Q3 2020 Philip Morris International Inc Earnings Call

Please also note that growth rates presented on an organic basis for consolidated financial results reflect currency neutral underlying results and like for like comparison, where applicable.

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

Please also note the additional forward looking and cautionary statements related to COVID-19.

It's now my pleasure to introduce Emmanuel Babbo, our Chief Financial Officer Emmanuel.

Thanks unique and welcome ladies and gentlemen, I hope everyone listening to the cool and lose close to you our safe and well.

Our business delivered an even better than expected performance in the third quarter. Despite the ongoing circumstances of the pandemic.

Most importantly, the excellent momentum a ficos continues.

Can you volumes have grown 28% year to date was a positive mix effect on our net revenues, where our piece again made up almost one quarter of our business in Q3.

I quit user acquisition outpace the prior year quarter to reach an estimated total of 16.4 million users at the end of September.

While still below pre pandemic levels in most places our combustible business recorded an improved sequential performance.

Underlying industry volumes were better across both developed and emerging markets.

Reflecting increased consumption occasions.

This was not to be the case in markets with a significant proportion of the wage workers like Indonesia, Mexico and the Philippines.

Despite these better industry volumes, Indonesia remains challenging together with duty free.

We must also retained a degree of caution around a second wave of the pandemic and its overall economic consequences across all of our markets.

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

Our cash generation was also strong with $3.6 billion of operating cash flow in the quarter, putting us on track to reach our target of at least $9 billion. This year.

Turning to the headline numbers, our Q3 net revenue declined by 1.5% on an organic basis.

Making marking a significant improvement from the decline of almost 10% in Q2.

While this was somewhat aided by certain timing factors, including the revaluation of distributor inventory in Japan. The rest of the October price increase it Nonetheless reflect the continued strength of Ikonos combined with a sequential improvement in our combustible business.

Indeed, the positive effect of the shift in our sales mix towards Rps can be seen in the 6.5% organic increase in net revenue per unit.

Combustible tobacco pricing was 2.1% up reflecting solid pricing in a number of market, partially offset by timing differences with the prior year a strong prior year comparison in Turkey and Edwin in Indonesia.

These timing differences into the effect of delayed pricing in some instances such as the Philippines, where we took a price increase this months rather than August in 2019.

Given this net revenue decline we were pleased to deliver such a strong adjusted operating income margin expansion of over 300 basis points on an organic basis.

I will cover this in more detail shortly noting that we saw a further benefit versus our prior expectation from additional cost efficiencies.

Some delayed spending in the last month of the quarter.

Adjusted diluted EPS of $1.42 cents increased by 5.6% excluding currency better than our prior expectation of flat organic development. The primary driver was above cost benefit as well as better industry volumes in Indonesia and the.

Region, where increased mobility coincided with the reopening of hospitality settings and warm weather.

I also want to reflect on our strong performance over the first nine months of the year. This was clearly a challenging period without disruption to many aspect of our operations, including our supply chain and route to market.

Our net revenue declined by only 0.9% on an organic basis and exceptionally resilient performance given this unprecedented headwinds we estimate the duty free and Indonesia loan, where a mid single digit drag on our topline growth.

Despite these factors we saw very good organic progression in our net revenue per unit from the increasing weight of Rps and solid pricing in combustible.

Our adjusted operating income margin increased by 260 basis point to deliver 7.4% adjusted diluted EPS growth all on an organic basis.

Let me now go into the driver of our Q3 margin expansion in more detail, starting with gross margin, which expanded by 180 basis points on an organic basis.

He is driven by multiple leavers first our ongoing transformation is delivering an increasing mix of rps in our business second is pricing on combustibles.

Third is our focus on overall manufacturing productivity, where our focus on efficiency quality and footprint more than offset the impact of lower combustible volumes.

The positive gross margin development was augmented by our focus on SGN efficiency with our total marketing administration and research costs 140 basis points lower as a percentage of net revenue on an organic basis.

This reflects the ongoing digitalization and simplification of our business processes, including our RP commercial engine and more efficient ways of working.

There was also a benefit from the timing of certain cost as I already mentioned.

Despite the challenges of Twentytwenty, we are today, raising our expected full year adjusted diluted EPS range to between $5, our five cents and five dollar 10 cents.

Reflecting around 5% to 6% organic growth.

This exclude and assume unfavourable currency impact at prevailing exchange rate of 32 cents.

As stated in our earnings release, we have also updated certain guidance.

At present.

Like for like decline in total PMI shipment volume of 8% to 9% both of which factor in the better Q3 developments in the EU and the smaller expected market decline in Indonesia.

We assume an organic expansion in our adjusted Oi margin of around 200 basis point also reflecting the above factors and ongoing cost efficiencies.

We expect capital expenditure of approximately zero point $6 billion and an effective tax rate, excluding discrete item of 22% to 23% we.

We also assume no recurrence of National look downs in our key international market in the fourth quarter and remain vigilant with regard to the pandemic as economic uncertainty remains and localize social restriction are being tighten in some geographies.

Focusing now on the fourth quarter, we assume underlying consumption trends should be broadly stable versus a robust Q3.

In many markets, including the region and Russia increased consumer mobility, the opening of hospitality settings, and similar conditions provided a helpful backdrop to our performance. However.

However, there remains continued pandemics related uncertainty as we now see localized restriction tightening in certain countries with potential impact on both mobility and economic volatility.

The delay of certain SGN Records from Q3 will also have an impact on our fourth quarter results in it.

In addition, it's worth noting that while the price increase in Japan took effect on the first of October the majority of the impact. This year was realized in the third quarter through the revaluation of distributor inventories.

I should remind you that Q4 2019 present, a strong base of comparison this is notably due to pricing in Indonesia ahead of the January Twentytwenty IXI stacking excite tech increase and an exceptional share gain in Saudi Arabia due to market disruption rate of new plant packaging requirement.

As such while we expect around 5% to 6% organic EPS growth for the year, we expect the organic progression to be flat to modestly negative in the fourth quarter, excluding four cents of estimated unfavorable currency.

I will now cover our third quarter performance in more detail.

As with a net revenues our combustible shipment volume sequentially improved all by the year over year decline remains greater than historic average.

This was supported by better industry trends in all regions. Conversely, our HQ shipments volume continued to grow strongly to reach a record 19 billion units driven by the region, Japan and Russia.

I also want to touch on the year on year inventory movements in the quarter, which negatively impacted our shipments on both cigarettes and edge to use vis-a-vis consumer uptake.

The reversal of trade buildup in each one in markets like Germany, and Russia was one contributing factor.

Specifically for Japan, they were reduction in distributor inventory in Q3 following increases in both Q1 and Q2 of this year in anticipation of retail and consumer loading before the October tax driven price increase as.

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

Importantly, inventory for cigarettes and edge to use in Japan are now aligned to the expected market size following the price increase.

The main positive impact of the price increase on our Q3 results was the reevaluation of distributor inventory.

This strong performance from Microsoft means that either tobacco unit made up over 10% of our total shipment volume in the first nine months of the year as compared to approximately 8% in 2019 and 5% in 2018, we can.

We continue to expect this proportion to grow over time as the positive momentum on Rps continues and remain well on track to achieve our target of 90 to 100 billion units in 2021.

Our mission is to grow the RP category globally and transforms the mix of our business with $4.9 billion in sales year to date Rps are now approaching one quarter of our total net revenues.

Indeed, what this percentage was just over 23% in the quarter. If we were to adjust for inventory movements Q3 will have almost reached 25%.

I Echo devices accounted for approximately 8% of RFP net revenue year to date.

Mainly due to a naturally lower ratio of new user to existing users longer replacement cycle and geographic mix, particularly in the second quarter in some.

In some geographies, we still sell a substantial amount of the lower priced original ICAST, we got four plus device and we have now introduced real solid in eastern Europe.

The East Asia, and Australia region provides an illustration of Rps operating at scale and is on track to deliver over Alex its revenue from our peak this year.

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

Focusing now on our total international market share the development were very positive for the bulk of our business before the impact of duty free cigarettes, and Indonesia, our share increased by 0.4 points. This was driven by higher share for it the tobacco unit, which increased by.

0.8 points to reach 3.1% only partly offset by lower share foresee Garrett.

In markets, where I cost as a meaningful presence our share increase with few exceptions it for.

It follows that our combined market share increase in the EU region, Japan and Russia.

However, our total international market share was negatively impacted by duty free where our share is higher than the PMI average, resulting in only partial recapture of volume in other markets and by Indonesia, which I will come back to separately.

It is also true that in many markets and Marlboro over indexes to social consumption occasion, which are naturally lower during coverage related restriction.

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

I turn now to Indonesia.

While the challenges related to the excise tax structure remain underlying consumer trends improve in the quarter in.

Industry volumes declined by 6%, excluding trade inventory movements and notable improvement from the 22% decline in Q2.

This primarily reflects a recovery in daily consumption from depressed level as confinement east.

Given the continued rise included cases, and the possibility of more localized restriction such as temporary introducing checkout Alice months, we do not assume significant further improvement in the fourth quarter, however, reflecting the better third quarter industry volume and exit rate. We now expect the total industry decline on.

The shipment basis to be around 11% for the full year versus 15% previously.

Why the smaller industry decline as a commensurate effect on our volumes our market share remains under pressure. Despite improved performance from the IR margin a mild GSM through Magnum and SK tea brands. This is due to the same dynamic mentions last quarter.

Most notably the gross of tax advantage below tier one brands continues as tax driven pricing and upon the mic as increase downtrading.

To illustrate this issue the tax per stick on our tier one m- brand is more than 60% higher than on the comparable to kretek brand with a similar resulting difference in the retail selling price.

With the segment now at 26% of the market. This represents a serious and growing threat to state excise revenue and a diminished return on the sales tax increase that.

The correction of volume based tax years remains urgent we are hopeful that the government will take steps over time to ensure more predictability in tax revenue and a level playing field by reforming the multi tier excise structure.

The process of minimum selling price implementation also continues to progress slowly hampered by the pandemic full enforcement may not be complete until the end of the year at the earliest.

I'll move now to our RFP performance.

We estimate that there were 16.4 million total acres user as of September 31st.

This represents the addition of around 1.1 million adult users since the end of the second quarter and over 4 million since the same time last year with more users added in both Q3 and year to date than the corresponding period in 2019. This.

This is an exceptional achievement given the circumstances, where our accelerated paper to digital and remote engagement is paying dividends.

We further estimate that 72% of the total or 11.7 million adult smokers as stop smoking and switch to I close with the balance in various stages of conversion.

This again reflect widespread use of growth momentum across all key icls geographies, including Japan, the region and Russia.

As our user base expand in markets like Japan, and Russia, we are increasingly enriching our offer and segmenting the market with new product and more price points we.

We plan to bring more exciting innovation from micros in the coming quarters we.

We also optimistic that the FDA granting of modified risk tobacco product reduce exposure orders for version of Heico's will contribute over time to better understanding of the heated tobacco category and the benefit of switching to lycos compared to continued smoking.

The success of Iqos in global TCT, where our commercial strategy typically as a strong initial focus so.

Serve as a useful indicator for national share growth potential in may.

In many cities across a wide range of market our share is now well into double digit and still growing this.

This provides an excellent base from which to further grow our RV business as we innovate and broaden the ico sulfur.

In the region. We added a further as you opened 4 million Ikonos user in the third quarter to reach 4.7 million a continuation of recent strong performance, while most adult menthol smokers, our switch to non menthol cigarettes since the ban in May we have seen some in.

Three mental switching to ARPU over the mid September period, and continue to see further opportunity to convert these consumers.

Third quarter share for each reached 3.9% of total cigarette and edge to you industry volume.

This was in line with Q2, Twentytwenty, but sequentially increased by 0.1 point when adjusted for estimated retailer inventory movements and consumer pantry loading effect.

Sequential I am as growth also on an adjusted basis was plus 16%. This reflects strong absolute growth in Italy and Poland. It also include further progress in Spain, and in the UK, where both national and London Offtake share continued to grow with the latter.

Exceeding 3% in September.

I also refer you to the appendix, where we show shares for key new markets.

I course continued its strong performance in Russia, with our HQ share by 1.8 0.2 reached 5.8% on a.

On a sequential basis versus the second quarter of Twentytwenty share decreased by 0.2 points, reflecting a cigarette market, which grew 6% on the same basis.

Good by seasonality of consumption and lower elicit prevalence.

Sequential edge to you in market sales adjusted for trade inventory movements increased by more than 9%.

With the introduction of its creation in Q1, Twentytwenty and seat consumable for lease solid this quarter, we know of a price to your portfolio to cater to a broader range of adult smokers across the social economic spectrum.

In Japan, our total reported share for it the tobacco unit reached 20.5% in the third quarter supported by line extension for both Marlboro It stick and it's such as the recent launch of Marlboro Black Ninefold.

Icls user grew 20 nanometer total of 6 million of which an estimated $4.4 million as stop smoking and switch to ipos.

On a total tobacco basis, including Cigarillos and adjusted for trade inventory movements the share for our edge to you brands increased by 2.6 point versus the prior year quarter and by zero point to point sequentially to 18.9%.

Q3, Twentytwenty adjusted in market sales volume for our HQ brands grew 7.3% sequentially.

The overall it'd tobacco category continues to grow with the large majority of this growth driven by cost and now makes up almost 26% of the total tobacco market.

In addition to a strong growth in existing market. The geographic expansion of Icls continues we leverage our digital capabilities to launching four new emerging market Costa Rica, Georgia, Jordan and the Philippines. This takes the total number of of market, where I could say is available for sale too.

61 of which over as our outside the OE CD.

The launch in the Philippines was initiated digitally before adding retail touch points and is focused on mutual Manila, where consumer purchasing power is higher while the.

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

We have also now started the commercialization of heico's via our new E vapor product, which was launched in New Zealand during the quarter initial other consumer feedback is positive and we plan to rollout to further market in Q4 and Twentytwenty one.

The commercial infrastructure of heico's will allow us to deploy efficiently and at scale.

We place great importance on guarding against youth access for all our product in this category in particular, we will be testing age verification technology in select markets.

As part of our mission to build and accelerate the global RP category. We aim to offer a choice of experiences format and price points to adult smoker and consumer of other nicotine product.

Our collaboration with KPMG is consistent with this goal as demonstrated by the first launches of Flint product through our Icommerce infrastructure, we insure.

We introduced the latest solid Eaton advanced device and fit edge to use in both Russia and Ukraine during the quarter.

As we reach shares approaching 15% to 20% with Iqos in key cities, such as most when Keith and we expand to area with lower purchasing power a simple affordable proposition can play an important complimentary role in reaching more other consumers and maintaining a strong rate of shoes.

Our acquisition.

Early results are encouraging with positive feedback from other user. This means that in both these markets. We know of Edgeview brands at three brought by price points within the inner brand category Superpremium, its creation dimension premium east and mid priced seats, all of which press.

And attractive margin.

We will also shortly be launching the Lil I've read device mix consumable and nicotine free liquid cartridge into Japanese prefectures, offering adult consumer a differentiated premium experience, which combines the satisfaction and rich flavor of heated tobacco with added.

Sensorial element.

There is a consumer segment in Japan looking for such an experience and we believe this will be the best hybrid product available in the market.

I will now to emphasize the deep alignment of our business with sustainability and ISG objective, which sits at the core of our mission and strategy.

Our most important is the issue is the EPS impact of our product.

By innovating, we significantly better alternatives such as Iqos, we have a historic opportunity to substantially reduce this impact by switching adult smoker, who would otherwise continue to smoke to reduce risk product.

Through deploying RFP is at scale, we can improve public health and contribute to the sustainable development goals, especially goals three good health and wellbeing.

We also have best in class practices across a range of central is Gi issues, where sales are sphere of our forces to be pillars are focused.

We believe this provides a unique combination whereby sustainability is a true driver of innovation and growth by embedding sustainability into the core of our business, we can create value for our shareholders and society at large.

To conclude our Q3 results were stronger than expected and we have raised our full year guidance to reflect around plus five to plus 6% organic EPS growth we are.

We are building a business through our plan is to deliver superior and sustainable growth over the coming years.

The continued momentum of heico's through the challenges of the pandemic demonstrate the structural growth characteristic.

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

We have a number of levers for growth in our top and bottom line first the powerful mix effect of Rps.

Second pricing, which will remain important for combustible and where appropriate for rpcs.

Additionally, efficiency in our manufacturing and SGN a cost are further leavers as we continued to hone our business model.

Moreover, with the launches of the I could leave and lead product, we are broadening and stepping up our product offer and innovation in Twentytwenty one.

You can also expect us to bring a further exciting innovation to our iqos it'd been platform.

As I, just mentioned sustainability and energy are at the heart of our Smokefree strategy and we continue to work tirelessly to further our mission.

As we all know there remain continued uncertainty regarding the pandemic the impact of social restriction and their economic after map.

However, when currency related headwinds abate, we expect to resume growth consistent with the currency neutral compound annual growth rate in our 2019 Twentytwenty one algorithm of at least 5% net revenue growth and at least 8% adjusted.

Diluted EPS growth on an organic basis.

In short, we look forward with confidence and we will expand on these topics further at our next Investor day, which we plan to old in early Twentytwenty one.

Thank you im not more than happy to answer your questions.

Thank you we will now conduct the question and answer portion of the conference again.

Again in order to ask a question or make a comment.

This past Starkey followed by one on your touched on sound.

In the interest of fairness and time, we ask that participants keep to a maximum of two questions. Each F.

As time allows followup questions may be taken.

You may rejoin the queue again by pressing Star then the number one on your Touchtone phone.

Our first question comes from Adam Spielman of Citi.

Hello, Thank you very much so our first question using its duration.

Burger comps 90 to 100 million.

Okay, So 2021 for Rpcs.

Are you still comfortable that you all will exceed 250 billion in Twentytwenty, five which is more of a longer term target of my first question. Thanks.

Thanks, Adam we definitely.

Repeating our ambition to reach next year 20 200 billion.

In the Eaton the done category and I think that the growth that we deliver quarter. After quarter is clearly pointing to that direction. Then you are alluding to the Twentytwenty five objective of 250 billion plus which is I think here in line with what I've.

Started to detail on the presentation, which is really the fact that we are broadening the.

The portfolio when it comes to our.

Rps product and we are going to of course.

With a more enrichment more segmentation more offering when it comes to it not burn we are entering the year.

Vaping category and all that is going to put us on the track.

To deliver that ambition and I think everything has been saying in term of segmentation of the devices now that we are coming with with the lead offering what we have started to do now in Japan in Russia. When it comes to the consumable. It shows that we are clearly now the demand the market is getting.

A bit more mature of course, if there is still at an early stage in most places but in a few places we have some first element of a bigger market. It is time now to enrich the offering and the and broaden the spectrum of what we can offer to.

I would say conquer and convince more smoker to switch to our product and and therefore that is what is going to put us on the right track for this ambition for Twentytwenty five.

Excellent. Thank you very much and then.

I don't want to minus or they want to put words in your mouth, but for your market shares in Russia in.

In Japan.

Grew in Q3 sequentially less than in Q2.

And I am wondering.

Verizon was do you think and weather related significance or its just sort of random quarterly fluctuations or we should just ignore that.

Yeah, I don't think that there is anything to be read there I think that we are very happy with the performance on on on the key market of course, you know what has been and depending on the on the season and the and the consumption pattern and what has been happening on the borders we know that some bother with tools, we talk about in English.

Trade being stop I mean that can be disruptors too.

Evolution should ticker.

Kind of flash or spurt quarter, as you add but I would say the trend that we've seen in Q3, we are very much aligned with a nice strong trend that we've been observing although the first part of the year over each one so I don't think that there is anything in Q3 that would be signaling a slowdown in the way we are gaining share in an underlying manner.

Thank you very helpful. Thank you.

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

Hi, good morning.

So there is obviously a lot of the ongoing uncertainty that I.

Just to reiterate eggs are on track for your heated tobacco target for 2021.

Broadly how are you thinking of that how you're positioned for growth next year and do you anticipate accelerating growth as you lap the performance SCR and key benefits from the key I enforcement as minimum price increases in Indonesia.

Well thanks for the question obviously, its very early stages to start thinking about next year I think you very rightly said it 20.

Twentytwenty one is full of uncertainty and we've been recognized as the last months of Twentytwenty of their fair share of uncertainty as well so difficult to of course start to elaborate on Twentytwenty one.

The only thing I can say at that stage is that we are going to enter 2020, one with the strength of our RV business that is clear enough from this.

This first nine months performance there will.

There will be certainly a number of low comes in.

The basis of Twentytwenty, but as we don't know also that are going to be in Twentytwenty. One you know and if I take the example of duty free which of course, you could say, we're going to have nine months with very very low business in duty free. It 2020. So one could argue whether thats an easy basis of conversion, but nobody is able to say today was going to be the rebound.

Next year of duty free so, it's it's just difficult to say, which kind of growth trajectory at that stage.

It is a design issue on I hope, we'll know more.

In the beginning of Twentytwenty one.

When we will comment on our full year 2020 and at that stage, we can share more detailed view, but I think that for us. The main element today that I would say is a kind of for sure whatever is the environment is very very soon.

Strong performance of our Infiniband business.

Thank you and also I think very strong margin performance in the quarter can you elaborate on the factors that contributed to that in Canada, as lower marketing and administrative cost and if I could out manufacturing efficiencies.

Yeah, how are your customer.

Customer acquisition costs trending and how much of the lower casket temporary.

Our sales as sustainable going forward.

Sure happy to do that where the margin improvement is and Thats, probably the strength of the performance is not coming from one element I think it's a it's a collection of driver that we have to add to the topline evolution.

Nice margin.

Evolution and and that is coming first of course from the growth of Rps and I think we are showing this quarter the impact on the gross margin of the positive impact on the mix of the consumable in in its not burn.

And as we keep growing that business that is of course, a nice mix positive.

Impact clearly, helping the margin. There is also everything we are doing on price and we keep clearly working.

In.

The direction of improving nicely price on combustible there is and I would be happy to elaborate further if you. If you want then there is of course everything we do on manufacturing productivity, which is also a nice driver and then below the gross profit Youre right. We have this.

Very positive evolution of our SGN, a where we managed to decrease on an organic basis as Jenny by about 7% when the decrease of the topline is.

Only 1.5% so we have a nice leverage if you want between the two and here you have a mix of thing first of all yes of course, we are working on the efficiency of our cost. So all functions. All team are working on working in a simpler more efficient more digitized manner. We are platforming in all our.

The work we are standardizing we are automating we are using digital in all capacity in order to work in a more efficient manner. So that is contributing to certainly some some saving then on top of all this in Fourq, you're absolutely right. We have increased efficiency as we turn to.

Toward a more digital commercial engine on Rps and that is of course, something that is going to a company is on the long term we build at the Orijin the ico business with a business model, we know with a lot of.

Physical cultures and based on the involving some retail.

Some places that we were owning and that was great to start we needed to do that of course as we are growing the market.

As we are learning about it and as we are developing our digital schemes. We are indeed, developing a tool which is a really efficient both in terms of digital customer experience and in term of digital trade experience and that is our laws, allowing us to be much more efficient in contacting smoker.

That we can convince to switch to iclusig in explaining an accompanying them on answering all the questions in coaching them in a digital manner for them to understand our networks are his global experience to answer that question, we have been creating communities where.

Well people switching to Michaels can exchange, our impressions and them and their and their tips and then once it is done of course, the drop in a down and we are moving to retention and really build this intimacy through adding a lot of data about our customer of iqos and really being able to bring them the best.

Overall experience and keep them as as customer affirm our it's not been a business. So thats. What we are doing today and absolutely that is translating into a reduced cost of acquisition and a reduced cost of retention. We are certainly not at the end of this improvement but that is nicely.

Helping the performance in Twentytwenty for sure.

Thank you.

Our next question comes from line of Michael Lavery of Pepper Sandler.

Good morning, Thank you.

You are.

Yes, I am.

Yes.

You've watched in some markets this year and certainly it's done.

In the circumstances to really get those going with with pandemic closures and restrictions, but you've got.

You've got some like Saudi Arabia, and already at 40 basis points of share of the small, but but France.

Several years to get to that.

Mexico also.

20 basis point, it's early but it looked like a pretty good start can you touch on some of what's driving that I know you just mentioned some of the digital things is that really the key are there other factors.

What is just getting some of these markets going a little bit more quickly than we've seen in the past.

Well I think it's and each market Michael is different so the answer probably could require a long explanation and entering into those type of of dynamic and starting with the regulation of course, you know the capacity that we have.

To speak about Ikonos unexplained our networks in some market. We are just capacity to explain to smoker that a better alternative does exist in other countries. We are much more limited so that is clearly having and having an impact.

Then certainly there is an impact you know as you grow the visibility.

Of course.

Of course as you are people starting to see a friends family around them using I cause you may have the kind of snowball effect, you know, maybe it's a little bit of a caricature, but I think to some extent it can play like that.

And that can accelerate the.

The.

Evolution of the market you have also the cultural dimension, which is quite important in some country people will be proud of having discovered lycos and they will want to share that with their friends and they will become our.

Become our best sales people I would say about ipos and taking themselves the time.

To explain and convince friends and relatives in other culture, it would be very different and that won't happen because they will believe that it's a personal choice and they don't want to interfere on that so all that to explain the very different.

Pattern that we are seeing in terms of development of the business, having said that you are absolutely right.

All is going to be able to to go digital and have great digital tool to contact smokers talk about.

Iqos be able to engage them in what is equally as experience the more we're going to be able to grow the market and the and keynote developing digital customer experience is going to be key awfully in accelerating the growth in several markets, but let's not underestimate the fact that regulation can.

Can be a pretty significant restriction nevertheless, even when it come to using digital tools.

So again that explain why I think they certainly know market, where we are not saying that we have the ambition to make them RP market, but certainly in some market is going to take a bit more time.

Okay. That's helpful. And then we're about five months into the menthol band in the EU for cigarettes.

You mentioned, a little bit of incremental momentum on on Michael's menthol, especially in a market like Poland. There has been a big share jump there how.

How much is that related to mental success getting cigarette smokers to switching and how much more runway is there for that to go.

Sure Michael what I can share with you is that so you remember that mental was roughly speaking 10% of the.

You market all together.

I think the vast majority of the mental.

Smokers have been switching to other type of combustible cigarettes.

So I don't think that there.

Sales in the certainly not not the maybe the what was owed in term of people stopping to smoke, it's probably a few percent, but no more than that and when it comes to switching to other alternative like eternal Burns and I costs. In particular, you know maybe around 5% of the people have done that so far we doesn't.

In that we are giving up we think that we can certainly convince more people, but I think the impact has been relatively limited you right, probably helping a little bit in Poland, maybe in the UK as well, which in our two big markets for mental but I would not say that it has been as being a big big positive impact so far.

On our Icls business.

Okay. Thank you very much.

Our next question comes from one of that and answer of Cowen.

Hi, good morning.

I appreciate all the detail around.

Hi, guys needs or engagement seemingly a lot of the house.

The Hardy investments you guys made early incremental investments.

I was wondering if we can kind of pull that altogether and perhaps quantify evolution.

In addition costs in particular over the course of 2020 getting killed it. Thanks.

Well I understand the question, but but at that stage you know I think we win nothing to enter into more granularity I think we are giving through a set of numbers and presentation more detail on the driver for profitability. So I'm I'm sure that you're able to capture in or through the gross.

Margin evolution and and the other element that we are getting some some some element.

But it's obviously as you can imagine a relatively strategic information.

Sensitive and therefore.

It is not something that we can we can share.

But but I'm certainly happy to confirm that we are seeing a significant degree.

Degrees and that we have ambition for more significant decrease in the future. So I'm just reiterating my comment that you should expect more improvement on the.

The ramping up of the of the profitability of our RFP business in the future, which is really great. Because we are combining a big big driver for the topline growth quite obviously and then in addition, a nice driver for profitability improvement.

Okay Fair. Thank you very much and my second question is just on price gaps in.

Category makes a lot of money that you would want to introduce tiered portfolio as your penetration.

Yes continued to mature if you will.

Thinking about the price gaps relative combustible. So I didn't give you the same kind of.

Descriptive language in terms of the pre segmentation in Russia.

I'll take that so I understand that youre going to match price gaps against compatible with a tier.

Consumable portfolio or thank you Barry Thank you.

Well as you know globally.

We have positioned because they deserve it our.

Our p. business as as the premium business, it's a unique.

Consumer experience and that fully justify a premium price position now of course as you know in some country as well.

Excise duty level is lower sometime materially lower.

On Rps and on into them than on combustible cigarettes, and therefore that is also justifying a lower price point. So I would say as a rule you know we have a our combustible that are priced.

And as the price on Marlboro or sometime you know even a bit below a mobile and I think it's it's it's a it's a it's a it's a good positioning the switch.

The sweet spot to really reflect.

The overall experience.

And the value for the consumer a battle.

But also the specificity of the.

Not burn.

In category and our estimate than product and in segmentation, we're going to do the same it's of course related to the customary expense as well and all three consumable are not the same and did not deliver the sales experience.

And exactly like you know we have been doing for decades on consumable depending on the level of.

Have I would say benefit value for the consumer.

What is is perceiving.

The overall.

Pleasure and positioned dimension for him will have different price positioning.

No that will be aligned with that I don't think we should expect anything really materially different there.

Understood. Thank you very much.

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

All right. Thank you have a menu.

Hi, Bill Hi, Carter was stronger than expected and you're seeing a better demand environment. And then you also took up guidance again, so I guess I'd like to get your thoughts on retaining a share buyback program and if this might be realistic next year. So.

Seems like you have flexibility and I guess I think of it as an important positive signal for the market that probably would be the favorite place sale.

Yeah, I just think it would probably help to support your stock price I'd love to hear what your current thinking is on that.

Thanks for the question Bernie.

We haven't changed our mind at that stage on the buyback.

We've announced as you know a 2.6% increase of the dividend to for the 80 cents a.

A year.

So we continue to reward the shareholders.

And I think we stated in the past and we are very much on that line that we will not start to share buyback that could potentially add.

Endanger the rating and I'm not sure that today.

We have a huge flexibility on on that rating and with the balance sheet that we have today. So we have a very strong balance sheet and we want to keep that I don't think that we would love to be.

Losing summer.

Some some nurturing the rating because of buyback so I'm I'm not closing the door on the long term you know of course, it's moving situation and as we keep generating cash and strengthening the balance sheet. You know, we we made together with the board decide to to change that but for the time being this is not on the agenda.

Okay.

That's helpful. And then I know, it's early but I was hoping to get maybe your thoughts on what you see as the key tailwinds or maybe headwinds as we look out and the 21 I guess as I'm thinking about your business and what you've accomplished during this pandemic it seems like the secretary quite poor.

Positive, especially since I think there are a few tailwinds such as Sina for instance that when you have in Japan.

Im not asking for guidance on for next year, but is there a way that you could just kind of lay out in a few of these tailwinds as you see them fair business and our possibly yes.

Well thank you.

Thanks, Ben if I'm not asking for guidance because the window anyway, [laughter] try try to try and track trying to to to elaborate on tailwinds and headwinds I think.

I think the Tailwinds are quite obvious we have this RFP business that is you know almost one fourth of the business. So its very material in terms of share of revenue that is going very strongly we talk about a growth of of about 2028 20.

9%.

Year to date, we see a number of market that are actually contributing to the dynamism. We are as we said you know enriching the offer so we see that we start to enter into new phase of this ambition of creating this category that we think one day will be.

I would say, putting an end to a smoking world by this segmentation enrichment of the offer so we have year, a very powerful tailwind that is going to help us as we enter into Twentytwenty, one and as you have seen its not only as I said positive for the top line, but it also nicely positive for the bottom line because we.

We are ramping up.

The profitability on that business and that is a business that as a button.

Has the potential to be super nicely profitable.

Then of course, you know I said it you have all this.

Very low cost that we're going to have in few markets. We have this Q2 that has been very difficult you have the duty free business that is extremely depressed one could argue that if things were to starting to gradually in 2020 one.

To be back to normal but.

That could provide easy come for growth now that unfortunately is a segue for Ed wins, because we don't know whats going to be easy environment.

More and more people are saying that we're not going to be back to normal maybe until the summer of Twentytwenty, one nobody knows what exactly it means by the way, but people are saying when the vaccine will be available, which could be somewhat 2020. One that is a condition to be back to some more normality and therefore, we don't know I was going to play out globally.

On on on the business, but I think we.

But I think we are taking comfort and confidence from the fact that the 2020 will not have been working walk into park is it for sure and despite that we are delivering what I consider to be a robust performance and targeting our nice organic growth for the adjusted EPS. So each year that even in a in.

The difficult environment, we we managed to deliver a nice performance.

All right very helpful. Thank you.

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

Hi, good morning.

Good morning America for a couple of questions. One is on the Capex.

Yeah, because again.

800 million and now it doesnt meaningfully below depreciation which runs at about 950 million for your company.

As a new run rate of Capex, and Ghana depreciation has stepped down in the future.

Sure. So no. This is not the new normal for the company. We are obviously you know go.

Going through stormy waters. So it's a it's a it's an adjustment and there is number of project by the way that given the environment. We we prefer to postpone so that explain why we are now targeting zero point $6 billion for the year I think you can expect us when we are back to.

A more normal environment to be back to a more normal capex.

Amount that I would say probably to be around 0.8 billion.

So that could stay.

Below the level you are right of.

Of amortization.

And the precision that is.

That is north of 900 million today and of course, you know over time. If it continues like that that will mean that this amount will decrease as well you are absolutely right I'm not able to give you phasing for that.

But that should be over time.

Natural evolution, though of course with.

With a carryover effect it will it will take and it will take some time.

Sure and my second question is on your travel retail business.

The revenues on costs in the Middle Eastern Africa line.

And.

Clearly the market and are now 100%. So you are supplying out of inventory.

Is there any risk of inventory write down and travel retail.

I think at the end of September we have been taking care of the potential impact of that so I would not you know.

Expect anything major for the rest of the year.

Okay billion tanks or not.

Thank you.

Okay.

Our next question comes from the line of Chris Grayling at Stifel.

Hi, good morning Emmanuel.

So the question time, just had a question for you if I could on some of the inventory adjustments that occurred in the quarter and just.

Just to understand so I coast had a had a inventory.

Inventory drag that weighed on its volume in the quarter.

Reported an even stronger performance for for that brand excluding inventory changes our inventories safer ico. So I guess I'd be curious for your business overall are they at the right level or are there I expect the changes to occur in the fourth quarter on inventory, perhaps a building inventory.

No, Chris I think that Youre right and I think we flagged in each one that there was a number of country with some anticipate.

Some anticipation on inventory, we got the reversal of that in Q3 Youre right. If you retreat. The shipment by that we have a record around 20.5 billion seek of often in market sales, which is I mean, it's quite a symbolic threshold that we deal with 20 billion is it.

Is quite nice.

And we believe that we are globally at the right level at the end of September. So we're not expecting today in Q4 and any material impact on inventory for four regional burn okay.

Okay. Thank you and then just so.

Second question on on Viiv, and the kind of just to understand the degree to which you can undertake a wider scale launch in more markets in the fourth quarter, our their production limitations. There obviously I'm sure. There are at this point, but just to understand how you think about the progression of that launch in more markets in starting the fourth quarter.

So there could be you know.

Very limited number of market launch in Q4, I think we're taking the time to have all the lessons learned.

From what we've seen in a in New Zealand to make sure that when we launch we are super ready and the Anda and very successful.

He certainly things around age verification.

On which we are still working and which are very important for us as you know so we are still working on them on these various dimensions that don't expect too much in Q4.

I think the big new launches would be more for Twentytwenty one.

Okay.

Thank you for your time.

Thank you.

Again, ladies and gentlemen in order to ask a question simply press Star then the number one on your telephone keypad.

Our next question comes from the line of Alan Bennett of Jefferies.

Afternoon ammonia out of about one hi.

And third question Clay I, just wanted to come back to Adam and the team.

He went in 50 billion target by 2020 pass you mentioned Novo expansion of the portfolio in bank will have here and obviously very different economics between it and they pass so how do you see that in 16 billion being split between between the two categories I know very early days.

Internally, how you see our building.

Sure and so we haven't been splitting the 250, so I won't do it now.

I think we believe that quite obviously each RFP category.

As a play in getting there, but there is no doubt that we continue to see the it's not been category as you know being I would say the majority of this 250, so we certainly intend to develop.

He's 18, and the and I could leave and the other thing that we could launch from now until 2025.

But I think you should expect steel.

A big part of this a big majority of the 250 to come from from from it. The remember I mean this is.

An aspiration that we have been sharing I think as we progress we'll make sure that you know we put more detail around that so.

So when you bear with US we're going to certainly continue to give more and more a vision more visibility but it.

But at this stage I I cannot split a third.

Further the.

The the the 250 and and quite obviously you know we want to develop thing in a profitable manner. So that is also drive the choices and the and the final number in a in the split of the 250 billion.

Okay. Thank you and second one I was hoping you could give me the AD inventory heated volumes in eastern Europe. The key one Keith Kimmel Keith rates, you just see how that type of glass in shaping the midstream upheld.

Well I don't have that with me.

What I can see with the team maybe as to whether there is some sales is something that we can then final one for you.

Okay, great. Thanks, very much appreciate thank you. Thank you.

Thank you we have reached the allotted time for questions I'd now like to turn the call back over to management for any additional or closing remarks.

Thank you very much that concludes our call for today.

If you have any follow up questions. Please contact the Investor relations team. Thank you.

Thank you again and have a great day.

Thank you all for too soon bye.

And thank you ladies and gentlemen, this does conclude todays call you may now disconnect.

[music].

Yes.

[music].

[noise] [noise].

[music].

[music].

[music].

[music].

Good day and welcome to the Philip Morris International third quarter, 2020, <unk> 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 a question. Please press the star key followed by the number one on your Touchtone phone at any time.

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 Rowley, Vice President of Investor Relations.

Financial Communications. Please go ahead Sir.

Welcome and thank you for Joy.

Thank you for joining us.

Earlier today, we issued a press release containing detailed information on our 2023rd quarter results.

Access the release on Www dot.

Or the <unk> Investor Relations.

Sure.

The glossary of terms, including the definition for reduced risk products or rps as well as adjustments.

Their calculations and reconciliations to the most directly comparable us GAAP measures and additional heated tobacco unit market data.

Today's webcast slides, which are also posted on the website.

Unless otherwise stated all references to our goals are to our goals heat not burn products.

Comparisons presented on a like for like basis reflect pro forma 20, lysine results, which have been adjusted for the deconsolidation of our Canadian subsidiary Rothmans Benson and hedges.

At March 22nd 2000 <unk>.

Please also note that growth rates presented on an organic basis for consolidated financial results reflect currency neutral underlying results and like for like comparison, where applicable.

Today's remarks contain forward looking statements and projections of future results.

I direct your attention to the forward looking and cautionary statements disclosure in todays presentation and press release or review the various factors that could cause actual results to differ materially from projections or forward looking statements.

Please also note the additional forward looking and cautionary statements related to cope with Nike.

It's now my pleasure to introduce a manual Bible, our Chief Financial Officer Emmanuel.

Thanks unique and welcome ladies and gentlemen, I hope everyone listening to the cool and it was close to you all safe and well.

Oh, it business delivered an even better than expected performance in the second quarter. Despite the ongoing circumstances Oh the pandemic.

Most importantly, the excellent momentum psychos continues its.

H to your volumes have grown 28% year to date with the positive mix effect on our net revenues were Rps again made up almost one quarter of our business in Q3.

I go through their acquisition outlays, a prior year quarter to reach an estimated full of 16.4 million users.

September.

Well I still feel pretty pathetic levels in most places our combustible business recorded an improved sequential performance.

Underlying industry volumes were better across both developed and emerging markets.

Reflecting increased consumption occasions.

This was not to be the case in markets with a significant proportion of DT wage workers like Indonesia, Mexico and the Philippines.

Despite these better industry volumes, Indonesia remain challenging together with duty free Wi.

We must also retained a degree of cushion around sickens wave will depend image and its overall economy consequences across all of our markets.

[noise], our operating margins were again significantly ahead in the quarter and on a year to date basis. Despite the challenges you know what duty free business. This reflects the increasing wage and profitability of Rps.

And cost efficiencies.

I would guess generation was also strong with $3.6 billion of operating cash flow in the quarter, putting us on track to reach our target of at least 9 billion that are this year.

Turning to the headline numbers, our Q3 net revenue declined by 1.5% on an organic basis.

They keep marking a significant improvement from the decline of almost 10% in Q2.

Well this was somewhat aided by certain timing factors, including the revaluation of distributor inventory in Japan.

You have to the price increase it nonetheless reflect the continued strength Oh I cause.

Combined with the sequential improvement in our combustible business.

Indeed, the positive effect of the shift in our sales mix towards our piece can be seen in the 6.5% organic increase in net revenue per unit.

[noise] combustible tobacco pricing was 2.1%, reflecting solid pricing in a number of markets, partially offset by timing differences with the prior year.

Strong probably you'll get complacent in Turkey, and Italy in Indonesia.

These timing differences include the effect of delayed pricing in some instances such as the Philippines, where we took a price increase this month rather than August in 2019.

Given this net revenue decline we were pleased to deliver such a strong adjusted operating income margin expansion of over 300 basis points on an organic basis.

I will cover this in more detail shortly noting that we saw further benefits versus our prior expectation from additional cost efficiencies.

Some delayed spending in the last month of the quarter.

Adjusted diluted EPS of $1.42 cents increased by 5.6%, excluding currency better than our prior expectation of flat organic development.

The primary driver was above cost benefits as well as better industry volumes in Indonesia, and you region, where increased mobility GE coincided with the reopening of hospitality cities and warm weather.

I also want to reflect on our strong performance over the first nine months of the year. This was clearly a challenging belliard with disruption to many aspect of our operations, including our supply chain and route to market.

Our net revenue declined by only 0.9% on an organic basis Alex.

An exceptionally resilient performance given this unprecedented headwinds we estimate the duty free and Indonesia loan, where a mid single digit drug on our topline gross.

Despite these factors we saw very good organic progression in our niche revenue per unit from the increasing weight of Rps and solid pricing in combustible.

I will I just to the betting income margin increased by 260 basis points to deliver 7.4% adjusted diluted EPS growth on an organic basis.

Let me now going to the driver of our Q3 margin expansion in more detail, starting with gross margin, which expanded by 180 basis points on an organic basis.

He is driven by multiple eva's first our ongoing transformation is delivering an increasing mix of RP is you know what business.

Second is pricing on combustible.

Yes, I will focus on the overall manufacturing productivity, where our focus on efficiency quality and footprint more than offset the impact of lower combustible volumes.

The positive gross margin development was augmented by our focus on as Ginny efficiency with our total marketing administration on research cost 140 basis points lower as a percentage of net revenue on an organic basis.

This reflects the ongoing digitalization and simplification of our business processes, including our Pico national engine and more efficient ways of working.

There was also a benefit from the timing of certain cost as I already mentioned.

Despite the challenges of Twentytwenty, we are today, raising our expected full year adjusted diluted EPS range to between $5 or five cents and $5.10, reflecting around 5% to 6% organic gross.

This exclude and assume unfavourable currency impact at prevailing exchange rate of 32 cents.

As stated in our earnings release, we have also updated certain guidance assumption. We now expect the total industry decline of 7% to 8%.

And the like for like decline until <unk>, P.M. I shipment volume of 8% to 9% both of which factor in the better Q3, the limit you and smaller expected market decline in Indonesia.

We assume an organic expansion in our adjusted Oi margin of around 200 basis point also reflecting the above factors and ongoing cost efficiencies.

We expect capital expenditure of approximately.

$1.6 billion, and an effective tax rate, excluding discrete items of 22% to 23%.

We also assume no recurrence of National look downs in our key international markets in the fourth quarter and remain vigilant with regard to the brand image as economic uncertainty remains and localize social restrictions are being tightened in some geographies.

[noise] focusing now on the fourth quarter, we assume underlying consumption trends should be broadly stable vis a robust Q3.

In many markets, including the original in Russia increased consumer mobility, the opening of hospitality settings, and similar conditions provided a helpful that dropped to our performance. However.

However, there remains continued pandemics related uncertainty as we now see localized restriction tightening in certain countries with potential impact on both mobility and it could any capacity.

The delay of certain as Ginny costs from Q3 will also have an impact on our fourth quarter results in it.

In addition, it's worth noting that while the price increase in Japan took effect on the first of October the majority of the impact. This year was realized in the second quarter through the revaluation of distributor inventories.

I should remind you that to fall 2019 presents a strong base of comparisons this year, notably due to pricing in Indonesia ahead of the January Twentytwenty excise tax and excite the increase and an exceptional share gain in Saudi Arabia due to market disruption of new plain packaging requirement.

As such while we expect around 5% to 6% organic EPS growth for the year, we expect organic progression to be flat to modestly negative in the fourth quarter, excluding four cents of estimated unfavorable currency.

I will now cover our third quarter performance in more detail.

As with the net revenues, our combustible shipment volume sequentially improved although the year over year decline remains greater than historic average.

This was supported by better industry trends in all regions. Conversely, our Ht your shipments volume continued to grow strongly to reach a record 19 billion units driven by you region, Japan and Russia.

I also want to touch on the year on your inventory movement in the quarter, which negatively impacted our shipments on both cigarettes and it's to use vis-a-vis consumer uptake.

The reversal of trade bills that each one in markets like Germany, and Russia was one contributing factor.

Specifically for Japan, there where reduction in distributor inventory in Q3 following increases in both Q1 and Q2 of this year.

Anticipation of retail and consumer loading before the October tax driven price increase that's.

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

Importantly inventory for cigarettes and its use in Japan are now aligned to the expected market size following the price increase.

The main positive impact of the price increase on our Q3 results was the revaluation of distributor inventory.

This strong performance from Lycos means that either tobacco unit made up over 10% of our total shipment volume in the first nine months of the year as compared to approximately 8% in 2019 and 5% in 2018.

We continue to expect is proportion to grow over time as the positive momentum on our piece continues and remained well on track to achieve our target of 90 200 billion units in Twentytwenty one.

Our mission is to grow the RP category globally and transforms the mix of our business was 4.9 billion dollar in sales year to date Rps are now approaching one quarter of our total net revenues in the.

Indeed, while this percentage was just over 23% in the quarter. If we were to adjust for inventory movements Q3 would have almost reached 25%.

I couldn't devices accounted for approximately 8% of RP net revenue year to date.

Mainly due to a naturally lower ratio of new user to existing users.

Longer replacement cycle, and geographic mix, particularly in the second quarter.

In some geographies, we still sell a substantial amount of the lower price original I custom built for purpose device and we have now introduced new salad in eastern Europe.

The East Asia, and Australia region provides an illustration of Rps operating at scale and is on track to deliver over as its revenue from our peak this year.

Gene as scale is built the strong margin expansion over recent years show, our both with scale and experience in RP can be as investments start to pay back and the commercial approach is optimized.

Focusing now on our total international market share the development were very positive for the bulk of our business before the impact of duty free cigarettes, and Indonesia, our share increased by 0.4 points. This was driven by higher share for heated tobacco unit, which increased by.

0.8 points to reach 3.1% only partially offset by lower share foresee Garrett.

In markets, where I coos as a meaningful presence our share increase with few exceptions it.

It follows that our combined market share increase in the region, Japan and Russia.

However, our total international market share was negatively impacted by duty free where our share is higher than the PMI average, resulting in only partial recapture of volume in other markets and by Indonesia, which I will come back to separately.

It is also true that in many markets Marlboro over indexes to social consumption occasion, which are naturally lower during college related restriction.

Well the easing of measures in uneven across market, we saw aggregate medical share start to recover sequentially in the quarter.

I turn now to Indonesia.

One of the challenges related to the excise tax structure remain underlying consumer trends improving the quarter.

Industry volumes declined by 6%, excluding trade inventory movements and notable improvement from the 22% decline in Q2.

This primarily reflects a recovery in daily consumption from depressed level as confinement east.

Given the continued rise inquiry cases, and the possibility of more localized restriction such as temporary introducing checkout that last month, we do not assume significant further improvement in the fourth quarter, however, reflecting the Venice at quarter industry volume and exit rate. We now expect the total industry decline.

And on the shipment basis to be around 11% for the full year versus 15% previously.

Why the smaller industry decline as a commensurate effect on our volumes our market share remains under pressure. Despite improved performance from the higher margin a mild GSM soon magnum and SK tea brands.

This is due to the same dynamic mentioned last quarter.

Most notably the gross of tax advantage below tier one brands continues as tax driven pricing and the pandemic of increase downtrading.

To illustrate this issue the ducks first take on our tier one m- brand is more than 60% higher than on the comparable to two critic brand with a similar resulting difference in the retail selling price.

With this segment now at 26% of the markets. This represents a serious and growing threat to state excise revenues and a diminished return on this year's tax increase that.

The correction of volume based active remains urgent we are hopeful that the government will take steps over time to ensure more predictability in tax revenue and a level playing field by reforming the multi tier excise structure.

The process of minimum selling price implementation also continues to progress slowly hampered by the pandemic full enforcement may not be completed until the end of the year at the earliest.

I move now to our RFP performance.

We estimate that there were 16.4 million total icls user as of September 30, just this.

This represents the addition of around 1.1 million active users since the end of the second quarter and over 4 million since the same time last year with more users added in both Q3 and year to date than the corresponding period in 2019. This.

This is an exceptional achievement, given the circumstances, where I, where accelerated favorite to digital and remote engagement is paying dividends.

We further estimate that 72% of total or 11.7 million adult smokers I stopped smoking and switch to I close with the balance in various stages of conversion.

This again reflects widespread use of growth momentum across all key icls geographies, including Japan, the region and Russia.

As our user base expand in markets like Japan, and Russia, we are increasingly enriching, our ofer and segmenting the market with new product and more price points we.

We plan to bring more exciting innovation from lycos in the coming quarters.

We also optimistic that the FDA granting of modified risk tobacco product reduce exposure orders for version of Heico's will contribute over time to better understanding of the heated tobacco category and the benefit of switching twycross compared to continued smoking.

The success of Lycos in global TCT, where our commercial strategy typically as a strong initial focus so.

Serve as a useful indicator for national share growth potential.

In many such cities across a wide range of markets. Our share is now well into double digit and still growing.

This provides an excellent base from which to further grow our RV business as we innovate and broaden the ico suffer.

In the region. We added a further as you opened 4 million I cause user uses third quarter to reach 4.7 million a continuation of the recent strong performance, while most adult mental smokers a switch to non menthol cigarettes since the ban in May we have seen some in.

Your mental switching to ARPU over the mid September period, and continue to see further opportunity to convert these consumers.

Third quarter share for each reached 3.9% of total cigarette and edge to you industry volume.

This was in line with Q2, Twentytwenty, but sequentially increased by 0.1 point when adjusted for estimated retailer inventory movement and consumer pantry loading effect.

Sequential I am as gross also on an adjusted basis was plus 16%. This reflects strong absolute growth in Italy and Poland. It also include further progress in Spain, and in the UK, where both national and London Offtake share continued to grow with the latter.

Exceeding 3% in September.

I also refer you to the appendix, where we show shares for key new markets.

I course continued its strong performance in Russia with our edge can you share by 1.8 bunch of which 5.8% on a.

On a sequential basis versus the second quarter of Twentytwenty share decreased by 0.2 points, reflecting a cigarette market, which grew 6% on the same basis aided by seasonality of consumption and lower elicit prevalence.

Sequential edge to you in market says adjusted for trade inventory movements increased by more than 9%.

With the introduction of its creation in Q1, Twentytwenty and fit consumable for these solid this quarter, we know of a price to your portfolio to cater to a broader range of adult smokers across the social economic spectrum.

In Japan, our total reported share for it the tobacco unit reached 20.5% in the third quarter supported by line extension for both Marlboro It stick and it's such as the recent launch of Marlboro Black Ninefold.

Heico's user groups when estimated total of 6 million of which an estimated 4.4 million I stop smoking and switch to lycos.

On a total tobacco basis, including Cigarillos and adjusted for trade inventory movement.

Share for our SG you brands increased by 2.6 point versus the prior year quarter and buys you would point to point sequentially to 18.9%.

Q3, Twentytwenty adjusted in market sales volume for our SG brands grew 7.3% sequentially.

Overall, it tobacco category continues to grow with the large majority of this growth driven by I close and now makes up almost 26% of the total tobacco market.

In addition to a strong growth in existing market. The geographic expansion of Icls continues we leverage our digital capabilities to launching four new emerging market Costa Rica, Georgia, Jordan and the Philippines. This.

This takes the total number of of market, where I could say is available for sale to 61 of which over as our outside the OE CD.

The launch in the Philippines was initiated digitally before adding retail touch points and is focused on mutual Manila, where consumer purchasing power is higher why did.

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

We have also now started the commercialization of heico's via our new E vapor product, which was launched in New Zealand during the quarter initial other consumer feedback is positive and we plan to roll out to further market in Q4 and 2021.

The commercial infrastructure of Heico's will allow us to deploy it efficiently and at scale.

We place great importance onboarding against youth access for all our product in this category in particular, we will be testing age verification technology in select markets.

As part of our mission to build and accelerate the global RP category. We aim to offer a choice of experiences format and price points to adult smoker and consumer of other nicotine product.

Our collaboration with KPMG is consistent with this goal as demonstrated by the first launches of Flint product through our Icommerce infrastructure, we entered.

We introduced the latest solid eaten up and device and fit edge to use in both Russia and Ukraine during the quarter.

As we reach shares approaching 15% to 20% we cycles in key cities such as most when kids and.

And we expand to area with lower purchasing power a simple affordable proposition can play an important complimentary role in reaching more other consumers and maintaining a strong rate of user acquisition.

Early results are encouraging with positive feedback from Edwards user. This means that in both these markets. We know of HQ brands at three brought by price points within the inadvertent category superpremium its creation dimension premium it's.

Price seats, all of which present attractive margin.

We would also will shortly be launching the little I've read device mix consumable and nicotine free liquid cartridge into Japanese prefectures, offering those consumer a differentiated premium experience, which combines the satisfaction and rich flavor of heated tobacco with added.

Sensorial element.

There is a consumer segments and Jeff I looking for such an experience and we believe this will be the best hybrid product available in the market.

I will now to emphasize the deep alignment of our business with sustainability and urology objective, which sit at the core of our mission and strategy.

Our most important is the issue is the EPS impact of our product.

By innovating, we significantly better alternatives, such as I cause we have a historic opportunity to substantially reduce this impact by switching either smoker, who would otherwise continue to smoke to reduce risk product.

Through deploying Rps at scale, we can improve public as and contribute to the sustainable development goals, especially goals three good day sales and welding.

We also have best in class practices across a range of central is Gi issues, where the other three of our four system be pillars are focused.

We believe this provides a unique combination whereby sustainability is a true driver of innovation and grows by invading sustainability into the core of our business, we can create value for our shareholders and society at large.

To conclude our Q3 results were stronger than expected and we have raised our full year guidance to reflect around plus five to plus 6% organic EPS growth.

We are building a business through our plans to deliver superior and sustainable growth over the coming years.

The continued momentum of high growth through the challenges of the pending which demonstrate the structural growth characteristic we.

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

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

First the powerful mix effect of Rps.

Second pricing, which will remain important for combustible and where appropriate for rpcs.

Only efficiency.

Further leavers as we continued to hone our business model.

Moreover, with the launches of the Iclusig and live product, we are broadening and stepping up our product offer and innovation in Twentytwenty one.

You can also expect us to bring further exciting innovation to our ikonos it'd been platform.

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

As we all know there remain continued uncertainty regarding the pandemic the impact of social restriction and their economic after that.

However, when coking related headwinds abate, we expect to resume growth consistent with the currency neutral compound annual growth rate in our 2019 Twentytwenty one algorithm of at least 5% net revenue growth and at least 8% adjust.

Diluted EPS growth on an organic basis.

In short, we look forward with confidence and we will expand on these topics further at our next Investor day, which we plan to all in early Twentytwenty one.

Thank you I'm not more than happy to answer your questions.

Thank you we will now conduct the question and answer portion of the conference I'd.

In order to ask a question or make a comment. Please press the star key followed by one on your Touchtone phone.

In the interest of fairness and time, we ask that participants keep to a maximum of two questions. Each if time.

If time allows follow up questions may be taken.

You may rejoin the queue again by pressing Star then the number one on your Touchtone phone.

Our first question comes from Adam Spielman of Citi.

Hello, Thank you very much. So that's question you've reiterated.

Perfect. Thanks, largely to 100.

Sockets for trace really wasn't for Rpcs.

Are you still comfortable but you all will exceed 250 billion in 2025, which is more of a longer term target. That's my first question. Thanks.

Thanks, Adam we definitely.

Our repeating our ambition to reach next year 20 200 billion. So.

Stick in the Eaton the done category and I think that the growth that we deliver quarter. After quarter is clearly pointing to that direction. Then you are alluding to the 2020 five objective of two.

250 billion, plus which is I think you're aligned with what I've started to detail on the presentation, which is really the fact that we are broadening.

The portfolio when it comes to our.

Our peace product and we are going to of course.

Them with more enrichment more segmentation more offering when it comes to is not done we are entering.

Vaping category and all that is going to put us on the truck.

To deliver that ambition and I think everything has been saying in terms of segmentation of the devices now that we are coming with with the little offering what we have started to do now in Japan in Russia. When it comes to the consumable. It shows that we are clearly now that the market is getting.

A bit more mature of course, if there is still at an early stage in most places but in a few places we have some first element of a bigger market. It is time now to enrich the offering and the and broaden the spectrum of what we can offer to.

I would say conquer and convinced more smoker to switch to our product and and therefore that is what is going to put us on the right track for this ambition for Twentytwenty five.

Excellent. Thank you very much and then.

Turning to undermine its I don't want to put words in your mouth, but for your market shares in Russia, and Japan grew in Q3 sequentially less than in Q2, and I'm wondering why that was just saying what a great significance or its just sort of random quarterly such.

Sure. So we should just ignore that.

Yeah, I don't I don't think that there is anything to be read there I think that we are very happy with the performance on on on the key market of course, you know what has been and depending on the on the season and the and the consumption pattern and what has been happening on the borders we know that somebody were tools, we talk about you know.

You should trade being stuff that can be disruptors too.

Solution should take a kind of.

Kind of flash sales, but quarter view, but I would say the trend that we've seen in Q3, we are very much aligned with a nice strong trend that we've been observing over the first part of the year over H. One. So I don't think that there is anything in Q3 that would be signaling a slowdown in the way we are gaining share in an underlying manner.

Thank you very helpful. Thank you.

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

Hi, good morning.

So there is obviously a lot of the ongoing uncertainty that as you just reiterated you are on track for your heated tobacco target for 2021.

Broadly how are you thinking about how you are positioned for growth next year and do you anticipate accelerating growth as you lap the performance here and see benefits from Lucky I enforcement of minimum price increases in Indonesia.

Well thanks for the question obviously, its very early stage and to start thinking about next year I think you very rightly said it 20.

Twentytwenty one is full of uncertainty and we even recognizing the lessons of 2020 of their fair share of uncertainty as well so difficult to of course start to elaborate on 2021.

The only thing I can say at that stage is that we are going to enter 2020. One is the strength of our RFP business that is clear enough from.

This first nine months performance there.

There will be certainly a number of low comps in the basis of Twentytwenty, but as we don't know also that are going to be in Twentytwenty. One you know and if I take the example of duty free which of course, you could say, we're going to have nine months with very very low business in duty free you Twentytwenty. So one could argue.

Well thats, an easy business of conversion, but nobody is able to say today, we're going to be the rebound now.

Next year of duty free so, it's it's just difficult to say, which kind of growth trajectory at that stage.

It it design if you want I hope, we'll know more.

In the beginning of a 2021.

When we will comment on our full year Twentytwenty and that that said, we can share more details you, but I think that for us. The main element today that I would say is a kind of for sure whatever is the environment is very very soon.

Strong performance of our isn't a dumb business.

Thank you and also I think very strong margin performance in the quarter can you elaborate on the factors that contributed to that in terms of lower marketing and administrative cost and you pointed out manufacturing efficiencies.

Yeah, how are your customer.

Customer acquisition costs trending and how much of the lower cost is temporary on versus a sustainable going forward.

Sure happy to do that where the margin improvement is and Thats, probably the strength of the performance is not coming from one element I think it. So it's a collection of driver that we have to add to the topline evolution.

Nice margin evolution.

Evolution and and that is coming first of course from the growth of RP is and I think we are showing this quarter the impact on the gross margin of the positive impact on the mix of the consumable in.

It's not burn.

And as we keep growing that business that is of course, a nice mix positive impact.

Impact clearly, helping the margin. There is also everything we are doing on price and we keep clearly working.

In the direction of improving nicely price on combustible there is and you know I would be happy to elaborate further if you. If you want then there is of course everything we do on manufacturing productivity, which is also a nice driver and then below the gross profit Youre right.

We have this very positive evolution of our agenda.

Where we managed to decrease on an organic basis as Jenny by about 7% when the decrease of the topline is on.

Only 1.5% so we have a nice leverage if you want between the two and here you have a mix of things first of all yes of course, we are working on the efficiency of our costs. So all functions. All team are working on working in a simpler more efficient more digitized manner. We are platforming you know our.

Work, we are standardizing we are automating we are using digital in all capacity in order to work in a more efficient manner. So that is contributing to certainly some some saving then on top of all this in Fourq, you're absolutely right. We have increased efficiency as we turn to.

The world a more digital commercial engine on Rps and that is of course, something that is going to a company is on the long term we build at the Orijin the ico business with a business model, we know with a lot of.

Physical cultures and based on the you know having some retail places that we were owning and that was great to start we needed to do that of course as we are growing the market.

As we are learning about it and as we are developing our digital schemes. We are developing a tool which is a really efficient both in term of digital customer experience and in term of digital tread experience and that is our laws, allowing us to be much more efficient in contacting smoker.

That we can convince to switch to I caused in explaining and accompanying them on answering all that question in coaching them in a digital manner for them to understand our networks always a global experience to answer that question, we have been creating communities where.

Well people switching twycross can exchange, our impressions and and their and their tips and then once it is done of course, the drugs and the dawn and we are moving to retention and really do this intimacy through I think a lot of data about our customer of icore and really being able to bring them to the best.

Overall experience and keep them as as customer of our it's not done business. So that's what we are doing today and absolutely that is translating into a reduced cost of acquisition and a reduced cost of retention. We are certainly not at the end of this improvement but that is nice.

I think the performance in Twentytwenty for sure.

Thank you.

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

Good morning, Thank you.

You are.

Hi.

If you've watched in some markets this year and certainly it's it doesn't seem like the circumstances, that's a really good thoughts going with with pandemic closures and restrictions, but you've got.

You've got some like Saudi Arabia, and already at that 40 basis points of share, obviously, small, but but France.

Several years to get to that.

Mexico also.

20 basis point, it's early but it looked like a pretty good start can you touch on some of what's driving that I know you just mentioned some of the digital things is that really the key are there other factors.

What is just getting some of these markets going a little bit more quickly than we've seen in the past.

Well I think it's and each market Michael is different so the answer probably.

Could require long explanation and entering into those type of of dynamic and starting with the regulation of course, you know the capacity that we have to speak.

To speak about Ipos unexplained our networks in some markets. We are just capacity to explain to smoker that a better alternative does exist in other countries. We are much more limited. So that is clearly having an impact and then certainly there is an impact you know as you grow the visibility.

Off I cause as you are people starting to see a friends family around them using I caused you may have the kind of snowball effect, you know, maybe it's a little bit of a caricature, but I think to some extent it can play like that.

And that can accelerate the.

The evolution of the market.

Evolution of the market you have also the cultural dimension, which is quite important in some countries people will be proud of having discovered lycos and they will want to share that with their friends and they will become our.

Become our best sales people I would say about ipos and taking themselves a time.

To explain and convince a friends and relatives in other culture. It would be very different and that's what's happened because they will believe that it's a personal choice and they don't want to interfere on that so all that to explain the very different.

Pattern that we are seeing in terms of development of the business, having said that you are absolutely right.

Oh, it's going to be able to to go digital and have great digital tool to contact smokers talk about I course be able to engage them in what is the aequus experience. The more we're going to be able to grow the market and the and keynote developing digital customer experience is going to be.

Key hopefully in accelerating the growth in several market, but let's not underestimate. The fact that regulation can can be a pretty significant restriction. Nevertheless, even when it's come to using digital tools.

So again that explain why I think you know there is certainly no market, where we're not saying that we have the ambition to make them a ARPI market, but certainly in some market is going to take a bit more time.

Okay. That's helpful. And then we're about five months into the menthol band in the EU for cigarettes.

And a little bit of incremental momentum on on I close menthol, especially in a market like Poland Theres been a big share jump there how are you.

How much is that related to mental success getting cigarette smokers to switch and how much more runway is there for that to go.

Sure Mike what I can share with you is that so you remember that mental was roughly speaking 10% of the.

You market all together.

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

So I don't think that there has been a certainly not not the maybe the what was owed in term of people stopping to smoke is probably a few percent, but no more than that.

And when it comes to switching to other alternative like Eaton Burns on Icls in particular, you know maybe around 5% of the people have done that so far with doesn't mean that we are giving up we think that we can certainly convince more people, but I think the impact has been relatively limited you right, probably helping a little bit in Poland maybe.

In the UK as well, which are two big markets for mental but I will not say that it has been as being a big big positive impact so far on our Icls business.

Okay. Thank you very much.

Our next question comes from one of the the answer of Cowen.

Hi, good morning.

I appreciate all the detail around digital.

Hi, guys.

Seemingly a lot of the heart.

The hard investment you guys made early incremental investments.

I was wondering if we could kind of pull that all together and perhaps quantify.

Evolution.

In addition costs in particular over the course of 2020 getting Tobin. Thanks.

Well I understand the question, but at that stage you know I think we will not going to enter into more granularity I think we are giving through a set of numbers and presentation more detail on the driver for profitability. So I'm I'm sure that you're able to capture in or through the growth.

Margin evolution and the and the other element that we are giving some some some element.

But it's obviously as you can imagine a relatively strategic information.

Sensitive and therefore, it's not something that we can we can share, but I'm certainly happy to confirm that we are seeing a significant degree.

Degrees and that we have ambition for more significant decrease in the future. So I'm just reiterating my comment that you should expect more improvement on the rents.

The ramping up of the of the profitability of our RV business in the future which is really.

Really great because we are combining a big big driver for the topline growth quite obviously and in addition, a nice driver for profitability improvement.

Okay Fair. Thank you very much and my second question is just on on gaps in.

Bernie category makes a lot of sense to me that you would want to introduce.

Portfolio as your penetration.

Thank you need to make sure if you will.

How are you thinking about the price gaps relative to combustible. So I didn't give you the same kind of odd descriptive language in terms of the pre segmentation in Russia.

We'll take that to understand that youre going to match price gaps against combustibles with a tier heat not burn consumable portfolio or is there a reason to think it might vary.

Thank you.

Well as you know globally.

We have.

Position because it deserves it our RV business as as a premium business, it's a unique.

Consumer experience and that you know fully justify a premium price position now of course as you know in some country as well as the excise duty level is lower sometimes materially lower.

On Rps and on each one of them then on combustible cigarettes, and therefore that is also justifying a lower price point. So I would say as a rule you know we have a our combustible that are priced at the price on Marlboro or sometime you know even a bit below a mobile and I think.

It's a it's a it's a it's a good positioning the sweet spot to really reflect.

The overall experience and the value for the consumer but also.

But also the specificity of the.

Isn't that a category and our little bit on product and in segmentation, we're going to do the same it's of course related to the customer experience as well and all three consumable are not the same and did not deliver the sales experience.

And exactly like you know we have been doing for decades on consumables, depending on the level of.

Have I would say benefit value for the consumer.

What is perceiving.

The overall.

Pleasure and positioned I mentioned for him will have different price positioning.

That will be aligned with that I don't think we should expect anything really matter the different there.

Understood. Thank you very much.

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

All right. Thank you Hello manual.

Hi, Bill Hi, Carter was stronger than expected and you're seeing a better demand environment. And then you also took up guidance again, so I guess I'd like to get your thoughts on resetting your share buyback program and if this might be realistic next year.

Seems like you have flexibility and I guess I think of it as an important positive signal for the market that probably would be viewed favorably. So.

You know I, just think it would probably help to support your stock price I'd love to hear what your current thinking is on that.

Thanks for the question Bernie.

We haven't changed our mind you know at that stage.

On the buyback.

We've announced as you know a 2.6% increase of the dividend to for the 80 cents.

A year and so we continue to reward the shareholders and I think we stated in the past and we are very much on that line that we will not start to share buyback that could potentially and danger the rating and I'm not sure that today.

We have a a huge flexibility on on that rating.

With the balance sheet that we have today. So we have a very strong balance sheet and we want to keep that I don't think that we would no love to be a losing summer so much in the rating because of buyback. So I'm I'm not closing the door on the long term you know of course, it's a moving situation and as we keep generic.

Cash and strengthening the balance sheet you know, we we made together with the board decide to to change that but for the time being this is not on the agenda. Okay. That's helpful. And then I know, it's early but I was hoping to get maybe your thoughts on what you see as the key tailwinds or may be headwind.

As we look out into 21, you know I guess as I'm thinking about your business and what you've accomplished during this pandemic. It seems like the satellite that's quite positive, especially as I think there are a few tailwinds such as Sina for instance, the when you have in Japan.

I am not asking for guidance for next year, but is there a way that you could just kind of lay out a few of these tailwinds as you see them fair business and our possibly headwinds. Thank you.

Thanks, Ben if I'm not asking for guidance because the window.

[laughter] that's right that's right just trying trying to to elaborate on tailwinds and headwinds.

I think the Tailwinds are quite obvious we have this RFP business that is you know almost one fourth of the business. So its very material in terms of share of revenue that is going very strongly you know we talk about a growth of of about 20 or 28 when.

9%.

Year to date, we see a number of market that are actually contributing to the dynamism. We are as we said you know enriching the offer so we see that we start to enter into a new phase of this ambition of creating a this category that we think one day will be.

I would say, putting an end to a smoking world by it is segmentation enrichment of the offer. So we have here a very powerful tailwind that is going to help us as we enter into 2021 and as you have seen its not only as I said positive for the top line, but it also nicely positive for the bottom line because we.

We are ramping up.

The profitability on that business and that is a business that has the potential to be super nicely profitable.

Then of course, you know I said it you have all this.

Very low cost that we're going to have in few markets. We have this Q2 that has been very difficult you have the duty free business that is extremely depressed to one could argue that if things were to start to gradually in 2020 one to be back to.

To be back to normal.

Well that could provide easy come for growth now that unfortunately is a segue for headwinds because we don't know whats going to be easy environment more in.

More and more people are saying that we're not going to be back to normal maybe until the summer of Twentytwenty, one nobody knows where exactly means by the way, but people are saying when the vaccine will be available which could be similar 2020. One that is a condition to be back to some more normality and therefore, we don't know always going to play out globally.

On on the business, but I think.

But I think we are taking comfort and confidence from the fact that the 2020 will not have been working walk into pocket for sure and despite that we are delivering what I consider to be a robust performance and targeting know nice organic growth for the adjusted EPS. So I'm not sure that even in a in a.

Difficult environment, we we managed to deliver a nice performance.

All right very helpful. Thank you.

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

Hi, good morning.

Good morning.

Couple of questions one is on the Capex.

Yeah, because again.

7 million.

Now it doesnt meaningfully below depreciation which runs at about 950 million for your company.

There's a new run rate of Capex, and Gartner depreciation a step down in the future.

Sure. So no. This is not the new normal for the company. We are obviously you know go.

Going through stormy waters. So it's a it's a it's an adjustment and there is number of project by the way that given the environment. You know, we we prefer to postpone so that explains why we are now targeting zero point $6 billion for the year I think you can expect us when we are back to.

More normal environment to be back to a more normal capex.

Amount that I would say probably to be around 0.8 billion.

So that could stay below that.

Below the level you are right of of amortization.

And the precision that is north of 900 million today.

Of course, you know overtime. If it continues like that that will mean that this amount will decrease as well you are absolutely right I'm not able to give you a phasing for that.

But that should be over time.

Natural evolution, though of course Uh huh.

It was a carryover effect it will it will take and it will take some time.

Sure and my second question is on your travel retail business when you're above zero revenues on costs in the middle Eastern Africa light.

Yes.

Clearly the market is not known hundred percent. So you are supplying out of inventory.

Is there any risk of inventory write down in travel retail.

I think at the end of September we have been taking care of the potential impact of that so I would not you know.

Expect anything major for the rest of the year.

Okay brilliant thanks a lot.

Thank you.

Okay.

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

Hi, good morning Emmanuel.

I just had a question time just had a question for you if I could on some of the inventory adjustments that occurred in the quarter and just.

Just to understand so I coast had a had a.

Inventory drag that weighed on its volume in the quarter.

Put it in even stronger performance for for that brand, excluding inventory changes our inventories safer ico. So I guess I'd be curious for your business overall are they at the right level or are there I expect the changes to occur in the fourth quarter on inventory, perhaps a building inventory.

No, Chris I think that Youre right and I think we flagged you know in each one that there was a number of country with.

Some anticipation on inventory, we got the reversal of that in Q3 Youre right. If you retreat.

Shipment by that we have a record around 20.5.

Billion seek of offers in market sales, which is I mean, it's quite a symbolic threshold that we deal with 20 billion is that it is quite nice.

And we believe that we are a global you have the right level at the end of September.

September so we're not expecting today into four.

And any material impact on inventory for for a number.

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

So there could be you know.

Very limited number of market launch in Q4, I think we're taking the time to have all the listener and.

From what we've seen in a in New Zealand to make sure that when we launch we are you know super ready and and and very successful there.

There is certainly things around age verification on which.

On which we are still working and which are very important for us as you know so we are still working on the on these various dimensions that don't expect too much in Q4.

I think the big new launches would be more for Twentytwenty one.

Okay.

Thank you for your time.

Thank you.

Again, ladies and gentlemen in order to ask a question simply press Star then the number one on your telephone keypad.

Our next question comes from the line of Alan Bennett of Jefferies.

[noise] afternoon money out of about one hi.

And next question. Please I just want to come back to Adam and the team.

50 billion target by 2025, C., you mentioned novo expansion of the portfolio in Batesville happy I am obviously very different economics between heated debate that show how do you see that coming in 16 billion being split between between the two categories I know very early days.

Yeah.

You see our building.

Sure and so we haven't been splitting the 250, so I won't do it now and I think we've.

I think we believe that quite obviously each RFP category.

As a play in getting there, but there is no doubt that we continue to see that it had been category as you know being I would say the majority of this 250, so we certainly intend to develop.

They bring and the and I could leave and the other thing that we could learn from now until 2025, but I think you should expect steel.

A big part of this a the big majority of that 150 to come from from from it. The remember I mean this is.

An aspiration that we have been sharing a I think as we progress we'll make sure that you know we put more detail around that so.

So if you bear with US we're going to certainly continue to give more and more a vision more visibility but it.

But at this stage I I cannot splits a further the the the 250 and and quite obviously you know we want to develop thing in a profitable manner. So that is also drive the choices and the and the final number in a in the split of the 250 billion.

Okay. Thank you and second one I was hoping you could get maybe add inventory heated volumes in eastern Europe.

In one case in Q3.

That type of flashing sneaking in midstream Pops out.

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

Okay, great. Thanks, very much appreciate thank you. Thank you.

Thank you we have reached the allotted time for questions I'd now like to turn the call back over to management for any additional or closing remarks.

Thank you very much that concludes our call for today.

If you have any follow up questions. Please contact the Investor relations team. Thank you.

Thank you again and have a great day.

Thank you all for two soon bye.

And thank you ladies and gentlemen, this does conclude todays call you may now disconnect.