Q4 2019 Earnings Call
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.
In order to ask your question. Please press the Star key followed by the number one on your Touchtone phone at any time.
Media Representatives on the call. We'll also be invited to ask questions at the conclusion of.
Questions from the infant investment community.
Now I'll turn the call over to Mr., Nick really Vice President of Investor Relations and financial Communications. Please go ahead Sir.
Welcome and thank you for joining US earlier today, we issued a press release containing detailed information.
On our 2019 fourth quarter and full year results you may access the release on our website at Www Dot P M dot com or the PMI Investor Relations.
He glossary of terms, including the definition for reduce risk products or piece as well as adjustments.
Calculations and reconciliations to the most directly comparable U.S. GAAP measures and door business transformation metrics or at the end of today's webcast slides, which are posted on our website.
Unless otherwise stated all references to I coasts.
Our to our lycos heat not burn products.
Comparisons are presented on a like for like basis, reflecting pro forma 2018 results, which have been adjusted for the deconsolidation or Canadian subsidiary Rothmans Benson and how did you think effective March 22nd 2090.
Today's remarks contain forward looking statements and projections of future.
The result I.
I direct your attention to the forward looking and cautionary statements disclosure in todays presentation and press release, where we view the various factors that could cause actual results to differ materially from projections or forward looking statements.
My pleasure to introduce Andre Cohen shop list, our Chief Executive Officer.
Martin King our Chief Financial Officer will join Andre So the question answer session Andre Thank.
Thank you and he can now welcome ladies and gentlemen.
Our 20 910 results continue to reflect strong underlying business performances from both our combustible and smoke free portfolio.
I guess is there.
Forming strongly across a broad array of geography and remains firmly on track to meet the 22 and one heated tobacco unit shipment volume ought to get the from nine to 200 billion units.
Meanwhile, I come back a little business continues to perform well underpinned by solid pricing.
We achieved several.
Important milestones you know transformation to a smoke free future.
This notably due to the authorization for additional hike was called <unk> from the U.S. food and drug administration.
The premarket tobacco product application.
And the subsequent commercial launch in Atlanta enrichment under licensing.
Agreement with Altria.
Hi, Chris is now commercially available in 52 markets worldwide.
Let me know take you through the main elements. So part of full year results starting with Wally.
Industry thought the volume for cigarettes, and shit the tobacco units declined by 2% broadly in line with the historical.
Right and slightly better than our prior forecast of around 2.5.
Our shipment volume declined by 1.4% in line with I previously communicated sarcastic line one one [laughter].
The outperformance of the industry was driven by heated tobacco share gains.
Oh, 0.6 points, which helped offset cigarette declines partially impacted by heated tobacco units can utilization.
Focusing on the fourth quarter I would also like to highlight.
Why did the effect of inventory movements across the year with small the greater shipment volume decline of four point.
4% in Q4, <unk> 2019, partly reflects unfavorable combustible cigarette inventory movement was 2.3 billion units.
Compared to the prior year quarter, notably due to the European Union region in Japan.
We anticipate the partial reversal of this effect in these geographies.
First quarter of Twentytwenty.
Fourth quarter end market sales volume declined by 3.1%.
As previously anticipated in that sort of quarter everybody.
This can market sales declined primarily reflects the increase in pricing.
In Turkey, and the Philippines in Turkey have cigarette.
The decline was due mainly to the impact was two price increases during the year taken in April and now totaling five Turkish lira for park.
To 4%, which disproportionately impacted our share given the timing of pricing viz, a viz a competition in addition to the industry decline.
In Q4 of them 2019 share improved on a sequential basis, but they thought that market was weak due to arise Ulysses tobacco.
In the Philippines out a cigarette volume decline, mainly reflected a lot about telemarketing. They immediately after months of industry price increases.
Well from a volume mix perspective, this was partly compensated by a strong share performance from over.
She said tobacco unit shipment volume increased by 44% to 60 billion units in 29 team. This performance include including shipments of over 17 billion units in the fourth quarter reflects.
Broad based growth across our launch markets with notable contributions from B E U region, Japan, and Russia, and it keeps us well on track to deliver 22 and two one shipment volume target was 90 200 billion units.
This excellent performance means that heated tobacco units now make up nearly.
The percent of ought to talk on shipment volumes as compared to almost nothing in 28.
We expect this proportion to grow kind of that as a positive momentum will reduce products continues.
Turning to our 2019 financial results net revenues increased by 6.4% excluding currency.
Driven by strong pricing from right combustible product portfolio.
And growth in heated tobacco units.
Our peanuts revenues reached $5.6 billion close to 19% P. M I spoke.
Well I guess devices accounting for approximately <unk> 0.7.
Billion dollars or 15% on our peanuts right.
As highlighted previously there's lot of proportion of device revenues, primarily reflects favorable geographic mix over heated tobacco unit volume the longer life span of the latest heico's devices and the impact of device, we paid price changes in select markets.
We recorded a strong combustible tobacco pricing variance Oh, 6.5%.
In 2019, better that our initial expectations for the year helped by a broadly rational excise tax and competitive environment.
No what notable contributions from Germany, Indonesia in Russia.
Vision to the aforementioned pricing in the Philippines in Turkey.
Yes. It was in line with the average historical Bari seems that 2008 speed.
When it currency neutral basis, adjusted operating income increased by 11.2%.
Adjusted operating income margin grew by an excellent I'm talking seven.
In two phases.
This margin expansion was driven by RP scale effects in favorable geographic mix with a heated tobacco unit.
Additional drivers include pricing in combustibles and the impact of our cost initiatives quite aware firmly on track to reach over $1 billion of efficiencies.
22 into one helping to find on its growth investments.
Behind our piece.
To this point, we implemented all about a $400 million London meant a lot RP investments into into 19.
The net increases in spans partially offset.
Hi efficiencies realized.
As part of our overall cost program.
Adjusted diluted earnings per share increased strongly growing 9.9 per se.
Moving currency and exceeding our prior forecast of around 9.5.
As explained in that sort of quarter to resolve the lower currency neutral growth adjusted diluted.
Earnings per share compared to adjusted operating income reflect higher non controlling interest and a higher like for like thanks Ray.
Our strong operating cash flow of $10.1 billion increased by $8.6 billion benefiting from a number of working capital initiatives and the.
Coming of certain cash costs related to our middle East.
Thanks.
Capital expenditures <unk> point $9 billion came in slightly below our full year assumption of around $1 billion benefiting from production efficiency.
Turning now to market share a total international.
Share grew by 8.1, 0.28, 20, Eightth, we hope is that with lower share for cigarettes, including the impact of cannibalization more than offset by higher share for hit the tobacco unit, which reached 2.2%.
Their share of a cigarette portfolio declined by 0.5 point.
Reflecting continued adult smoker outreach and twice because particularly the European Union region, and Japan, coupled with lower share, notably in Argentina, Indonesia Korea in Turkey.
Further despite these outreaching marlboro's share of the cigarette category increased.
By 0.3 points to an all time high 10% driven by Indonesia, The Philippines, Saudi Arabia and Turkey.
I guess is now commercially available in a 52 markets representing 44% of the total international market, where our weighted average geographic coverage within these.
Okay.
Proximately, 60%.
This follows. The addition of eight to new markets, even 29 team, including Hungary, Sweden, United Arab Emirates, United States.
And the fourth quarter launch in Mexico, initially focused in selected areas Mexico City.
In the later part of the yeah.
We took another important step in our journey towards the smoke for future with the launch of a hike was three do which is now available in all of our international like this market.
Supported by a new simply amazing bronze campaign simply amazing.
Our focus is on everyday relate double moments and demotions. They showcasing two adult smokers, who would otherwise continue to smoke the benefits of switching twice.
This latest addition to the Ike was family wasn't designed with enhanced features to help adult smokers Swiech most seamlessly from.
Cigarette.
It was pretty dual allows two consecutive uses without recharging the hold a wireless charging time, you significantly faster compared to like was three and I was 2.4 plus.
We've seen positive initial effects on rates or conversion and consumer satisfaction.
From that are allowed to do.
Which also assessing encouragement on consumers' response, we innovation as we start twentytwenty.
We continue to nurture a strong pipeline future product improvements and innovations for the core Heico's block.
Turning now to a more detailed discussion of our People's homes.
We.
We estimate that they would it nearly 14 million told the likely to users.
Right.
Presenting the addition for media and I doubt users over the course of the year.
Based on our current momentum we expect these rate of acquisition to significantly increase 20 twond.
We've had their.
Right that's 71.
<unk>.
To close to 10 million acres uses stop smoking the switched like with the balance in body the stages Oakland Bush.
These are the flex widespread use or growth.
Highlights, including nearly doubling of using meat deli in Germany.
He is traveling in Poland.
Very strong growth in Ukraine, and the addition of 1.7 million users to Russia to reach a dollar adult.
Fine.
Let me know take you through the performance of Iclusig in 29 team you have it all share performance for Iclusig heated tobacco units continue.
You see excellent progress.
Indeed in international markets, what I call because been commercialize.
I could get to debacle units, where the third largest tobacco brand.
In the fourth quarter with a 5.5% share.
Greetings from that number full position.
Hi.
The third quarter.
This has been achieved despite not having full national distribution in a number of markets as mentioned done.
The continued excellent growth of bikers reflects progress across a broad range of market.
Our commercialization approach it starts with a focus of the PCT Lucky.
Within a market building adult smoker awareness trial and convert.
Well this slide we see this trunk offtake share momentum in the number of Q seating.
This gives us further encouragement just with the potential future growth at the national level as we see increases in both our geography.
Page.
And rates of consumer awareness and trial.
You know they you read your fourth quarter share for heats reached 3.2% of total cigarette and heated tobacco use anything that's true.
An increase of 1.5 points near doubling compared to the fourth quarter of 20 <unk>.
The sequential basis share growth accelerated in the quarter, increasing by 0.7 point.
In markets sales volume also grew 16.1% compared to the third quarter.
<unk>.
This growth reflects continued strength across a broad range of market as detailed in this slide.
It is worth noting that I 'cause is only president and geographic areas, representing approximately 57% of industry total volume.
The quality of consumer acquisition is also high which conversion rates and registration rates improving over time.
I.
Hi, Chris continued strong performance in Russia in the fourth quarter with heat share up by 3.3 0.2 reach 5%.
When you think when should basis versus the third quarter he'd share increased by one point when into markets sales increased by over 20% to reach 2.9 billion Union.
Its share growth in the quarter was consistent with the pace of adult smoker adoption and geographic expansion.
We have now commercializing iclusig in cities, representing approximately half of the market total industry volume compared to an estimate that 40% at the end of the second quarter.
In Japan are thought to report that share for hit the tobacco units increased by 2.4, 0.2 reached 17.6% into fourth quarter.
Supported by the <unk> the launch of like was three too.
Line extensions in them, all but a heatsticks and he's right now.
As we've previously mentioned.
Total industry and the share of metrics in Japan are currently somewhat distorted by the low price agree look category, which grew rapidly over the past two quarters to reach a total tobacco share of 6% in December.
This projects represent presently enjoy a significantly preferential tax treatment, though the tax.
All of the ruling party is it recently announced the closing of these GAAP over to two steps October Twentytwenty and October 22 into one.
Well the but also this category is likely to be temporary we plan to enter with Philip mores brand in the current quarter to capture our fair share.
I thought the tobacco view, including Siguiri and adjusted for trade inventory movements.
The share of a heated tobacco unit brands increased by 1.5 points versus the prior year quarter and by 0.6 points sequentially to 16.9%.
2019 in the market sales volumes overheated.
The Buckley rides grew 4.2% compared to a total tobacco market, including Cigarillos, which declined just over 3% after adjusting for the estimated impact of trade inventory.
This helped drive growth of the all girls shipped to tobacco category fourth quarter total debacle Shareables must.
Both the side.
Good thinks it got he knows and adjusted for training event.
[noise] in Korea.
There remains a lingering impact on the heated tobacco category of the consumer confusion goes.
Korea, and FDIC 2018 communication.
The.
Glory also remains highly competitive, particularly in the area of non mental flavors and related new face day mentions that also present in the cigarette category.
His chair in the fourth quarter, because declined by 2.2 points or by 1.4 points on an adjusted base.
However on a.
Additional basis fourth quarter adjusted share was essentially stable enough segment share continued to grow supported by Ike was three dual and recent launches that expanded the flavor lineup.
Well I was encouraged by this trend we still have a lot of work to do to reinforce the heat.
Tobacco categories benefits and build up on Iclusig leadership position.
It could develop lamenting 2019, what they launch of white goods in the U.S. throughout a commercial arrangement.
Yeah.
The first tyco's retained stores open they knew should launch markets of Atlanta, Richmond, marking a.
Eric milestone and providing better committees to the 40 million men and women in the United States continue to smoke.
Why does remain certainly days they need to market commercialization quite excited about the significant opportunity.
As a reminder, I could I guess is currently the only hit burn.
Product on the market authorized by the U.S. food and drug administration.
So the PMTA pathway as appropriate for the protection of public health.
We also plan to seek an additional marketing or are there, but the acreage threed device.
Which will further support of the efforts to convert U.S. and I was confused.
That's what would otherwise continue to smoke.
Building on this excess over heated tobacco portfolio, we planned to launch our E vapor product heico's smashed 2.0 this year.
Floating consumer confusion around evade brings a lot. The later part of 29 team.
We took the decision to postpone our initial commercial launch.
Unfortunately, these miss perceptions, although moderating stupidities and as such we now plan to launch in the third quarter of this year.
Glenn will also reach the optimal capacity to deploy at scale.
That is.
We plan to foster acceleration of commercial rollout through the second half 2020.
It's worth pausing a briefly.
Briefly to consider the dynamics of the international paper market reach I plus mesh 2.0 will operate.
The.
In the market is concentrated in a small number of geography, we stand markets, making up around 70% of the approximately 25 billion international about uses.
Which despite.
Numbering also almost double that heated tobacco.
Contribute less than half its.
Thanks Bonnie.
This inflect the heavy existing skewed to open tax system and low degree of product differentiation and their low rates of food compression relative to heated tobacco products.
Oh This 10 markets seven also have been meaning from limit.
Nicotine concentration.
The Atlas.
<unk> has been designed to address these dynamics.
We'll be able to leverage existing RRP commercial infrastructure and capabilities.
Drive consumer trial.
And repurchase.
In summary, we're optimistic that I, 'cause mesh will deliver superior experience and dry.
Further growth in their business over time.
Lastly in terms of the commercialization outlook when our piece, we also recently announced a global collaboration agreement.
Okay T N G.
For the commercialization, they're small through products outside of Korea.
The.
Your rationale for this agreement is to accelerate the growth of the smoke free category.
Which will require multiple protex, providing a wide array of Brian.
Base price and technology choices to adult smokers.
The capabilities with build our outdoor piece in terms of commercially.
For structure and know how.
Acknowledging scientific substantiation and regulatory engagement, our best in class.
These capabilities can be leveraged to broaden our strong portfolio and innovation pipeline to further drive category growth, including partnerships with others when it makes.
Strategic and economic sense to do so.
KPMG has arranged of smoke free products, which we see as complimentary two hours.
We have responsibility for all elements of commercialization product supply that does this agreement.
We intend to apply a market by market approach to deployed.
Yeah agreement, we arrived for emulation period of three years with intention to expand the markets could creep based on commercial success.
Why do we don't disclose the financial terms of such arrangement. This is a royalty based agreements.
Well I'd like sold under the agreement will be subject to careful assessment.
To ensure they meet the regulatory requirements in the markets, where there as long.
As well as PMI is high standards of quality and scientific substantiation that harm reduction but bench.
We're now working towards the first launches late this year.
There are no current plans to commercialize gay TG projects.
The United States.
With this agreement and our own hike was mesh launch in Twentytwenty have an active and exciting year ahead.
Turning to Twentytwenty Guy, we forecast to reported diluted earnings per share to be at least $5 50.
Bailing exchange rate compared to reported diluted earnings per share of $4 61.
Yes.
Well I like to like a like for like basis, excluding an unfavorable currency and by approximately four cents.
At prevailing exchange rates these forecasts represent.
Projected to increase of at least 8% versus pro forma adjusted diluted earnings per share.
Dollar $5 sort of team into anything team.
In terms of quarterly phasing, we expect earnings per share growth and net revenue growth to be particularly strong in the first.
First quarter, and notably softer in the second quarter two into it.
The first quarter would benefit from the timing of pricing in the Philippines, and a favorable comparison with the first quarter 19, which included the absorption of substantial excise tax increases in Turkey.
Conversely.
The second quarter, we'd likely be impacted by both physical par is into a strong performance. The second quarter 19, and the most pronounced effect of the tax driven pricing in Indonesia.
It's also worth noting that the higher waiting.
Growth two markets with significant non controlling interest see new this.
I couldn't help of 29 team will continue into the first couple of Twentytwenty you to Annualization effect.
Let me now explain the dynamics in Indonesia in more detail.
As we said in December the industry faces and typically it.
Chocolate.
Hi, snacks and price.
The Twentytwenty excise tax took effect on January 1st implying a weighted average excise tax increase of 24% industrywide with a 46% increase the minimum Bob drove price.
While the potential tax by Sony is relatively.
Keep at 14% of the weighted average price.
In the context over two year stack with no excise tax increase into it to 19, the average percentage increases broadly lied with historic levels.
It's actually increased and the higher bunker price should also give us the opportunity to address the price.
Perhaps which impacted our 29 teacher before.
So far between October in January we have announced pricing or 8% on a weighted average basis or approximately 60% of the pass off.
To date some of our competitors are like price.
And we'll required a larger catch up to comply and it was a new medium home retail price.
It's effective April 1st.
We should also highlights the onetime impact on our pricing variance from the lack of any excise tax increasing 2090.
With minimal pricing taken in the first.
I'd months last year, we will not benefit this year from the usual annualization effect.
Increases taken in the prior year.
This exceptional dynamic effectively creates and one off drive or not twentytwenty pricing bargains, well over 200 million.
In line with our.
Commons, we expect the total industry.
Measuring 370 billion units into end to 19 to decline by around 6% to 7% in 2020 with the highest impact likely in the second quarter. They knew minimum retained selling price takes effect and the new prices work their way.
So the trade.
With the resumption of pricing this year, we expect market dynamics to improve 22 and to watch.
I Twentytwenty guidance reflects certain key assumption.
The most significant we've just noted.
Pricing roll out in Indonesia, which at this stage.
We assume to dilute our combustible pricing variance to approximately 5% in twin to do it.
Quite lower that went to 19 pricing variance. This is still very robust and it's supported by a generally rational excise tax environment.
In combination with a projected total market.
Slide 6% to 7% in Indonesia at this stage. We are cautiously asked you currency neutral net revenue growth of around 5%.
However, I would reiterate that we remain very confident in our guidance of at least 8% currency neutral earnings per share growth.
One of the reasons for this confidence is a positive margin outlook, what our efforts to deliver over $1 billion in annualized cost efficiencies by 22 at one are bearing fruit.
But important initiatives related to productivity cost category management and project based organization, both <unk> and other cost.
Patients.
Twentytwenty, we expect cost efficiencies to fully offset expected net incremental.
Our Pete.
With the growing scale and geographic reach about RMP business. Additionally, the investments now primarily reflect variable cost links to new consumer acquisition and existing.
The retention last newmark event.
Consequently, the cost per user is improving.
Specs, a decrease of 25% in other acquisition cost per user into into it.
We expect the increasing leverage of our commercial platform to contribute to an increase in currency neutral operating income margin.
Well, if at least 150 basis points into into it.
Moving to the industry volume backdrop, our estimated total market decline is around 3% to 4% for the why this is weaker than the historical average of 2% to 3% is very much reflects the temporary situation in Indonesia.
Which represents.
Around 11% of total industry volume.
Additional effect sort of comes from the present growth of the cigarette category, which is not included in the cigarettes total market calculation.
As shown on the chart the assumed 6% to 7% America declined in Indonesia isn't expected effect of I would 0.7.
Robin industry with a further 0.3 points from the growth of Siguiri listen good bye.
Were quite that are they use all puts and takes elsewhere.
Together. These two temporary impacts fully explained the deviation from historical average with underlying for them and those remaining unchanged.
In addition.
Upcoming development included in our industry forecasted that debacle products directive.
Medicine cigarettes.
Effective may two intertwined.
Matt So and medical capsule variance makeup for around 10% of consumption in the region.
Quietly we do not expect a significant impact.
The overall industry volume decline one 2%.
There is a further opportunity for iclusig, given the Minnesota hits bargains are not covered by the bond.
We expect via my shipment volumes seem twentytwenty to again outperformed the industry trends and I anticipate that thought for the cigarette and hit the debacle units shipped.
Volume decline.
Approximately two and a half two 3.5%.
We expect a shipment volume trends to be slightly better in the second half compared to the first half due to the dynamics already mentioned in Indonesia and Turkey.
Well I look we're not providing a specific twentytwenty targets.
But he did debacle units.
We expect continued broad based growth remains on track to meet their shipment volume target of 90 200 billion units by two into into what.
We anticipate a full year effective tax rate of approximately 23% consistent with last year and relatively stable net interest expense.
Compared to 29 teeth.
Well targeting twentytwenty operating cash flow of approximately $10.5 billion subject to year end working capital requirements and currency.
This concludes the expected one time adverse impact on you excise payment rules in Australia.
And the timing of certain cash costs.
They did to the believed factory structure.
Together. These two factors I called for an expected unfavorable crashing back to approximately $60 million.
We project total capital expenditures this year to be approximately $1 billion.
Summing up a strong year, we've made very significant progressing I trust for.
Nations with smoke for future in both our organization and up 29 Division as a result.
Just over four years since the first full scale like was commercial launch in Japan September 2050 already have $5.6 billion you not RP net revenues, making up almost one six of our business.
Importantly, our peer averages are increasing increasingly accretive to our profits as evidenced by the strong margin growth seen into it in 2019 unexpected into into 20.
I guess continues to perform strongly with 35% growth of heated tobacco unit in the markets sales volume.
From an increasing.
Number of market quite close to 10 million adult smokers, who have already to stop smoking history.
We project the number of new users over the course of Twentytwenty to be significantly higher than 2019, and other cost per user that is lower there's a large therapy for structural investments with several years are mostly complete.
We're also focused on maintaining the leadership of our combustible tobacco portfolio, which is delivering robust performance in pricing power.
Despite the temporary headwinds in Indonesia, but are confident in our twentytwenty guidance I remain well on track to deliver I Plenti 19 to 21.
Compound annual.
Ex currency growth not a good somebody's, 5% net revenue growth and at least 8% adjusted earnings per share girls.
Finally, we're confident in the strategy for the smoke free future enough convinced that the current and future ARPI portfolio continues to provide us with the single largest opportunity to.
It's a business growth and generously reward our shareholders over time.
Thank you Martin and I have no happy to answer your question.
Thank you we will now conclude my question and answer session.
The conference.
Again in order to asking question. Please.
Hi Star.
Then to number one on your telephone keypad.
Our first question comes from the line up of Michael Rama Lee from Piper Sandler.
Thank you good morning.
Hi, Michael.
Can you touch on.
I close and some of what's going on in really sort of two different ends of the adoption curve I guess on the one and you see a market like hungry for example that.
Yes, that's for sure points plus in just a year out of out of nowhere, but then you're also talking about the lower cost of acquisition per user.
That you've mentioned in the past comes from scale and growing word of mouth, I guess I'd love to just understand both dynamics a little bit more one is how are you driving some of the rapid adoption in select markets and then second one or some other key drivers of your efficiencies as they get a little bit no more mature.
Yes, well.
I guess as a learning organization.
Every time, we're launching a new market, we apply what we'll learn from the previous ones sold.
Hi, I'm.
When we start growing faster is shorter and shorter and I think we show the chart like this.
Recently and will explain that can guide me next week. So it's it's there.
Learning organization, the deployment of more digital skills.
That makes that every new market, we often starts growing faster than the previous so.
That's correct organization knowledge.
Now as we have also the infrastructure in place clearly.
<unk>.
The cost per user will.
Decrease.
And Doug decreased this year.
This year in Twentytwenty, we'll have to invest a little bit more money in retention I would say, although the Costco retention will also go down as we have people, but clearly you know the cost of acquisition is higher so it makes sense now that.
We have enough people in our CRM base to invest a bit more there because losing a consumer there have acquired is much bigger losses I'm not acquiring someone by definition okay.
And also because now we have the digital infrastructure, we can start lodging beyond overtime. They.
During.
Beyond Axess, all reason, just special additions and normal products to more thinks that can help us build a different type of.
Business overtime.
As we have Daytona consumerism, so so I'm optimistic that although we will continue investing.
Hi.
Cool incrementally the on or piece I would grow the number of users. This cost per user is going to.
Go further and further down and obviously you know we retain more consumers so [noise].
That's all in on the positive side, that's how I see decline.
That's very helpful. Thank you one just quick follow up related to that when you look at the evolution of I guess usage of consumers you've shown the charge that's pretty consistently show.
70% of users who fully convert.
Obviously, you're also adding new years is constantly as well who.
Uh Huh, obviously, just gotten started what amount of time to the typically take for somebody to transition and maybe related sitting in kind of a different way for users then.
Again, using the product to say a year or two ago is the amount that's fully converted into more like 70 580 or 85.
<unk> percent or how should we think about that dynamic.
Well.
You know for today.
New users clearly.
On average, we say two weeks to a month, depending on the individual sometimes people take much more time to fully swiech. Okay. They stopped using the product we immediately obviously because they bought it.
Now.
Regarding.
Retention over time, it's fairly stable I would say and I think with a new programs. We have enough CRM will increase the retention no depends also on the markets as you know in markets, where they have and lot of competitive activity we get some.
Some dilution of consumption because people by other devices typically lastly, cheaper from competition and they try a few products.
But if I compare markets, where the competition is not yet successful I think we have very good retention.
And I think.
We can further enhanced this retention as we now deploy and much better CRM program during the year some.
Pretty happy with what we have we can improve from here.
That's great. Thank you very much.
Your next question comes from the line of Robert rampant plant.
Yes.
Hello, three questions for me the first would be in outside Korea, and Japan are there any markets without cost volumes of the decline sequentially.
Then on the flip side are there any markets where sequential growth has accelerated.
Okay.
Okay.
I mean.
A couple Korea I would say we have.
Growth every in every market, okay careers that particular phenomenon because they.
It confusion of consumers around the hitting a bird category that is not dissimilar to what happened in many markets would be vapor category.
Not happen.
The beginning of last year.
In June when the Korean FCTA, although they found.
A very significant reduction in the toxic comes with heated tobacco brother compared to cigarettes very similar to plot with communicated.
They kind of confused consuming it by say, yes, but the.
Part of this product is very similar to cigarettes, although there were comparing apples and oranges because there's two different passed the one is water and blistering and the other is bought chemicals.
So this has stalled the category and I think we'll take a bit of time.
To restart the process.
I think sooner or later there is a realization.
By the authorities in Korea that that's not the right thing to do with consumers and the alignment we have now much more with KPMG. After the agreement I think that will outgrow the category, except for Korea I.
I don't see any other plays where we have an issue.
Great and then I'm just in terms of the margin expansion. So we.
We think about how much of the old 2020 expectation is driven by say cost saves pricing and I Cook.
Thats a thinks that the impact of I cost is offset by cost savings and the incremental increases pricing goal, how should we think about that.
Got the margin expansion is driven by a number of factors.
First of all.
It's partly mix in that we're growing very rapidly now you, which has very good margins on heico's EDA tobacco units the second pieces.
As you point out our cost saving initiatives have stepped up.
Currently at this point the investments that we're making.
And our here now fully offset by these cost savings initiatives, and that's where you get the big benefit from margin expansion and the cost saving breaks down into a couple of buckets.
In the operations area, we have various productivity.
Especially.
As we get better and better it producing the consumables for heated tobacco units with scale, a better uptime and equipment lower waste.
We're improving the footprint across the whole.
Manufacturing area you saw the.
Factory optimizations, we've done in last year.
Which begin to pay off in 2020 and beyond and we also have initiatives across all of our spending categories to find ways to become more efficient intelligently and rotate money out of.
Less efficient areas and be able to put it into reduce risk products, so that whole up.
Effort started to pay off for the last year, you Saar margin expansion last year was very strong at 1.7.
Percentage point increase and then this year, we're committed to at least 1.5 percentage increase and this is something that we will continue to focus on.
In the out years going forward as well.
Yeah.
Thanks, Paul.
Yeah regarding pricing I would say as I explained we put us in pricing to be a bit below this year.
2019.
That is essentially due to Indonesia, okay because.
If we took to 2019 where had.
The realization of pricing from 18 in Indonesia, which at this stage.
We assume is not going to happen obviously.
One there was no real pricing in 19 sort of normalization in 20, and we'll have to be cautious about pricing and how it rolls out in Indonesia.
Pretty steep increase but we assume that.
Situation would resolve.
During 20, Twentys going to enter two unaware have annualization of pricing in Indonesia.
Okay.
Actually I apologies just one follow up on that in terms of I costs operating margins can you give us some color on.
How it compares to cigarettes, and say you know, Italy at one end in Russia. The other.
Well.
I suppose margins are higher than cigarettes, okay.
So [noise].
That's basically clear in a lot of the margin improvement is coming is.
I can explain from Mike.
Yeah.
Okay. Thank you very much.
Your next question comes from the line maybe in either from Cowen.
Thank you good morning.
Good.
So you guys town very constructive on the momentum.
I tell us that is clear I was hoping that you could comment on your key competitors commentary. This morning on for the RP category in Japan, specifically are they maybe have a different view than you I'm, specifically, saying that they're looking for more moderate gross to capture 25%.
I've industry volumes its competition intensifies can you comment on that.
Okay.
I think it's very difficult to comment at this stage wide is going to be the mid size growth of the category, maybe I'd see higher than.
And but you know, we see both growth and that they import.
And Bob.
And I think we are well positioned with Dolby and you should do come to the largest bundle for growth.
So we'll see a year out unfolds.
Quite exactly we yet.
But the key thing is that we remain focused I go still has a liar.
Auto segment share.
And.
And the momentum is positive and accelerate and we're increasing segment share another or marketing.
So that's the key things we repaid.
Perfect. That's helpful. Just a follow up on Japan can you offer any color on what your H.T. you mixes between he tomorrow at the end of 2019.
I don't have the exact numbers in my head, but I would say.
The cannibalization.
[music].
Table, we had a little bit of down trading I would say after the price increase.
Because marlboro increased prices more than Heath.
No it's back to stable and with our both growing balbo is growing again I'd give you and we haven't given the exact split but I think it's safe to say that.
Marlboro's share Marlboro Heatsticks share ended up being.
More than we had originally expected we thought that eats would.
Via bigger component by now and Marlboro Heatsticks has.
Held up better than we expected given the pricing.
On the other half each did its job of expanding the category and making the offering available to a broader array of consumers that were more price sensitive source satisfy when its performance.
And and overall it did its job however, more.
You tobacco users opted to stay with the Marlboro Heatsticks than we originally plan, which is positive of course for our margins in further profitability.
Sure absolutely no. That's a that's a great outcome last one from me.
Andre I appreciate your commentary.
On the E vapor concerns.
Her spreading seemingly to the you that certainly consistent with what we heard from one of your competitors yesterday are there any principal markets that we should be watching out for in particular, where consumer concern or confusion around E vapor risk is taking hold most dramatically.
Yeah.
Well I think the maximum was after the unfortunate cases in the U.S. relying disease and ads.
Got to span by some people.
The wrong way.
Yes.
No I.
I think this is getting better but we're not there.
Oh, yes, because they're still people that spread confusion despite all the efforts.
Myself and others.
Making to explain that this has nothing to do receive vapor category and more with.
You'd with an abuse oils and so.
My our perspective on these laws.
So in any case our plan.
The vapor was to build the capacity and going into the bulk of the market that is the European union or what's the right.
Okay, then we have combined.
At scale, we had planned a couple of markets earlier.
Try basis.
I think is better not to put wasn't oil into five, especially since we will put.
You know the vapor under the iconic brands or minimize confusion I prefer that we let a little bit time fly build capacity and it doesn't move in reality our plan for the European Union, which was towards the end of this year.
So.
But that's my perspective, and I think.
It it's about time that are more voice is here to stop.
Misleading people and.
I was reading the recent una by the World Health organization, and it's not my commentary but.
It is so much.
Paul.
Leading and I would say malicious statements in there, but some of the top advocates in public health came out and say.
Yes. This is unacceptable so the modified their version, but they still misleading so I think.
Short term is that may appear not a good thing, but long term the more people say, saying things the more credibility they lose and the more of the alternatives will become more gradual because they lose our credibility and I think we are in this phase now.
Frankly speaking, you'll see more and more of these.
Nonsensical thing and more and more voice and saying, let's stop of these have very sets now of the situation and stop talking seriously because these alternatives are better where people would otherwise small but as far as the commercial product is concern. That's it. That's why you know that's what I've said and I explain.
Well bundling.
Very clear thank you so much.
Your next question comes on the line of Adam Spielman or something.
Hello, Thank you very much for taking my question.
I mean was asking about Japan come out just I'll just one quick question that before turning to my cost My question on Japan.
He's.
In your pricing variance youre, bringing in any assumption hole the around the tax Raj that we're obviously going to catch you know talking about she asked and that's the first question.
Well any any policy any pricing is all in the guidance obviously item.
So you know.
We're always hope there is an opportunity in jump on when there is a tax increase to get pricing and make some assumptions with sees how much they materialize or no.
Great.
The.
Real quick question Dorsey around all the costs.
And.
So one though.
[laughter] thinking about the the European should begin in the European Union to begin with.
In Q3, you had <unk>, 0.1% schools from Corso market share growth and then you've had a much I really really strong growth in Q4.
So just wondering how you.
You should think or how we should think about do you market shot progressing gathering going forward, whether there's any sort of seasonality in that on how you see we should sort of smoothes out those few things fall just wanted your margin in Q3, and then a really strong performance Justin in Q4.
Okay.
In brokerage in broad strokes.
There is says on seasonality, Sam a pretty obviously, that's favoring cigarettes and little bit less market share or keep it debacle units. The second thing although like was it was very marginally affected by the whole.
Yeah.
Situation nobody vapor in the U.S. It was just the moment.
The quarter, we had the people that slowed down in September I would say, but we recovered as of October and November and I think what entering twentytwenty with a pretty good momentum.
Number of users who is increasing.
And as I explained I think the mental ease and opportunity for us.
The you know towards the second half of the yet so I'm very optimistic about that.
Gentlemen outcomes in the European Union.
I I am so just to summarize I think you'll say you expect to get more new.
Users in the even 2020 than you did in twin she 19, partly because of a medical issue, but also the CRM. The just the to hold momentum is sort of course, yeah, that's what I'm, saying.
Hey, Adam I would have so just gill.
The.
Ipos heated tobacco Sharon you there is.
Seasonality there look at for instance in 2018, you see the same basic dynamic where the increase.
From Q2 to Q3 is relatively small with a bigger increase from Q3 to four and then again in 2019, you see the same dynamic.
In addition, this year, we had even more pronounced effect that Andrea mentioned with.
The other.
News flow.
But this isn't a this is back to the seasonality p. cigarettes in you are going to be higher because it's warm weather people go outside and they can use it more.
And then lower in the winter months, whereas I close you could use much more easily frequently.
Without any worry as far as.
What the weather outside is so you don't see the the volume changes quarter to quarter as much as you do on cigarettes. So it's really the cigarette seasonality that's driving the share numbers.
The impact.
Overall, I would say item we see.
Significantly increasing the number of.
Users overall across the markets.
And I think it's also due to the fact that were getting scale getting momentum, we see more toward the mouth company in the markets and the tools, we use now most scalable so.
I hope you'll see these accelerate.
[noise].
And then quickly so turning to Russia, which obviously is very large market and you're getting share very fall off in a roughly speaking well in Q3 last year, you had roughly 1% market shown you've now got five so in five quarters UK four percentage points at Hawkins shop.
I guess the question is do you think that recent growth can continue.
Would you expect you to slow slot.
Well first of all we need to compare comparable things. Okay. We're still growing in cities, where we started before there is some obviously some expansion in there that helps and we still have scope for.
Now, it's pretty clear in my mind that at a certain stage, we would need probably a second price point in the portfolio in Russia, because in certain cities will be getting the essence of the premium and somehow a large part of that more.
I would say.
Well two part of.
Meet price segment.
I don't know, but we'll need leasing twentytwenty, but we'll have to plan.
At least for Twentytwenty one okay.
And that's how I see so.
We don't see a slow down, but we need to prepare for you know.
Reaching the limits in terms of affordability overtime in the big seats and the cities. We just thought that clearly we'll have more.
Runway in front of it.
Okay. Thank you very much.
Your next question comes from the line Apollo pop.
Pamela Kaufman from Morgan Stanley.
Hi, good morning.
Hi.
Oh, so over the last several years, you've quantified a level of incremental I caution back and then can each yet how much incremental investment do you anticipate and 2020 relative to 29 team.
Well in my view is going to be a bit less then.
29 team.
Hi, and it's all variable.
End of the day told depends on the number of New Consumer York wire. So I would say what would be between 303 50.
Depending on the number of new users.
And that's what we have because that's happened of course, the fuel environment, but it's not been clearly said all this is offset on it no comparable basis by all the savings we have.
Even in.
From a cost saving initiatives. So that's that helps clearly the margin expansion plus the.
Oh I close that these health.
Thanks, that's helpful.
I guess it better understand your decision to partner with KPMG and how you see their products competing with icon.
And given that this partnership extend your portfolio T E vapor and hybrid products do you.
Also see a need to fill the gap in modern oral.
Yeah.
I think at the end of the day.
I said many times I don't think we'll do all the new products on our own reinvent everything and were very open to partnership.
Oh and this is a very simple principle.
These what can we add to the partnership I think we'll have technology, we have IP. That's compliments, we'll have the scientific assessment capabilities and obviously the route to market.
And.
In my view, Katy and GE has an interesting product like the hybrid product, which by the ways.
Peripheral heated tobacco product, but not for Isis at the same time, when we think there is potential in certain markets and sort of in consumer segments.
That hit the tobacco product has is that second most performing.
Heated tobacco product and it's also.
Shifting from the inside.
Side and I think.
With the know how we have if necessary we can improve this project.
And I think we decide to market by market went out of there right price points for this product.
So that they are complimentary to our ico strategy.
And as we discussed in Japan.
For Japan, there may be some cannibalization, but from Japan. For example, we did two price points without old.
Products, we didn't see much cannibalization with so much more incrementality.
So that's how I see it for they vapor product we have not major plans at this stage, but I'm not.
Much more interested in their hybrid and the heated tobacco with <unk>.
Pete.
Has potential in these markets and let's call. It seat. We also have more alignment I would say.
Overall in Korea, that's important for the Korean market.
And we also have accessed from a technology point of view to account for like Korea that is one of the centers for electronics.
So I think it's a win win for both companies.
The license agreement the financial work for both of Us.
So I look forward to you know.
Working with them and.
Expanding into rise markets offering consumers much more wide range of products.
Thank you.
Can you give an update on the impact on your new user adoption in Japan from your device price reductions and other initiatives to accelerate I close growth in this market all.
<unk>, Yeah are you seeing increasing heated tobacco adoption in trial among the harder to convert later adopters.
Certainly we see Saab I think the I close tool will help.
Of course consecutive used for some people is important we.
Yes, this problem with the muti.
But now we addressed it also with the main product and we see better adoption.
The pricing is also in general to avoid all these promotions and promotional the money. We think that's the right price of the product and well with prepare the portfolio.
For the next generation that will always Cobb I premium so we always reduce the previous version price in view off the forthcoming new version and as I explained many times well have a strategy of having a major innovation every two three years and significant upgrades every year.
Okay, and that's where we're doing in Japan. So say that there is enormous reduction reaction just because we'd use the device prices. It helps but they did a whole mix that warrants, we see actually more overreaction in Russia or disposable income is really an issue.
Hi, having steel that 2.4 plots on the market and I think was three were still a lot of consumers by the 2.4, because the more price sensitive market.
I think the I'm sort of is not only pricing is much more resolving constantly the consumer pain points that I barrier to entry in the category.
That's why we're working on the current version and the forthcoming one so that's a little bits that philosophy, we apply.
Thank you.
Your next question comes on the line up Chris Growe from Stifel.
Hi, good morning.
Hi, Chris Hi, just.
So the question for you in a bit of a follow on from earlier question.
Yeah as you said your cost per user and acquiring users and I suppose is going down and I guess I'm, assuming that that scale effect you haven't in Rps, you're obviously to spend more money. This year, but I think at the same time I'm just trying understand how you can leverage.
Is that infrastructure you have as you think about the launch of platform to where mash is a lot of the same or are a lot of the same resource being used for that.
Are those I assume they are figured as part of the $3 million to $350 million you decided for this year.
Think about the launch costs, a little new products.
Well, obviously these new products.
If they go through our infrastructure, which means our own retail or part of the retail that these guys know franchises I don't digital platforms now that are put in place.
Coaches, obviously, you can use the infrastructure you have in it much more efficient way, so I would say that still give.
The majority of the investment during the year is still on Ike was skewed.
And we assume even when we roll out a bit more massively ico before it's going to be on a per user base is much cheaper compounded by the fact that we don't have.
To explain the category to be we just need to explain to people, but the differences and what the benefits of mesh on compared to existing you paper product. So there is no category explanation effort behind.
He will be much.
Cheaper in my view less expensive.
I'm not the hit not.
But in product.
Okay. Thank you for that and then I just one other follow up question and this gets to a question a bit of a question earlier and your response, but you have seen this a number of markets and you were I coast market share has really accelerated and we talked in the old couple of two years ago about.
In Japan, when you got over the 2% to 200% threshold you start sort of see market share really accelerate are we at that point than the you do we see that in the fourth quarter because some of those market share increases are quite notable are we at that stage. So my question and are you seeing that in more markets or do you hope to see that more markets in 2020.
Well I would hope, we'll see more and more.
Markets.
Twentytwenty as I said, we expect the number of users to grow which means compared to what had 4 million users we expect much higher numbers on that.
So I called this acceleration on if say markets basis okay.
Looking at the beginning of the year I would feel.
Good about the fourth quarter.
Good momentum going into 2020, we keep you up to date on on how we promise and that comes at a much lower cost so.
I think we're building it pretty nice.
Okay. Thank you very time.
We have time for one.
Final question and that is Famco RASM Jain from Barclays.
Hello, Good morning.
So my question is [noise].
On that Canadian subsidiary, So can you tell us where every argument the ought to be H granita prediction negotiations.
We try to happening.
Well, they're progressing but I cannot give you more.
Still very sustainable litigation and that our discussions or to resolve the issue.
Once we have something concrete I can give you more details, but things have broker.
[laughter] a follow up on the I close mesh launch so would you consider applying for a P.M.D.A. considering all clear change some of the language around the jewel agreement that would you will not allowed and the market for the yard and other things.
Hi.
I think would have a lot of plans for.
Before so one day probably apply for.
PMTA the U.S., but.
We still have to finalize a few studies.
Before.
<unk> have the same.
Type of filers.
Good.
That's important also for many other account rate.
And I in due time, you know who will discuss on if and when.
We want to enter the U.S. market.
Oh, the FDA is gonna be very busy in the U.S. because a lot of mixed.
A few months.
On.
On all the PMT I guess I don't think.
That's the appropriate moment of doing it.
Sure and if I can ask one last question can you comment on the selling unless a central plants, what I call. It sports and the last quarter then for the full 2019.
Oh I'm sorry.
At.
The end market sales versus the shipments or your we're selling.
Were approximately equal as anything actually the IMS is a little bit more than the shipments. So there was no inventory a change on the year.
It's in line with Okay.
Yes.
Sure. Thanks, a lot.
Okay. Thank you.
That concludes today's session of today's call presenters do you have any closing remarks.
Yeah, I would like to thank you all for joining first of all.
I would say we had pretty good 2019.
We're entering twentytwenty in a very good shape.
We outlined there one unusual things that is Indonesia with thing.
We'll see how these unfolds, we prepared to be cautious about this at the beginning of the yet.
And just something that is in.
In the added just now.
Now I mean, this whole issue around the Corona buyers.
Oh no problem today, but clearly if that continues they may be some impact on travel and the duty free.
And in terms of supply chain I think we're in pretty good shape for a few weeks.
If that persist for a very long period of time like everybody else would may have some issues with device supply now that's not a continuation of the like in any company is not baked into guidance.
Guidance, but we all hope this is gonna be sold resolved so we put it behind.
[noise].
So thank you again and you know I look forward worked with pretty good twentytwenty.
Thank you very much that concludes the call. If you have any follow up questions. Please contact the investor relations team here in Switzerland.
Okay, Great day. Thank you.
That concludes today's conference call.
You may now disconnect.