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Philip Morris International (PM)

Participants
Nick Rolli Vice President, Investor Relations and Financial Communications
André Calantzopoulos Chief Executive Officer
Martin King Chief Financial Officer
Michael Lavery Piper Sandler
Robert Rampton UBS
Vivien Azer Cowen
Adam Spielman Citi
Pamela Kaufman Morgan Stanley
Chris Growe Stifel
Gaurav Jain Barclays
Call transcript
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Operator

Good day and welcome to the Philip Morris International Fourth Quarter 2019 Year End Earnings Conference Call. Today's call is scheduled to last about one hour including remarks by Philip Morris International management and the question-and-answer session. [Operator Instructions] Media representatives on the call will also be invited to ask questions at the conclusion of questions from the investment community.

I will now turn the call over to Mr. Nick Rolli, Vice President of Investor Relations and Financial Communications. sir. ahead, go Please

Nick Rolli

you release us. our containing full quarter thank issued XXXX today, a and results. press detailed year for and Earlier joining we fourth Welcome information on

or may the You release the on PMI Relations App. access Investor www.pmi.com

which are definition today's GAAP A reduced-risk posted RRPs, business measures, are other and and products, adjustments, webcast most the metrics for reconciliations glossary our as including to website. well at directly our or of terms, calculations of slides, the the end as comparable on transformation U.S.

Hedges, Unless otherwise have our XXXX. reflecting are a stated, the Rothmans, all IQOS Inc. which are & our basis adjusted been references presented effective IQOS to to of March pro like-for-like results, subsidiary, deconsolidation Comparisons XXnd, heat-not-burn XXXX for forma products. Canadian on Benson

projections for forward-looking in the statements review cautionary forward-looking of results. contain forward-looking to projections from release I disclosure various statements. attention to that remarks cause statements or press direct a the and future actual your Today's results could differ and materially factors of today's presentation and

Officer. pleasure question-and-answer It's Executive our session. Chief for Financial King, join our André Chief André? Calantzopoulos, my to Officer, the introduce will now Martin André

André Calantzopoulos

gentlemen. and you, ladies Thank and welcome Nick

from Our reflect underlying XXXX both portfolios. strong results smoke-free our business continued and performances combustible to

target IQOS volume track of and a XX to billion is performing to tobacco broad on shipment strongly billion geographies remains meet heated firmly across array of unit our units. XXXX XXX

product under now subsequent launch & our future. agreement Altria. by our Drug in notably IQOS in worldwide. perform Administration of Atlanta underpinned transformation is to tobacco application business solid and pathway We for the smoke-free Richmond our Food commercial Meanwhile, in continues available markets IQOS authorization from the a licensing with XX and Commercially included important through the U.S. pre-market This well our achieved pricing. combustible to product a the version several milestones

trend cigarettes starting volume volume. me through our Industry full prior now results, of for our the in and than units X.X%. line around X.X%, slightly declined of you elements by heated the year better with broadly Let and historical take forecast tobacco total main with

with the tobacco Our by of of which driven shipment volume previously by industry outperformance X% unit in declines, communicated gains decline tobacco was X.X%. helped to our of X.X The cannibalization. partly heated X.X%, by forecast cigarette share offset impacted points heated declined line

X.X was fourth I highlight quarter, Focusing of volume due that inventory of quarter geographies effect of also of decline shipment unfavorable combustible prior greater XXXX the to reflects to inventory in effect X.X% on this year Union a while partly like quarter, XXXX. small, partial anticipate would of movements cigarette in across units billion movements the year the the QX European reversal notably in the region these the Japan. compared to and the We first

X.X%. declined Fourth quarter by volumes in-market sales

previously in As recent our Philippines. of this pricing sales in quarter reflects third impact and in-market anticipated remarks, the decline Turkey the primarily

competition, but basis, pricing a a on weak in due the improved total the industry was QX our to in our cut the or share XX% the year, pack, impacted In our share price August five cigarette which mainly due the two was disproportionately April increases during -- In of illicit timing the decline. vis-à-vis volume Turkish sequential Lira consumption. tobacco addition given market totaling and impact XXXX, to taken Turkey, of in decline to per our rise

by share a from lower mainly market of total strong the aftermath the our partly a compensated this volume/mix volume immediate Though price increases. cigarette reflected In performance perspective, was a in Philippines, Marlboro. decline industry from

volume on from notable with shipments quarter, track of units over of tobacco target in across keeps in shipment billion performance volume growth well Russia Heated XX increased and units billion fourth XXXX us broad-based billion Region, XX% the by shipment XXXX. This to units. Japan our contributions unit XX and XXX reflects to billion our EU the markets XX including to launch deliver

that heated make in X% compared performance now excellent XXXX. This as tobacco almost up total units, means to nearly nothing shipment of volumes, our

this further, reduced expect positive proportion as our continues. products of momentum to We grow risk

increased Turning portfolio excluding XXXX, results, growth our currency, our for tobacco from heated strong in to financial pricing net by combustible by revenues X.X% -- product driven and units.

revenues reached devices, IQOS billion of net to or PMI's or XX% $X.X RRP close revenues of net billion for revenues. with approximately $X.X XX% accounting total RRP net

price favorable markets. retail of impact mix longer the device device The heated proportion of in of highlighted unit of devices previously, As revenues lifespan the select reflects volume. and tobacco geographic this changes IQOS lower primarily latest

variance We excise recorded by rational tax tobacco for better environment. and initial the expectations our strong than combustible helped XXXX, broadly competitive a pricing a of in X.X% year,

contributions average historical variance, since Indonesia in the Russia, were to and Philippines from notable was spin. the in There in Germany, the This and pricing, aforementioned line addition Turkey. XXXX with the

income operating unit. excellent currency-neutral by effects the margin was adjusted a an by income for On This by points. basis favorable margin XX.X%, driven RRP increased scale basis, tobacco XXX heated and while expansion mix grew adjusted geographic operating

and drivers firmly reach billion of $X to cost helping impact Additional investment, finance over growth by to efficiencies combustibles our RRPs. track in the of on pricing include behind XXXX, we're initiatives, where

investments currency as share of efficiencies program. the Adjusted excluding cost of all offset partially our realized forecast million To X.X%, with earnings increase of strongly, $XXX part our and point, X.X%. increased spend, XXXX, exceeding overall around our planned net RRP prior growing this in we in diluted higher by implemented incremental per

a non-controlling rate. the the reflects in in interest compared currency-neutral diluted share, quarter and explained operating income, As third tax lower adjusted like-for-like per earnings growth results, higher adjusted higher to

benefiting billion, full expenditures $X a related optimization. cash capital costs certain by and from assumption $XX.X of production working our initiatives slightly cash billion, came efficiencies. operating of the in timing below billion, of Berlin of benefiting billion flow $X.X of factory our number year to $X.X around increased strong from Our Capital

more point including to with XX.X%, than tobacco units, share by by heated Turning grew which reached offset for cigarettes, for higher X.X share cannibalization, now market impact our share, share X.X%. of total to lower international the

Region The in Argentina, particularly the portfolio Turkey. reflecting Korea out-switching points, European to coupled our Indonesia, in and declined cigarette IQOS, lower share by and notably Union continued with of Japan, share, smoker X.X adult

this by share XX%, Marlboro's out-switching, all-time high the of of Philippines, Saudi increased Indonesia, driven an X.X cigarette and the to by category despite points Further, Arabia Turkey.

IQOS XX%. is of approximately commercially markets, the XX representing weighted-average international our in where markets, XX% now these available geographic within market, is coverage total

in including This Hungary, markets City. Emirates, the fourth the follows States United the launch, focused in areas, of of quarter and X XXXX, addition Mexico initially United Sweden, in select Mexico, Arab the new

new our another the launch international with now part IQOS smoke-free in all Amazing campaign. important the supported future, by our of of X In journey latter towards we the markets, year, which brand of is DUO, took in Simply our IQOS step available

IQOS. The benefits to relatable everyday, to Simply of focuses switching emotions, smoke campaign who moments by and otherwise continue Amazing adult the showcasing on to would smokers,

This IQOS latest X addition and X the time consecutive with allows it's uses was more without recharging enhanced two is adult IQOS while PLUS. to from holder, help designed cigarettes. the IQOS compared features IQOS faster to X.X switch DUO to family seamlessly smokers significantly charging

satisfaction, us we on We have from initial as effects which innovation, XXXX. response encouragement rates consumers' seen offers roll-out conversion the DUO, consumer start and of of to positive on

nurture future to innovations pipeline platform. strong continue a IQOS of and for product core improvements We the

of increase were million of significantly of IQOS estimate expect course rate that of addition to representing as nearly detailed on acquisition our XX more a performance. to momentum, now year. users over in current of We million total this users RRP there the the the adult year-end, discussion Turning four we XXXX. Based

have We total of Russia smoking further with a reflects in near and or growth IQOS, strong Ukraine stopped million that users Germany, close with and including Italy total users IQOS of switched a to estimate X.X the in users reach of stages trebling balance conversion. the Poland, XX This highlights to XX and million various user of growth the X.X in widespread near in very million. addition of in a doubling to

X.X% IQOS where now continues been IQOS tobacco heated for me progress. performance were you IQOS units IQOS share This as has the excellent Indeed position third see tobacco through in commercialized, full performance overall XXXX. Let number The of in markets quarter international despite the not heated take a having units share, in from to fourth number tobacco largest quarter. achieved in mentioned with the in earlier. of markets a been four distribution increasing brand has third national the the

The continued across growth of excellent a progress reflects of IQOS broad market. range

a trial and commercialization focus cities adult with the Our the starts approach within awareness, on smoker -- market, cities a key conversion. of building key

awareness at see we This both us gives this encouragement of and number future see key reach the as the potential our level off-take in strong cities. the of geographic a in and rates we consumer national trial. slide, momentum to share further as increases growth On

tobacco In of cigarette compared share of of fourth reached unit an industry to the XXXX. doubling, X.X quarter increase volume, near X.X% HEETS quarter heated region, EU total points the fourth for but and

On in growth This share volume by as detailed reflects strength of accelerated a a In-market total slide. this approximately compared in the It increasing range XXXX. IQOS grew worth that quarter sequential sales continued in noting X.X XX% in quarter representing volume is present also basis, points. the broad of across markets the to industry areas, geographic third growth is region. XX.X%, only

XX% up units. performance third point, in is sales IQOS quality also quarter the and the versus by Russia billion conversion by consumer registration while HEETS increased in-market quarter, rates share increased share to basis improving fourth time. over On by X%. HEETS X.X high reach points X.X a over acquisition with The with reach of strong rates continued in sequential to one

quarter of consistent geographic and HEETS was share the smoker with pace our growth expansion. adoption in the adult

at half an the by in the of now are compared cities, IQOS estimated XX% market commercializing quarter. approximately total the industry volume of end second representing to We

reported to by Marlboro in launch line supported of Japan, heated and quarter, total extensions a share X the in X.X tobacco and HEETS by our units the line-up. increased reach In DUO HeatSticks points fourth IQOS for XX.X%

mentioned, treatment products cigarillo share previously has are October total a XXXX. of As somewhat past ruling steps These metrics announced currently category, over price share low significantly quarters rapidly reach preferential total recently the over of tax December. gap this industry the by two we of grew a October and have the in though tax which in XXXX distorted in the party to the presently X% council enjoy closing two and Japan tobacco

we our of Philip growth this likely fair is the current the enter quarter to to category share. Morris brand temporary, be in to the plan While with capture

movement, On prior tobacco a for and points including the by increased adjusted the to XX.X%. total inventory our heated quarter X.X versus points year cigarillos of by and X.X share sequentially view brands trade tobacco unit

helped This adjusted grew tobacco estimated the XXXX to a X.X% movements. over which inventory declined trade cigarillos, including in-market fourth drive market including category almost X% heated impact tobacco and of compared over tobacco for growth heated sales of quarter of tobacco to unit trade total volumes movements. XX%, inventory the just adjusting brands a cigarillos share total after for overall

impact Korea, on there flavors highly confusion of the taste the particularly competitive, remains tobacco category goes the present and lingering In are on the category related Korean a dimensions in heated tar. also in remains consumer The FDA's the also new cigarette XXXX communication by non-menthol that of area category.

declined fourth X.X HEETS adjusted X.X points quarter or by share basis. by an on in points the

and that on basis, continued line-up. recent share was stable IQOS launches quarter and flavor to a X our by DUO the grow, However, supported adjusted segment sequential share fourth expanded essentially

build heated of tobacco we the encouraged position. are to IQOS' this category's we upon lot do have still a While work by and reinforce trend, benefits to leadership

in launch arrangement of with key through the Altria. XXXX commercial the U.S. our development in IQOS A was

The women XX milestone Richmond, historic the smoke. a million providing of in and who better in to opened and continue the in launch Atlanta markets first stores the retail States United marking IQOS men initial alternatives to

in excited market the it opportunity. early While we're days the about remains significant commercialization, lead

product by reminder protection for on public PMTA Administration, the the U.S. Drug the and authorized pathway a IQOS is Food As heat-not-burn health. as appropriate of only so market the currently the

otherwise continue We also further convert in efforts consumers plan support to adult will the coming to seek an the to device the who smoke. months, of which IQOS U.S. X additional marketing would order

success our our to this portfolio, launch of Building product IQOS e-vapor plan X.X on year. heated the we tobacco MESH

deploy consumer commercial launch plan Following still this of the later also around the we optimal these part such, although confusion to to Unfortunately, of moderating, took year we the initial the will and XXXX, misperceptions as e-vapor reach postpone scale. persists our in third we decision launch. now quarter when in capacity to at

will market operate. XX% result, double faster rate we a geographies in to million It's of retail that IQOS of X.X tank which markets of adult a acceleration concentrated reflects product contribute numbering number value. with to users, a existing e-vapor of which plan up worth briefly in tobacco, making the dynamics of of products. international The despite MESH heated of This XX the through commercial to its heated to open than rollout As XX low low second -- XXXX. international heavy full pausing is the consider around a existing degree skew approximately the a relative half market of differentiation conversion half systems, tobacco less almost and the small

over deliver In Of these been superior optimistic trial dynamic to XX designed experience have nicotine consumer able our RRP commercial a growth seven IQOS time. our further business summary, capabilities MESH and to IQOS infrastructure repurchase. product drive and MESH concentration. on also drive and be and meaningful limit we're will that will existing in a has this leverage to markets, address The

the outlook to products rationale wide we KT&G commercialization of adult to providing on of RRPs, of agreement array for price the will global smoke-free category, recently this of technology a collaboration terms and key of with Korea. the which in their smokers. taste, require smoke-free choices growth also brand, products, the commercialization multiple agreement is a for Lastly, The announced outside accelerate

complementary category The has we commercial leveraged when strategic technology, to strong with are built innovation economic and term of capabilities best-in-class. pipeline to capabilities be as around makes portfolio it products, to sense and our substantiation of growth we range can broaden ours. have further drive and partnerships which including do others engagement RRPs so. in see regulatory smoke-free infrastructure These scientific to KT&G a and know-how,

approach We we of under deployment. of commercialization elements market-by-market to agreement responsibility intend have this all for product supply apply and to a

an run for the commercial the The period based with on of market agreement expand three intention will footprint initial years success. to

terms sold requirements be financial scientific is don't launched arrangement, reduction Products they royalty the PMI's their the standards based regulatory to under as disclose a ensure of and of agreement markets quality the meet are the we where they such careful to While this agreement. will potential. subject harm of assessment well as in high substantiation

exciting products this There launches towards MESH now commercialize we in our We first XXXX, ahead. have are this later plans KT&G in no to own With active working year and United launch are current the agreement IQOS the year. States. and an

prevailing rates forecast We at of $X.XX earnings per increase share X% and currency Turning projected excluding rates, an unfavorable diluted in share impact On a share be compared earnings to least of reported approximately represents basis diluted to to this a at XXXX least XXXX. $X.XX XXXX. $X.XX per in versus guidance. adjusted at diluted reported at exchange prevailing per of of $X.XX, exchange pro-forma like-for-like forecast earnings

quarter, particularly phasing, expect the quarterly softer revenue we of to in and quarter, first strong EPS terms and be the growth, notably in second In net growth, XXXX.

a the in The the favorable of first absorption XXXX, pricing included the quarter, of which increase in benefit Turkey. quarter timing Philippines, first excise substantial with comparison a will from and tax

that weighting of noting comparison both of effect the growth performance quarter pricing effects. a the seen tax-driven to markets second of Indonesia. worth quarter, the XXXX XXXX second and non-controlling It's higher to will the will of with also by, significant half annualization interests continue half in first into due most the impacted in strong in to XXXX, pronounced second the the performance be likely Conversely, in

me Let in in now dynamics explain more Indonesia detail. the

price. industry increase industry-wide, tax a As tax excise effect faces January The in with Xst, atypical banderole on we an weighted-average increase catch-up excise on a the the of minimum of said pricing. XXXX and XX% December, in excise tax XX% took year implying

the in with in-line XXXX, the While of the with broadly relatively no is the XX% impacted potential XXXX of The price should stack, our average us increase opportunity which also the historical context and share to percentage weighted banderole higher levels. tax price address increase gaps increase price, two-year average steep at tax excise pass-on the a give in performance. is tax the

October and January, of X% pass-on. a of basis, weighted-average on or far, XX% announced have So pricing between approximately we the

with catch-up from some Xst. comply XXXX. one-time lagging price highlight the new on to impact effective also of require that is in our minimum We pricing larger tax increase excise the of lack a pricing, To date, will our should variance the any and April competitors are on retail

With benefit XXXX first in not annualization minimal creates will $XXX of exceptional taken pricing over drag months we year, this a in the last variance one-off pricing our from nine taken the the period. usual of prior million. increases of effectively year effect dynamic on This

In line around the trade. likely quarter, to and retail industry, in in work XXXX, with the price X% new through second to highest the billion minimum prices in comments, selling new XXX by as with our the we way their the XXXX, effect the total decline units prior X% measuring impact expect takes

expect resumption this of improve With in dynamics the year, to market pricing we XXXX.

certain Our XXXX combustible the in to at which XXXX. variance roll-out we as dilute approximately assume this our significant, Indonesia, just reflects pricing X% key stage, to guidance noted, assumptions. we pricing most is The in

pricing our excise robust a and than generally tax environment. XXXX is still is by lower supported While very rational variance, this

around combination this with cautiously assume revenue projected in In at X%. X% X% of stage market currency-neutral net growth Indonesia, the total to of decline we

However, guidance of currency-neutral remain per least X% share in growth. I reiterate confident would very we at earnings our that

margin in related fruit, annualized bearing to XXXX project-based the outlook; One $X category a this cost where initiatives reasons of efficiencies. cost model management, over for productivity, is to cost by organization are and by confidence efficiencies deliver our led positive the efforts important other billion

expected cost we XXXX, investments. efficiencies net fully incremental to RRP offset expect In

to linked new and user scale With plus consumer new additional retention, primarily reach existing market the business, costs entries. of variable reflect our and now RRP geographic growing investments acquisition

cost in of is XXXX. expected per acquisition with user an Consequently, decrease improving, the XX% in per our user cost

platform increase of commercial the increasing We XXX operating least in income points neutral our contribute to leverage to in expect basis of currency margin an XXXX. at

market volume to Moving for is backdrop, to total around estimated X.X% X.X% industry year. the decline our the

historical weaker industry the in Japan, which in category calculations. the While the situation of Indonesia, this XX% additional average market cigarillo temporary around of comes which not X.X% total growth much in cigarette the is to is total volume. the this than factor present of reflects from very X.X%, represents An included

a the in on points growth the we market of X% As to the industry, Japan. in X% global decline with cigarillos an shown expected on points around X.X has chart, from effect of assumed X.X Indonesia further

and fully the historical there deviation two puts remaining the these average takes elsewhere, usual While unchanged. are together from fundamentals temporary the impacts with explain underlying

An Union, additional European on our upcoming included cigarettes industry in development Tobacco ban effective is menthol forecast Products May XXXX. the the in Directive

Menthol while industry the not IQOS is for given decline covered significant we And XX% impact to a further by in variants not volume menthol variants are capsule for menthol HEETS and around make expect region. the up that consumption the on X%, of ban. of overall there X% opportunity a do

XXXX a tobacco We X.X%. cigarette the volume PMI again of total and to expect heated shipment industry to unit X.X% and anticipate volumes in outperform approximately decline shipment trend,

to expect Turkey. slightly better mentioned shipment and dynamics the in already the volume be the due our in We first trends to compared half second half to Indonesia

growth on by specific XXXX. to billion units continued shipment, target shipment for While XXXX to XXX providing track we we're well heated tobacco volume broad-based of not unit our a target meet and billion XX remain expect

of compared requirements billion, expense effective tax relatively last capital to XXXX. rate working and with of year, We movements. to cash full interest targeting flow consistent approximately XXXX currency $XX.X year-end We're operating approximately stable and net year subject a XX%, anticipate a

expected one-time the Australia, Berlin of the restructuring. cash timing in impact related to of the costs new and payment adverse certain rules excise This includes factory

be $XXX capital factors cash We to approximately two $X account unfavorable this billion. expected an project these million. total expenditures of impact for approximately Together, year

XXXX up Summing strong progress very our a future in made our business we to transformation significant year, a in both smoke-free organization results. our and

almost have in since September Just in billion commercial years our up full-scale XXXX, four in of one IQOS we business. $X.X first revenues, already over launch RRP Japan making net fifth the

XX margin adult strong with IQOS sales XX% increasing our and close and stopped HTU evidenced continues revenues where as to by seen increasingly strongly, smoking to in the IQOS. XXXX. are have RRP in Importantly, markets perform growth growth smokers volumes switched to in-market accretive XXXX, an to million profits, from expected number of of already

number is XXXX at XXXX project and of of infrastructure as We user investments mostly new a several the the of over the that cost the past large years to course significantly than users per lower, are be RRP higher completed.

on confident portfolio, focused growth remain ex-currency are at in per least on XXXX combustible our pricing at to We growth leadership Indonesia, our revenue delivering and headwinds power. is and guidance well share the are of which X% very performance Despite track in to XXXX growth. our and adjusted maintaining robust temporary targets we annual of deliver also the X% net XXXX compound least earnings tobacco

our we opportunity shareholders strategy future smoke-free confident time. reward with and us a in RRP and portfolio current business are our our single to and accelerate generously are future Finally, the our for over provide that to convinced largest continues growth

happy now questions. are I and Martin you. to answer Thank your

Operator

Thank you.

now will session Instructions]. the conference of the conduct [Operator question-and-answer We

Our line Piper first the Sandler. comes from from Lavery Michael of question

Michael Lavery

morning. Thank you. Good

André Calantzopoulos

Hi, Michael.

Martin King

morning. Good

André Calantzopoulos

Good morning.

Michael Lavery

of key from market rapid the some Can has two bit your mouth. both bit word you One I is, are more the comes like that on they a growing costs as little dynamics of But I'd of of of a that per more. just on and scale drivers then hand of and different understand you just get past acquisition lower the out driving you've Hungary, adoption in select a in guess love mentioned also you you're see the touch the nowhere. second, year on really what's in talking points mature. example, markets. plus adoption little efficiencies what four curve? are for I in And to of how some a about user sort of some one then the ends guess, going IQOS, share of

André Calantzopoulos

a we Yes. every learned from apply we what a guess, time previous Well, in we the as launch one. market, organization, I new learning

chart start this shorter and So faster next I showed And like week. CAGNY will explain where that the shorter. a we is and we think in recently time growing

every a deployment it's knowledge. The fact that's new learning digital the one, previous growing we starts that organization. organization market, open that So of makes faster skills than of more and

have in have in decrease this infrastructure invest does the we little as year will more also clearly, XXXX, money Now the in we to per and cost a place, user bit decrease retention. down I would say, retention more the But also have although clearly, so will is sense. go of know, the as cost higher, acquisition it makes we cost of you people. and

Now that we bigger CRM to that have definition. a than consumer because a have our is by not enough people invest losing someone we in acquired there, loss base more bit much acquiring

the Okay. type that more data beyond now start of things over we we time help build And just the and different special on we digital products also can beyond so time infrastructure, as and to can editions business and because consumers over us on. enlarging normal accessories have a offering have

per is the incrementally Was grow RRP, we of number so continue side further to that, and that it see will optimistic so user obviously the in we all on retain Michael, investing This I'm and you that's that's how I down and the going cost we consumers, know, positive So more users. clear? although define. further go

Michael Lavery

converted who usage take XX% or users What the quick convert. about fully year that you're XX%, evolution to that. as No. at who and different very look well dynamic? for say, product, ago, pretty just we to gotten adding a amount Thank or for of does think it's two just When should users new kind fully that you've obviously related it using charts IQOS saying of constantly shown of helpful. amount But the maybe typically transition follow-up the consistently One time have XX%, way, also a consumers, related show or around obviously, like users That's the started. of how you. is you XX% of it somebody that's more began to that

André Calantzopoulos

much sometimes for time average, users to the a we Well, switch. on take on people weeks month more individual, new fully the say depending clearly, to two

They obviously, immediately Okay. it. they start the products because bought using

I Now, would have regarding think retention it's increase will time, I we retention. this stable, in new the and programs, over CRM, fairly our say, with

you Now it market as depends on know. also the

of have vastly buy we and good consumption, people enhance a a where competition markets, retention, if is typically cheaper lot we further devices not from and this get dilution competition other products, some can but In I markets a because I few they activity, we think very much competitive I of retention we try the deploy program the as CRM successful, think yet year. better have now where we during compare

I'm we improve have we here. what from can happy So really with and

Michael Lavery

very That's much. you Thank great.

Operator

with comes Robert question from next of Your the line Rampton UBS.

Robert Rampton

Hello. Three questions me. for

there first The Japan, have would are markets there flip – where be in outside then growth any IQOS volumes accelerated? any where are the markets side, and on Korea sequential and sequentially declined has

André Calantzopoulos

Okay. I mean, except market. for every Korea, I would say, in we have growth

glycerin, saying similar to The of although, they by what there two because we're heat-not-burn product different is markets they in to on very very the cigarettes, phenomenon of in is significant and toxicants confused a June, other of around consumers kind but dissimilar what in category many Korean although paths. beginning of that e-vapor with a found and communicated, and to water when tar category confusion compared that product similar is particular the have the the very yes, the not one comparing consumers chemical. a is this at because reduction of is tobacco is we the heated year to but Korea apples is last there Okay. cigarettes, happened happened FDA, the oranges,

think bit the and to stalled I restart take has of this a So category, time will the process.

more we other see any that's will in not except agreement, where Korea, by alignment have Korea with the that right I think have sooner, and issue. consumers they realization the the to I or the an think grow help thing after don't the KT&G, we category, but there with later authorities is I now do for much place

Robert Rampton

the Great. And just of in margin terms then expansion.

by So, cost about of the how how think expectation is driven if savings increases fair pricing cost is about, we think pricing the and IQOS, we think say incremental it and by should or impact offset IQOS much saves, your that? to of is that XXXX

Martin King

a is margin number the expansion Yeah, of by factors. driven

of in very very IQOS tobacco EU, First it's growing mix margins which in has rapidly on good partly all, via now that we're the units.

The point stepped second saving piece is, up significantly. as out, have cost you initiatives our

making these the and with where fully and At of margin a down into as various cost we're tobacco for breaks the the heated better offset by cost especially, for and In we initiatives investments productivity, for get this scale, area, you units buckets. equipment get RRP better big the better point, the that's behind operations expansion uptime are on now savings saving couple benefit we at have the consumables waste. producing that

We're whole footprint area. the improving across manufacturing the

You saw XXXX and to and which of initiatives have able we across into products. begin in done optimizations of to factory in be less we've to put beyond become our money rotate ways the spending and all out find also to last categories intelligently off areas and efficient pay it year, more risk reduced the efficient

percentage as we pay to focus to last increase, point in very we're and our margin the year, effort and whole then year committing going the least at percentage expansion saw started strong forward X.X that years you at increase out to is will off year continue something that for on was So last this X.X well. this

André Calantzopoulos

Yeah.

pricing, we Indonesia, below had we took would is which assume happen. we stage this this essentially explained, to not at okay. due say, in I from to year Indonesia, XXXX bit pricing Because but is of a be annualization foresee than XXXX pricing XXXX, going we Regarding as if I to

there pricing no one, Obviously, in XXXX. was real

steep a be pricing annualization a Indonesia, resolve situation there you increase. about this So no it we But pretty XXXX XXXX. out how during is that in assume in and we and to rolls have have cautious will bit

pricing So Indonesia normal, back of okay. in annualization we in XXXX come have and to

Robert Rampton

Apologies. Excellent.

Just one give margins, at cigarettes the terms some in follow-up, IQOS in other? operating Russia of end on can it compares color to how at Italy say you and us one

André Calantzopoulos

margins higher IQOS Well, than are cigarettes.

Okay.

of Martin a basically IQOS the lot improvement from clear as that's So coming, explained margin essentially. and is

Robert Rampton

very Okay. Thank much. you

Operator

Cowen. Your comes from of Azer the from next question Vivien line

Vivien Azer

you. Thank morning. Good

Martin King

Vivien. Hey,

Vivien Azer

on comment that I clear. hoping commentary for your in the guys constructive on could category you So this RRP sound competitor's very key morning the that on Japan. IQOS momentum was is you

be for XX% industry specifically may as that. growth competition they're can different capture to comment intensifies, you than a on you volumes have saying that they moderate looking more Specifically, view of

André Calantzopoulos

is the I the growth. I to of I the comment think we to we growth category. it them, have think but with going the all And that's this to both higher stage growth initiatives well positioned it's we be Maybe the than precise at see very important difficult largest what part of see part. capture are the and

the key where So that we thing remain market momentum we'll a part accelerating. is has increasing share overall year lion's is still and end, exactly see share. share the IQOS and segment as We're but the segment focused. we of unfolds positive the and

the key So that's retail. thing to

Vivien Azer

Perfect. That's helpful.

what Just any Can offer you between end a mix color is XXXX? Japan. follow-up Marlboro on your at the on in HTU and HEETS of

André Calantzopoulos

the after HEETS, down-trading, head, would is I price I Marlboro little I don't again. the in say growing, back it's would and numbers more to now have increased of my Marlboro stable cannibalization than but prices both stable. had bit growing, because say, exact but the is are We a increase but

Martin King

I we haven't exact think, given Vivien, the split.

André Calantzopoulos

Yeah.

Martin King

I than had the Marlboro's given that expected and think expected. better to pricing. originally more than it's being we up ended We HeatSticks now bigger safe up But has HEETS by that would component a Marlboro we share Marlboro thought HeatSticks say share, held

hand, its that a sensitive. On array job the did of offering price broader available making were expanding other their and of to category consumers HEETS the more

job. and performance did this overall with it its satisfied we're So

However, is tobacco margins for HeatSticks which than the stay for the more course Marlboro originally our with to profitability. positive and planned, heated users we of opted

Vivien Azer

Sure, absolutely.

from should be watching yesterday. your appreciated certainly e-vapor around taking there that that's a EU. I on concerns to seemingly of we are Last some one commentary e-vapor concern me. the in the of or we most outcome. your any competitors consumer one spreading That's principal consistent André, where great out Now, from what confusion for, risk particular with markets hold is dramatically? Are that heard

André Calantzopoulos

the spun after with deaths Well, wrong I the people by maximum the and was in that the cases think in the way. was lung unfortunate some disease U.S.

As there people the know, better, all spread are there this efforts. that yet, but confusion we you think are because out despite I getting is still not

bulk Union build scale. on case our more in at that this this our into the misuse nothing okay, was are explain with European is oils others e-vapor making on and to to capacity the the and go and market, plan e-vapor because with has year end, do category have with any that was to the the My Myself and of perspective on. – towards cannabis, the capacity then we so

earlier on planned a of couple try markets a had basis. We

to the it's in will IQOS especially, we I since better think the oil under the e-vapor brand. not put fire, put

I bit of towards time Union, So was let prefer year. which capacity build to doesn't in We it reality we and our fly. the end this plan the that European confusion, for move a minimize little

that's my perspective. So

commentary, I by it's Organization my was stop here it's about think the time, people are there World of there unacceptable. not much is misleading and Health reading said, would but recent and health and And came to the Q&A some more in this that and misleading that malicious I voices of I it the so is in say public statements advocates top out

their modified still but they misleading. So they version,

more this So appear phase their I alternatives a we the credibility I'm seriously people the more and it concerned, as short-term this of say is thing, part you term, alternatives far the talking And Hope now. more as and things, otherwise better frankly become think because who I the more not think now I and lose of the that's but may more and these speaking, lose what just are because said they more insane more credibility. I -- I they credible thing for and and the have let's that commercial are saying smoke. will stop nonsensical in these, see long voices good situation people explained that's it's more clear. reset stopped why, But are would now

Vivien Azer

you Thank so clear. much. Very

Operator

comes question Adam of the from line next Citi. Spielman Your from

Adam Spielman

for much very taking the question. you thank Hello,

was on tax And question to IQOS. before baking the ask there turning one to so Vivien in around you're question. this the that October we're the I year, the variance, your for assumption going any quick obviously pricing rise asking in get first that's As question can Japan, just about Japan, is in whether

André Calantzopoulos

the Adam. Well, in obviously all any, guidance, pricing is

much hope increase make how tax is some an is assumptions, opportunity in a there we'll always Japan, they there we'll we're pricing, not. see So or materialize to when get

Adam Spielman

very clear. that's Perfect, very,

the you've the to market growth question, had So begin really so strong a and and about share with, one and X.X% European the Union thinking in – core quarter-on-quarter high, really, you begin real question much with, is IQOS in obviously had then around to QX, European QX. growth the so

And sort out in I sort wondering forwards, a how think smooth there progressing just whether in is seasonality just how was we and EU should about any two disappointing QX you you we should in and then things, slightly how that my share of think, going think should strong QX? market those really performance view of in

André Calantzopoulos

Okay. broad as is share seasonality pretty obviously on heated unit. the strokes, bit less In favoring hence tobacco cigarettes in summer little okay, that's there market on a

say bit it would I a momentum. the in of was October/November as XXXX a pretty I the whole we thing, recovered slowdown quarter, second with by but although marginally affected September U.S., situation e-vapor had in just good moment entering we're the of think a of The IQOS and was in the we very

Number of users is increasing.

explained, us of I for year. opportunity is think an second the menthol As half the towards I

So I'm the about the very in optimistic Union. European momentum and outcomes

Adam Spielman

more I a CRM medical EU you good? partly that because expect XXXX also issue, you the summarize, whole than is momentum get to users just just think saying, new in in the in but of so did the you're And XXXX, to so

André Calantzopoulos

that's what I'm saying. Yeah,

Martin King

Martin. I'm Adam, Hey

the On the is seasonality IQOS EU heated tobacco there share in unit there.

small at XXXX to with the XXXX, QX then increase a QX bigger look you see from again dynamic, same see instance you to the you increase QX and for the from QX in in basic dynamic. If same where is relatively

addition, is, is higher we had warm effect this but and André year are it's to Cigarettes back In in more pronounced use so with the seasonality the mentioned that you as see weather go to cigarettes. outside this it is use frequently news be in the without outside worry you going more as people volume other lower as this much whereas flow, EU they the weather, IQOS don't more even do what could piece. -- because and far you as months, then can changes winter on much the any quarter-to-quarter easily

to So it's seasonality be share the that's these cigarette impacted. driving really numbers

André Calantzopoulos

the increase the I number would of users significant say, Overall, Adam, overall we a across in see market.

getting that scalable. markets now the the fact happening momentum. more in it's getting mouth think of are I use see we're We more And Okay. scale, also to due the we tools word and

accelerate. So I see this hope will we

Adam Spielman

four is, slow rate which market gained last five well would of share. share, question fast. speaking, growth or to it you've very X%, of obviously is so and large year think then you in points in market quarters Russia, very you've had And slightly? guess to market percentage turning quickly, so I a roughly do Roughly that QX you share gaining you're the you continue now X% expect can got

André Calantzopoulos

things. to Well, all need first comparable compare we of

Okay.

growing there and have in in we expansion. expansion obviously for There still that are scope We some where helps cities we started still some before. is

pretty probably cities, a and the the certain it's don't we Russia of the will at XXXX. need would because stage, large a certain in would we to essence in be wealthy getting somehow, for my point at say mind XXXX, need the clear of in price the in will least Now portfolio part in that second that more a plan know mid-price I this we of premium have I part segment. but we

Okay. I And that's it. see how

the but in big in time we So a cities. need the prepare over for terms we reaching see limits of affordability don't slowdown, to

us. in have of more started Now in we the runway cities front we just clearly,

Adam Spielman

you much. Thank Okay. very

Operator

the from of Your next from Morgan question Stanley. comes Pamela line Kaufman

Pamela Kaufman

morning. good Hi,

André Calantzopoulos

Hi, Pamela.

Martin King

Hello, good morning.

Pamela Kaufman

anticipate you've you last investment the over level incremental of quantified So relative year. investment in a do How much each incremental XXXX? years, to several IQOS in XXXX

André Calantzopoulos

going the day, on to end and of consumers less is bit variable. the the At than a depends be number view you all XXXX my it of in Well, acquire. it's new all

is saving are offset that would this we savings say Martin as comparable number a XXX and of we a be -- would the on But have between basis I on initiatives. all users clearly from said, cost that new XXX have by certain are all So variable. cost purely the because in we and depending there

So IQOS mix that geographic plus of helpful. the margin is helps clearly expansion the that

Pamela Kaufman

portfolio and with this see and partnership to partner your see their wanted helpful. you your I you IQOS e-vapor Thanks. And also That's with better do given fill how modern competing in to the gap products, KT&G expands and to to that oral? understand hybrid decision need a products

André Calantzopoulos

the can products I is said of will this everything I very very I open the we the and to a partnership. simple our do day on new at we Yeah, the many to own add what principle don't we're think all partnership end invent think times, is or and

scientific we have capabilities route time. has think way to have assessment IP product, and product same which interesting by like in KT&G have the an the we is technology, the product we complements, heated tobacco And the that the a peripheral I that obviously my view market. vaporizes hybrid at

cannibalization. -- there are right heated for certain we points may did our second think I products. own segments, we and this we consumer And their Japan, we for know-how And but potential didn't see price with have improve decide market-by-market, Japan, also the We points certain the we from our discussed is inside with so if some are necessary, the they performing for product. this can cannibalization, product tobacco more has much more we I that much in from two think and to product, When Japan, complementary IQOS what example, strategy. We're product heated markets think there and the heating tobacco as be is price in still incrementality. it's

how that's it. So see I

and that markets at product, and tobacco e-vapor the potential more plans major hybrid has how much I in interested stage, their it. team heated a these not in with see this the the that's we have but For

market. have also technology that access more overall, one for from We country have the also that's centres of a view we a Korea electronics. alignment And Korea, is would the point say like important Korean I in of for to

win-win works I of financial for it's a companies. license a the It's for agreement, both us. both So think

much wide look expanding with I markets to forward and consumers them right offering range in working more So the products. of

Pamela Kaufman

initiatives impact price market last your year? Are and Thank an in give you among on over trial increasing adoption the update you. growth and harder Japan tobacco the from can device the to you user to later this on accelerate reductions heated new adoption in convert other IQOS And adopters? seeing

André Calantzopoulos

Certainly, some. we see

the IQOS now see because consecutive the we this adoption. some better and problem address help, with people but the think it DUO I is we addressed multi, use would product for We with important. main also

avoid at to pricing in come the that's product a that The prepare all and always generation premium. general we the always of these the portfolio is also and will price promotions money, think for promotional right we next the

why So three major and year price upgrades version. significant the And explained, innovation doing a we having view new a years we're in of as that's every strategy always Japan. reduce portfolio previous the and in the times, version have in every of forthcoming I two, many we

the because So see there device prices, reaction say works. it but more mix consumers having where the more buy is enormous whole X.X of actually issue. IQOS on that still X.X, X, reaction is still the reduced income market in because and disposable market. By really where an that the We helps, price the a sensitive lot reduction we -- a is just there Plus Russia

in entry that's much pricing, are is the I think current one. only we're and constantly the forthcoming is a and version answer that resolving more the to working points not the consumer pain the on why barrier category

the philosophy little apply. that's we bit So a

Pamela Kaufman

Thank you.

Operator

question next the line of from Chris comes Growe Stifel. Your from

Chris Growe

morning. good Hi,

André Calantzopoulos

Hi, Chris.

Chris Growe

a you earlier question. of bit I from had for question follow-on a just Hi, and a

is said, As have in in guess and users acquiring interested that going scale I'm IQOS RRPs. down, per and cost user your effect I you you in

those assume that? are cited the new year you that infrastructure money same about you year are X think think how as You, MESH. the time, $XXX about you launch as they the to a think as million had for resources of I -- same to at Is $XXX I you can of Are figured Platform spend understand cost or obviously, lot the of being the trying of to just million I'm more used part the same those or you launch lot this of but leverage the this have for products.

André Calantzopoulos

Well, through franchises. kind new go our which retail products, obviously, infrastructure, own if these you of our where retail, this third-party means

place, platforms infrastructure can are a digital own Our more you our way. put coaches, that much obviously in have in use efficient you the now

the vast be So more even going to are cheaper on of category a IQOS I is assume still IQOS heat-not-burn people it's would say fact to the need just basis the by the before e-vapor during user per allowed to explain massively to people. a we year that we existing to that, to what the product. majority we are compounded bit benefits still the is and and explain investment difference the on MESH of compared have We what don't when much

So category no behind. there explanation is effort

So view in or it my the will much less cheaper expensive be product. than heat-not-burn

Chris Growe

in more bit are or you that. of XXXX? Because about Japan accelerate. notable. seeing then response. you market number the talked point you when some Are your years share quarter? hope over where of question, EU? got we the that X% that stage IQOS of this markets Okay. markets, gets at And question seen increases in are that do Yeah, in markets market earlier see follow-up you to my that the in for threshold, Do that thank see ago the of start we more of one we question. Are But a -- fourth X.X% quite that see in And EU, a really this the -- you share to you share question -- in and we a in to market few accelerated at to have started is a those -- in has and couple really

André Calantzopoulos

in see in Well, and markets more hope XXXX. we more we'll

we grow, higher we expect -- million compared number much the we said X to I users of As number a to had expect which users, that. means than

a market basis, this call acceleration on I same okay. So

Look it's feel the good the fourth beginning of the year, about we quarter.

progress much good at cost. date to and have you into on XXXX. up We lower a comes that keep how going we momentum We'll

nicely. pretty it building we're think I So

Chris Growe

you time. Okay. Thank your for

Operator

one for question time is and Barclays. Jain from final Gaurav have from that We

Gaurav Jain

you subsidiary, morning. on we can the are Hello, us protection is question My so the with happening? Canadian are RBH where which good tell creditor negotiations,

André Calantzopoulos

give but details. I more progressing, are cannot they Well, you

the Still, there I is we details, litigation Once can resolve things progressing. a issue. have but discussions there more Okay. are of something to concrete, and all stay give you are

Gaurav Jain

Sure. follow-up, Juul in and around launch, so not would A MESH if changed for considering Altria Juul agreement, applying on of is some the PMTA, you a a allowed consider other for language IQOS the the their things? market year

André Calantzopoulos

think I plans we a before. have lot of for

I the in PMTAs. that's we we for over to we important same finalize the that's in apply know the other think the appropriate on to of head going one also we as we time, moment we have U.S., will few anything. next So, for many you countries. day, be for enter want due if is have few but type PX, when probably a U.S. but don't to And the busy on, IQOS, file will still studies PMTA FDA and discuss The all market. very the in months to on U.S. the do for

Gaurav Jain

both sell-through and for I one last question, can sell-in last you the And ask comment trends the Sure. versus if quarter on XXXX? the for in can IQOS, full

Martin King

bit versus the actually, I'm little was sorry, a the sell-out, more sell-in approximately the your equal. If in-market or shipments. are than we anything sales versus in shipments the words, IMS

on there was inventory no the change year. So,

Gaurav Jain

Okay.

André Calantzopoulos

I Yeah, it's beginning in said from line with the year. of

Gaurav Jain

Sure. a Thanks lot.

André Calantzopoulos

Okay.

Martin King

you. Thank

Operator

Presenters, closing of any you call. do Q&A the session today's concludes have remarks? That

André Calantzopoulos

you to would joining. I Yeah. like thank all for

this be air year. a the would And I the is had something pretty cautious now, thing shape. the this this see XXXX good in I in all, how unusual very coronavirus. think We good we one unfolds. We just this that is beginning the a say, of to prefer we'd First We just of mean about Indonesia. around the that entering XXXX. We're outlined whole, at issue

have no problem We today.

a very clearly, I for few device that that else, in weeks. persists of and travel some like think there issues if some in chain; for everybody we may if long be But with supply. time we're of impact and period shape terms duty-free on have pretty But good supply a continues, may the

continuation like any not that's to resolved. baked going this be our is hope is this but of guidance, not all a we in Now, soon company into

So it behind us. we put

So, thank to forward and good again a you look pretty I XXXX.

Nick Rolli

call. the much. That So, concludes very thank you

Switzerland. contact you Thank If the Relations Have any questions, have day. here Investor in please a follow-up you. great team

Operator

That conference concludes today's call.

now disconnect. You may