act. We anticipate capital expenditure of around $1.5 billion with a large portion of this related even as we prioritize the investment behind our smoke-free portfolio. Our strong 2024 cash flow and EBITDA growth, combined with a favorable impact from our euro balance sheet hedging allowed us to reduce our net debt to adjusted EBITDA ratio by 0.5x to 2.66 ahead of our expectations and representing a dramatic acceleration of our deleveraging. We expect further progress in 2025, placing us on track for our target ratio of around 2x by the end of 2026. I will now turn it back to Jacek for continuing remarks.

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

[Operator Instructions] And our first question today comes from Matt Smith of Stifel.

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

No. So in the guidance, we essentially continue seeing good growth in Japan and in the number of parts in Europe. I mean, Emmanuel mentioned about the Italy, Czech, Poland, right, when the growth is a bit below what we'd expect at this stage, especially Italy and Czech following the flavor ban. But we also see that there is some recovery coming in. So I think, hopefully, in the second part of the year, we should bring Italy another geographies at part to what the rest of the Europe is going through. And we have not in the guidance, assume any significant new market opening in terms of volume. As you know, we -- and I had it in my remarks. I mean, we're dealing with this rational word fighting with the irrational word. I hope that the most recent authorizations of FDA following the authorizations of heat-not-burn, now the pouches will be a good incentive or encouragement by other governments, which to be very frank, stupidly oppose smoke-free products while allowing cigarettes. But in the guidance, we have not put any significant volume coming from the new geographies. So this is all organic growth. And as you could saw it in the quarters of this year, despite the fact given if you look at Japan, when almost half of the market is already on a smoke-free products, the growth continues there.

Our next question comes from Bonnie Herzog of Goldman Sachs.

I had a question on your margins. You're guiding robust operating leverage on a currency-neutral basis this year. So hoping you could highlight some of the key drivers behind this. Also, sort of want to verify if your guidance assumes a potential entry of ILUMA in the U.S. or just possibly continued investments without any corresponding sales? And then how should we think about the margin contribution from ILUMA in the U.S., and how long it might take after your entry in the market for those margins to really be meaningful?

Yes. So maybe I start Bonnie, I mean, yes, we're looking for a robust margin expansion this year, maybe not precisely to the same level as we had last year, but still is going to be robust. I think 100 basis points. So territory, this is what we're looking into is that combinations of a few factors, we're still looking at the pricing contributions pretty obvious. There's obviously positive mix, right, between our categories and especially now that we have a free smoke-free categories on the positive margin path, including the vape as very happy that our strategy of going selectively, but we have the right impact in the geographies that is needed. We're not really leaving money behind, if you like, margin behind. So this will contribute. And we had in the past as you remember quite the headwinds coming from COGS. And I think those have -- I think they are behind us, okay? Then obviously, this all conversations these days here and there, especially coming from the U.S. about the tariffs and so on. But the way we organize our supply chain, as you know, U.S. on the ZYN is essentially self-sufficient. Our supply chains in Europe. I mean -- we organized our supply chain almost by block. So I don't see at this stage that there should be any surprises coming on the tariff side. So I think we're pretty confident where we'll land with the COGS for the year. There is obviously ongoing support coming from the sale of IQOS, especially devices. And -- okay, there is economy of scale. There is a robustness of the device in terms of quality, et cetera. So we actually don't have this like in the past, a bit of a pressure on the margins coming from a device sale. So this we have well stabilized for 2024. It was behind the margin expansion. And I think we should expect the same -- we are expecting the same in '25. Now your questions with regards to ILUMA margins U.S., okay, maybe one by one. We still expect that hopefully, we will get the authorization for IQOS ILUMA around the mid of this year. Again, on the one hand, one could read this as an encouragement after as we said, it's total scientific, et cetera, review, FDA has gave authorizations for all variants of ZYN. I wouldn't be myself if I wouldn't comment that obviously, if something takes 5 years, it must be thorough because otherwise, I cannot explain the length of the process, but I do hope that FDA will move faster and already I could do my spending for a while. And by the way, a few other also authorization for ZYN. So the margin story, I would repeat myself that obviously, when we start adding support behind ILUMA. I mean at the initial period will be a negative, right? But in a scheme of the things in the P&L side, if you like, of our business in the U.S., I don't think it should be something which is that much worried. And I believe U.S. will go into similar path as we had on a heat-not-burn in other places. So 2 to 3 years, we should -- IQOS should be net-net contributor 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 in a better starting position, and we had a growing confidence in the IQOS ILUMA in international, but we know where IQOS ILUMA brought us on international over the last 3 years and it continues generating the growth user acquisition. So I believe it's really a great proposition for adult smokers in the U.S.

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

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

Look, on the consumable, we've already highlighted the fact that there was a 10 percentage point gap, and it has been expanding in the last few years. So indeed, we have the ambition to do better on the gross margin for combustible and we explained why. But as we continue to progress also rapidly on smoke-free products, both with the mix effect coming from ZYN, but separately on IQOS 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 combustible in the coming years.

Our next question comes from Gaurav Jain of Barclays.

I have a couple of questions. One is on ZYN. So if I look at the scattered data, your volumes have decelerated to mid-teens growth, and your guidance is for 34% to 41% growth and then you also mentioned that the supply normalization would only happen in 2H '25. So I just wanted to understand what gives us the confidence that suddenly ZYN will be accelerating to this almost 40% growth rate again?

Yes. So I will take it Gaurav. So we look also on how the volumes were evolving in Q4 of the weeks of the last quarter, we see the growing velocities behind ZYN. And actually, ZYN 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 4 other brands or smaller but big other brands. Look, we also have to understand that we're reading all this data with no full supply of the supply constrained environment, right? So it's a bit difficult that you see at the retail, it depends even in which source you're looking at, that is something which would be significantly different than what we're shipping to the trade. But Q4, as we predicted with the increased capacity in Owensboro. We had the first quarter with a significant sequential quarter-on-quarter growth. Even if you will take the run rate of what we see in the last weeks, et cetera, I think the guidance is somehow reflecting what we see there. Now our comments that we should -- we think that we should be meeting 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 ZYN demand for the product and knowing that these purchases or the purchases are somehow impacted by the fact that, unfortunately, they are confronted with lack of availability out of stock. And that it's the -- all the positive momentum, which the ZYN has. I believe also the FDA authorizations, which, on the one hand, one could read product was in a market, so there is no change. But actually, I think it gives a lot of visibility and stability to all the market participants, including the trade. And I believe also the consumers that the product now has the full fledge my language authorization in all the flavor variants. So all of these things are I think, will translate into the volumes which we -- projections of the volumes, which were reflected in our guidance.

Sure. And a follow-up question to that. So ZYN clearly in supply shortage. Retailers have been putting their markups. I think you increased prices at $0.30 last year, while retail has increased pricing by $1 or $3, $5. 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.

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

Sure. And if I could just squeeze in 1 last question on ZYN Ultra. Could you just talk about that PLTA, what the product is? And when do you think we can see it in the market?

Yes. So obviously, well, as we all noticed, right, the ZYN authorization came essentially last days or hours of the one administration. Now I guess, we'll have to wait for the new administration. Look, as I said in the answer to the questions before that I do hope that period of 4 or 5 years waiting for authorization is too much, is too much, is too long. And I believe that there will be some -- I hope there will be some accelerations in the processing because of the authorizations. And we have to also understand that partially the challenge which the U.S. market has very much on the e-vape product is by the fact that the legal part of the market has not been created. So on the one hand, FDA is doing a lot of right things in terms of law enforcement and chasing the illegal Chinese or whatever imports. But on the other hand, there is a demand among the smokers, 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 we're essentially wasting our time and money. So I do believe that FDA will take this also in consideration that this situation shouldn't happen in our product category. And there is a demand for the product which arises a better alternative to cigarette. We also have interest in the legal part of the market and then a controlling part for the law enforcement, et cetera, the illicit market. But you can not just control the illicit market if you haven't provided legal solutions in the market, which are available. So I do believe that the IQOS -- sorry IQOS as well, but ZYN has some pending authorizations or applications, I should say. I do believe that they're going to be processed in a faster manner than before.

[Operator Instructions] And our next question comes from Eric Serotta of Morgan Stanley.

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

Yes. So maybe I take the last one is the easiest one, and I come back to Italy, which is a bit a longer story. I mean, in a $0.22 at spot rates right now, I mean, frankly speaking, the biggest contributor to the negative is the Russian ruble, and that's well above the 60% of the variants. The yen actually goes in cents. I guess it was, if I recall about the $0.04 in our estimates at the spot rate. Obviously, as we all know we're living in the pretty dynamic times as we speak, but this is what it is. There was a big contribution last year coming from the Egyptian pound, right, when I mean we had to take the hit that obviously will not be repeated in the -- will not repeat in '25. Actually, this will result in a positive currency variance. But this is on the currency. So frankly speaking, at this stage, is the ruble and as I said, $0.04 or so of the yen and the rest is just the mixed bag due to our international footprint. Emmanuel wants to add something.

No, I want to add something because I think -- I mean, the volatility we're seeing on the currency market today will be a good [ test on ] how things are working for us. I should first remind you that we have a natural important hedging in our balance sheet with more than 60% of our debt that is in euro. And therefore, when we have a weakness in the euro versus the dollar, which is a situation we've seen recently, of course, we have a negative impact on our P&L, but we have also a decrease of our debt in dollar terms. And we are also benefiting from lower cost of the debt in Europe, plus, of course, lower interest cost in euro translated into dollars. So that has been certainly helping our trajectory in '24. And if there was continued weakness of the euro that will 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 2 significant hedge position, one on our exposure to the yen for 2025. We have around 60% of our exposure that is covered at a rate of around JPY 138 for $1. So that means that we are not impacted by the possible deterioration of the yen for that part of our exposure. And we have also a lower exposure to lower hedging -- sorry, on euro where we have around a bit more than 1/5 -- sorry, 1/4 of our exposure to euro, where we are covered at 112, which is also limiting a bit the impact on the P&L when the euro is going down. So with everything I've been saying you have all the explanation plus what Jacek has been sharing with you on the ForEx impact for us today.

Yes. Now on Italy. So I think, yes, the second half was a bit weaker than we would maybe expect. Italy was going as many others, not all, but many other member states of the EU to the flavor ban I think what we see is that, okay, some smokers, some users have hopped temporary, right, but the return to cigarettes, which always was that risk. So it also explains in some geographies, the cigarettes trends are slightly better than one could expect or could think. There is some poly use between the e-vape products very much. And that, I believe, maybe partially also explains why our VEEV proposition has advanced most in Italy, right? And this was in a VEEV in a post, in a closed system very shortly after a short period of time, jump to travel to the #1 proposition. I think we need to maybe look at the category of smoke-free over a period of time on a total basis because there will be some poly usage and sometimes driven by the events like this by this flavor ban. But we also have geographies in Europe that very shortly after the implementation of the flavors ban I mean they actually return to the growth rate which we had before. So maybe Italy is outlier. We're looking into this conflict. But as I said, part of our multi-category strategies also should there be any leakage at the heat-not-burn users, we can capture this with other proposition. And then I guess we need a bit more time to see the stabilization. Poland, you asked about the Poland, I don't think Poland has put the stick in the ground at which moment they really want to fully implement the ban. So I think it will happen. I think somewhere in the '25 it has to be, if this is not -- if the stick has not been put in the ground, it is more towards the end of this year.

And our next question comes from Faham Baig of UBS.

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

Yes. So maybe the second part I take it. I think the total pie grows despite the fact that the movements between the categories within a smoke-free there is some dynamics, right, between a heat-not-burn and e-vape and the pouches now depends how market is organized and regulated. We also know that the most difficult actually to read category due to the way the market is organized currently is the e-vape category, right, because you have a disposables, you have pods, you have open tank systems still and some products under the regulations and properly authorized depends on the jurisdiction, some products are just popping up in the market. So you could call it a different form of illicit trade. But I think you see this in the U.S., but also in Europe, in the U.K. and a few other places, the regulators, governments are taking more serious look into properly organizing that market. I can't tell you whether this will be completed in the '25. But definitely, there is the moves -- the moves are in the right direction. So I believe '25, '26, the category should be normalized by the fact that it's going to be properly regulated and then we take it from there. I now want to talk about the youth exposure, et cetera, because you know our policy, what are our views on this one. But definitely, it's difficult to control of the discipline in the market if you dealing with all of the different emanations of the product coming essentially legally to the marketplace that obviously also enjoys the less discipline trade channels, so completely invisible trade channels, if you like, et cetera. When it comes to your questions about the synthetic versus dry, so just to take it from a perspective, the way we look at the data in the U.S., for example, this whole new things which are coming into the market, there is quite a long list of different SKUs and the moist or others and the whole market -- that part of the market, why I'm not mistaking move year-on-year by barely 20 basis points. So in a scheme of these things, there's presumably a lot of dynamics on the weekly basis, but doesn't seem that it has any major tractions, et cetera. The insights which will have when we talk with the consumers, we see -- and obviously, when you read the consumer insight, it's not a pure mathematical accuracy and the exact number. But I think that moist product -- moist pouch products is more appealing to the moist snuff type of users, right, like Snus et cetera. While what we see in the marketplace that the dry product has more appeal towards the smokers and e-vapor or e-vapes. What is what I can tell you at this stage.

Our last question today comes from Philip Spain of JPMorgan.

I just had one question, please. It was just on the HTU guidance. If I look at where the volumes landed at the end of '24, and then I look at the guidance range you've -- the 10% to 12%, you've guided for '25. But then just extrapolating that out for '26 and looking at your guidance there of the 180 million to 200 million of shipment volume. Just trying to get a sense of what gives you confidence in -- by my math, that implies no reacceleration in the growth in 2026. I just wanted to understand suppose what gives you that confidence that you will see a re-acceleration in 2026.

Yes. So as I said earlier, I mean, in the guidance for this year for '25, we essentially stayed very low into -- we essentially focused on organic growth in the market, existing market. Obviously, if you open the '25 and beyond '26, I think it's becoming maybe more prudent or fair to assume that there will be some geographies also coming finally and opening the market to the new proposition. There is one point which I -- maybe we haven't articulated well in the -- in our remarks and the answers to the questions before is that there is still about the 20-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 the geographies of Russia and Ukraine now for obvious reasons. But if I would just look at the numbers of '24, I think we have left behind about 0.6, maybe even more point of a growth, which we would normally expect to deliver, if all these markets where subject to the same sort of market conditions as other places, right, ILUMA, et cetera. So let's see how this unwind. I think the growth which we projected very much focused on organic, meaning the geographies which we have today on hand. I think it's 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-free products is just the one category. And as we know very well, the margin -- from the margin perspective, they all essentially create a great opportunities. I mean, they're all greatly accretive to where we are today and to -- especially to the combustibles. Second thing is, and I think we will zoom a little bit more or try to zoom a bit more to this at our CAGNY presentation, but from the user's perspective, it's actually a pretty nice economic proposition because we're essentially then leveraging all the investments through the user acquisitions, et cetera. And one of the category obviously takes the burden of acquiring the user but all the other product categories actually very nicely benefited from this whole thing. So you will hear from us more and more talking, obviously, we'll give you the granularity about the heat-not-burn e-vape, but I think in the next few years, the focus will be more and more turning into total of a smoke-free rather than just the individual because this also somehow reflects the user directions, the user or consumer dynamics.

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

Thank you. Before closing our call, I'd like to remind you that, as Jacek mentioned, we will be presenting at the CAGNY Conference on February 19, 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.

Thank you.

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