We may need half a day to go through all, but just take a quick one. As always, the forward-looking cautionary statements, you are supposed to read and get familiar with those. Earlier today, we should have a press release reaffirming the guidance. We will be shooting at the closing of the year and the 13% -1 5% growth on EPS level. I think, just as a retrospect, because we are in this smoke-free transformation for more than 10 years with the results, which I guess most of you are well familiar with. This is our strongest growth since 2011 when obviously you take out the post-pandemic COVID recovery. There is a strong continuum. I mean, we're shooting into the fifth year on the positive volumes for the total business.
This is despite obviously that we're putting ourselves a combustible business under pressure by pushing and being focused on a smoke-free product. It doesn't matter whether this is a heat-not-burn, oral pouches, or the e-vape. This yields the results. I think in a tobacco and nicotine industry, having five years in a row of the continuous positive volumes, obviously that's to the quality of the revenue as the strong pricing very much on the combustible cigarettes continue. We're looking into another year of strong prices on strong pricing. It's also supported by the relatively good tax or fiscal environment. We don't have any disruptive tax increases and outlook. Even in this day, somebody can talk about an outlook, but it seems that there is nothing as a significant or headwind at all coming there. This obviously gives this quality of revenue in this industry.
For us, very much where you have a volume mix which is coming from the product, you know very well that the smoke-free products are much more accretive both on the top line, but very much on the gross margin level and at the bottom line. Obviously, our recent re-entry to the U.S. or comeback to the U.S. obviously multiplied the margin profile and the unit revenue and the margin profile. This is how we aim at the closing of the year. Just from the last update which we gave at the second quarter earnings release, we continue to see a strong IQOS growth, very good international ZYN volume growth and a geographical expansion. I think ZYN is already in 47 markets. We're adding a few markets per month per quarter. Obviously, the category is still very small, but we all know that it has a great prospect.
We're very pleased that our entry into electronic cigarettes, and this is the third year when we're going into the e-vapor products, is still yielding the right results. We have mentioned in Q2 that we might have some issues around the combustibles. Mainly, we quoted two geographies, Turkey and Egypt. The way I think we've so far, we're going for Q3, I think we will be, as is written here, better than expected. It's all things together. We may actually come with a stronger total PMI volumes that we have highlighted at the end of Q2. ZYN, o bviously, all eyes and the attention is on ZYN in the U.S., as is obviously Philip Morris. There are two dynamics which we observe there.
One is something which is not really very much strategic, but we just have to go through this whole thing, which is to normalize the inventory levels, post the very long period of the out of stock and the limitations on the supply driven by our undercapacity. You know very well capacity now is in the right shape. We have a ton of room to grow. I guess the inventory at the trade level will somehow have to normalize. I expect that we expect that somewhere in Q3, the final is going to be behind us. Now, inventories obviously are the result of what is happening on the back end in the sense what is in off-take. Obviously, very closely happening the market situations and the retail level.
What I can say, and I think it was even in my quote, we put it in my quote on the press release. I mean, we do observe intensified level of competition when we talk about ZYN U.S. I can talk later on about the other places where the competition is intensifying. This resulted that somewhere is when we've been at the end of addressing out of stock and start shipping more products to the market, the price gap between ZYN and the second or the third competitor in the market has opened to the very high level because we're talking today about the price situations when ZYN is 65% + on a per pound basis, higher price than its next competitor. You can read it.
Obviously, our reaction is that now having a full supply of the market, we're gearing up the marketing and the promotional support to put ZYN on the track of growth, which would meet our ambitions, our expectations. There is another way if you want to look into this whole thing that ZYN has survived the last two or so quarters with this intensive competition, opening that price premium. This actually, from my perspective, tells quite a lot how strong ZYN as the brand is because if I will use the parallel to the premium propositions which we have on the cigarette category, Werner Barth, Marlboro, which is a great brand globally, you know not ours, but you know we say it's a great brand in the U.S. I mean, a Marlboro would not be available to attain such a price premium versus the key competitors as we have with ZYN.
By the way, as we have IQOS and any international. It tells me that we're doing an excellent job, very good job in brand building because that's the brand which gives you this pricing power, price premium. However, some of these price gaps have to be addressed, which we're doing as we speak in Q3. The rest I mentioned, I talk about the pricing. The smoke-free, obviously, you know through the mix contributes positively, further enhance the margin profile. There will be a margin expansion this year. I think a couple of sometime ago, we had a bit of a hiccup with the margins. I know there was a point of attention by some of the investors, but I think these things are behind us. Needless to say, that's somehow a common thing in this industry.
There is a good cash conversion, cash flow generation, which obviously helps a lot because this creates the platform for a continuous investment through the product development. A lot is still needed, but also generates a good platform for the investors, for the shareholders to returns. There are a couple of other things which happen. You know that we still have a few markets when the smoke-free products in total or heat-not-burn per category abound. We had a couple of good developments. Finally, Taiwan is opening the market to heat-not-burn. There was Malta in Europe and a few other geographies. It's like every quarter, despite the fact that some regulators are not really following the science and the logic of your life, but they're finally getting on our side and opening the market. This is a net positive. It presumably will wait more 2026 than 2025.
Every time when you know we achieve another milestone, it's important to us. That's from me. I think we can go to your Q&A.
Sure. Thank you so much, Jacek. Let's just get into some of the details on ZYN because that clearly is a big question in investors' minds. For 2H 2024, PMI shipped, if I remember correctly, 314 million cans of ZYN. Assuming that shipment was the same as sell-through in 2H 2024, essentially what you are suggesting is that whatever our assumptions are on sell-through growth rate for 2H 2025, we should apply it on 314, and we will come to the 2H 2025 shipment number. Is that the right way to think?
Yeah, it is with the difference that, sorry, with one comment that I mean, this is an assumption, right? The things may, somewhere this year, and I think in Q3, we'll have to clean up. This is now everyone guessed that we have excess of one or maybe two weeks of inventories.
Right.
If you take this and now calculate, you know, the total annual shipments or sell-through, you're talking 20, 30, maybe 35 million cans. This is not that much of an issue. This is assuming that the trade here would target, say, about three to four weeks of inventories. Different rate because of different policies and the working capital, et cetera. We know that we are a little bit still on the high end. In the ideal situations, we should clean it up. The more important is how much the marketing and promotional activity will now give the boost to the brand at the retail off-take level because this is the more important questions. These inventories is a washout, Q3 or for the remaining months of the year. You little can do about this next year, right? It's a retail trend which is going to flow to the next year.
This is what's going to translate to our financials.
Right. You mentioned that ZYN is at a price premium of 65% on a per brand, on a per pouch basis.
On a per pouch. I remember that ZYN, we're selling ZYN at the cans of 15 pouches per can. The market is on the 20.
Right.
When you see the prices at the retail, it was obviously premium on a per can basis, but the premium per pouch basis is even higher.
Right.
My reading, our reading of the situation is that coverage of the or intensity of the promotional activity by competitors is about 50%, 60%, close to 60% of the volume is covered by the different sort of promotions.
Right.
When we started Q3, ZYN was at a much, much lower level.
Right.
Okay, now we're gearing this up to start matching what is the market situation.
Right.
As I said, ZYN has had a great growth rate from Q1, Q2, which also tells me that there is much more behind ZYN, which can withstand such a challenging pricing environment. It is what it is. We just have to go and fight for our presence and for our share. Nobody said that our return to the U.S. will be a walk in a park.
Is there a price premium in mind that you have, which is?
No, I would start disclosing the things which I don't think I should, even if you torture me. I will not go into this territory. Definitely, ZYN is the premium as is IQOS, et cetera, but in other places, right? I mean, a 65% is on an extremely high end. Let's be also realistic. We also have to take it that, you know, the more people go into, more smokers, adult smokers, or consumers go into the category, obviously, people are acting, are looking at the value equations into this whole thing. I guess a product has some limits in terms of relative pricing, which you need to take into consideration. Look, I know there is a lot of interest. There's a lot of, obviously, focus and attention at PMI, but I just want to remind everyone that all smoke-free is extremely exciting.
An oral, which is the oral category, especially pouches, right? The nicotine pouches are extremely exciting because this is like a new, a new thing on the block. The U.S., which is the most developed nicotine pouch market, I mean, at the total nicotine pouches market in the U.S., it's a 6%, maybe 7%. Depends what statistics you start using. I think a big question is, what is happening to the 94% of the market? ±< 0.5% is cigarette. There are still a lot of other smoke-free products in the market. You remember from one of our presentations before, we said from data we had on ZYN, ZYN is taking from oral, the classical oral, which is relatively logical and obvious, but it's taking from a vape, it's taking from a cigarette.
I'm trying also at PMI, obviously, you need to focus on what you have with the 6% category today. The big question is, can category be 12%, 24%, or 48%? That's the prospect. I think direction, which is category showing that people consider oral vis-à-vis inhalables, including combustibles, inhalables, is extremely highly encouraged. We have a few markets in international. I'm not talking Nordics, which was the whole tradition, which also have very promising, exciting developments. If I tell you the U.K., which is presumably in Europe other than Nordics, Sweden, the most developed market, I mean, the barrel has been scratched up to, I don't know, 1.5% of the total market.
If we see now the insights from the consumers, you know, the level of attractions, the growing awareness, trial, and so on, I think more exciting is what is left, what is not still in a category, what is in a category.
Right.
I understand you need to, you know, build your base and, you know, hold your, build your positions from what you have today. I think the smoke-free in general is the phenomenal opportunity which happened in front of this industry. You can put, obviously, Philip Morris is the leader into this whole thing. I think the industry is on the path for growth as long as you really start, you know, following the consumer, which is a smoke-free product. Also understand one thing that the products as we have today, where IQOS, heat-not-burn, no e-vapor , which has its own problems, challenges, or pouches, five, ten years from now may look completely different. The common denominator is people want to continue to inhale the products, but with a different risk profile. The adults want to enjoy the oral nicotine.
Whether this is a pouch or anything else, this is the territory in which you play. There will be a lot of innovations. Remember when we started IQOS 10 or whatever years, 11 years ago, how many innovations we had to roll through the IQOS. This is just 10 years. I always was saying that if I compare it to the innovation level which you used to have on a cigarette, when in the span of 60 years of the industry, you had the two and a half innovations, flip-top box pack and the filter, which you see the innovations which are going through this category, which by the way triggers a materially important response from the consumer level, is a phenomenal opportunity.
Now, you know, ZYN is a product which was created, you could argue, before August 8, 2016, which was the deeming date, while your competitors like BAT's VELO PLUS , it's a product which has been recently created because it's a synthetic nicotine product. Altria just announced two weeks ago that they will launch on! PLUS , even though they don't have a PMTA. Your competition is launching, you know, one would argue, the latest flavors, the latest products, while you are waiting still for the PMTA for ZYN Ultra, which, you know, nobody knows when it will come. How do you navigate this competitive dynamic? Do you think you would want to follow Altria and launch ZYN Ultra?
Yeah, so look, all options on the table for these reasons. I will not talk about the Ellison, which configurations we launch. I mean, behind the ZYN, we had quite a number of pending PMTAs on the moist, on the dry, different nicotine strands and the flavors. They are, I mean, the most important or critical or strategic post any date when the FDA issued in the normal course of a business rule on these things, but I will not comment. However, we will wait for FDA or what I'm just reading, following the footsteps of one of our competitors. I just think that this is another example to demonstrate how attractive this category is to anybody and how rational or irrational the market may go at this stage.
Because look, I think Philip Morris did a phenomenal job in smoke-free when we opened the concept of harm reductions and smoke-free. We demonstrated and we continue, you know, have a leadership in heat-not-burn. E-vapor have their own thing. Oral nicotine pouches is the third category, smallest, the very dynamic partial is because it is also smallest. I don't think, you know, anybody can afford not trying at least to win in this category. The level of competition will be there. Again, I think ZYN has the first mover advantage. I think ZYN is the brand. We talk about the price and a few other aspects, as is IQOS. You know, it's a long term, it's a long battle, but I think we're very well equipped to go through this battle.
I'm not talking about the e-vapor because there's a bit more of the complicated situations, but I do believe that the demand for the e-vapor is well-grounded and will stay. The market will have to go and clean up a lot of things, listed the illicit regulatory. There's a lot of misperceptions. I think five years from now or whatever, the situations will look different. The important thing is that cigarette smokers, adult cigarette smokers, there is a myth that they will migrate to the one category or the one product emanation. This monochromatic type of a category, which was one cigarette and every cigarette looked the same, branding was differentiating, will now be split into what we have today in the marketplace, which is heat-not-burn, e-vapor , and the oral. There will be more innovations. There might be other ways of delivering the nicotine. It's all opened.
Consumers will go in and navigate into this one. Hence, you know, we have been for the last some time talking that it is not just the betting on one category. I actually think very smart is to play what we call the multi-category. You need to have that presence because if you start taking first, again, I don't think the consumer will just jump to one. There always will be segments, very sizable segments. For heat-not-burn, there will be sizable segments for e-vapor . It will have to be, and there will be a niche in some places about to be a sizable segment for the pouches. That's going to stay. Obviously, if you operate at scale, it's one of the building blocks to your margin profile because obviously the scale gives you the better view from a, you know, from a cost perspective.
Also, you have a lot of synergies because at the end of the day, you're talking to the same consumer. Your target audience is the same. It's a smoker. You have synergies middle way through the PNL, but actually, you have a lot of synergies at the top level.
Sure. Now, moving on to IQOS, and you know, I think investors have focused a lot on ZYN in the last two years and also cigarettes. While IQOS, you know, clearly had a flavor ban in Europe, which decelerated the growth rate, and also Taiwan, which people were expecting would have come probably a year ago, hasn't come in yet. Now, IQOS is adding about $15 billion of sticks per annum for the last two years, and that is your guidance for this year as well. If we say that the flavor ban in Europe is now largely through, except for maybe Poland, one of the large markets, and Taiwan comes in at some point of time, I don't know which month or year if you want to put when it will come, does that suggest that FY 2026 volume growth for IQOS could accelerate from this $15 billion per stick?
Yeah, I mean, from the flavor ban in Europe, I recall it is still about six markets to go. The most sizable is Poland. You might have some, again, some transitory type of headwinds, but you could see what is happening as we speak in Italy and other places which went through the flavor ban over a period of time. There is a wash in this whole thing. The consumer is adjusting, and IQOS is going back to its past growth trajectory. I mean, $15 billion without going into any guidance for 2026, right? This is still too early. I think $15 billion is a nice number.
Okay.
Plus the geographies and everything, which will be open.
Right. Any date on Taiwan, like when will they start?
Less we speak about it.
Okay. Now, also, there is a big topic around the EU Tobacco Excise Directive and what they are saying on different product categories. Would you be willing to share more details on what the EU is saying and how it could impact?
Yeah, so they are, I guess the audience is familiar with the process of adopting excise tax directives. Essentially, all member states have to agree, which, as you can imagine, in a current political type of environment, and not only to have more than five people to agree on something, it's getting challenging. You're talking more than 20 states which will have to go and agree, and everyone has its own interest. Remember that smoke-free products are also well invested in certain points of Europe. Member states have their views. The good thing is there is a recognition of a smoke-free product with regards to the tax differentiation. How that thing is going to settle, you know, remains to be seen, but the starting point is very good.
I think the EU is coming with this absolute notion of increasing the total burden of the taxation on cigarettes, and obviously it's going to travel through all other products. That creates a lot of tensions and a discomfort between different member states. We'll see how that's going to unfold. The good thing is also that they recognize or they plan to recognize for tax purposes nicotine pouches. Just remember the status of the nicotine pouches in Europe has to be more solidly reflected in the regulations legislation. I think it's a good part. Net is positive, but until we have the final drafts and see different concessions, different member states will put on the table how it's going to unfold, we'll have to see. Another good thing in the draft of the commission proposal is the derogations period.
You're really talking not something which has an impact now or 2026 or 2027. It's actually derogations periods depend on a category. They're talking about 2030 or 2032. It also gives you a lot of time to adjust, to prepare, et cetera. This will not be, I don't think at this stage, I don't think it looks like anything which is creating a major disruption which will change, for example, the trajectory important to us, which is a smoke-free support, smoke-free product support from a fiscal perspective.
Sure. On the IQOS launch in the U.S., you're clearly awaiting the PMTA.
That's a bit of a, we had expectations that with the new administrations and FDA definitely more open for conversations than the previous administration, I have to admit. Still, the output, the outcomes, I should say, it's not there. Obviously, with the remaining period of this year, it's becoming highly unlikely, but we're also living in the times when things tend to happen very fast. I believe that this is presumably more 2026 events than a 2025 event.
Sure.
We have already now found the ILUMA, and we still think that our strategy or our strategy of don't go to the U.S. with your second technology and technology, which by the way, we already retired, except one country. We better go with the current technology. You have economies of scale and all the other attributes which you immediately tap into.
Sure. Now, moving to the Cigarette business, which is still 60% of the company, and it has done pretty well. Over the last few years, volumes have been pretty strong, including in one edge, and there seem like the markets you mentioned, Turkey and Egypt, which are high volume but low in value markets, they're seeing some volume step down, which now it seems that it is running better.
Yeah, but those markets are very important to us because I think eventually for Egypt already is going smoke-free in a sense the regulations allowed. We're also interested that, you know, the cigarette market is in the, you know, sort of a stability because this is our base to build a smoke-free business of converting smokers there. Like margin is always the factor of time. If I look at the history even of the cigarette, you know, markets in the past, you always start somewhere low and this margin always tends to increase, improve, etc. This I am less of the worry. Turkey is a very important market, size-wise, number of consumers, number of smokers, and I think a venture which has banned today on a smoke-free product, but I think that's going to be resolved.
That's the reasons why we're also paying attention to some of these important big pockets on a smoke-free burn CC combustible markets because they are the base also for a future growth for a smoke-free.
Sure. Now, just one specific question on Japan, which is your biggest country. If I remember correctly, when you guide, and whenever you said your FY 2026 guidance in February, you never assume pricing in Japan because the market pricing in Japan follows a very strange pattern depending on excise tax hikes. Japan will increase excise tax on cigarettes next year in October, and the last time they increased it was in 2021.
Yeah.
You almost have had five years of no pricing in Japan. How should one think about pricing in Japan next year? Clearly.
I have to be very careful about talking future pricing. Yes, in this scenario of the excise adjustments, and there are a few steps when the excise will be moved initially for a smoke-free, which is heat-not-burn, only in Japan, but also for a combustible. I mean, it's fair to assume that it will result in price changes in the market, so you will have a pricing.
Sure.
I mentioned Japan is one of these markets I had in mind when I talk about the intensified competition.
Right.
Okay, this is different. Okay. The U.S. is a ZYN and Japan is heat-not-burn. IQOS pulls it through and still is doing very well, but the level of competition is very high.
Sure. Now, just coming to some of the financial numbers and leverage. The target that you have said is you will start share repurchases when leverage is below 2X, or would you take advantage if you have a line of sight to leverage?
No, I think our communication was that, you know, when you have to have a, or be confident that we are on the trajectory to get to the two. The moment when we see that this is about to happen, it obviously creates the space for us, for the board to start talking, does this deserve, can we consider or should we consider, you know, what's our approach to dividend, what's our approach to a bib. I mean, that's pretty obvious. I think so far, with these numbers, because remember, there's another thing which has happened or is happening, maybe not to the level as one would expect it, but definitely supports the financial is the currency, which unlike in many, many years in the past, currency starts playing into our hands. In this guidance, we have $0.10 positive currency.
I think that knowing where is the dollar going, et cetera, there will be support from a currency which further reinforces our trajectory on the leveraging. Remember in the past, part of the problem with our leverage was created by the fact that the dollar cash flows were eroded by the fact that the dollar was on a stronger side. Now we have a reverse of the trend. The underlying business is doing very well. In addition, you have this extra, okay, tailwind, if you like, coming from a currency. This further reinforces the case. I think it's more 2027, it's not 2025, it's a 2026 type of conversations we'll have.
Sure. On M&A, you clearly did a big acquisition with Swedish Match a few years ago. Is there anything in your product portfolio where you feel that there is a gap and you might need to do M&A to fill that product gap?
No, but I think we have quite a strong capability which we have developed over time. Obviously, capability on the product development. I think we're still on the very much, very, very strong front foot when it comes to heat-not-burn. Obviously, the competition is trying to get something, but I think we're pretty strong. There is a pipeline of this whole thing. I know there are these conversations around the moist versus dry and the synthetic. Synthetic, by the way, at the consumer level doesn't play any role. It's more driven by the regulatory things, very much specific to the U.S., maybe on a few countries, but has no value in terms of the cost or consumer preference or anything of this nature.
Actually, I would argue that some people are a bit more open to the nicotine, which is naturally derived than a synthetic, but this is not the factor to play with or be worried about. All of these things are attainable to us. You never say never, but you also screen the market and you see what is in the market. I think we so far, other than the acquisition of Swedish Match, which I think everyone agrees was the great strategic move for us and serves us very well, I think we're self-sufficient for the time being.
Sure. One last question on IQOS. I think you have mentioned over time that every few years you have a major platform innovation at IQOS, and then every year you have a minor innovation. IQOS ILUMA, you know, next year it will be probably three years or four years that IQOS ILUMA would have been in the market. Should we expect a major platform innovation at IQOS?
I'm not confirming, but directionally I like your thinking. Because we said this, yeah, there will be, look, there's, the audience, there are consumers, millions, millions of consumers who are using the product for 10 years. You know, their expectations are evolving with the user experience, the user interface with regards to the device, or maybe some other characteristic of the taste directions, etc., maybe duration. This is the number of the things which you need to watch for existing audience. Also remember that audience which is left behind is a bad word, but smokers. Even if you take Japan, which is most advanced, still a bit less than 50%, but still almost half of the market is on smoking. Now that audience which is left with cigarette smoking have also different expectations. Clearly the product as they are, it didn't make them jumping into this whole thing.
Hence the reasons they stay on a cigarette. You have these two vectors of innovation with the product for the remaining smokers and those who already are in that heat-not-burn, whatever expectations they have. One thing which we don't talk that often is, but there is an adult initiation to smoke-free category. I know for big volumes and big movements in the markets are happening, smokers to alternatives, but also over a period of time you have more and more relative audience which they don't remember cigarettes or they never engage with a cigarette. Their expectations of how this ritual and the experience should look like is different.
Sure. I think we are out of time. Thank you so much, Jacek.
You're welcome.
We have a breakout in the other room, so please do join us here. Thank you so much.
Thank you.