Good day, and thank you for standing by. Welcome to the Philip Morris International 2025 second quarter results conference call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, James Bushnell. Please go ahead.

Thank you, operator. I would now like to hand the conference over to your speaker today, James Bushnell. Welcome, and good morning. Thank you for joining us. Earlier today, we issued a press release containing detailed information on our 2025 second quarter results. The press release is available on our website at PMI.com. A glossary of terms including the definition for smoke-free products as well as adjustments, other calculations, and reconciliations to the most directly comparable US GAAP measures for non-GAAP financial measures cited in this presentation are available in exhibit 99.2 to the company's Form 8-K dated today and on our investor relations website. Today's remarks contain forward-looking statements and projections of future results. I direct your attention to 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. Joined today by Emmanuel Babeau, Chief Financial Officer. Over to you, Emmanuel.

Thank you, James. And welcome, everyone. We delivered an excellent set of H1 results following another very strong performance in the second quarter of 2025. Line dynamism from our smoke portfolio, which recorded $4 billion in net revenues, coupled with margin improvements across our business, drove strong double-digit adjusted diluted earnings per share growth in both constant currency and dollar terms. The multi-category momentum of our Smoke-Free business accelerated with a Q2 step up in offtake growth for IQOS, ZYN, and VEEV. As expected, IQOS delivered another strong performance with heated tobacco unit adjusted in-market sales growth accelerating to plus 11.4% in Q2. This reflects broad-based growth both globally and in Europe as markets such as Italy pass the transitory disruption of the characterizing flavor ban. Then confirm its upward trajectory with a significant acceleration in US consumer offtake growth to plus 26% for Q2 and plus 36% in June as in-store availability improved. Internationally, Q2 nicotine pouch volumes increased plus 65% and almost tripled out of the Nordics. In e-vapor, VEEV continued its remarkable trajectory with shipments more than doubling year on year, driving further gross margin expansion. For combustibles, despite an unexpected return to modest volume declines, our business delivered robust top and bottom line performance reflecting its resilience model led by strong pricing. We continue to generate best-in-class growth across the P&L with high single-digit organic H1 top line growth and mid-teens adjusted operating income growth, to reach a margin of over 41%. This high-quality performance reflects the increasing profitability of our three smoke-free categories: scale, operating leverage, and efficiencies combined. These results provide an excellent platform for another year of superior growth. We expect strong smoke-free momentum to continue in H2, while we factor in the exceptional H2 prior comparison notably on growing combustible volumes and certain timing factors. With strong business fundamentals and a slightly more favorable expected tax rate, we are raising our adjusted diluted EPS full-year forecast to plus 13% to plus 15% growth or plus 11.5% to plus 13.5% excluding currency. Looking at our Q2 financials. We delivered another quarter of shipment volume growth of plus 1.2% and organic top line growth of plus 6.8% or plus 7.1% in dollar terms to reach over $10 billion in quarterly net revenues for the first time. Excluding the Indonesia technical impact explained last quarter, organic net revenues grew by more than plus 8%. Adjusted operating income grew by plus 14.9% organically with growing profitability in all categories, positive smoke-free margin mix, and ongoing cost efficiencies. Adjusted diluted EPS of $1.91 reflects growth of plus 20%, including favorable currency variance of two cents four cents lower than previously guided, mainly due to intercompany transactional impact from currency volatility at pair end including on the Swiss franc. This better-than-expected EPS delivery notably reflects strong top line momentum, positive margin evolution in our smoke-free product business, and robust combustible pricing. Combining this excellent Q2 with a strong first quarter, we achieved one of our strongest ever H1 performances. Total shipment volumes grew by plus 2.5% and organic net revenues by plus 8.4% or approximately plus 10% excluding the Indonesia technical impact. Strong performance from both smoke-free and combustibles drove adjusted operating income growth of circa plus 15% in both organic and USD terms to reach $8 billion in total. H1 adjusted diluted EPS was up by plus 17.7% in constant currency and by plus 16.1% in dollar terms. Turning to shipment volumes. We delivered Q2 growth of plus 1.2% and plus 2.5% for the first half, driven by more than plus 13% growth from our smoke-free business. While adjusted in-market sales growth accelerated, Q2 HTU shipment volume grew plus 9.2% to 38.8 billion units including robust growth in Europe and Japan as well as promising growth from global markets such as Indonesia, South Korea, and global travel retail. H1 HTU shipments increased by plus 10.5%, broadly in line with adjusted in-market sales growth. As mentioned last quarter, our H1 shipments include a Q1 shipment timing benefit of around one billion units which we expect to reverse in the fourth quarter. Overall e-vapor shipments again, grew significantly. Cigarette volumes declined modestly in Q2 following the exceptional growth of recent quarters. This was primarily due to contraction in Indonesia and in Turkey where we experienced supply chain issues following a change in regulatory requirement. This resulted in a temporary loss of volume and share with some associated inventory write downs. We expect gradual recoveries for the remainder of the year, though two year on year comparison are still likely to be affected. In Indonesia, despite good share performance, a growing illicit segment is impacting both the legal industry and our volumes within it. And this is also likely to extend into H2. We expect our cigarette volumes to decline around 2% for the year, more in line with the historic underlying trend. This includes a forecast decline of 3% to 4% in H2 against the high prior year comparison I mentioned with Turkey accounting for close to half of the decline. This also factors in the continuation of decline in Europe and Japan as smoke-free product grows strongly and the dynamic in Indonesia and in Egypt where the recovery of the main local competitor is ongoing after previous supply constraint. As a testament to the resilience of our combustible model, we are still targeting combustible gross profit growth in H2. Supported by pricing, and cost efficiencies. For smoke-free products, we anticipate continued double-digit volume growth in H2 including the expected reversal of H1 phasing benefit on IQOS. However, given cigarette dynamics, it is possible that H2 may see a modest decline for total PMI volumes. Importantly, with the forecast full-year increase of around plus 1%, we continue to target our fifth consecutive year of total volume growth as we do for future years as our smoke portfolio continues to drive performance. Breaking the performance down by category, exceptional gross margin and operating income growth in Q2 resulted in impressive first half results powered by our increasingly profitable smoke-free business. H1 Smoke-Free net revenue grew organically by plus 17.3% to $8.1 billion and gross profit by plus 27% to $5.6 billion with plus 530 basis points of organic expansion to reach over 70% gross margin. This is around 4.5 points above the gross margin of combustibles at the current category geographic mix. As in 2024, this reflects continued margin expansion for all three smoke-free categories, notably combined with the positive mix impact of ZYN, accretive unit economics and pricing on both HTUs and ZYN. Very strong IQOS gross margin expansion reflects the powerful growth and scale effect of this large and growing business manufacturing productivity, and a comparison benefit from higher device shipments in the prior year when Iluma I was launched in Japan and other markets. We expect strong margins to continue in H2, albeit without the device year on year comparison benefit, as we also further expand the presence of Illuma Eye across markets and brands in Indonesia. Convertible net revenues increased by plus 2.9% or more than 5% excluding the Indonesia technical impact. Gross profit grew by plus 5%, driving plus 140 basis points of margin expansion. Despite the financial impact of the Turkey disruption. This includes a robust Q2 with organic net revenue growth of plus 2% and gross profit growth of plus 4.8%. This performance epitomized the resilience of our ongoing combustible business model with low single-digit volume declines, robust pricing and efficiencies combining to deliver top-line and gross profit growth over time. We continue to target combustible gross margin expansion organically and in dollar terms for the year despite slower pricing and weaker volume in H2. The combination of sustained smoke-free momentum and combustible resilience led to plus 15.4% H1 organic operating income growth at total PMI level resulting in plus 250 basis points of operating income margin expansion to surpass 41%. H1 net revenue growth of plus 8.4% was again fueled by the three engines of our top line growth model. With positive volumes, robust pricing, and favorable smoke remix. Pricing contributed plus 5.2 points driven by convertible pricing of plus 7.7% and low single-digit smoke-free pricing excluding devices. The positive mix impact of rapid SFP growth drove further contribution of plus 3.1 points. Combustible geographic mix and other factors had an unfavorable impact of 2.4 points including the Indonesia technical impact of around 1.5 points. Currency had a negative impact of 1.5 points, with a further 0.4 points from acquisition and divestitures which include the divestment of Vectura. Turning now to gross margins. We delivered H1 organic expansion of plus 300 basis points and plus 320 basis points including currency acquisition and divestitures. Pricing made a plus 1060 basis point contribution more than offsetting the 60 basis point unfavorable impact from cost inflation net of productivity and other cost items. Smoke-free growth drove an excellent plus 190 basis points, reflecting the factors I covered earlier. The impact of combustibles was broadly flat excluding pricing, but including the Indonesia impact. Below gross profit, we continue to invest strongly in the future growth of our Smokri brand, including in the US, with SG&A organic growth of plus 10.6% for H1, marginally above net revenue growth excluding the technical impact of Indonesia. We achieved more than $500 million in gross cost savings year to date through our manufacturing and back-office efficiency initiative. At the midpoint of our target 24, 26 period, we have delivered over $1.2 billion placing us well on track towards our $2 billion objective. Altogether, with gross margin expansion more than compensating for higher year on year commercial investments. We delivered plus 290 basis points of adjusted operating income margin expansion in H1, or plus 250 basis points organically. Q2 organic operating income margin expansion of plus 300 basis points was even stronger than the plus 200 basis point in our first quarter. Focusing now on our smoke-free business, where our multi-category strategy is facilitating the continuous growth of our smoke-free user base. Estimated legal age consumer of our SFPs grew by approximately 5 million versus one year ago, reaching around 41.5 million as of June 30. Our smoke-free products are now available in 97 markets, following the Q2 launch of ZYN in Ireland and Cambodia. Almost half of these markets now have a multi-category offer with at least two of IQOS, ZYN, and VEEV on sale to legal age nicotine users. As shown on this slide, we now have all three categories deployed in 20 markets and we continue to broaden our multi-category presence. The regulatory environment is a key enabler of smoke-free growth and I'm pleased to report some more examples of positive progress such as legislation providing new market access for one or more SFP category across several Middle East markets. We also note the recently published proposal to revise the EU tobacco excise directive, which marked the start of a formal legislative process that will require unanimous approval by all member states and subsequent transposition into national law. Many member states have already adopted risk-proportionate regulation and taxation frameworks for smoke-free products which can serve as a valuable foundation and benchmark for shipping the final directive. While we know the clear differentiation for smoke-free products relative to combustibles in the proposed minimum rate, we are also disappointed to observe the lack of a plan to counter the threat of illicit trade, which accounted for 9.2% of total EU cigarette consumption in 2024. With governments losing over 14 billion euros in tax revenue at a time when many countries face intense economic pressure. Our multi-category approach is built on the strength of the brand and commercial presence of IQOS, which remains our core smoke-free product growth engine. We continue to be laser-focused on maximizing the growth of IQOS over time, with the deployment of ZYN and VEEV under its umbrella offering complementary opportunities to fully transition legal age nicotine users from cigarettes to SFPs. In this context, I'm especially pleased to confirm the acceleration in IQOS HTU adjusted in-market sales growth to plus 11.4% in Q2, notably driven by Europe, including excellent progress in its largest market of Italy. We are seeing the impact of the characterizing flavor ban received from our work and commercial initiatives bear fruit. Japan also delivered another robust quarter of growth and other global markets accelerated nicely. While competitive activity is increasing, we see this as positive for category growth over time, and we expect continued strong IQOS progress in H2. We continue to target plus 10% to plus 12% HTU adjusted IMS growth for the year. Continuous IQOS innovation on devices and consumables combined with investments in brand equity are fundamental pillars of our growth. The rollout of the Illuma Eye technology, now present in over 30 markets, remains ongoing. We are expanding the portfolio of Livia tobacco-free consumables, with promising initial results from recently launched new test variants and flavor capsules. We also commenced the rollout of a resin pack design on our core premium terrier HTUs as well as the expansion of our mainstream price offering, Delia, with excellent results in markets such as Germany and Poland. In the US, we continue with small scale IQOS three pilots which are generating considerable adult consumer interest. As we progress our commercial pilot in Austin, we also launched a second pilot in Fort Lauderdale during the quarter with further initiatives planned in the coming months as we prepare for the at-scale launch of IQOS Iluma once authorized by the FDA. Our second flagship premium smoke-free brand, ZYN, leads a category which has the potential to fundamentally reshape the consumption of nicotine for the substantial net benefit of global public health as adult smokers increasingly switch to smoke-free products. Q2 can shipments grew by plus 43% on a global basis and offtake reaccelerated strongly in the U.S., which I'll come back to in more detail. Building on ZYN US strengths, our global rollout continued to advance with Q2 international can volume up plus 65% year on year or a remarkable plus 179% excluding the Nordics. The growth of our international business reflects both market expansion and strong offtake growth, supported by expanding production capacity in new geography. Notable strong performances include our global travel retail business, with close to plus 200% volume excluding the U.S., as well as the UK, Pakistan, Poland, South Africa, and Mexico. As covered in our recent Europe focus event, our focus is on growing the category by switching legal aged smokers rather than sourcing from the small existing category. It is also notable that ZYN holds the number one position in Mexico and South Africa where we launched our predominantly mini dry portfolio at the same time as competitor brands. Dry pouches already make up the majority of our pouch volumes in more than three quarters of the ZYN market and we believe this format is especially relevant for legal-aged smokers. ZYN is now present in 44 markets globally, following additional launches in Q2. Our smoke-free trilogy is completed by VEEV. H1 shipment volumes more than doubled to reach almost 1.5 billion equivalent units with increasingly profitable growth driven by Europe, where VEEV now holds the number one close spot in six markets, including Italy and Greece. Outside Europe, we see significant potential for the brand with nice results in diverse markets such as Indonesia, Canada, and Colombia, and further rollout plan. Increasing repeat purchase rates and consumer loyalty are especially promising as we seek to leverage our multi-category infrastructure under the IQOS umbrella of quality, premiumness, and superior technology. In this vein, we recently launched our latest innovation, VEEV in Prime, in the Czech Republic. VEEV Prime offers an upgraded premium user experience with higher intensity of flavors, a larger cloud size, and higher battery capacity with an optimized product profile. The most developed multi-category consumer landscape is in Europe. And we now have 30 markets with at least two categories on offer. Of course, IQOS remains the core driver of our performance in the region and I'm delighted to report a meaningful Q2 acceleration of HTU adjusted in-market sales growth to plus 9.1% as adjusted market share grew by plus 1.2 points year on year to 10.9%. In this seasonally higher period for combustibles. As explained at our recent Europe event, IQOS has a very strong brand platform across the region, and this performance reflects our innovation and commercial initiative including those on Illuma, Livia, and Delia. This helped drive strong double-digit adjusted IMS growth across markets including Germany, Spain, Romania, Greece, and Bulgaria. A significant Q2 callout is Italy, Europe's largest IQOS market by volume, which delivered a very welcome uptick in both sequential and year on year growth. With the exception of Poland, Austria, Estonia, and Croatia, the impact of the EU characterizing flavor ban is now behind us. And our absolute regional growth in HTU adjusted IMS is now getting closer to pre-ban levels. While quarterly comparisons from 2024 have some volatility from flavor ban dynamics, sequential trends are very positive and we look forward to the remainder of the year with confidence in further strong IQOS growth. On top of this IQOS progression, the accretion from our multi-category strategy is evident in our total volume of IQOS, ZYN, and VEEV, with shipment growth of plus 13.5% in Q2 compared to HTUs alone at plus 10.5%. ZYN and VEEV are still very early in their development, but are demonstrating exceptional growth. The numbers you see here are for Europe overall, and I would also note that where we are present with all three brands such as Italy, Greece, Poland, and Romania, we see several points higher SSP volume growth. In Japan, we achieved the significant milestone of 10 million estimated users and Q2 adjusted HTU shares increased plus 2.3 percentage points year on year to 31.7% despite increased competitive intensity. IQOS continues to deliver strong progress with Q2 adjusted IMS growth of plus 7.8% against the prior year period, which included the full launch of Iluma I. As shown on the slide, IQOS delivered truly exceptional growth in 2024, especially considering the size of the category, now stands at almost half of total nicotine offtake volume nationally, and more than half in certain cities. The high single-digit growth that our business delivered in H1 2025 remains very healthy and is essentially in line with the trend in the years prior. We expect further strong adjusted IMS growth in the remainder of the year. We are pleased to see our competitors embrace the heat-not-burn category as while our category share was sequentially stable at around 70% in Q2, our biggest focus is on accelerating the size of smoke-free products overall maximize the growth of our leading proposition and convert more smokers. Switching now to the US. The strong reacceleration in ZYN growth is a clear highlight of our Q2 performance and testament to the strength of the brand as in-store availability improves and legal-aged consumers regain access to the full ZYN portfolio offering. The supply constraint of previous quarters had limited the growth in sellout volumes and meant ZYN was growing less than the overall category. With manufacturing capacity now in very good shape, the recovery to around plus 36% offtake volume growth in June as measured by Nielsen and plus 26% in Q2 overall marks the return of ZYN to its category driving position in terms of growth and market share. On a sequential basis, ZYN's offtake volume accelerated to around plus 12% growth versus Q1 in line with the total category. With the number of commercial programs restarting at the end of the quarter, this is clearly very promising as we increasingly focus on legal aged smokers and vapers who have not yet switched to the category. Q2 shipments increased plus 41% year on year, reaching 119 million cans. As with any out of stock situation, quarterly shipments are subject to volatility. Restocking of the value chain was effectively completed in H1, with the majority of this taking place in the first quarter. We estimate the total net impact at broadly 40 million cans for the year slightly below our initial expectation. This factors in the good news that retail availability is now approaching normalized levels with a lower scarcity premium in retail price narrowing the price gap to competition. Importantly, sales velocities are accelerating and with 36% of the growth in June, this bodes well for the second half of the year. With shipments now primarily driven by consumer offtake, we expect a broadly similar level of shipment in Q3 as in Q2, factoring in the possibility of a few days adjustment to wholesaler and distributor inventory, as the situation fully normalizes. We continue to target full-year US shipments of 800 to 840 million cans, including a sequential step up in Q4. With our US production capacity increased ahead of plan, we are now well set for this year and beyond. We are incredibly excited to drive ZYN and the overall nicotine pouch category potential over the coming years. Having covered Europe, Japan, and the US in some detail, let's look at the rest of the world. In most markets, both the nicotine pouch category and our multi-category presence are nascent. Both ZYN and VEEV will leverage the strength of IQOS, where Q2 adjusted in-market sales accelerated to plus 19.3% growth with broad-based progress, including Egypt, the Philippines, and Indonesia. While pouch and e-vapor volumes are naturally very small across these markets at this stage, we can measure their Q2 growth in multiples rather than percentages. This impressive IQOS growth is exemplified by offtake share gains in global key cities. Strong presence in South Korea and Malaysia is more than matched by key cities in Mexico, Serbia, the Middle East, and North Africa. Global travel retail, where multi-categories increasingly prominent, also continues to grow strongly. The world’s largest cigarette market by volume outside China is Indonesia, where Jakarta's offtake share grew by plus 2.5 points year on year to 7.5%. Following promising results from the pilot launch of our full-flavor heat-not-burn technology called Bons, which is tailored to local taste preferences, we have recently commenced a broader rollout. Bons is also progressing well in Lebanon. Turning to combustibles. Our business delivered robust organic net revenue growth of 2% in Q2 and plus 2.9% for H1 with Marlboro reaching a post-spin category share high of 10.7% in Q2. Strong Q2 pricing of plus 7.2% included notable contributions from Indonesia, Germany, and Italy yielding plus 7.7% in H1 overall. While we continue to expect a moderation in H2 pricing due to timing and comparison dynamics, we now forecast plus 6% to plus 7% for the full year. Our strategy is to take pricing action to optimize the financial contribution to the business over time, which can naturally impact volume and share performance on a quarterly basis. Our convertible business is resilient and the combination of pricing, category leadership, and ongoing efficiencies drove very good gross profit growth as covered earlier. This performance is in line with our objective of maximizing value over time and supporting the growth of our smoke-free business. This brings me to our revised outlook for a remarkable 2025, where we are raising our adjusted diluted EPS forecast for the year in both currency neutral and the long term. As expected, we delivered a strong H1 organic performance compared to our target ranges for the full year. While combustible volume dynamics and the phasing of comparison and cost are less favorable in H2, our fundamental outlook remains very good. We expect continued strong momentum on both IQOS and ZYN alongside robust pricing and meaningful margin improvement. We expect further double-digit HTU adjusted IMS progression with growth skewed to the fourth quarter given a strong comparison in Q3. We forecast Q3 HTU shipments of 38.5 to 39.5 billion and dynamic growth in adjusted diluted EPS to $2.08 to $2.13 including strong investment and a favorable currency variance of five cents at prevailing rates. For the full year, we continue to expect very strong organic net revenue growth in the range of plus 6% to plus 8%. Following excellent H1 top line in terms of Amazon and margin progression, we are raising our forecast range for organic operating income growth to plus 11% to plus 12.5%. We are also raising our currency-neutral adjusted diluted EPS growth to plus 11.5% to plus 13.5%. This includes a slightly improved effective corporate tax rate of approximately 22% to 23%, based on the latest assessment of tax dynamics and market mix. We are still reviewing the implications of the OBBB Act US tax reform. In dollar terms, we expect adjusted diluted EPS growth of plus 13% to plus 15%. This includes an estimated ten-cent favorable currency impact at prevailing exchange rates with favorable earnings translation from the broadly weaker dollar partly offset by transactional impact due to currency volatility which I covered earlier. Given our expectation for a strong full-year profit delivery and cash conversion, we are raising our forecast for operating cash flow to around $11.5 billion at prevailing exchange rates and subject to year-end working capital requirements. Project capital expenditures slightly above our prior forecast at around $1.66 billion, primarily due to further international ZYN capacity investment with CapEx spend almost entirely focused on supporting the growth of smoke-free. With regard to our balance sheet, we continue to target further deleveraging in 2025, placing us on track for our target ratio of around two times by the end of 2026. As mentioned last quarter, we are a global company with broadly diversified production and a worldwide supplier network including an established US manufacturing base, and we believe we are well positioned to mitigate potential supply chain challenges. While the situation is volatile, we do not currently anticipate a material impact on our business from recently introduced or discussed tariffs. Our financial growth model is driving a continuous improvement in the quality of our business with smoke-free accretion and combustible resilience driving considerable bottom-line growth. We are well on track to meet or exceed our three-year targets demonstrating our ability to deliver what we believe to be best in class CPG growth. Adjusted diluted EPS growth in dollar terms is a key objective and we are pleased to see this delivered in H1 as well as in our outlook for the year. I will now conclude this presentation with some closing remarks. We delivered an exceptional first half of the year placing us well on track for another year of strong performance. Our smoke-free growth is increasingly profitable as IQOS, ZYN, and VEEV gain scale and drive synergies at the consumer and commercial levels. Our best-in-class financial performance is bolstered by underlying strengths across all categories including the resilience of our combustible business, in addition to our proactive measures on pricing and cost efficiencies. This drives our confidence in strong and sustainable adjusted diluted EPS growth in both currency neutral and dollar terms. Finally, we remain a highly cash-generative business with an unwavering commitment to our progressive dividend policy. We look forward to further rewarding our shareholders as our transformation delivers continued growth. Thank you, and we are now very happy to answer your questions.

To withdraw your question, please press star one one again. Our first question comes from Gaurav Jain with Barclays. Your line is open. Hi. Good morning, Emmanuel.

Thank you for taking my question. So a few questions for me. One is on ZYN. So, you know, you are saying that restock was less than what you had expected. So how should one read it that your expectations for future growth are lower? And not only for us, but the market expectations were higher, and now they are lower. And that's why the need for restock is lower. In that context, if I look at your ZYN volume guide, if I say Q3 is flat versus Q2, then in Q4, you need to do 219 to 259 million cans. For that 800 to 840 guide range, which would imply almost 15% to 36% growth on a QOQ basis. I remember from covering Swedish Match, a few years ago that Q4 actually used to have fewer shipping days for them, so they didn't really use to grow Q4 over Q3. Can you just help me understand all the main parts on this?

Sure, Gaurav. With great pleasure. So first of all, on the impact of the restocking, let’s be a bit humble here. We talk about a brand that we're targeting to deliver for the year 800 to 840 million cans. There are several weeks of inventory between wholesaler, distributor, and the retailers. I'm not able to tell you a precise number. It's probably anywhere between, let's say, six to seven weeks altogether. And here, when it says it's a bit lower, I mean, it's clear that, you know, for instance, at the retailer level, we had no precise idea of the level of inventory. So we are a bit below our expectation. If I were to give a number, it's probably maybe ten to twenty million cans below. Frankly, I'm not able to give more specific than that. We are talking about a few days of sales, so it’s really small. So that's really what we're talking about. And, again, we've been facing this significant out-of-stock situation with the exercise of reloading. The good news is that it's behind us. We made a few assumptions on what it will mean in terms of restocking. Okay. We've been probably a bit higher versus what was really needed, but this is it. So I don't think there is anything else to be read there. At the end of the day, I think we should focus on what is really important, which is the great dynamism that ZYN is facing now that there is full availability. Indeed, June was growing 36% in terms of consumer uptake according to Nielsen. If I look at the first two weeks of July, we are north of 37%. I think the market is a bit above 39%. So, basically, we are going now in line with the market. So it just shows that we have absolutely resumed a strong momentum and that of course bodes very well for the future as at the same time as I mentioned, we are really restarting promotional, advertising, and commercial activity in 360-degree manners.

Sure. And my second question is just on EUTD. Like, you referenced a few comments, but can you help us understand in more detail what exactly are the proposals in terms of different tax rates on NGP products? And if there is any update on EUTPD as well?

So, Gaurav, I'm not going to elaborate on the initial proposal. We are at the beginning of a long process. Last time, it was 2010, 2011; it took two years, I think, from the beginning to the end. A lot of discussions will happen. I reminded everybody that it requires unanimity from the parties. So I'm not going to comment on things until, you know, there is more clarity on what's going to happen. The process has started. There will be several steps. As I said last time, it took almost two years. And, of course, when we have more clarity on what is really likely to happen, then, of course, at that moment, we will comment on the implications. In my remarks, I noted the two points which are important for us for the time being. One is the fact that the initial proposal is indeed coming with differentiation between smoke-free and combustible when it comes to minimum taxation. So that's an important element. And the second is an element which we hope will be improved. Obviously, there is nothing when it comes to illicit trade, which is, I think, a real question for the European Union to tackle. That’s what we can say for the time being.

Thank you so much. You too.

Thank you. Our next question comes from Eric Serrano with Morgan Stanley. Your line is open.

Great. Thanks, Emmanuel. A couple of questions. First, in terms of IQOS Iluma US approval timing, I think you said you mentioned, you know, launch once authorized by the FDA. Are you guys still sticking to your expectation of a second half authorization, realizing it’s not something you have control over? And then second, when you look internationally, can you talk a bit about some of the drivers of the reacceleration in IMS and sort of the sustainability for the second half of the year? Thank you.

Sure, Eric. So first on the US. So, I mean, we don't have anything new to report on the potential PMTA for IQOS Iluma. I think everybody can see that FDA is resuming activity on PMTA, and that's good news. As far as we are concerned, and this is public information, there is now for the renewal of the MRTP on IQOS 3, there is a tobacco product scientific advisory committee that has been scheduled. There, I've also opened a docket for a ZYN MRTP. So a number of things are happening, and that’s what we know for the time being. So I have nothing new to report on the PMTA for IQOS Iluma. We are still hoping for an approval in H2, but we are also acknowledging the fact that the agenda and the workload for the FDA is very heavy. And therefore, it is clear that we don’t have certainty that we will get this PMTA in 2025, and that could move to 2026. On the second question on the reason for the acceleration of IQOS, I mentioned several of them. I think it’s really, you know, Europe, where you have now the effect of the characterizing flavor bans that are waning and a number of markets reaccelerating. Some markets doing really, you know, very strong performance. I mentioned some of them like Spain, Germany, Romania, Bulgaria. It's great to see Italy reaccelerating as well. So I would say momentum is rebuilding. Now there will be some phasing last year on the performance in Europe, but I think we are expecting a nice performance overall for H2. And outside Europe, we expect continued very nice performance from Japan, and I have been elaborating on the trend there where we continue to do very well. And there are all these new growth markets that are super exciting. And, of course, global travel retail is one of them, but Indonesia, many countries in the Gulf region, Mexico, Philippines. And, I mean, these are plenty of markets where we see very nice growth trajectories and growth potential for IQOS. In these new growth markets, the momentum, I would say, is progressively building up.

Great. And just one follow-up on Combustible volumes down one and a half percent, or I should say only one and a half percent despite the headwinds you called out in Turkey and Indonesia. Was that actually a little bit better than you expected since you guys have been pretty upfront really since last year that you expect combustibles volumes to resume their declines in 2025?

So you're right. Globally today, you know, when we say that for the year, we are targeting to be around minus two percent in shipments. That's something that I have had the ability to say in previous instances very clearly. The fact that we believe we are going to be back to what we describe as a long-term trend for the combustible business, which is a low single-digit decrease. I'm not able to specifically say exactly which kind of low single-digit decline, but that is a trend for sure. That we expect in the future. Yes. Of course. Countries where there is a ban on smoke-free can have some impact on this low single-digit decline, but nevertheless, that is a trend.

Great. Thanks so much, Emmanuel. I'll pass it on. Thank you.

Thank you. Our next question comes from Matt Smith with Stifel. Your line is open. Hi, Emmanuel, I wanted to ask about the increase in the underlying guidance. The currency range is up about a point from the previous midpoint. That reflects the stronger second quarter and some favorability on the tax rate. Is it fair to say the second half is more or less in line with your previous expectations? And can you provide a little more detail on the considerations in the second half? You called out phasing and comparisons and costs and the impact on margins from those and the timing of those. When they become lapped into the base.

Yeah. I think, you know, when you look at the there are, of course, a number of elements that can distort the vision quarter on quarter, H2 versus H1. What we wanted to ensure that everybody understands is that in fact, the momentum in Q2 on smoke-free is in fact even better than Q1. And Q1 was already very good. But in fact, in Q2, we've seen an acceleration of the IQOS in-market sales. And, you know, we are nice to back to nice double-digit growth. Very nice and very powerful reacceleration of ZYN in the US. Of course, you know, elsewhere ZYN and VIV are growing very fast. But Q2, in fact, is a very nice acceleration of our smoke-free business, and this is absolutely visible in our numbers. When we look at H2, in fact, we expect a continuation of these very strong momentum that we’ve seen in H2 on smoke-free. So we expect IQOS to continue to grow double digits in term of adjusted IMS. We expect now that we have availability which is no longer an issue for ZYN in the US and expect the continuation of this very strong acceleration of ZYN in the US. Again, I reported the 37% growth for the first two weeks of July. So H2 is starting on a good note for ZYN in the U.S. So this momentum is unchanged, and we expect it to remain very strong. Certainly, what is going to be less favorable is the trend on combustibles. We were almost flat minus 0.3% in volume in H1, and we expect a 3% to 4% decline. I've been explaining the drivers for that. Despite that, we expect growth on gross profit for combustibles but nevertheless at a lower level, of course, than in H1. So this is one of the reasons for the differentiated performance in H2 versus H1 for what we can expect. And then you have a number of phasing element on smoke-free, which have nothing to do with performance, but which are due to basis of comparison or a number of one-off events. If I look at IQOS, there was this one billion stick shipment in Q1 that we're going to compensate in Q4. And, of course, that is favoring H1 and penalizing H2. We had super favorable comps in H1 because of accelerated sales of devices last year that has been growing profit and margin. We're not going to have that the second part of the year, so that's another element. Then you have the restocking that has been benefiting H1. And, of course, we'll not be benefiting H2. But I think that’s really what is behind the guidance and I think if you take all the element I've just been sharing, you have the right understanding of the dynamics. I hope this is helpful.

Very helpful. And as a follow-up, pricing for heated tobacco units was up, I think, low single digits again in the quarter. You're about a year into realizing a nice contribution from pricing in that business. In the markets where you are taking pricing, how is that impacting volume and new user acquisition relative to your expectations? And has that changed the way you think about the pricing potential in the HTU business over time? Thank you, and I'll leave it there.

Sure, Matt. I think we’re really trying to make sure we don’t penalize volume with price increases when it comes to IQOS and ZYN because we described how positive the volume growth is because we have higher revenue per unit. We have higher margins. So the name of the game is, of course, to absolutely optimize the volume. But there is obviously, as we are growing the franchise of the brand, the strength of the brand, there is a positive to increase price without impacting the volume. And I think that is the right balance we’re looking for, which is we increase volume, but we certainly don’t want to change trajectory on volume because of that. So price yes, but provided it does not impact in a meaningful manner the volume trajectory. That is our strategy, and that is what we will continue to do.

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

Thank you. Hi, Emmanuel. I had a few follow-up questions on ZYN. Based on everything you discussed and, you know, what you're seeing in the market, should we assume the lower end of your full-year shipment guidance range is more realistic? I guess I’m trying to understand, is the high end even possible in your mind? And then can you update us on your capacity and where it stands today? And when it will increase.

Sure. So of course, if we give this bracket, we believe that we can finish the year within the bracket at every point of the bracket. We are giving the 800 to 840 million. Clearly, the fact that, you know, this ten to twenty million lower restocking than what maybe we thought, I mean, that is having an impact. But at the end of the day, you can see that the restart of IQOS can be very powerful. I mean, thirty-six, thirty-seven percent. We are restarting commercial activity advertising. So we don’t know what’s going to be the growth profile for H2. So that's why we are still comfortable with the 800 to 840 million can bracket. On the capacity, we can say that today, we have been building comfortable capacity to face all kinds of very dynamic growth scenarios for the future, and therefore, we are comfortable for the coming quarters.

Okay. And then maybe just another follow-up because you just touched on something that I also wanted to ask about, which is, you know, now that you're essentially back in stock or can ship to demand, how does that change your strategy? You know, as it relates to ZYN, as it relates to, you know, your pricing, promotions. Are you going to get a little bit more aggressive in an attempt to possibly grow ZYN faster to take more market share? Just how are you thinking about that?

Thanks. Yes. Yes. Of course, Bonnie. So you're right. As I said, we go for putting all levers to maximize the growth of ZYN, and all that in a very different environment because now we have full availability. So during many months, many quarters, we've been refraining ourselves from acquiring new users because we knew that we were not really able to supply the need for new users. So that means limited activity across the board. So in terms of pricing, in terms of marketing activities. So we're going to restart normal activities, and that will certainly include more promotion. We have a much lower level of promotion than any other brand, and I think it will stay like that. But it doesn’t mean that we cannot increase the level of promotion as well. That will be certainly advertising and commercial activity on the point of sales where we need to step up now that the product is available. And that will be the continuation of building the brand franchise and all these iconic elements of the ZYN brand and the fine using campaign. So we're going to pull all levers to make sure that we give the best support to ZYN.

Okay. Thank you. I'll pass it on.

Thank you.

Thank you. As a reminder, to ask a question, please press star one one again. Our next question comes from Faham Baig with UBS. Your line is open.

Hi, Emmanuel. Hello. Thank you for taking my questions. To be honest, your answers have been very thorough. So I don't have many more. But I’ll take two. I noticed in the second quarter, the gross margin gap between combustibles and smoke-free narrowed. And maybe smoke-free even gross margin slightly reduced to Q2 on Q1. Maybe if you could expand on some of the dynamics around that and maybe what you expect for the gross margin gap over the next couple of quarters? And the second question is probably simple, but if you could please remind us your FX hedge rates for the year, both euro, Japanese yen, and any other currencies that you may hedge.

Yes, Sam. So on the gross margin evolution, you are really looking after the comma because, in fact, we are both in Q1 and Q2 around 70% gross margin rate. So, of course, the mix of ZYN or, you know, the importance of the device can have an impact. But globally, in line with what we said after Q1, we have a small pre-binder that is around doesn’t mean that it can be a bit below, but around 70% gross margin. And I would expect H2 not to be very materially different. Okay? So I'm not saying it's gonna be necessarily at seventy, but I think we are ballpark in this area where there is a very nice gross margin rate for smoke-free, higher than combustible, and you noted that the gap has been narrowing a bit. It's still significant, I mean, four point five for the full H1. And it's because the combustible business has been improving a bit which is pricing and mix of the combustible sales in the quarter. So when I look at the second half of the year, I think I would insist on the fact that the improvement of margin on the smoke-free business was very important in H1 as we were facing easy comps because of a lot of Illuma device sales last year as we were launching Illuma I. Fundamentally, this is not the case again in H2. So we expect margin on smoke-free to stay high and expect, of course, the progress year on year to be reduced because we are facing higher margin last year on the smoke-free business. For combustibles, I think we said that we have the ambition to increase the gross margin as well, and that is valid for H2.

Okay. Thanks, Emmanuel.

Thank you. Our next question comes from Callum Elliott with Bernstein. Your line is open.

Great. Thank you very much for the question, Emmanuel. So my first question is on VEEV, if that’s okay. For a number of years, I think as a company you guys were quite reluctant to expand too much into the e-vapor space, citing lower loyalty in that category and the resultant lower gross margins that came from that lower loyalty. We obviously heard a bit at your Europe event a month ago about this increasing emphasis on the three-category approach and the sort of the synergies for all three categories. When you sort of play in all three areas at the same time, yeah, I guess my question is what's changed over the past year or two to drive this increasing three-category approach? And in particular, I think you called out in the release the improving gross margin that you're seeing that you may have in particular. I wonder if there’s anything qualitative you could share about what that means.

Sure, Callum. So, I guess it has been explained with a great deal of detail during our European day. So I’m sure I’m not gonna come with the same granularity. My first comment will be to say, be assured that we know what our priorities are. Our priority is first and foremost to grow IQOS. Okay? This is a leading star brand. This is the one where we see the biggest potential. This is the one where we have the best profitability. Yes. ZYN could be one day at the same level, but, of course, it’s in terms of volume, it’s very small today when it comes to most of the market. So that's something for the future. You should see VEEV as an aiding brand to our portfolio. Yes. There is an interest in the multi-category play. I'm not going to repeat everything we presented in Europe. The fact that we have some consumers that actually prefer to be only in one category, in one brand. And sometimes, you know, there are also smokers that want to fully exit from smoking. They will only do that if they move to several smoke-free products. And that's when we want to be able to offer several smoke-free categories, and this is having a role to play in these circumstances. We are, of course, putting priority on this where we believe we can develop a profitable business. And that’s, of course, a very, very important condition to develop these. I’m not going to quantify the gross margin of these, but I can tell you that it improved by more than ten percentage points at the beginning of 2025. So its profitability is improving very rapidly. And we believe that with the right loyalty, the VEEV business has a possibility to have a similar profitability as the primary brands. Together, you need to have the right loyalty, but the elements that we see today on the market where we develop this seem to show that we can generate this level of repurchase and loyalty. So it’s a bit short as a summary, but these are the conditions for us to develop these. And that’s what is behind our VEEV progression.

Just as a clarifying question, when you say similar level of profitability to VEEV, do you mean percentage margin or unit margin?

Well, in term of gross margin on revenue.

Okay. Perfect. And then my second question is on ZYN, sort of the intersection of Gaurav and Bonnie's two questions earlier. Where obviously, what you've spoken about is a cadence of growth that in Q3 is something like 27% year on year growth. But maybe a little bit impacted by, seems to be, you're suggesting some destocking. Then the full-year guidance implying a reacceleration again in Q4. And I guess my question is I wonder how the commercial activities sort of flow into that reacceleration that you’re forecasting for Q4 and how confident that you are that as you lean back into those activities that you did in the past when you took over this business from Swedish Match that drove an acceleration back then. But as you lean into these activities again, you had stepped away from when you had the supply chain problems. Did you have this ability to drive the acceleration? How confident are you in that? And does the cadence of these activities explain that sort of cadence between Q3 and Q4?

Look. I think I've been kind of already, you know, giving the answer I could give. So, yes, indeed. That is pointing to a very dynamic second part of the year. Again, the level of growth in the consumer offtake in June and at the beginning of July is pointing to a direction that is broadly in line with this growth, and it is at the point in time where we haven't yet as I said fully restarted all the commercial/marketing activities. So we are hopeful that this will provide further boost to the growth. I don’t have much to add at that stage. I think that the data are out there on the table, public, and everybody can can understand the objectives that we have.

Maybe I can just follow up then. Like, how quickly can you turn these commercial activities back on? Like, it seems clear that you were taken a bit by surprise with how quickly you were restocking. So how quickly can you turn it back on?

Well, yeah, it’s not it does not happen in a few weeks. It’s gradual. It’s not everything at the same time. So the teams are very busy in the US today restarting gradually everything. But you’re right. That is like, you know, reshooting an engine. And to get to full speed on the engine, it’s going to take some time. I’m not going to elaborate further, of course, as you will understand, but that’s something that is going to happen gradually during the course of the third quarter.

Okay. Thank you very much.

Thank you.

Our next question comes from Gerald Pascarelli with Needham and Company. Your line is open.

Great. Thank you very much for the question. Most of them have been answered, but I just I wanted to go back to currency. If you could give some color on exactly what transpired in the quarter. You didn’t get the benefit that you have been guiding for in Q2. And that really is this despite the fact that the dollar weakened further over the course of the quarter. So I think the expectation that maybe in addition to an underlying EPS raise, we would have seen an even bigger benefit to your adjusted EPS just due to a more favorable outlook on currency. So, you know, not looking for detail on your exact hedges or anything like that, but maybe just some color or thoughts on how we should think about the currency tailwind in the event that we continue to see this dollar weaken over the back half of the year? Any color there would be great.

Sure, Gerald. In fact, what probably people are not always kept in, I think, you know, versus the ten cents we're coming up with, we are around four cents versus consensus below what the consensus was expecting. I think it’s largely the Swiss franc, both in the negative impact that it has because we have a strong exposure in terms of cost to Switzerland. As you all know, we do. But also because the intercompany flows mean that when there's a lot of volatility and there have been a lot of surges in the Swiss franc versus other currencies, at the end of the period, that is generating some transactional losses. So that's a significant impact. And, actually, when I look at what is driving this ten cents estimated impact at the prevailing rate, in fact, the Swiss franc is to a large extent offsetting the benefit we have on the euro, just for people to understand. So it’s a very significant negative impact.

Got it. Thank you very much.

Thank you.

Thank you. And our last question comes from Priya Ohri-Gupta with Barclays. Your line is open.

Hi. Good morning. Thank you so much for taking my question. Emmanuel, I was just wondering if you could walk us through the working capital piece on free cash flow. It looks like based on the numbers that might have been seasonally a bit weaker than what we normally see in the second quarter. Is that largely attributable to the IQOS dynamics or what else is going on there? And then we expect most of that to reverse as we get through the back half of the year.

Yes, Priya. So, really, I think when you look at the end of H1 on the differences versus last year, I mean, indeed, the cash generation is lower. Most of it is the payment of duty that we made in Germany and the final payment of the job act in the US. I think that the cumulative impact is largely north of one billion dollars, and that is really the biggest impact. Otherwise, yes, we may have had on a temporary basis some inventory building, I mean, supply chain, of course, playing here and there. You may have some regulatory constraints. But I don’t think that for the year in terms of working capital, beyond the two elements I mentioned, you should expect anything special.

Okay. That’s helpful. And just with one housekeeping item, what was your capex in the quarter?

I'm not sure we're disclosing it by quarter. I’m not going to give you the number. I think we said $1.6 billion for the year, but we don’t split that by quarter.

Thank you.

Thank you. That concludes our call today. Thank you all for joining us. If you have any follow-up questions, please contact the investor relations team. Thank you again, and have a great day.

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