Earnings Call Transcript - PM Q1 2026

Emmanuel, CFO

A strong start to the year with outstanding growth from our international smoke-free business and very robust pricing driving impressive progress despite a particularly strong prior year comparison for both the U.S. and combustibles. Income growth exceeded our expectations, driving plus 10% adjusted operating income growth and plus 16% adjusted diluted earnings per share growth to reach $1.96. International smoke-free delivered a striking performance with double-digit volume growth, mid-teens organic top-line progression and high-teens organic gross profit growth or almost plus 30% in dollar terms. This was led by IQOS with close to plus 11% adjusted in-market sales growth alongside further multi-category accretion from ZYN, which reached the estimated joint #1 position in parts of Europe based on Nielsen estimates. The financial performance of our combustible business was robust, delivering results in line with our midterm model with low single-digit organic top-line growth and low-to-mid single-digit organic gross profit growth. This was especially remarkable considering cigarette volume declines were at the more negative end of our expectations following a prior-year period of volume growth due to a number of temporary factors. This reflects the enduring pricing power of our portfolio led by Marlboro alongside efficient cost management. In the U.S., ZYN offtake volumes grew by plus 10% despite an even competitive landscape. As anticipated, segment financial performance was challenging due to the specific combination of impacts this quarter, including increased investment and the comparison to Q1 2025 which had close to no price promotion and significant inventory rebuild as we exited supply constraints. As we flagged last quarter, there was also a channel inventory overhang at the end of 2025, which largely normalized in Q1 and thus impacted shipments. We continue to invest for future growth and expect U.S. performance to progressively improve over the course of 2026 as we prepare to launch ZYN innovations and comparisons normalize, notably in the second half. Overall, while the global economic outlook is uncertain, our strong financial performance in Q1 underscores our momentum and gives us confidence in delivering another year of best-in-class growth. Let's discuss our Q1 results in more detail, starting with the headline financials. We delivered over $10 billion in net revenues, representing a plus 9% increase in reported terms and plus 2.7% organically, surpassing our expectations for a broadly flat delivery. The strong performance in our multi-category portfolio more than offset the Q1-specific combination of U.S. and combustible headwinds I just mentioned. Adjusted gross profit grew by plus 10% to $6.9 billion, reflecting plus 3.8% organic growth and plus 70 basis points of organic gross margin expansion. We achieved this through strong pricing, operating leverage and the continued benefit of smoke-free mix, partly offset by the anticipated U.S. impact driven by the same factors and partly offset by increased growth reinvestment. Adjusted operating income also exceeded our forecast, growing plus 10% to $4.2 billion with close to plus 1% organic growth. Adjusted diluted earnings per share grew by an impressive plus 16% to $1.96, including an $0.18 currency tailwind supported by positive Q1 transactional impact in addition to the generally weaker U.S. dollar. Our effective tax rate was also slightly better than expected and more favorable in this quarter compared to the forecast full-year rate. Our international business delivered an outstanding quarter with both gross profit and OCI growing by around plus 10% organically and around plus 16% in dollar terms. This was achieved even as we invested strongly behind our smoke-free portfolio. The excellent organic performance of smoke-free was the clear standout with plus 11.9% volume growth, plus 15.8% net revenue growth and plus 19.4% gross profit growth, driving gross margin expansion of 210 basis points to 70%. This was primarily driven by the continued broad momentum of IQOS in addition to increasing contribution from ZYN and VEEV. Looking at PMI as a whole, our global smoke-free business delivered very solid organic net revenue growth of plus 5.3% and organic gross profit growth of plus 3.9% despite the dynamic in the U.S. We continue to expect strong global smoke-free growth for the full year, supported by high single-digit volume progression and normalizing U.S. comparison. In international combustible, while volumes declined by 5.1%, organic net revenues grew by plus 1% and gross profit increased by plus 3.9% with strong pricing and effective cost management outweighing volume and mix headwinds. Gross margins expanded organically by 190 basis points, underscoring the resilience of this business. Turning now to volumes, total shipments declined by 1.9% as compared to our broadly stable forecast for the full year. Smoke-free shipments increased by a very good plus 9.1% versus prior year, in line with our full-year target of high single-digit growth. This was primarily driven by plus 11% growth in HTU to 41.3 billion units, including a modest net phasing benefit of around 0.5 billion units across several markets. In addition, the stellar plus 95% growth of e-vapor largely offset a decline in oral smoke-free volume of 16%, notably reflecting the U.S. shipment and inventory headwinds previously discussed and timing dynamics in the Nordics. Total smoke-free product in-market sales volume increased by plus 11%. Cigarette volumes declined at the high end of our expectation and above the international industry decline of 2.3%. This reflects a number of dynamics including the lapping of exceptional plus 1.1% volume growth in Q1 2025, which included inventory replacement in a few markets such as Indonesia, Russia, Italy and Spain. In addition, a challenging economic environment has contributed to a higher level of illicit consumption in certain markets, while excise increases in some countries, most notably Mexico in January, drove a significant industry decline. Looking ahead, we expect volume declines to moderate over the coming quarters, and we continue to forecast a cigarette volume decline of around 3% for the full year. This includes a negative industry impact in India following the introduction of new excise rates in Q1. Looking at our Q1 top-line drivers, strong pricing and the positive mix impact from international smoke-free more than offset the negative volume and mix dynamics from the U.S. and combustible. Pricing was the largest contributor, adding plus 5 points. This was driven by another strong quarter of combustible pricing at plus 8.5% and with international smoke-free repricing of plus 2.9%, led by IQOS offsetting the impact of more regular promotional activity in the U.S. compared to the very low level of Q1 2025. International smoke-free mix also made a substantial positive contribution of plus 2.7 points. This was partly offset by a 1.8-point impact from the U.S., reflecting the abnormal combination of factors outlined. Currency added a further plus 6.4 points, resulting in reported net revenue growth of plus 9.1% for the quarter. Overall, the composition of Q1 growth closely mirrors the structural drivers of pricing power and smoke-free mix delivered consistently over recent years, underscoring the sustainability and consistency of our growth model. Moving now to adjusted operating income margins, which expanded by plus 40 basis points to reach over 41%. This notably includes a positive currency impact, which enabled us to increase margin despite additional reinvestment in future growth as well as unfavorable timing and comparison effects. Gross margin expansion contributed plus 70 basis points, driven by the factors mentioned earlier, while only a small impact from disruption and cost increases related to the conflict in the Middle East. With regard to SG&A, as planned, we continue to invest in commercial programs, scale and innovation, both internationally and in the U.S. While Q2 is likely to see further strong year-over-year investment, we expect this to moderate in H2 and for SG&A progression to be organically at or below the level of net revenue growth for the year. Currency provided a meaningful tailwind of plus 110 basis points, supported by a favorable comparison to transactional losses in the prior year. Overall, while this quarter had the slowest expected organic growth of the year, we continue to invest in our smoke-free portfolio supported by efficient back-office and manufacturing cost management, including approximately $150 million of gross cost efficiency realized in Q1. We remain on track for full-year organic margin expansion in 2026. Turning now to our worldwide smoke-free business, we delivered in-market sales (IMS) volume growth of around plus 11% in Q1, approximately 3 percentage points above the industry smoke-free product growth rate in markets and categories where PMI is present. This reflects our ability to capture over 70% of industry growth in these markets as compared to our share of around 60% and is driven by the strength and scale of our multi-category portfolio. We remain focused on expanding the footprint with three geographies, adding another category to reach 55 multi-category markets and two new markets for smoke-free products in total to reach 108. This includes the launch of ZYN in Portugal and Kenya and VEEV in Egypt. Within smoke-free International, IQOS delivered another strong quarter with adjusted in-market sales growth of plus 10.9%. This reflects very good and broad-based momentum across markets and regions, including Europe and Japan. Adjusted IMS volumes outside these two geographies grew by plus 19%, including dynamic growth in Korea, Malaysia, Indonesia, GCC, Mexico and remarkable early results in Taiwan. At this stage, following its launch in Q4 2025, Taiwan is the most successful major IQOS launch market to date with a national exit offtake share of almost 6% in March. This represents around 70% of industry heat-not-burn volume and a near doubling of our combined Taiwanese cigarette and HTU market share in the last six months. Global Travel Retail also continued to post double-digit HTU growth with only a limited impact from the Middle East. Q1 adjusted in-market sales included a consumer pantry loading benefit of approximately 0.5 billion units in Japan, ahead of the April 1 excise-driven price increase. Even excluding this temporary effect, growth remained strong at plus 9.4%. Importantly, IQOS profitability continues to expand as we invest consistently behind the brand, driven by a growing contribution from pricing, continued scale benefits and productivity improvements across both consumables and device costs. Innovation remains a key enabler of consumer acceptance and retention, broadening choice across taste profiles and price points. During the quarter, we continued to innovate on our flagship consumables in addition to excellent traction from the expansion of mainstream price DÉLIA and a tobacco-free variant. We also continue to make progress on the rollout of our alternative heat-not-burn technology, "Bonds by IQOS." Following promising results from initial key city launches in Italy, we commenced a national rollout during the quarter. A significant proportion of consumers are entrenched traditional cigarette consumers, fully in line with our mission to provide better alternatives which appeal to adult smokers. The strength of IQOS continues to be illustrated by sustained offtake share gains across key cities, which act as a lead indicator for national success. This includes impressive Q1 milestones such as Tokyo surpassing 40% share for the first time, Global Travel Retail at over 20%, Munich exceeding 16% and Madrid over 10%. Coming back to Taiwan, a particular highlight was Taipei, where IQOS share reached over 7% in its second quarter post-launch and exited in March at close to 8%. You will find additional market and SSP volume data in the appendix to these slides. While IQOS is a core engine of our international smoke-free business, ZYN and VEEV strengthen and complete our multi-category strategy with excellent momentum and significant global opportunities. ZYN continued to deliver rapid growth. Modern oral shipment volumes increased by plus 7% on a comparable basis or plus 42% excluding the more mature Nordic market. On that latter scope, where the greatest opportunity lies, we estimate offtake volumes grew by well over 50% and are gaining share in a dynamic category. This notably includes strong results in markets such as the U.K., Pakistan, Poland and Mexico. Volumes declined in the Nordics, primarily due to timing dynamics. We continue to expand our portfolio to better meet the needs of adult smokers looking to switch by offering a broad spectrum of adult-appropriate flavors and strengths. This includes the rollout of our lower-strength offering, the XO 1.5 milligram product, across a large majority of our 58 international ZYN markets, driving a significant improvement in first-experience nicotine acceptance among adult nicotine consumers. In e-vapor, VEEV continued its remarkable momentum in the quarter, reinforcing its position as the fastest-growing international e-vapor brand among major players. I am pleased to share that VEEV became the joint #1 closed-pod brand in Europe in Q4 2025, as estimated by Nielsen across 19 markets, surpassing long-established players. Quarterly shipments exceeded 1 billion equivalent units for the first time and IMS volumes almost doubled, driven by impressive growth in Italy, Romania, Germany, the U.K., France, Spain and Indonesia. With an expanding footprint across 49 markets, this rapid volume growth and improving margin profile demonstrate its growing value within our multi-category portfolio. This is especially clear in Europe where VEEV was an important contributor in delivering plus 12% shipment volume growth for IQOS, ZYN and VEEV in the quarter, more than offsetting the ZYN dynamic in the Nordics with plus 31% growth elsewhere. IQOS adjusted IMS volume increased by plus 5.4% with a very good performance across the region, despite ongoing disruption in Ukraine and the initial impact from the implementation of the EU characterizing flavor ban in Poland. Excluding markets where excise took effect in January 2025 such as Poland and Hungary, adjusted IMS volumes grew by around plus 8% as the brand's powerful momentum continues. Double-digit growth continued in Italy after annualizing the flavor ban, which came into effect in mid-2024. Other notable markets delivering strong growth include Spain, Germany, Greece, Romania, Serbia, Bulgaria and the Netherlands. We expect further good growth from IQOS in Europe in the remainder of the year. In Japan, the heat-not-burn category continued to grow strongly, reaching around 53% of total industry offtake volume in Q1. IQOS adjusted IMS volumes grew plus 10.4% or around plus 6% excluding consumer pantry loading. This robust level of growth demonstrates the ongoing momentum behind the brand which delivered an impressive increase in adjusted market share to reach a record 34.9%. While competitive intensity in the category remains high, IQOS returned close to 70% of industry heat-not-burn volumes, reflecting the strength of the combined proposition of product, brand and commercial reach. In shipment terms, Japan HTUs increased only slightly compared to the prior year period, which included a timing benefit of around 1 billion units. As we mentioned last quarter, volatility between shipment and adjusted IMS is possible over the year due to the excise changes in April and October. Indeed, we expect Q2 adjusted IMS growth to reflect the reversal of consumer pantry loading and the price increases, which took effect on April 1. While too early to comment on the initial consumer reaction, we remain confident in the growth of IQOS and the wider category in Japan over the coming years. Moving to the U.S., ZYN continues to lead the nicotine pouch category, delivering offtake growth of plus 10% in Q1, as estimated by Nielsen. This performance comes despite the competitive landscape where our portfolio does not yet address all of the most dynamic strength and flavor segments. While offtake volume increased, Q1 shipment declined to 155 million cans, reflecting the inventory dynamic explained last quarter, which I will now briefly recap. With around 40 million cans of inventory rebuild in Q1 2025, the underlying shipment base linked to consumer offtake was around 160 million cans. Therefore, the underlying volume for this quarter was around 10% higher at approximately 175 million cans. As flagged at our full-year results in February, we estimated around 25 million cans of surplus inventory in the downstream supply chain at the end of 2025. As anticipated, this was largely normalized in the first quarter of 2026, resulting in lower shipment volumes compared to consumer offtake. While some quarterly shipment volatility is to be expected in any market, our base expectation is that ZYN shipments should broadly track offtake growth in future quarters against the estimated underlying 2025 basis provided in February of approximately 180 million cans in Q2, 205 million cans in Q3, and 200 million cans in Q4. More important than inventory movements, however, is the trajectory of offtake growth for both ZYN and the category. To that end, alongside brand building and commercial execution, we are sharply focused on innovating and we are preparing our manufacturing and commercial operation for new product launches in the coming months. This includes further investment in our U.S. manufacturing footprint with our Aurora facility progressively increasing initial operations. This brings me to our key areas of focus to drive growth and value from the leadership in this promising category. First, we continue to invest in the ZYN brand and in the long-term growth of our U.S. business. This includes marketing, distribution and commercial activation as well as regular promotional activities which were unusually low in H1 2025. Second, we continue to navigate a complex and dynamic regulatory environment which impacts timely innovation and the switching of adult smokers to better alternatives. It is clear from the science that nicotine pouches are a much better choice for those adult consumers who would otherwise smoke. We also note the recently published data from the National Youth Tobacco Survey showing that underage usage of the category remained stable or slightly declining at low levels below 2% despite the strong growth of the category. The authorization of certain products via the FDA's nicotine pouch pilot program remains a priority. Our application remains under active scientific review and we have a continued dialogue with the FDA as part of this process. The FDA's intent for the pilot program is to increase efficiency and streamline the review process. And while it has taken longer than targeted, the science supporting our application is robust, and we are optimistic that we will be able to launch this product to consumers in the coming months. In addition, we have made a number of ZYN submissions to the FDA that are at various stages of the regulatory process, and we are preparing to bring further innovation to market also in the coming months. With regards to IQOS, we are pleased that the FDA has now reauthorized the previous version as a modified risk tobacco product. We continue to engage with the FDA with respect to the authorization of IQOS ILUMA to enable American smokers to access the world's biggest and most successful smoke-free product in achieving full switching away from cigarettes. Overall, we look forward with confidence to the future growth of our U.S. business. Finally, moving to combustible, which once again demonstrated the resilience of our net revenue and gross profit growth model despite significant Q1-specific volume headwinds which we expect to substantially ease in the balance of the year. Very strong pricing of plus 8.5% was the key driver with notable contribution from Turkey, Indonesia and Mexico. While we expect some moderation notably in the second half of the year due to timing and comparison effects, we now forecast a full-year pricing variance of more than 6%. International combustible gross profit grew by plus 3.9% organically and plus 9.8% in dollar terms, despite strong performance in the prior year, putting us nicely on track for another year of robust delivery. Our cigarette category share declined 0.6 points to 24.8%. A strong performance in Egypt was offset by market mix and declines in Indonesia and Russia, largely reflecting pricing dynamics as well as the ongoing share recovery in Turkey. Marlboro once again underscored the strength of its premium brand equity, reaching a record first-quarter share of 10.7%, an increase of plus 0.4 points year-on-year. Our objective remains to maintain broadly stable category share over time with a clear focus on maximizing value through top- and bottom-line growth, while actively supporting the continued growth of smoke-free products. This brings me to our outlook for 2026. The Middle East conflict had a small impact on our business in the first quarter, which affected shipments to global travel retail and certain markets in the region for both combustible and HTUs. While we have observed increased energy prices and some disruption in energy supply in a number of markets, this has not, at this stage, translated into a discernible shift in consumer behavior. The situation remains uncertain in both duration and potential impact, and it is difficult to assess the broader implication for the consumer or the global cost environment. We have factored in some increases in transport, energy and other input costs, and we will continue to closely monitor developments to assess the mid- to long-term impact across the main variables. Acknowledging this uncertainty and following a good start to the year in Q1, we are reconfirming the currency-neutral growth outlook we provided in February. We continue to expect broadly stable shipment volumes, organic net revenue growth of plus 5% to plus 7%, organic operating income growth of plus 7% to plus 9%, and currency-neutral adjusted diluted earnings per share growth of plus 7.5% to plus 9.5%. While exchange rates are volatile at present, we now forecast a currency tailwind of $0.25 at prevailing rates. This results in an updated adjusted diluted EPS forecast of $8.36 to $8.51 or plus 10.9% to 12.9% growth in dollar terms. For the second quarter, we expect continued strong performance from our international business and a sequential improvement in growth with HTU shipment volume of 40 billion to 42 billion, slower HTU adjusted IMS growth due to the short-term impact of excise-driven pricing in Japan and a low single-digit cigarette shipment volume decline. We expect mid-single-digit organic net revenue growth and solid operating income progression despite another quarter of strong commercial investment. We forecast adjusted diluted EPS of $2.02 to $2.07, including a higher effective tax rate and a favorable currency variance of $0.02 at prevailing rates. This quarter also coincides with the publication of our value report 2025 which provides a comprehensive financial and nonfinancial overview of our strategy, governance and priorities for sustainable long-term value creation. Following the completion of our 2025 roadmap, we highlight the progress made over the past five years across our most material sustainability priorities. Key achievements include the continued expansion of our smoke-free business, further strengthening underage access prevention in indirect retail, carbon neutrality in our direct operations, eliminating systemic child labor from our tobacco supply chain and advancing effective anti-littering initiatives. We also introduced our value plan 2030, a focused, business-driven framework across six priorities: Consumer, Circularity, Our Workforce, Workers in Our Value Chain, Climate and Nature. As outlined in the report, our approach to sustainable value is fully integrated with our business strategy, supporting the growth of our transformation and reinforcing long-term resilience, competitiveness and value creation. I would strongly encourage those interested in how we are executing our transformation to review the report. I will conclude today's presentation with a few key takeaways. Our strong and resilient first-quarter performance reflects the structural growth fundamentals of our business model. Our results continue to be underpinned by three powerful drivers: strong pricing, favorable mix from the ongoing shift to smoke-free products, and volume growth led by IQOS, ZYN and VEEV. While we continue to invest in future growth, these drivers are profit accretive and together with pricing power and cost management, reinforce our confidence in our midterm growth targets. While the operating environment remains complex, marked by macroeconomic uncertainty, we believe we are well positioned to navigate external headwinds. Our smoke-free transformation continues to gain momentum, supported by remarkable cash generation and a strong balance sheet. Finally, we remain firmly committed to our progressive dividend policy and to returning value to shareholders as our transformation delivers sustainable long-term growth. We look ahead to the remainder of 2026 with confidence. Thank you, and we are now very happy to answer your questions.

Operator, Operator

Our first question will come from the line of Eric Serotta from Morgan Stanley.

Eric Serotta, Analyst

So starting with smoke-free or international smoke-free, your profit performance of gross margins over 70% is very impressive. You guys have spoken in the past that while you're still in the early innings of optimizing the supply chain and really harvesting gross margins across international IQOS, as you look at that effort, how much of a priority is that with your margins at very high levels and a lot of growth potential ahead? And then the other question was on U.S. ZYN. Your price gaps have certainly widened back out, not that far from where they were when critics called them out last September as being wider than you'd like. Has there been any sort of strategic change in terms of how you're thinking about the trade-off between pricing and market share that you're willing to pursue in the U.S.?

Jacek Olczak, CEO

Thank you, Eric. So first of all, on smoke-free international margin, you are right, we continue to improve. And I would say it's a combination. First and foremost, IQOS has continued to do well. We've been increasing price in a number of markets. We're close to 3% in price increase on smoke-free and of course, IQOS is the biggest contributor to that. To be clear, that's not the top priority because we've explained on many occasions that on IQOS and on our smoke-free portfolio globally, we are benefiting from a higher margin than on combustible, which is very positive. In dollar terms, we are significantly above—more than two times—in terms of dollar per unit for revenue and also for gross profit. So maximizing volume, of course, is a big objective. But as we are building the portfolio, we are building a very attractive brand with IQOS very differentiated, and look at what we're doing with VEEV. These brands are smaller than IQOS at this stage, but we are also working on the profitability of these brands. IQOS is a big driver. We do, I would say, the best possible job to optimize the profit per unit, but we don't lose track of the fact that the name of the game is to maximize volume because that powerfully contributes to our overall profitability. Now your second question on ZYN in the U.S.: to a large extent, the premium versus competition remains the same as a few months ago. Let's not forget that it is a moving target because competition is also evolving their price, and we've seen a lot of commercial aggressiveness on pricing in the market. Fundamentally, ZYN is the leader of the market. If you look at the brand power, it really stands out versus any other brand in the market in terms of differentiation and brand strength. As the leader, it will remain the more premium brand in the market, and it's our intention that this is going to be the case. Of course, we need to permanently monitor the right level of premium versus competition. At the end of the day, while we're not going to lose our compass—which is to develop a leading brand with a very attractive premium and profitable positioning—we need to ensure that we have the best pricing for that and that we optimize all the parameters, including pricing, to achieve this objective. I can't elaborate more on specific pricing tactics because this is a sensitive matter, but our objective is clear: keep ZYN as the leading premium brand and navigate the parameters to achieve that.

Operator, Operator

Next question will come from the line of Bonnie Herzog from Goldman Sachs.

Bonnie Herzog, Analyst

Maybe a follow-up question on ZYN in the U.S. You did mention you expect performance to improve over the course of the year. So I'd like to better understand what gives you that confidence. And curious to hear how much you're willing to continue to sacrifice short-term profitability to drive volume growth? And finally, given the FDA's slower-than-expected review of nicotine pouch applications, curious if you would consider rolling out some of the innovation you mentioned without approval.

Jacek Olczak, CEO

Yes, Bonnie, happy to take this. I'll repeat what I've been saying on our objective for ZYN in the U.S. and elaborate on why we expect a more positive dynamic in the second part of the year. First, on Q2: last year we had some market reloading in Q2 more than in Q1, so we don't have a fully underlying performance as a basis for comparison for Q2. Second, last year in Q2 there was almost no promotional activity, which meant an abnormally high level of revenue per can. Therefore, this year we will be facing the market growth of ZYN with a more normalized basis for comparison. You can track Nielsen week by week for a view on ZYN performance, which will impact invoicing and revenue. In the second part of the year we expect normalization of the basis of comparison in terms of revenue per can and shipment. There will be, of course, a one-off promotion last year in Q3 (the free can activity) that we must account for; that event negatively impacted our financial performance in Q3 last year. We are also expecting innovation to come in the coming months. I'm not able to say exactly when and by how much it will impact, as this is sensitive, but when we say we expect to launch innovation in the coming months, we expect it to positively impact the second part of the year. If you take all these elements—the capacity to launch innovation, a more favorable comparison in the back half, and the normalization of shipment and revenue per can—that explains why we expect a better dynamic. We will continue to invest in the brand and support growth, but we won't comment on specific innovation details for commercial and regulatory reasons.

Bonnie Herzog, Analyst

Fair enough. I appreciate the color. And then if I may, just a question on IQOS. Your Q1 results came in better than expectations, driven by strength behind IQOS. I was hoping for more color on the drivers behind that strength and what exactly came in better than expected. Also, were there any timing benefits in Q1 on IQOS that might reverse? And finally, as it relates to profitability on IQOS, your margins continue to expand while you also invest. What are the key drivers of profitability growth moving forward—between pricing and productivity improvements?

Jacek Olczak, CEO

The biggest driver for our combined performance is IQOS. I don't think there is any equivalent in the smoke space in the world to IQOS—this is a multibillion-dollar brand, well north of $10 billion. This is a unique proposition and a brand that has been consistently owning around 75% of the category, which is unusual. There is clear differentiation for the consumer. The success is explained by the fact that IQOS is a great product that meets smokers' requirements and expectations and provides clear differentiation from competing products. If I take one market to illustrate that, Italy is a strong double-digit growth example. Italy had been disrupted by the flavor ban and it took some months to adjust, but we're back to strong growth there, reaching in some key cities very high shares north of 20% and we're bringing innovation. A leading brand has to innovate and I think no one matches IQOS in terms of innovation. Look at what we are doing with DÉLIA and with new variants. We are launching Bonds and Bonds is showing promising steps in Italy. That is the DNA of a leading powerful brand and is really what is behind the IQOS success. On margin improvement, pricing is a key factor. We are increasing prices on IQOS consumables in a number of markets. We are also working on supply chain efficiency and device electronics costs, improving productivity and reducing consumable costs. These are other drivers behind IQOS margin improvement. There were some timing benefits—such as Taiwan and the pantry loading in Japan—but even excluding those temporary effects the underlying growth remains strong.

Operator, Operator

Next question will come from the line of Pallav Mittal from Barclays.

Pallav Mittal, Analyst

On nicotine pouches in the U.S., can you help us understand the excise tax environment? We've seen some proposals from a few states planning to increase excise taxes. Earlier this month pricing for the entire category accelerated significantly in some data. Is something changing on the tax front, and how is the industry responding to those tax increases and discussions? And just again on nicotine pouches in the U.S., if I look at ZYN volume trends based on Nielsen data, it might soon be flat or even declining assuming current trends continue. Given PMTA timing is out of your control, what gives you confidence that ZYN Ultra once it comes into the market can accelerate growth again? Any particular market where you get this confidence? Also, are the timing of those innovations dependent on the FDA process or are some launches under your control?

Jacek Olczak, CEO

Happy to take this. On excise taxes, of course we hear discussions in a few states about taxing nicotine pouches. Let's be cautious: I prefer to comment when changes actually happen because speculation is difficult to assess. We're not saying nicotine pouches should be completely untaxed as a general rule, but we believe there should be a continuum of risk reflected in taxation, with substantially lower excise for lower-risk products compared to combustible cigarettes. Nicotine pouches, being lower risk, should be treated with relatively low excise to help smokers switch by maintaining purchasing power. In the U.S., the FDA has indicated these products are a better choice than combustible cigarettes in their public statements and is working to accelerate reviews. We believe that putting high taxes on these products would be counter to the public health intent to facilitate switching away from combustible cigarettes. On ZYN Ultra and innovation timing: yes, innovation submissions follow regulatory processes, and we are following those diligently. We expect ZYN Ultra to be a compelling product that matches the dynamic segments in the U.S. nicotine pouch market and we expect it to bring renewed momentum to the ZYN brand in the coming months. That is our expectation, but the timing depends in part on regulatory clearances. We believe the product will be well received given the market dynamics favoring higher-strength and new flavor profiles in certain segments.

Operator, Operator

Next question will come from the line of Andrei Andon from Jefferies.

Andrei Andon-Ionita, Analyst

Firstly, on heated tobacco, could you tell us a bit more about early trends you're detecting in Japan after the excise tax increase on April 1st? Secondly, in combustible, you mentioned in the release that in Germany you have been seeing a discernible volume decline. Is that market-share driven or is the industry itself seeing a slowdown in early 2026? And finally, a technical question: corporate expenses registered a significant year-on-year decline. What is that attributable to and do you expect that to persist into Q2 and beyond?

Jacek Olczak, CEO

Happy to take this. On Japan, the excise increase was only a couple of weeks ago. It's too early to draw firm conclusions. From what we see in the first days there is nothing contradictory to our long-term confidence in the category and IQOS's success in Japan. We do expect the Q2 disruption related to pantry loading to reverse and we will be in a better position to comment in a few weeks and months. On combustible in Germany, there is both a weaker market overall and some industry slowdown—so it's a combination of market softness and industry decline. The German consumer is a bit under pressure, which is contributing to the weakness. On corporate expenses, the year-on-year decline in Q1 is largely technical: it's due to currency and transactional losses in the prior comparable period. Those losses are recorded in corporate expenses, so by comparison Q1 looks better. It's a Q1 event and doesn't imply a persistent trend for the rest of the year; for the remainder of the year we expect corporate expenses to be more in line year-on-year.

Operator, Operator

Next question will come from the line of Matt Smith from Stifel.

Matt Smith, Analyst

A follow-up on commentary regarding IQOS Bonds and the national rollout in Italy. Can you talk about the incrementality you're seeing from that offering versus trade-down, and the profitability today for Bonds by IQOS compared to core IQOS and how you expect that to evolve? What scale do you need for that evolution in profitability? And a follow-up on Japan inventory dynamics: you laid out the Q2 expectation clearly, but as we look ahead to a second excise-driven price increase later in the year, was the inventory dynamic in Q1 entirely driven by consumer pantry loading? Are there mechanisms in place to keep wholesalers from stocking up, and how do you think about potential impacts between Q3 and Q4?

Jacek Olczak, CEO

Bonds by IQOS is a logical evolution aligned with what a market leader should provide. Initial steps in Italy and a few other markets confirm there is clear consumer interest and the product convinces some smokers who had not switched to switch to a better alternative with Bonds. In terms of profitability, the name of the game is that it should be at least at the level of combustible as a minimum. If we can do better, we will; but certainly it is not coming at a lower margin than our combustible business. On Japan and inventories: we'll see how the October excise change plays out; it's too early to comment on that now and whether there will be similar pantry-loading dynamics. It will depend on what each player does regarding price increases. We'll come back to this later in the year when we have better visibility.

Operator, Operator

Next question will come from the line of an analyst from UBS.

UBS Analyst, Analyst

Two questions on the U.S. nicotine pouch category. First, recent scanner data shows U.S. nicotine pouch volume growth has moderated over the past three to six months. From your perspective, what are the key factors driving that moderation? Second, on ZYN Ultra and higher nicotine strengths with a broad flavor range, how are you thinking about potential regulatory concerns around higher nicotine strengths and flavor variety, particularly regarding the category attracting non-nicotine users?

Jacek Olczak, CEO

On the category moderation, there has been some speculation in the press. The clear scientific view is that these products are far better than smoking. The National Youth Tobacco Survey shows underage usage in the U.S. remained stable or slightly declined at low levels below 2% despite rapid growth of the category. The FDA recently authorized another nicotine product with higher nicotine content, which suggests the agency is not generally opposed to higher nicotine levels when the science supports it. Regarding the recent moderation, part of it could be that newcomers to the category have lower average daily consumption initially, which can slightly soften scanner trends. But in absolute nicotine-pouch volumes, the category is still growing. On regulatory concerns for higher-strength products and flavors: we take these matters seriously. If higher nicotine-strength products and new flavors are backed by robust science and regulatory submissions, they can be appropriate for adult consumers seeking alternatives to smoking. The FDA review process addresses these matters and we are engaged with them. We believe responsible product design, appropriate marketing and regulatory oversight are essential to ensure these products serve adult smokers seeking to switch and do not increase youth uptake.

Operator, Operator

Our last question for today will come from the line of Gerald Pascarelli from Needham.

Gerald Pascarelli, Analyst

A follow-up on U.S. ZYN and nicotine pouch consumer dynamics: as the category matures, are you seeing evidence of higher per-capita consumers graduating from 3–6 mg pouches into higher nicotine content pouches like 9 mg at a faster rate than before? In the context of ZYN Ultra, is having a higher nicotine content product in the market enough to drive a reacceleration in volumes?

Jacek Olczak, CEO

We do see developments in the market toward higher nicotine content products and more dynamic flavor segments. Fruit flavors and similar profiles are currently the most dynamic parts of the market. We do not currently offer products above 6 mg in the U.S., and we have some limitations on flavors today. It's plausible that as consumers evolve in consumption, some may trade up from lower nicotine content to higher strengths and explore new flavors, which contributes to growth in those segments. While I can't point to a single study proving this, that dynamic could explain some of the market shifts and the stronger performance in higher-strength categories. We believe that providing a broader range of strengths and flavors responsibly can help capture consumer preferences and potentially reaccelerate brand growth when aligned with regulatory approvals.

Investor Relations, IR

Thank you for joining us today. That concludes our call. Please contact the Investor Relations team if you have any follow-up. Thank you again, and have a great day.

Jacek Olczak, CEO

Thank you. Speak to you soon.

Operator, Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.