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

Hi, everyone. Thanks so much for joining us today. It's a pleasure to welcome Philip Morris International back to CAGNY this year, including Jacek Olczak, Chief Executive Officer; and Emmanuel Babeau, Chief Financial Officer. So it's been an exciting time for Philip Morris as the company continues to accelerate its smoke-free transformation while delivering best-in-class organic top and bottom line growth. The company achieved several key milestones this past year with both IQOS and ZYN hitting their 10-year anniversaries and PM smoke-free business now generating 40% of PM's revenues and over 40% of its gross profits. So it's clear that PM smoke-free transformation is gaining momentum, having reached impressive scale, but still growing fast and becoming increasingly profitable. we are generally excited for the next chapter of PM's growth story, especially as it expands further into the U.S. market with ZYN and then ultimately, ILUMA. With that, I'm going to turn it over to Jacek to hear more about their efforts. Thank you.

Thank you, Bonnie, for a very nice and a warm welcome. So yes, I mean, as you know, we are a couple of weeks literally after the announcing the annual results even if we're living in a highly dynamic times this year is difficult to print a new news even in a highly dynamic industry as recently the Tobacco/Nicotine industry. So I'm today with -- as Bonnie said, I am with Emmanuel Babeau, our Chief Financial Officer. We also have on stage Yann Guerin our General Counsel; and James Bushnell, our Head of IR, I guess, is known to most of you. So earlier today, we issued a press release reaffirming our 2025 guidance. Giving 2 weeks ago during our earnings call. The materials from today's presentations are available on our website, including the content of this slide and obviously, the forward-looking cautionary statements, which I always encourage everyone to get a familiar with. We divided today's time allocated to us into the 3 slots. One is a bit of a retrospect on 10 years, what has been achieved, but I think it also gives a good sort of a proxy directionally where the company is heading to. Bonnie mentioned, we have, I believe, a quite successfully went for the 10 years -- the first 10 years of the transformation and our quest to become predominantly a smoke-free company. I think what is very rewarding to us also, and I guess, to the many of you in the audience that we also have achieved this while keeping an eye on the generous returns to the shareholders. And I think if you follow our financial performance, dividend growth, et cetera, final most of you legacy. I will also come back at the end of our time, and we talk what are the recent from our perspective, brands and the consumer insight. So you will have a little bit of a snapshot of what is currently happening both on international and the U.S. market with regards to the dynamics in the nicotine space. So 10 years ago, when we started -- I mean we always have to start with a market #1 or #2. I mean, fast forward, we have 100 markets with the presence of our smoke-free product, more important or equally importantly, the category for us and the top line is approaching $15 billion. And as we know, it is a profitable $15 billion. So the growth is today being financed by the category itself almost if I can tell like this. Another way of looking what we have achieved is that the Marlboro International, which by far is the biggest premium -- not only premium in a category, the largest brand. Last year, actually 2 years ago in '23, IQOS for the first time, we surpassed the revenues of Marlboro and in last year exceeded $11 billion. If we take this from a perspective, it took Philip Morris International about 60 or 70 years to get to the Marlboro to that level. And IQOS, our heat-not-burn brand has managed to get to that level of performance in roughly about the 10 years. What is equally important for us, and we have made it very clear from the beginning with regards to our strategy. Obviously, there is a product there is innovation. There is a continuous investment in R&D. But equally important, we know, in this industry, brand recognition is very important. And therefore, it always was to make sure that wherever consumers go market-to-market, they always see the same execution of the brands, the same the same brand signal samples, the same execution at retail, the same execution and retail, et cetera, et cetera, because our aspiration was not only to be #1, but also have the global brand. IQOS today, even less than 10 years is the second largest brand in the market when we launched IQOS. Obviously, the #1 by volume is still Marlboro but it's another testament of how successful we were in our execution. Now -- and this is being achieved despite the fact that the year-over-year, we're also adding a new markets into the base. So wherever we enter into the base very shortly, IQOS travels to the #2, very strong #2 nicotine space. History of ZYN in the U.S. coincidentally, also spans over the last 10 years. Reportedly, I was told it was the first store in Colorado. I still couldn't figure it out how come from Kentucky, Swedish Match AB product to Colorado. But apparently, I reported it was the first store when the ZYN was sold. Presumably few other stores in the country, which claim the same podium but found it very interesting. Sale in the U.S. is essentially approaching $2 billion revenues. Over a special, I think, excited for us, for all of us is the last few years of a growth, which puts ZYN today as the #4 nicotine brand as of last quarter last year, and definitely is #1 smoke-free brand on the U.S. market. We also, as we speak, I mean the Kentucky plant, Owensboro plant is working 24/7. As you know, we continue to be confronted with an out of stock, and we're catching up with our supply production manufacturing capacity. And as we speak, almost literally, we start going vertical in Colorado Aurora, meaning that we start raising the wallets for the new factory, which should become operational towards the end of this year. So what does it mean for us when we set this aspirational target of crossing 2/3 of our revenues coming from smoke-free products by 2030. And obviously, it's a nice number, which always looks very nice on the PowerPoint. But the reality in the execution is that unless will become a majority smoke-free country by country, market by market, while we operate. I mean the miracle will not happen at the group consolidated level. So today, on a group level, we're approaching 40%. But more importantly, if we take the top 5 operating income markets of PMI, we are already at the 60% mark. So we're getting there. We have a number of a markets, and we put it at the bottom of the slide here, which indicating how many markets we are above 30% margin, how many markets you have a 50% margin, you see these numbers growing. So if I take a 50% mark, we are today at the 23%, 25% markets when we exceeded that level, but we already start having the market when we are 75% of a smoke-free. And at the end of the last year, that count was 6%. So I think this is how we see how that progress -- sorry, what are the steps, if you like, the company will have to achieve, take in order to reach this aspirational 2/3 in 2030. What has happened now in the business, and I guess those of you who are invested in a tobacco historically, that there is a lot of great attributes of tobacco, at that time, as we call it, presumably nicotine is a more appropriate characteristics of these industries going forward. There were many positive things, which we all liked about the tobacco model. Obviously, the loyalty of the consumers, the industrial was consolidated. There was a lot of brand consolidation. This was translated into the pricing power. Obviously, the margins are very attractive over the gross lateral and at the bottom level, this is not a highly capital like intensive industry. But there was one thing which was creating more and more of the pressure. This was the decline in volumes. What we have achieved since 2020, and I believe it was the last year when Philip Morris International has reported still the volume declines you see on this chart. Historically, we've been declining by about on average 2% per year as of 2020 until yesterday, last year, and if I baked in or add the guidance which we gave there a few weeks ago for this year. We're going into the sustainable 2% short of the volume growth. So we corrected this in our algorithm. You have a breakdown here how much was coming from the smoke-free products. Obviously, there is a cannibalization of our own cigarette products. And we also have this phenomenon that whether we like it or not, there are some markets in the world, countries in the world that despite the science and knowledge evidence about the new product in terms of the risk profile versus cigarettes. They will not ban cigarettes, but they will ban the smoke-free products. We're allowing cigarettes to continue. Usually the countries also, whether the demographics in terms of the population growth, et cetera, is supporting growth of the cigarette category. So obviously, we participate there with Marlboro and other great brands, which we have. So we take this benefit. It is irrational from a public health perspective, but that is what it is. Okay? Now we start looking. You might have noticed over the last few quarters, we'll start looking into the nicotine -- new nicotine market, the smoke-free market, more from the multi-category perspective versus [indiscernible] because we also cities in the marketplace, the consumers are not really focused on one product category. They're looking at the smoke-free products from the perspective of the repertoire, which satisfies the response to the different needs or moments or situations that might have during the day. And you may have a continuous mix between an inhalable product, which today are represented by heat-not-burn and e-vapor, but he also repertoire now is being extended by the oral category. Obviously, each of them gives the different satisfaction when it comes to the nicotine different release profiles of nicotine, but also allows for the different usage during the moment, which I have during the day, during a week, et cetera. You see on this chart that we're adding them in a sustainable matter year-over-year. Some are in the tune of 20 billion -- 19 billion, 22 billion units into our volume base. I took the liberty to go back to the beginning of PMI, as we know it today. So 2008, when we spun from the -- our patents in the U.S. I think around this time, I had the pleasure also to be a CFO. So I was behind this growth algorithm. And I remember it was actually Bonnie, who asked me the question many, many years ago, we said, if you are very successful with this transformation, what you think is going to happen to your growth algorithm? And at that time, I said that if everything goes as we plan to go, we can add the 2 points of the growth on the top line, but will improve the quality of this growth. And this is exactly what has happened, you showed the slide on the volumes evolution. We lifted the revenue growth from the 4% to 6%, which was based on the negative volumes offset by the 5% of the pricing. Fast forward. We retain the pricing. We added the volume. We lifted the top line growth to the 6% to 8% in -- you could see this on operating income, the middle line, we added a solid 2 points because the margins, et cetera, the operating leverage played in our advantage. And the bottom of the line, which may look by 1 point shy versus what we had in the previous algorithm. But again, the quality of the top line is much better than we used to have at that time and to be very fine transparent, and this is in our disclosures, the 10% to 12% was supported by the buyback, which we don't run as we speak this day. So we're essentially delivering good in-class -- best-in-class, however you want to call it, results. The last year, we had a shipment volumes almost 3% up, revenues just shy of a 10% growth. You know our guidance, which we gave for this year. And you're also familiar, I guess, with our midterm growth algorithm '24, '26 you just said '24, '25, it looks like we are on a good track not to deliver, but actually the better the algorithm, which we gave more than a year ago. I will stop now. Emmanuel will dive in more into some aspects of our financials, which is essentially a reflection of what we hear from you in terms of the questions and I'll come back at a later part.

Thank you, Jacek. Good afternoon, everybody. As always, great to be here. And I'm going to continue with the same kind of perspective that Jacek has just started to give. But I'd like to add one element to the very long list of growth achievements or outlook that Jacek has been sharing. And this is our capacity to deliver in dollar term a nice growth as well. So not just at the level of organic growth. And this is a very important objective for us. We managed to do that in 2024. You see the growth of 9.3% in dollar. And again, based on the ForEx of the sixth of February, we have the ambition to do it again in 2025 with the growth that would be between 7% and 9%. What I'd like to do in the coming minutes with you is to lead you through the engines powering the growth model of PMI and make sure that they are well understood but also provide more detail on what are the drivers that we can use in order to mitigate possible negative ForEx impact on our performance. Let me start with a summary of our best-in-class growth and return model. And let me lead you through that rapidly. First element, which of course, is key. We are a strong growth company in terms of top line with 3 drivers. The first one, Jacek has been already describing it. We talk about growing volumes. If we achieve our objective of growing volume again in 2025, it will be 5 years in a row of growth in volume. It's a total change of parading for the nicotine industry. Second, price increase, and you have seen over the last 2 years, our dynamic we've been in growing and increasing our price. First, on combustible, of course, but also on the smoke-free portfolio where we have started to post some nice price increase. Third, and very important, the very positive mix impact that is coming from the growth of our smoke-free portfolio. So these three elements together generate strong growth, and you have seen a very, very strong dynamism at the level of our revenue growth in the past years. We grow revenue, and we are in a position to grow margin also very nicely. And again, 3 reasons and 3 drivers behind our positive evolution of margin. First one, of course, pricing when we increase price, that is giving us the capacity to improve margin. Second, the mix once again very important. Smoke-free growing is bringing a positive mix on margin and pushing margin upward. And third element, of course, very important, cost efficiency at the level of our cost of goods sold, manufacturing productivity, but also at the level of our SG&A, and I will come back to that. So these 2, of course, delivered very strong organic growth at the level of top line and bottom line. And then, as I said, we have a big objective to deliver performance in dollar terms. And I'm going to lead you through the 4 drivers that are helping us to mitigate possible negative ForEx impact. The first element, which is quite obvious, we have a very strong dynamism at the level of the organic growth. Therefore, we are in a position to absorb some possible negative news on the ForEx. Second element, which is important, progressively, we are improving our exposure to currency, and I will provide more detail on that. Third element, we have a number of hedging in place that are for some of them long-term hedging. Some of them are more midterm that are enabling us, again, to offset possible bad news on the ForEx evolution. And fourth element, we have 2 levers that we can pull in order to try to react to negative evolution on ForEx. One is price increase, and the second one is cost management. We grow fast top line and bottom line. We have elements to mitigate potential headwind on currency that is delivering strong growth with highly cash generative and that is enabling us to deleverage fast the company after the acquisition of Swedish Match, as you have seen in 2024. We grow fast. We are highly cash generative. We deleverage fast. Well, that is clearly helping us to strengthen our capacity to deliver a very strong return to our shareholders. And again, I'll come back to that in a few slides. Now let me on a few elements that have just been rapidly covering. The first one, which I think is super important is the mix impact and understanding why the growth on smoke-free product is a very positive element for our growth, both by the way, at the top line level and at the margin progression as well. Here, on that slide, you have the net revenue and the gross profit for 3 categories. You have combustible cigarette International globally. You have IQOS International and you have ZYN in the U.S., let's start with IQOS versus combustible cigarette. So as you can see, we are here showing revenue per thousand unit or in the case of IQOS per thousand stick. IQOS reaches $80 per 1,000, which is around 2.2x higher than the average of our combustible portfolio. So that means that IQOS is coming in dollar terms with more than 2x what we do on average on one combustible stick. So that's for the revenue. So that means that, therefore, when we grow IQOS, not only do we come with volume growth, but we accelerate the revenue growth with this positive mix effect on revenue. Look now at the level of gross profit, $54 per 1000, this is around 2.4x higher than a combustible cigarette. So here again, the gross profit generated when we grow IQOS is more than twice: One we are delivering on combustible; and the gross margin is also higher. Here, the IQOS perimeter that we are showing does include also the impact of the device. So that means that everything included, including the lower margin that we are making on the device. And even with that, we have today a gross margin rate on IQOS that is 2 to 3 points higher than on combustible cigarettes. So not only are you coming with a higher dollar per stick top line and gross profit but there is also a positive impact on the gross margin. Now let's move maybe to the most spectacular impact in terms of positive contribution due to the mix. This is a U.S. number. Revenue per 1,000, $215. This is about 6x the average of our cigarette business and at the level of the gross profit, $185, which is about 8x the profit that we make on average for our combustible business. And of course, here, the gross margin rate, but you know it, we've been sharing that with you is north of 80%, and it is absolutely best-in-class in our portfolio. So obviously, when we grow IQOS and ZYN, we are growing very nicely in volume. Remember, close to 14% growth in volume for our more portfolio in 2024, but we are coming on top of the volume with all the positive mix impact that you are seeing on this slide. Rapidly, let me pause on how fast we've been improving the gross margin rate on our smoke-free portfolio. When we started 2018, so the journey has started only for 2 years, where we were significantly behind and that was, of course, expected when you start. A lot of investment, supply chain is inefficient. You don't have the volume yet to fully absorb the cost and at that moment, the smoke-free portfolio had a much lower margin than combustible. And then there is a very strong and fast ramp-up, which is due to, of course, a positive scale effect. Which is due to productivity, which is due to a better optimization of the manufacturing footprint. You have, of course, the ZYN contribution. But as we have seen, IQOS on its own is already above CC. And that means that today, our smoke-free business is almost 3 points higher in terms of gross margin rate than our combustible business. And we expect this positive difference to keep growing, and we expect this, therefore, positive mix to strengthen further in the future. So that was for understanding one of the big driver of the growth at the level of revenue and at the level of operating income in terms of organic growth. Now I'm going to spend some time on explaining how we are today mitigating potential negative impact on currency. And we have several levers that we can pull to do that. The first one here is that we are gradually improving our exposure to currency. The first element, of course, and the most noticeable is the fact that we are increasing our exposure to the dollar extremely rapidly. We're at 5%. We are on our way to be rapidly at 15%. And of course, the more we sell in dollar, the lower the volatility, I would say. And then look at this emerging part exposure that has been reduced from 44% to 40%. But actually, within the 40%, 10% of this exposure of the 40% is exposure to currency that are under hyperinflation, namely the Turkish lira, the Egyptian Pound and the Argentinian peso. And on this three currency, we are already reporting in dollar. And therefore, you're not going to see any negative ForEx impact in our P&L coming from this recurrence. So gradually, we are also decreasing the potential volatility on our exposure in terms of basket of currency. We are also hedging and doing a number of hedging. The biggest one, of course, and the most important one is that more than 60% of our debt is in euro, whether directly or indirectly through cross-currency swap. And that means that we have a pretty good liability asset hedging. And if the euro is going down, there is a negative impact on the P&L, but the debt is reduced as well in dollar term. And therefore, we have a kind of long-term hedging to the way we are financing the company. We are also more in the midterm with rolling forward 12, 18 months, hedging part of our exposure in terms of profit generation. Mainly to the Japanese yen and a little bit to the euro as well. And that, for the time being, seems to be a positive hedging that we took for 2025. So 2 very important elements. Other lever that we've been mentioning with you is that we can play with 2 drivers when we are facing maybe more adverse evolution of the currency, that's what we were expecting. The first one, of course, is price increase. We can, of course, decide to be more aggressive on price increase if you see -- if we see headwinds coming from the currency. But by itself, I would say, currency that is weakening will open up for opportunity to price that because very often, it will come with more inflation, and that will give us a possibility to price more. So that's one area that we are using. For the cost, it's a little bit the same. We are, of course, today working on our efficiency. Certainly, today, we are spending a lot of time on AI and what AI can mean for us in terms of notably a saving on our back office cost. We believe that AI is pervasive to the organization. To be clear, AI will have a lot of impact in the way we are connecting with the consumer in the way we are developing our marketing activity. But everybody knows that it's going to have also a very positive impact on cost in terms of standardization, in terms of automatization and we're going to leverage that. But there are a number of things that can naturally come when you have weakening currency on cost management. You can decide to have more production in country with lower cost. You can decide to go for providers that are coming from region with a currency that is weakening, which is going to generate efficiency. You can decide to change your exposure and gradually put more presence in terms of shared service, for instance, in country where the currency is weaker. So there are a number of things that you can do and that are going to help accompany a possible negative evolution of the ForEx. And we've been quite successful in not fully offsetting, of course, but mitigating the negative impact of currency. And look on this slide, you have since 2022 the currency impact year after year that has been quite negative. And despite that, we are in a position to grow our adjusted EPS nicely, largely using everything I've been describing in terms of capacity to correct in terms of hedging and also a better exposure to currency. We grow organically fast our top line and our operating income we have ways to mitigate nicely negative impact coming from currency, if any. So that is giving us the capacity to grow nicely, both organically and in dollar term, and we continue to be extremely highly cash generative. You have hear the summary of our cash conversion for the last 5 years. So free cash flow on adjusted net earnings. And despite the fact that these have years have been years with a lot of CapEx because as you know, we are facing strong demand for our product. We need to invest in terms of production capacity. We've been, on average, nicely above 100% of cash conversion. So we are highly cash generative, and we have a very strong return on invested capital. We are north of 45% of return. And allow me to say that Swedish Match is going to be another way for us to illustrate how we manage to generate strong return from the investment we make. You may remember that at the end of '22, when we made the Swedish Match acquisition, we said, well, it's a big one. We've been paying a certain price. We expect to match our WACC, our weighted average cost of capital in 5 years, where actually, we've done that in 2 years. And of course, from now we're going to keep growing the return on Swedish Match. We're going to pass the WACC, and we're going to increase the return on the capital. Highly cash generative growing fast our profit. That is, of course, driving a very nice and fast deleveraging, as you can see here, we've been moving in 1 year from 3.16 in terms of net debt to adjusted EBITDA to 2.66. It's in line with our objective. Remember, we want to be around 2x by 2026. So we are absolutely on course. But this is, of course, giving us a very nice outlook in our capacity to continue to reward our shareholders opening for nice outlook. We stay absolutely committed to our progressive dividend policy. There is just one way for the dividend that is up. We are targeting on the long term to have a payout ratio of around 75%. But with the growth of profit, I think that bodes well for future evolution of the dividend in the coming years. And then there is, of course, the possibility to be back to share buyback. Remember, we said when we will be getting close to this objective of being around 2x at that time, this is a discussion that we will resume with the Board. The journey is continuing in line with expectations. That's it for what I wanted to share with you, and I'm going to hand over back to Jacek.

Thank you, Emmanuel. We're okay on time, surprisingly. It's a good news. So how the market now looks like and we'll try to go back and forth between the U.S. and international because I think lumping them together, it doesn't give a good picture. So on the international side, the total nicotine market, frankly speaking, over the last few years is close to stable or stable. I mentioned earlier, there are some places where smoke-free products are not allowed, very heavily restricted in those places that cigarette volumes essentially reflects the positive development on the demographics, so they're growing obviously, in the market when a small products are available, and you have accelerated the client rate on the cigarette. Now it's a lot of in the last 10 years was extremely excited for us in PMI. But if you look at what we actually have done in terms of the total nicotine space. I mean I hit the tobacco products constitute in volume terms about the 7% of the total consumption. E-vapor around the 6% and we are all aware that, that's presumably the most difficult category to give a sort of a precise number due to the open time systems, illicit trade, et cetera. So we need to look at this number. I think the directionally is the right number, precision is presumably something which will come over time. And the oral category, which we're now expanding beyond the traditional very small international presence of Swedish Match. But the overall category on the international basis is barely 1%. So if you look now from a perspective, what we have achieved in terms of the revenue contributions to the top line, the margins, what flows to the bottom line of the company. We still -- we're not even halfway through of where we -- when I think this market, what is out there for us. I think with having a presence in all of the category, at least at this stage, we have 2 leading brands, I mean have put us in a very good position to continue following this undeniable switch of the consumers to move of the adult smokers from combustible products to the new products. U.S. is slightly different, but to be very frank, it's about the same if you like. Obviously, vape a much bigger here, cigarettes here are smaller, nicotine pouches, which we lot of people are extremely very excited, but this is just the 6% of this whole thing. And you have a different ways of -- and obviously, I don't want to repeat then obviously, this is the largest and definitely the most profitable market. We entering -- we entered this market on the back of our acquisition of Swedish Match. Unlike on the international, we don't have an exposure to the combustible products e-cigarette. So the economics for us are even more attractive than maybe for some others. But I hear more and more that some people ideal scenario would be and I understand that everyone tries to simplifies the predictions and forecasts and so on that we would like to find the one silver bullet, which will be the cigarettes as we knew them cord tipping filter tobacco rod, wrapping a white paper, put in the flip-top box and everyone sells the same. And I think the future actually will be more complicated, but actually creates the more opportunities, the smokers will not go, and I'm not going to the one format of the product. They're actually looking at these products, as I said earlier, from the repertoire perspective because all of these products is delivers a different opportunity. So obviously, as I guess that one of the French President who said that forecast still is very difficult, especially with regards to the future. But any combination of these products at the consumer space is there is a degree of probability that is going to happen. So I think the best strategy which one can have is to actually keep on with the pace of developing these products and offering them to the consumers. And then maybe spend too much time on the assumptions that only one category will win versus the others because we also very recently observed what is the dynamic among the consumers. So as I said, we have about 24% on the international category share on the CC. We have a double share of the smoke-free product. 3/4 of the market on the heated products and 42% international when it comes to the pouches. 60% along in the U.S. e-vape, which we treat very strategically but very focused when we think it makes sense from the economics, et cetera, perspective. We're launching this product also for the reasons then we're looking at the sourcing where the consumers are coming from and this is becoming a bit more and more interesting. So IQOS, and these numbers obviously were different 7.5 whatever years ago. And this is a sort of a latest type of the view which we have in the market. IQOS source about 60% of its audience from smokers of a combustible cigarette. But 20% are coming from vape, we're 15% sourcing within the categories obviously have a competition, and it also starts interacting with oral. So the classical assumptions, which we would have made a few years ago was that it is a path from a combustible inhalables to smoke-free inhalables to oral. But actually, what we see in the marketplace is there are more iterations with people or consumers are doing with the product. ZYN, the picture was actually different even a few years ago, when we look at the first data set posted very shortly after acquisition, ZYN is sourcing today about 45% from a cigarette 22% from our oral tobacco categories, but 33% from e-vape. And we also know that when it comes to the breakup of the -- or reakdown, sorry, of the users' behavior once day in the category. On a smoke-free products, about 60% of the consumer base are people who are moving to this category, which is 60% staying exclusively with the smoke-free. So if you like the fully quick tobacco, combustible tobacco. But about a 38% are dual still with cigarettes, which is also explained by the fact that there are more and more people leaving cigarettes moving into this whole thing and these changes on a behavior or retailer level are not happening from Monday morning, you change totally your life. It requires time and so on. But we also have a more and more growing poly users. Today, it's on the total basis about the 2%, but the markets when the poly use is actually growing, which is another argument which we're using behind offer the portfolio of the products rather than try to make consumers switching to the smoke-free products with the choice of one and let the consumers go and satisfy all the moments during the day. When we start zooming into the data, what is happening about the consumption once they go to the spartan? Obviously, poly usage, which is small in scale, as you see on the chart, but it's growing, as I said, in a certain market. Smoke-free poly users products will tend to have a sustainably higher daily consumption versus exclusive use of one smoke-free category. Dual users with cigarettes definitely have consumed more than what they used to have on a cigarette and what they presumably will have as they once they go through the full cycle, unless they will turn into poly use within a smoke-free products and then the consumption tends to go higher. Exclusive heat-not-burn users, they will be marginally by a stick, presumably higher consumptions than a cigarette. And exclusive vapor will have a lower consumption lower will tend to have a lower daily consumption. I know I from a lot of things which everyone has to process. But as I promised you at the beginning the slide will be posted on our website, so you have to digest. But that's becoming very interesting, which actually starts explaining why we have an industry going to that today going into the flat volumes because behind this whole thing and especially in the countries which open to smoke-free products, this dynamic is happening at the background, right? That's the snapshot today, what is -- what are our brands in terms of a user or consumer adult profiles on international and on the U.S. I appreciate there's a lot of details, but the net result of this whole thing that all of these categories represented by the brands here, they essentially cut across the age categories, genders, et cetera. I wouldn't pay too much attention of a few percentage points differences because this picture is very dynamic. But I think these products can appeal to the young adult smokers to the old adult smokers. And if you add into this whole thing that 40%, remember from a previous slide of smokers or former smokers try to mix, actually, they will find per each of the demographics, if you like, a product for them. Very importantly, the category started or has started the absolutely right food from the premiumness, et cetera, perspective, which as you can see both on the U.S. market and International is much more skewed towards the higher income levels, okay? So this is, I think, when you come with a category which is build-out of the innovations, et cetera, that all goes pretty well going forward. Now where do we stand on the brand equity? I mentioned at the beginning, technology product innovation is absolutely very important. But on the back of the mind, we need to land with the strong brands. Marlboro, which we only use as the trademark for the combustible products, combustible cigarettes outside holds a very strong equity. IQOS, and I remember, we have 70 years or 60 years of the marketing behind Marlboro and barely 10 years of IQOS. IQOS today is at 140 index points level, which is more important is 40 points above any other next competitor in the space. ZYN, we measure here just versus total nicotine space in the U.S. So obviously, there is more work to be done, but ZYN already starts popping up as the brand not just the product proposition, SKU, but not just the trademark, but the brand, which to be very fine and you know it very well, make the significant inroads almost into the pop culture in the U.S. Nicotine, is all debate that FDA and others should finally start clarifying what is nicotine, maybe not waiting for FDA for clarification. This is what we say about the nicotine, and I am not saying what we know, we are just repeating what is known to the public health organizations, including FDAs and many other reputable institutions. Nicotine is addictive. And obviously, it's not risk-free, but it's not the primary cause of smoking-related diseases. Everything else which you find in a tobacco smoke is bad, but it's not nicotine. Now historically, because we only knew that the nicotine can be consumed from a cigarette, nobody had to pay attention to the details or accuracy of the language and whether you call it the nicotine or cigarette or smoking, there was not much difference. But over the last 10 years, this is a fundamental difference. Nicotine consumption changes the level of releases of chemicals like dopamine, which can enhance mood cognitive skills like attention of memory, time to react, reflex, et cetera, but does not cause intoxication and it's not functionally impairing like many other substances, which we have in the consumer space. Nicotine carries a very little risk at all to the healthy adults at level typical of consumer nicotine products, which means if you consume the product within the reasonable limit like you would consume in a past cigarettes, et cetera, you would not have a negative impact of the nicotine definitely not to the level which you have on the cigarette. And the most important thing, and we will be repeating this until we succeed, nicotine doesn't cause cancer. And this is not a PMI research. This is a research which was done over the last 60 or 70 years when any public authority in the world was looking into cigarettes and the harm caused by cigarettes. And nobody has come up with any conclusion even close that the nicotine causes the harm and definitely not causes the cancer. So that's the starting point and the industry and definitely PMI is going into direction. Having said so, the most important thing, and this is not just coming from the rule of law, but also from the societal expectations and the license which we received from the society to operate. This product has no reasons to be given or to expose the kids to the product, right? So we stand and the Swedish Match stands very strongly behind the responsible sales practices, which goes into the product design, flavors, et cetera. Net-net result is that after 10 years, neighbor IQOS nor ZYN does not trigger any worrisome levels of the youth or underage usage despite the fact that ZYN, as I said, 10 years in the U.S. and IQOS is for 10 years in almost 80 markets. We have an authorization despite the fact that the FDA is the -- or used to be, I hope, the slowest organization, which was dealing with this whole thing. But fine, this is the past the fact of the live is we have a majority of the granted authorizations. I do admit that it is not maybe that difficult to achieve because the underlying denominator is very low. But still, we got it. We have it for a heat-not-burn. We have it for ZYN and there are a few other pendings. And hopefully, I just find very positive-minded person. It's difficult to be slower than we used to be. So I think the only improvement can happen. And net-net, I promise you, these are the total shareholders' return, which we had over the last 3 years and 5 years. I don't think I should spend the time more on here. Thank you very much. So I think we can go to questions, one or two questions, maybe we can take.

Thank you, Bonnie Herzog from Goldman Sachs. So thanks for all of that Jacek and Emmanuel. I guess I have a high-level question for you. As you accelerate growth into all of these new smoke-free platforms, trying to understand how you're going to ultimately balance the need for continued investments in R&D, while also being able to drive profitability and then the sustainable growth that we've been seeing. So if you could touch on that. And then in the context of the investments in R&D, could you touch on your innovation pipeline and whether we should expect to see further innovation behind burn devices. I know there was such a step function change with ILUMA, are there still things that you feel you need to solve for with the device.

Thank you, Bonnie. So the pipeline of innovations that I'm talking big innovations comparable like change of technology, ILUMA the blade product, et cetera. we have -- we're looking in the corridors 6 to 7 years, okay? And there's a lot of other innovations which we're deploying into the market on the regular basis, but they are not really very capital, if you like, or resource extensive, right? I mean don't require much of the resources. Now market is evolving. 10 years of IQOS preferences are changing. There are new consumers coming into the market, adult consumers, et cetera. So the product has to evolve. Now I don't think -- so every few years, right, every few years, it's fair to assume and a few in my language is more than a couple of years, just to clarify. Every few years, there will be some major innovations being brought to the market, but not necessarily it has to be the way as we have done it with IQOS ILUMA, then one technology deliberately wanted to replace retire and move into new technology, which is the highest, obviously, call for the resources. There will be some investment behind the CapEx, not R&D, but more the manufacturing. You know about our plants in the U.S. on the. I think on the IQOS on the International, we broadly have a room in terms of capacity. So that's it. So I don't think you will have a -- but remember, R&D budget is sort of almost a recurring budget. You don't have to increase it. You finish one project, you have resources to finance another project. I think we get into the stage that we have a good level of R&D support.

Okay. Thanks for that. I think we're going to pause there and move things over to the break room. Thanks for a great presentation.