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Philip Morris International (PM)

Participants
Nick Rolli Vice President, Investor Relations & Financial Communications
Emmanuel Babeau Chief Financial Officer
Adam Spielman Citi
Pamela Kaufman Morgan Stanley
Michael Lavery Piper Sandler
Vivien Azer Cowen
Bonnie Herzog Goldman Sachs
Gaurav Jain Barclays
Chris Growe Stifel
Owen Bennett Jefferies
Call transcript
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Operator

Good day, and welcome to the Philip Morris International Third Quarter 2020 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 quarter thank issued XXXX today, a results. press detailed for and Earlier joining we third Welcome information on

Please release Chief COVID-XX. related cause Emmanuel Financial introduce Please press also statements the my a growth in where are of end Relations www.pmi.com actual and note applicable. our from access reflect directly definition cautionary the for I contain comparable also the stated IQOS also products. results attention Rothmans, the and other Benson results. risk various comparison at Unless our or now could as of currency of the which to statements. measures, like-for-like like-for-like forward-looking the release Officer. calculations effective presentation may results which forward-looking RRPs on your March posted reduced glossary statements additional on cautionary the Inc. results, US been or unit Hedges forward-looking as You pleasure are and & and PMI and forward-looking heat-not-burn terms, results note XXXX to a review GAAP Babeau, have materially today's factors neutral, financial webcast direct on the XXnd deconsolidation all our slides, for rates an market Today's Investor disclosure adjusted that of basis basis Canadian heated the most consolidated that projections well future app. website. products including and to differ It's additional The forma XXXX. the reflect of to underlying Comparisons data for IQOS are or Emmanuel? organic to subsidiary, statements otherwise tobacco presented adjustments, and on projections to reconciliations pro references presented to remarks today's for

Emmanuel Babeau

and those the Nick, safe are close everyone and welcome listening I to well. call and ladies hope gentlemen. and you you, Thank to

almost despite have Our circumstances momentum with grown expected the an volumes Most than pandemic. quarter RRPs ongoing net the IQOS outpaced our to revenues, effect reach even third excellent the business of of mix made where million prior business delivered the estimated up the XX.X QX. end again continues. year better September. of the XX% user year-to-date of in our one-quarter an IQOS positive users acquisition total of a at HTU performance on in importantly, quarter

both industry better levels below second wage like also business were overall a economic better our a case degree of consequences in across emerging market We While these Mexico across a with was and all volumes, markets, reflecting consumption notably an Duty Indonesia increased workers volumes places, the the still developed and retain Indonesia, combustible in industry with performance. must the together our of daily wave significant recorded proportion sequential Free. most Despite This markets. and challenging, around Underlying caution of pre-pandemic pandemic remains improved occasions. Philippines. of its

year a This cost again were in increasing efficiencies. duty-free despite profitability ahead margins the on date and and challenges to and business. RRPs our in operating weight Our of significantly the basis, quarter the reflects

least putting strong the was track cash $X in with at target billion us of our flow $X.X of this also reach billion generation cash operating quarter to Our on year.

our organic the basis, numbers, on from X.X% -- QX revenue QX. XX% almost net a decline marking an Turning to significant in declined making the by improvement headline of

Indonesia. unit. organic pricing up number differences with headwinds with strength of Indeed, of including increase IQOS of partially by solid market, strong the in in of towards the factors, timing X.X% prior mix the Turkey RRPs delayed comparison offset Combustible somewhat a revenue by instances, certain some While sales revaluation of of seen rather in pricing reflects it differences inventory combustible in nonetheless in was the XXXX. a prior Japan where we aided a August this our the the in shift distributor X.X% pricing October price this ahead can combined per the timing be our was as Philippines, and year increase include the business. increase, sequential positive the price timing reflecting in tobacco improvement effect in year, These in in net continued than effect a took month such

an versus cover revenue adjusted detail income will noting pleased were to saw year. a strong to with period decline, disruption challenging over Indonesia was cost in efficiencies months the in of weather. the more of expectation by volumes additional the region, of driver reopening a of to many basis primary This supply chain well excluding EPS and increased currency; reflect than the a better better shortly, benefit such quarter. route-to-market. margin we expectation diluted operating that performance hospitality a industry organic on warm as operations, Adjusted flat deliver Given net with last as this strong I and in nine some prior on our our where this of mobility development. settings coincided spending month clearly above organic prior increased I basis. also want XXX including from aspects was our and cost EU first our and the points the expansion of The our over benefit $X.XX the we further of delayed X.X%

a organic in Indonesia RRPs weight only progression our on saw our in factors, Free organic exceptionally good very combustibles. X.X% per alone Our pricing that growth. net from we resilient unit an revenue were by and declined performance net basis, line Despite headwinds. drag these increasing solid unprecedented top on given digit these Duty revenue estimate mid-single the an and We of

XXX income deliver by all adjusted basis. to adjusted basis EPS X.X% growth, organic Our on operating points diluted margin increased an

starting more Let basis. with me gross an is in margin, levers. of now This multiple go basis driven our by organic XXX detail, by expansion into which QX the expanded points on driver margin

ongoing is business. RRPs increasing our an transformation First, mix our in delivering of

Second is pricing on combustible.

on quality is today the margin productivity, focus overall as our with volumes. by net our simplification was and footprint administration Third our a percentage research on than commercial on diluted range X% impact $X.XX between total SG&A development reflecting engine Despite augmented more gross $X.XX, focus and exclude currency EPS already to points growth. business timing the rate This and combustible more efficiency, processes, marketing benefit basis of ways ongoing our an on of This an positive mentioned. The XXX of lower prevailing raising the was unfavorable digitalization costs working. lower as focus revenues efficiency basis. around reflects organic to also offset our manufacturing are where including and of at XXXX, X% of of the our efficient RRP adjusted I impact our certain challenges expected cost from a full There and of $X.XX. exchange organic year assumed we

As market expansion XXX also efficiencies. the in reflecting the above decline development around and industry in an the volume both our factors of in point, OI in of EU adjusted stated better X%, a assumption. organic updated X% decline X% earnings of guidance Indonesia. a now in release, of assume factor total and expected a also basis smaller and have ongoing total We certain X% like-for-like margin to QX We expect shipment our PMI to which in we decline cost

and $X.X tax of expenditure item capital approximately expect rate, We XX% of effective billion to discrete an excluding XX%.

remains economic no national to uncertainty with vigilant assume the in also restrictions the being key as regard in our recurrence We quarter pandemic market geographies. social tightened are fourth and some of lockdowns international and in remain localized

quarter, fourth of markets, the hospitality the should helpful QX. and a assume to provided settings the on we stable versus region increased consumer Russia performance. consumption trends a and including summer opening be our backdrop broadly now Focusing In underlying robust mobility, many conditions EU

countries However, impact tightening results. there quarter see delay uncertainty an costs have and potential will on on from pandemic-related restriction certain mobility The continued our both certain economic now we QX vitality. with impacts localized fourth of also SG&A as remains in

the to effect that this distributor of addition, in was strong Xst that quarter of in earlier price majority In January QX share worth to excise in market remind and you impact took XXXX the I the noting the Japan plain the of tax year revaluation an XXXX the Arabia it's of should while increase base new presents on through October, disruption notably inventories. increase third Indonesia pricing the exceptional requirements. of comparison. ahead due is of This due gain a packaging in Saudi realized

EPS negative our in expect in for growth the X% to flat while we third excluding progression the to unfavorable modestly more now currency. performance year, we the I expect detail. such, estimated $X.XX of will X% fourth to As be quarter, organic cover quarter around organic

the continued year-over-year grow albeit volumes and with Conversely, in better This Russia. EU historic all consumer revenues, the reversal our region, vis-à-vis one was shipment inventory Japan in remains trade net Germany trends quarter, and XX by combustible driven to factor. supported offtake. touch to Russia the of on sequentially was than record cigarettes in improved, contributing HTU by negatively impacted to our As on greater shipments like billion HX a our want shipments also volume build-ups units which movements reach industry I year-on-year decline the HTUs regions. strongly and markets both in average. The

retail in QX both QX, of year Japan, tax-driven there in distributor anticipation for of before increase. Specifically this and and consumer loading in inventories in were October the price reduction following QX increases

As in-market than volume. were sales such the our shipments in our less quarter

nine increase. and price inventories was unit expected in the market year of price XX% the means distributor now X% months the impact performance strong inventory. for revaluation to shipment X% that IQOS HTUs The size on the our to XXXX. the first over cigarettes approximately following main positive QX are from results Importantly, compared in of aligned tobacco the in of XXXX increase in up Japan our and total made of as heated volume This

of continues proportion continue the over positive grow to on as billion to XXX time expect RRPs units to billion in We XXXX. and target achieve this to well remain our on track XX momentum

business. year-to-date, were mainly year. are mix movements, billion the QX our $X.X would approaching now RRP is net to Indeed, IQOS one net total have was quarter, year-to-date, mission the due for transform of naturally to globally and of quarter revenues. we With inventory adjust sales X% Our revenue in approximately RRPs this grow RRP reached if almost over of percentage category the for accounted a devices while Asia particularly just to in of at XX%. scale XX% of our operating over replacement mix, Eastern cycle In X.X+ users RRPs on users, illustration this half still we to amount sell introduced and quarter. longer Europe. and have new to lower revenue IQOS substantial we of the ratio SOLID lower priced and now and original The geographic lil in Australia the device, a deliver third existing East in geographies, from provides is an its region RRP track some

is investment RRP to commercial the and can phase margin investments and scale margin years of recent While experience on over is infrastructure building the built, expansion strong the shows pay weigh in how commercial as optimized. powerful scale back approach be can start as

international now developments very for Focusing share, business. our positive of were the total on our bulk market the

impact to Free share and Before increase In market markets follows where This tobacco reach EU Indonesia, share which Japan by by points. X.X meaningful a X.X of for with cigarettes shares partly Russia. It IQOS units, heated share presence, only Duty lower few was by in points by region, increased the combined exceptions. higher our and the our driven for our cigarettes. has increased that offset X.X%, share increased

other occasion, share However, are naturally higher resulting many that where related PMI in It Free, by only international markets, total lower COVID than back the and of is was Indonesia, true partial also to our in during in restriction. which social negatively over-indexes consumption to markets, Duty average, volume recapture I by come will is Marlboro impacted market share our separately. which

easing Indonesia. the of to quarter. across measures recover we to I While Marlboro now start market, aggregate sequentially is saw uneven the turn share in

notable trade in This excluding tax structure volumes decline from level a primarily remain, consumer QX. in related movements, recovery Industry excise the from a improved the quarter. XX% consumption eased. the improvement declined the depressed by While reflects trends in inventory daily challenges X% as underlying to confinements

COVID not quarter. significant fourth we last in of possibility rise the restriction, localized in as do Jakarta improvement continued the those temporarily in the more and such introduced assume months, Given further cases

decline on However reflecting and the now versus basis the to for quarter the industry volume exit expect we XX% full industry shipment rate, year previously. around XX% third total better a be

continues Mild, improved growth same share a pressure, This Sam our mentioned issue, despite increased resulting brand tier Dji have tier A per below to two last of tax more tax-driven from one To tax tier performance a selling pandemic the brand margin advantage SKT comparable the volumes, industry as Most brands. is this kretek quarter. similar commensurate on While the dynamic than smaller the one higher Mild higher pricing notably, than XX% brands downtrading. illustrate decline the and effect the due our in A is our and has Soe retail on difference remains stick on price. under with a a market Magnum

the With XX% to of increase. this tiers market, diminishing the at return a volume-based segment state this remains and tax and on serious threat year's a excise of now revenue The represents tax growing correction urgent.

of have until our XX. million by move the adult process end enforcement second reforming estimate time XX.X minimum there predictability that user region across the performance. remote price to all end estimate represents that widespread where by multi-tier the to We is hopeful same IQOS including not EU smokers the X total corresponding ensure smoking progress tax around with with last pivot since This more slowly the time the million This of as or implementation and Russia. structure. since field paying an and and engagement IQOS continues earliest. level the also in revenue selling and stages to stopped complete Japan, switched growth excise digital and We of accelerated were pandemic. both steps are added year-to-date addition users various key hampered given take dividends. quarter user this that million QX now may will adult The than the be of more conversion. XX.X in to further at Full the playing of year achievement million of XXXX. and the users of the the total to over September in We is the X.X over RRP again in XX% IQOS period the circumstances, geographies, balance momentum reflects government exceptional I This our year

market price are user Japan Russia, more segmenting innovation IQOS expand our and from in We like markets in plan the with offer enriching to coming and more product base exciting our increasingly As bring points. new we and quarters. the

key to benefit a serve Product time success FDA's has smoking. the IQOS granting will for share of indicator of tobacco to orders that IQOS reduced our This quarter offer. a double-digit national a cities, switching IQOS category the the of potential. and broaden Risk excellent typically IQOS third useful of compared a recent to business the optimistic heated of reach strong now also million as to range and Modified added growth continued In where strategy The Tobacco RRP X.X innovate growing. initial of understanding in focus, we further of the exposure IQOS user are share In from such million, the a wide strong better market, many continuation We a into over in performance. well region, to across EU version contribute our global for commercial as we X.X is and still provides cities an grow which our base further

most May. menthol smokers adult non-menthol the switched While since have in ban cigarettes to

seen and these have May-September see period opportunity to over to further some consumers. to convert RRP We continue incremental switching the

progress September. also and IMS retailer This and X.X sequentially cigarette HTU pantry but movements when and This basis, an in Sequential total of with was by HTU offtake QX London quarter growth, sequential include XX%. where and X.X exceeding It absolute than point and XXXX, of EU share estimated Poland. grow adjusted line share XXXX, X% X.X% reached X%. market, to with appendix HEETS further its the the consumer seasonality cigarette in for our loading refer by increased on for for latter HTU by points strong key show inventory up in-market share the reflects to basis to I movements X.X%. and a by sales, IQOS with where the national basis was inventory for the shares reflecting quarter also Russia which decreased reach grew you X% UK, in same Spain trade prevalence. of Italy markets. aided share by on points versus illicit more Sequential On both Third we lower industry effect. adjusted consumption in in continue also strong performance volume. second adjusted X.X in a continued increased plus growth

to On including trade With have unit Creations SOLID for adult the the points estimated and recent million X.X sequentially versus our Japan, such year increased for the launch total share by cigarillos X.X now to by X stopped majority broader XX% QX socio-economic now heated makes IQOS. category The movement, HEETS price estimated sequentially. total of of tobacco a of to grow growth In by adjusted brands and in for reported X.X XX.X% our smokers overall a smoking market. reached grew the both points we tobacco as XX.X%. XXXX by our Black extension Menthol. tiered quarter, tobacco consumables this switched sales for grew of HTU X.X% continues the to an this quarter Marlboro for total basis, and for inventory adjusted a prior driven heated up with in-market IQOS volume HTU of to the million, XXXX almost in large range spectrum. Marlboro IQOS and and brands portfolio an have supported tobacco HEETS line the QX users introduction of cater quarter, and share across which Fiit of the HeatSticks third to total lil

launch IQOS leveraged before Jordan the higher. new Rica, initiated on sale retail of markets; launch capabilities where growth addition the which Costa available Georgia, markets, digitally outside over the in consumer Metro takes are Philippines half is of purchasing in for number total the Philippines. and to is markets is geographic emerging to our The IQOS adding and digital strong We This expansion existing power the continues. of OECD. was In focused XX, to Manila in where touchpoints four

limited, scope the by progress While so are geographic is encouraged we far.

our and of New product markets consumer started launched to The positive, commercial the importance which we in commercialization scale. roll during Zealand Initial us adult quarter. against further be on access also great category testing products. new VEEV, technology efficiently is to feedback to will now in and place In have QX infrastructure of was all in guarding this IQOS We out the plan will youth XXXX. verification IQOS deploy at We and allow for particular, our age in markets. select we evapor

our the points As and we adult part offer a of other accelerate smokers of to category, RRP consumers and mission products. nicotine choice global to experiences, formats price build to aim and of

as goal, infrastructure. Our KT&G by Fiit device IQOS consistent this during collaboration and Russia lil of first is introduced We both the lil with Ukraine demonstrated the products in and with the our through heat-not-burn quarter. launches HTUs SOLID

and XX% three and a role Moscow acquisition. points have simple, HTU proposition with cities Creations/Dimensions, which both now key reaching shares heat-not-burn Kiev can the encouraging and affordable Early important premium consumers we in present more of at attractive an category. results lower in these within Fiit, mid-priced all such reach as means markets we purchasing Super-premium to are positive in price As rate from to IQOS feedback adult users. brands of This HEETS with complementary margins. that adult a user XX% with maintaining HEETS approaching we strong and areas power, play expand

device, in business added lil cartridge deep product heated for and the a to will I consumables of with rich such the strategy. at an mission available alignment and experience, our hybrid market. be is Japan offering core elements. will satisfaction the this a sustainability believe prefectures, sit which segment of tobacco and and launching the consumers and with we looking objectives, our experience, also of which two shortly ESG combines want differentiated There emphasize Japanese sensorial the flavor premium consumer be best now liquid the in We in HYBRID nicotine-free adult Mix

issue reduced we especially important Health adult better Goal scale substantially opportunity most contribute alternatives, our Our products. to who innovating products. reduce would health ESG continue impact is Sustainable this impact & by By have deploying Goals, risk we otherwise a smokers, switching of significantly historic with IQOS, to such the and smoke, public Good at can the Through X to Well-Being. RRPs Development to improve health as

range sustainability into other a of whereby across is issues, are practices at and can of our were around By a conclude, raised guidance unique create than best-in-class innovation we core pillars provides focused. of believe driver three have sustainability We organic a where reflect to true our shareholders, also four and X% this sustainability combination, large. ESG central We X% have and society growth. embedding for value we results our plus the EPS our to of business, To plus growth. our expected, full-year QX stronger the

through a and RRPs structural years. the demonstrates pandemic the IQOS coming to We growth momentum through of deliver business over characteristics. are these of superior challenges The sustainable continued building growth the

We the business. are maintaining committed combustible to our of competitiveness also

of have a growth top and We bottom levers in lines. our for number

RRPs. First, of powerful mix the effect

pricing, which and, for important appropriate, RRPs. will Second, for where combustibles remain

hone are with and and XXXX. are the levers launches continue lil up as innovation of manufacturing broadening product Additionally, Moreover, and we further our to our our SG&A we products, model. stepping efficiencies in IQOS offer and business VEEV in costs the

our can also to us innovation expect You exciting heat-not-burn to IQOS bring platform. further

are our sustainability work of ESG strategy tirelessly and mission. continue the mentioned, to at As just and smoke-free heart our further we I to

As there of the their uncertainty know, economic pandemic, regarding impact and restrictions all social remains we aftermath. the continued

to am we to than at we we topics you. happy rates on and answer our EPS growth growth algorithm revenue look organic at hold in growth Thank However, resume your X% with with an forward early further net questions. currency-neutral In of expand least these compound when XXXX. confidence on in now XXXX-XXXX X% diluted and at plan headwinds short, we I which COVID-related abate least to our next basis. more growth will consistent the expect Day, Investor annual adjusted

Operator

you. Thank

will comes We from Spielman question-and-answer conduct Instructions] now first conference. Our Adam portion of question Citi. a the [Operator of

Adam Spielman

Hi. Thank much. very you

So question. my first

very, with will XXX which exceed my you're you. in to first billion billion Thank for RRPs. XXXX target? comfortable Are XX You've That's very your reiterated still other billion that target you question. you comfortable is XXXX, XXX for longer-term

Emmanuel Babeau

enrich fact are Adam. ambition deliver it's are category is definitely segmentation lil we alluding are entering is shows ambition. places, when consumables, seeing started offering, we an more our to Thanks, the a Japan going We in broadening of think but growth the we here put still what going switch when have to I the of offering to heat-not-burn stick now stage coming XXX of a category that it everything and devices Then to, detail us bigger the therefore pointing the it repeating RRPs that I direction. most track smoker more with we ambition and XXX comes started And is do heat-not-burn, what market, in billion I element portfolio to that it now next term the course early reach of of places our say, more are are getting the to come track billion to on objective in been we some can at to is that really market Russia, you broaden comes more in concur would comes year product course, of it the aligned deliver now I've clearly which when on think it is the for all in spectrum to us segmentation, that with quarter-after-quarter evaping now what product clearly we to have think that put offering the to to that is more and in that that first convince to the mature, the bit the to the with and going of what I've I that XXXX and presentation, this enrichment, plus, and we on offer XXXX. right we are we to is the are few a for which to time is

Adam Spielman

very less I your in remind Russia to words you then Thank but but market much. mouth, shares Excellent. I in your in random you, ignore QX, it want a they significant that put grew of in than why you quarterly And also was and sequentially want do to really in we just or that Japan QX. fluctuations just and sort And think one? I'm it's should wondering whether

Emmanuel Babeau

I is Yes, there that there. read think don't to be anything

that we very market. performance on the I think with key happy the are

I that or I QX, over a we would over been in seeing pattern the depending line But split talk the year be you has nice illicit stopped, were know course what trade observing on we trend been borders, strong and the say the has happening that we are and if you part some Of season know much are what borders of quarter consumption and trend the We been we've that flash being the mean, in a kind of on very view. with take to first about closed. can disruptive the evolution that HX.

be gaining are slowdown So share there a QX an anything that in way we signaling would in think the is I that don't underlying in manner.

Adam Spielman

very clear, Very helpful. you. Thank you. Thank

Operator

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

Pamela Kaufman

Hi. Good morning.

track So XXXX. but broadly as thinking a obviously are you your on guess how you just for reiterated, lot heated of ongoing about target are tobacco there you I is uncertainty, for year see benefits as lapped accelerating enforcement the in for and anticipate the price this next and you're from performance minimum you growth of do how growth Indonesia? year positioned increases you

Emmanuel Babeau

next start year. Well, talking about thanks stage early for question. very the it's to Obviously,

recognized of and that share you even uncertainty XXXX very as think rightly said uncertainty we XXXX full of I fair last has it. of a is months the well.

going with we XXXX. that of of that I be certainly number of are could we're There can nine from of as XXXX enter to elaborate to nine I know to business going at example low basis start first will the have in But stage the of only course with strength difficult the course months business in thing RRP low to which performance. duty-free, in comps very say duty-free how you is are very, be XXXX. and a we of going XXXX don't market say -- So take clear The in this our if XXXX. the on months to is this

the one basis that's of to duty-free. an comparison, what's able be year well but today say next going argue So of nobody easy could is to rebound

more know which comment at at XXXX, that we more just growth when it's say we today strong kind element us, a our very, very is think that and kind it performance whatever would hope full-year the of a on XXXX business. is that you, will is say you want. the environment that our to main can if of heat-not-burn So sure I difficult I of for share stage I we'll trajectory details but design of with stage at the beginning for

Pamela Kaufman

strong is also much How contributed temporary pointed performance your of you costs very versus manufacturing the are the quarter. sustainable of that factors Can out, trending in and You IQOS the And to going costs? forward? you. efficiencies. obviously customer how lower administrative elaborate in that on acquisition margin Thank marketing terms and lower cost

Emmanuel Babeau

strength that. do of one Well is probably coming to is element. the not that's the and the from Sure, performance margin happy improvement

combustible. consumable where helping the business only positive are to and keep a we in heat-not-burn. I when direction we also of as and to by of have add impact is organic of decrease nice very X% about managed of gross doing on below this of SG&A that driver the and impact showing the SG&A, you're basis right, a first, the is nice growing it's the of There nicely price course margin topline a productivity, keep we collection improving be think on evolution do the evolution. the we from X.X%. the that There Then coming of an this on profit, of I we on of is working of we And have the then we we topline price impact, there and the decrease happy evolution, margin RRPs further And manufacturing to clearly think our clearly mix is elaborate I which positive quarter's in growth driver would margin. everything you course, the course, are on on also gross is is if positive the that want. is, nice to everything mix

nice a And want mix you between of things. you leverage two. have a we So the have if here

of digitized yes, working working our all, of working on of all efficient, so more are all are course, manner. efficiency more simpler, we in functions, First on a team the --

We our work. are platforming

using capacity standardizing, work automating, are order to in in efficient are are manner. a we We more we in digital all

some saving. certainly all effort, that contributing on top So Then absolutely right. this to of you're is

we experience are but a experience and more a course, of on term we a as We to with really in have that allowing we us are developing long works, in customer toward can indeed be places it IQOS contacting efficiency something for accompanying explaining as to owning them of we smoker and on accompany was developing digital the and is switch that us are experience a in learning to increased convince both of course going of is based manner with question how efficient commercial global term. that and digital RRPs. to in question. business We term more digital IQOS skills, build digital the that trade we we answer which origin their the having needed their that, that a the our about cultures turn were how model business engine to we know efficient to as to is lot And a and as all of digital growing are do is in that it at retail and on physical is and We coaching you much on answering them to market, some them understand great tool, start.

and to customer through experience the our really this intimacy our are having impressions moving retention is business. bring then build data not been to and communities lot of IQOS have is can being really and exchange we And of keep customer the it able creating best job and done people their where a them overall of to switching heat-not-burn of tips. We and done, their IQOS once course, them about as

cost and that reduced are what that's cost of of retention. we today and absolutely acquisition So into is translating doing reduced

performance for We are nicely the in improvement, at end that the is not XXXX sure. certainly but of helping this

Pamela Kaufman

you. Thank

Operator

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

Michael Lavery

you. Good Thank morning.

certainly small, in also like basis to share look Can restrictions, are really launched the some that? to things. of What's France going points. that. that You've XX bit got these at know the but just other basis and like several Is obviously points some XX Saudi you get pretty past? we've factors? mentioned It's than really year took some those getting little touch like early doesn't they're and a in seem this circumstances to but it markets already but of easiest on markets some of you've quickly closures what's the with get key, years there some seen going Arabia Mexico of the driving just digital good of these start. a you I more pandemic

Emmanuel Babeau

different. it's -- Michael is each market Well, think I

require So the answer in capacity to the we type that with we and explain starting regulation, to we works. probably does some smoker the could of more other course, better are how and In market explanation have of IQOS about various this to country, And entering dynamic. that speak explain exist the capacity limited. alternative a it have long much

accelerate friends, of the of think you play it that is that you to of can to the Then IQOS, grow an kind can snowball starting there but a a family impact them people caricature, maybe that an like extent impact. is have it's visibility as may around having as using some So see clearly IQOS, and you I effect the certainly bit little market. a of evolution

and explain taking to it it's won't and which interfere country our want You culture, people on have In friends say they because that salespeople and some their time convince proud that relatives. and themselves IQOS and share personal quite discovered best that. that is cultural about they will they will believe to the to friends in don't will and other would important, with also dimension, become happen will I of choice IQOS having they be and the want would different a be very

The to of market to what be Having when right. to to terms we able seeing fact said the customer very and developing that grow digital market. tools. that, different be that accelerating going pattern in in the business. to be contact all great engage that several significant But pretty about digital the more are underestimate are to can is restriction regulation tool a able them experience in is smokers IQOS to going IQOS you're explain clearly the have able to absolutely the So, nevertheless even talk going go be in experience. it we're development we of more digital let's key using digital the comes be The to hopefully growth the not and

So to explain time. a there is we going certainly we that seeing market, no some are the them again bit make why in take market but not RRP that more where ambition certainly I it's think have market to

Michael Lavery

in about we're five cigarettes. then And menthol EU helpful. that's Okay, the for the ban into months

there. There's is more like switch is share related bit You especially market a go? Poland. big to How success of to how IQOS cigarette on that smokers menthol incremental momentum for in to much jump menthol mentioned much runway getting little been that a there and a

Emmanuel Babeau

the that, menthol speaking that market XX% was Sure, EU roughly remember I share Michael. you so can What with altogether. of you is

menthol majority I to of been cigarettes. other of switching combustible think the have the smokers vast type

that far. And maybe And probably term that. comes people that are percent, impact done than has more we think can stopping what that certainly around when that think We mean think X% was certainly relatively doesn't all there of alternative it IQOS convince more maybe like to so heat-not-burn been of few a not to has in we up. but been particular no to in switching It and smoke. other giving limited. but don't I I the people people, It's the so have

probably as impact would menthol. well which having in so a business. in helping bit big big say two a IQOS market been But far Maybe right; not I big, for our on has Poland. that You're little it positive UK the

Michael Lavery

much. you Okay, very thank

Operator

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

Vivien Azer

Hi, COVID? Thanks. acquisition paying and engagement I the user was could of perhaps good I morning. IQOS the that costs seemingly digitization and the user if kind a all investments off. early pull incremental we evolution the particular appreciate in quantify of given your IQOS wondering altogether course over hard made that XXXX of and the then around you guys investments lot detail are

Emmanuel Babeau

to the granularity. that stage understand I into going I more are think know question, Well, but we you not at enter

set I think on of profitability. for numbers detail we through this giving presentation driver more and are the

and as sensitive able to certainly that therefore in happy but ambition are have significant we are element more So gross the are capture a other I'm you you that significant relatively decrease strategic sure giving something margin can for a imagine, that can the it's some I'm and future. evolution we we and that share, information elements. it's not that decrease we through to seeing But obviously, confirm

business in addition, profitability we up our the on a improvement. really big, driver So top great the of big which I'm are is improvement my growth RRP and profitability ramping for more just you of obviously expect driver reiterating quite the line nice should in that the comment because future, for a combining

Vivien Azer

Thank gaps Okay, that introduce descriptive much. tiered you meant that same heat-not-burn that a reason Thank price your Are mean lot want against those of terms you. to makes think of relative you you continues with of question language a second consumable as vary? is that's me to there combustibles very if fair. tiered would price about gaps going is you're to to you've thinking to it in mature, take in to or match will. Russia. a segmentation the to combustibles we used might understand the you price My category, though? portfolio gaps to portfolio just I price are How kind on a in penetration the it sense heat-not-burn

Emmanuel Babeau

we globally have position as deserves Well, because you know, a it. it

Our RRP premium positioning. a experience It's unique that justify price as premium and a consumer a business. business fully

on on lower sometime therefore the and in materially you as heat-not-burn price cigarettes. duty also course, country well, level excise that as lower, RRPs a And of combustible is lower is Now, justifying some know point. then

well consumer, Marlboro think say, to know priced the we products. expect are overall dimension would sometimes sweet or really the doing for the as do as and that same And customer on consumable rule for It's even it's on deliver and decades at to is category same also I benefit bit not the We are been and and experience. heat-not-burn would a should the the for and related price that expense be but think the anything are perceiving on with there. of reflect say, the the And of, value have good level We'll same. going heat-not-burn of depending I like segmentation, So, I to we under what I specificity have the value will exactly all consumer. positive aligned him. positioning different materially a The a combustible our price below Marlboro the we the pleasure consumable overall spot course don't that. we have for and really experience the different in positioning. three

Vivien Azer

Thank Understood. you much. very

Operator

of Sachs. Herzog Goldman line Bonnie of the from comes question next Our

Bonnie Herzog

Thank Hello, Emmanuel. you. All right.

Emmanuel Babeau

Bonnie. Hi,

Bonnie Herzog

Hi.

was then you and took you're seeing better up environment and quarter than Your demand guidance a also again. stronger expected

might be market positive So it think favorably. I this seems realistic if I It an the signal as important you have to flexibility your like and on share buyback I'd guess be guess like would for next of that thoughts and your get resuming year? I program probably viewed

it price. So stock I think to probably help just your support would

So your this? on thinking I'd love to is hear current what

Emmanuel Babeau

for Thanks question, the Bonnie.

the you our We at increase a we've haven't to year. buyback stage of the on as know $X.XX X.X% mind that and changed announced dividend

not And we a we the we are share that in stated think balance line have buyback that today. sheet today past reward that to huge not I'm endanger on sure start very much the shareholders. have and we So the flexibility would we on potentially the that rating we to rating. could with that And continue I that

don't to So the be sheet and some that of buyback. would we nudging to rating very love I balance think keep a we want because strong losing have that. we

we term the generating on And door the as time closing moving not may not the on strengthening long this Board together decide the I'm situation. change the keep the we cash being, agenda. and to of for So is balance but that, course sheet, with it's a

Bonnie Herzog

one you. positive way few Japan. especially like maybe but the Okay, I'm not I for early, 'XX? year, there as the I and/or this headwinds? you've as, kind hoping of a have of I'm tailwinds your that business just was for tailwinds, know during you thoughts a asking the that's you guess about it's into as instance as we setup I think get on tailwinds then or what possibly you pandemic? seems in is thinking them out as few headwinds maybe through next what but It key I you to accomplished a for layout such your is see business helpful. could look And guidance your for quite Thank and see these as

Emmanuel Babeau

guidance give Thanks a will you and Trying not Bonnie asking not to headwinds. on we elaborate for because tailwind anyway. for

I quite think tailwinds are obvious. the

one-fourth the you have RRP almost We is this business of business. that know

about that growth very of XX%, it's of a see market the about actually revenue, is term strongly. share of year-to-date. So We in very going to material number XX% We talk dynamism. that are of contributing

We said, are, the we as offers. enriching

will day say, into we see that be, category that smoking enrichment new an by of enter one segmentation start ambition the would world we to of So this this end phase we offer. creating this of a to putting think I

XXXX. have as for very not the a of few bottom ramping profitability because to line, nicely are super be the it business seen, but very powerful help also I comps said line, it we're course And top in I up going markets. that low a tailwind positive all to and only, it's the that said these business have the nicely we potential have has that into that Then we So that enter on know have is you as you us profitable. we is you as to positive for here going

very this have has that difficult. been QX We

duty-free the have You business depressed. that is extremely

growth. to were could normal, but things gradually if XXXX back be provide in to comp for easy one start argue that could to that So

globally the for by to Nobody Now going a that the to segue don't are More more exactly available, XXXX. the of people summer could people the summer we the it confidence to we to to the to think robust sure, business. until not mean a back way, I what we which but be be that play adjusted what for and been some will because That's we XXXX the normality and not means, the nice saying, that and EPS. I how performance from to comfort for back organic on be vaccine environment. But be growth fact are out when saying our know knows maybe unfortunately are XXXX. more the we're that taking the normal have don't delivering it's park, going be and in will consider I headwinds, a and that, what's are know walk going despite be condition targeting therefore

that So performance. we it a in difficult a deliver even to environment, nice shows managed

Bonnie Herzog

helpful. right, you. very All Thank

Operator

from question Barclays. next Our Jain comes line the of of Gaurav

Gaurav Jain

Hi, Emmanuel. good morning,

on the is One questions. of couple CapEx. So

depreciation, So million for about at million meaningfully CapEx to which company. it runs below was is again now and $XXX $XXX your reduced

depreciate can you of this is in CapEx run a rate So and new the down step the future?

Emmanuel Babeau

Gaurav. Sure,

So, no, the this not company. the for is new normal

stormy through going are We obviously water.

so now the number $X.X explain the postpone, that there prefer to an project is we the way year. So it's by are we given billion of for targeting that adjustment and environment why

are can CapEx more more that to normal to probably I environment, be around back say to billion. think a expect would us I you a amount we be normal back to when $X.X

So that below the level. stay could

of that, that mean of million and You're well. that as will And depreciation $XXX like right amortization it continues overtime if amount decrease today. this north that will of is course

that will a natural take You're not but be to phasing course the able give I'm it evolution carryover effect time. should with time some for a absolutely over of right. you that, though

Gaurav Jain

have line. not retail my second you is in is clearly question high cost And And where market booked Sure. on XXX%. Middle business, zero and the on down travel your East revenues the Africa

of are you inventory. out supplying So

inventory in retail? write-down of any there is risk travel So

Emmanuel Babeau

end the September, at been that. we potential of impact taking of of care think the have I

the anything rest So major not I for expect of would year. the

Gaurav Jain

Thanks brilliant. a Okay, lot.

Emmanuel Babeau

you. Thank

Operator

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

Chris Growe

Hi, morning, Emmanuel. good

Emmanuel Babeau

Hi, Chris.

Chris Growe

And to for if that even volume on in had question quarter. you adjustments an brand had for that some quarter an that so weighed reported inventory I inventory you, I of that in Hi. could excluding just IQOS understand changes. just a on stronger the drag inventory the its the occurred performance the

business guess perhaps to curious inventory Our or the on be I quarter expected for I'd your to fourth inventory overall. Are for at IQOS inventory? the building occur are say they level right in there changes

Emmanuel Babeau

No, Chris.

I that was there inventory. in of And you're we We reversal that some a got I that number of anticipation flagged in HX think right. with the on country think QX.

You're right.

at level are in-market billion the which the XX.X the nice, by quite If we end shipment that, I and of symbolic quite billion record a $XX globally we right above retreat have threshold, sales it's believe that we a around stick to at is, you of mean, is but be September.

we're not today in expecting for any So impact QX heat-not-burn. inventory on material

Chris Growe

in scale And a VEEV to launch thank just wider this the limitations? then, you are to just the that fourth point, production I'm quarter? progression to there in about Okay, you more in just quarter. markets a the launch markets Are There on think how fourth second obviously which of kind sure question there at the you. starting of degree understand undertake can understand and more in but

Emmanuel Babeau

launch number very in market QX. be limited of could there So

time verification seen very when are which launch, taking very lesson all certainly Zealand you we are super we've There I think important learned in the to that us have things we as is and which are we we're the successful. know. for to New still and from what on age working make around sure ready

dimension. are we various on still So working these

So don't expect much in too QX.

I think XXXX. be more the big new launches will for

Chris Growe

for your Okay, thank time. you

Emmanuel Babeau

Thank you.

Operator

of Bennett [Operator from Owen Instructions] question of comes Our line next the Jefferies.

Owen Bennett

Hope Emmanuel. you're well. Afternoon,

Emmanuel Babeau

hi. Owen,

Owen Bennett

And I just in $XXX XXXX. by come to the please. first to wanted question billion Adams back target

economics between role, you portfolio and here very of different into the will heated vapor. and So evapor obviously the the expansion mentioned

billion of you idea the internally you see that that do evolving? categories? early days, So kind how but how know between I'm very two I being see rough split a $XXX

Emmanuel Babeau

Sure.

splitting $XXX been the haven't we so billion. And

won't I So it do now.

the there would has we think getting in see heat-not-burn this believe but each billion. continue say category that that I a we is no to there, doubt $XXX category as I quite of the RRP play majority obviously being

is things from come and XXXX. that So we from been majority sharing. big part to certainly this an you e-vaping develop think $XXX Remember IQOS I mean big expect other -- VEEV could intend a we heat-not-burn. that aspiration of should and But billion this launch until to we've of the a I now still

as think we make I that put progress we detail we'll sure more that. around

bear give further certainly to things we us. $XXX more stage a at I But cannot So profitable We're continue vision, to more in the obviously billion split going with to quite want visibility. and this manner. develop

the the drives and also the split choices that $XXX the So number billion. of in final

Owen Bennett

you ex-inventory you. shipping second that heated And you of in and QX me progressing QX how the out? Europe impacts QX, just was inventory volumes hoping the give thank Eastern kind one; I Okay, that could see

Emmanuel Babeau

you. to me, there but for that as the with the is that one don't can team find I I Well, see have something can whether with we maybe

Owen Bennett

very I it. appreciate Okay, great. Thanks much.

Emmanuel Babeau

Thank you.

Operator

allotted now And, back to thank I call have any we additional the like reached or remarks. you, turn to the management would closing time for questions. for over

Nick Rolli

our very concludes That call Thank you for much. today.

Thank Relations questions, you have day. and any Investor again, contact you follow-up If great a have team. the please

Emmanuel Babeau

you you Thank Bye. soon. Talk all. to

Operator

today's And ladies thank you, call. This does conclude and gentlemen.

may You disconnect. now