Q4 2020 Philip Morris International Inc Earnings Call
In addition, please be aware that today's remarks and question and answer session will focus on the performance in 2020 and the outlook for 2021.
And we plan to address the outlook beyond 2021 at our virtual Investor Day next week on February 10th.
It's now my pleasure to introduce Emmanuel Babel, our Chief Financial Officer.
Andre <unk>, our Chief Executive Officer, and theatrical check our Chief operating officer will join them annual for the question and answer session Emmanuel.
Thank you and Nick and welcome ladies and gentlemen, I hope everyone listening to the call is safe and well.
Our business delivered a robust performance in 2020, despite the unprecedented challenges of the global pandemic.
Most impressive was the continued strong growth of Iqos, which made up over 10% of our volumes and almost one quarter of our net revenues for the year.
It's a daily consumption of H T use by Iqos user so minimal impact from social restriction and despite significant constraint we were able to continue acquiring new users and switching from cigarettes at the very good space to reach a total of $17 6 million of which.
$12 7 million of switched to Iqos and stopped smoking.
Ht your shipment volumes grew 28% compared to the prior year with recall and market shares in key iqos geographies in Q4.
Moreover, 10 market exiting 2020 with double digit national share in December.
Our rate of user acquisition was again strong in Q4 propelled by the increasing sophistication of our digital commercial model and the positive word of mouth effect from this increasing prominence despite tighter restriction in a number of markets.
The most significant pandemic related headwinds, we faced were in the combustible business with the highest impact and duty free and Southeast Asia, where we also faced additional challenges in Indonesia due to the excise tax structure.
The least impacted region with the EU.
And the timing and duration of the recovery remains uncertain, we expect a rebound in industry volumes over the next one to two years as dependent and receipts.
Despite these challenges our operating margins were again significantly ahead in the fourth quarter and the full year.
Does this reflect the increasing weight and profitability of Iqos and the delivery of our three year cost efficiency target. One year ahead of schedule, which also enables reinvestment and the business.
This drove excellent EPS growth and cash generation, where we also exceeded our prior targets.
From a product standpoint, we broadened our smoke free portfolio with a wider range of consumables, such as each dimension and seats and the launch of Iqos and E vapor and Neil and Eaton.
We also continue to make good progress around the world on the recognition of the positive impact of switching smokers to scientifically substantiated rfps.
And the FDA has modified risk tobacco product authorization of a version of Iqos was a major milestone in this regard.
This was also followed by the pre market authorization of the Iqos three device in December.
Turning now to the headline numbers, our full year net revenue declined by one 6% on an organic basis.
This was an exceptionally resilient performance in the context of the pandemic.
We estimate that duty free net of special volume recapture and local markets and Indonesia alone where mid single digit drag on our top line growth.
Despite these factors we saw strong organic growth of six 9% and our net revenue per unit driven by the increasing weight of iqos in our sales mix.
Combustible tobacco pricing was plus three 7%, reflecting solid pricing in many market, partially offset by headwinds in Indonesia.
Excluding Indonesia convertible pricing was around plus 6%.
Despite the decline in organic net revenue and convertible volumes, our adjusted operating income margin increased by 240 basis points on an organic basis.
This reflects the positive impact of Iqos on both our gross margin and the ratio of SG&A to net revenue, which I will come back to.
The resulting 7% adjusted diluted organic EPS growth exceeds our previous guidance of around 6% and also reflect a strong into the year and Japan.
This brings me onto the fourth quarter, which adds very similar dynamic to the full year organic net revenue declined by three 5%.
While a significant improvement from the decline of almost 10% and Q2 continued weakness in Indonesia, and duty free and a lower total market in the Philippines, including pricing for the effect more than offset strong performance for Michaels.
Our net revenue per unit again increased solidly by five 2% due to the same factors as our full year.
Our adjusted operating income margin expanded by 200 basis points to deliver plus seven 4% adjusted diluted EPS growth all on an organic basis.
Before we turn back to the full year I will now expand on the strong underlying Q for dynamic in little more detail.
Our <unk> shipment volumes continued to show strong growth and reached a record $21 7 billion units driven by the EU region, Japan and Russia.
In Japan, and the industry was weak as expected as consumer and trade diluting. Following the October tax driven price increase led to a 13% decline in the total tobacco market, including Cigarillos.
We outperformed this trend significantly as a strong finish for iqos of debt and share gave rise to higher shipment for both in quarter sellout and to provide appropriate inventory for a strong expected start to 2021.
We social restriction and starting to tighten towards the end of the quarter in a number of market in response to a second wave of the pandemic.
Congress stable volumes and revenue so some impact from reduced mobility and social location.
Right to a significantly lesser degree than the second quarter.
Nonetheless, the strength of the Iqos business enables EU, Eastern Europe, and East Asia, and Australia region to deliver mid single digit topline growth.
Elsewhere, the continued challenges in Indonesia, and duty free against a tough comparison, and a lower total market and the Philippine and the immediate aftermath of the price increase.
Jade on revenue growth.
Despite the ongoing restriction in many market and the first quarter of 2021 and a tough prior year comparison, we expect better top line performance, which I'll come back to later.
Let me now go into the drivers of our 2020 margin expansion and starting with gross margin, which expanded by 200 basis points on an organic basis. This is driven by multiple levers for.
First our ongoing transformation is delivering and increasing mix of iqos consumable and our business.
And is pricing on combustible.
It is our focus on overall manufacturing and supply chain productivity, which compensated for lower combustible volume exacerbated the impact of the pandemic. In addition to inflation and investment and extraordinary COVID-19 related costs in our supply chain.
Gross margin expansion was augmented by our focus on SG&A efficiency with our adjusted marketing administration and research cost 40 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 Iqos commercial engine and more efficient ways of working.
Clear focus on cost efficiency allows us to improve profitability, while continuing to invest and the growth of iqos.
I'm very pleased to report that we have already achieved our 2019 'twenty 'twenty one target of over $1 billion in annualized gross savings and only two years with $1 1 billion debt are delivered by the end of 2020.
Over two thirds of the savings came from manufacturing and supply chain productivity and device costs, and where our focus on efficiency quality and footprint more than offset inflation and supply chain investment extraordinary COVID-19 related costs and the effect of lower convertibles Williams.
And.
The remainder came from commercial efficiency and G&A costs.
Importantly, these savings do not include those resulting from the pandemic such as reduced travel and the necessary shift of consumer through digital channels.
Between manufacturing cost and SG&A savings such as these we estimate net efficiency of around $150 million.
Due to Covid effect.
We plan to elaborate further on our cost initiative and the fueling of Iqos growth at next week's Investor day.
The strong uplift in our profitability and excellent earning growth allowed us to deliver nearly $10 billion and operating cash flow for the year well above our expectation of at least 9 billion.
This represents three 5% like for like ex currency growth and also reflects ongoing working capital initiatives and impressive performance in the year with significant disruption to global supply chain.
Our capital expenditures amounted to zero 6 billion below our historic run rate Cigna.
Significant improvement in manufacturing performance I have translated into lower ongoing requirements. However, we also benefited from the timing of certain investment and expect capex of around zero point $8 billion in 2021.
Aside from reinvesting in the business. The primary use of cash is on return to shareholders and we raised the quarterly dividend this year to an annualized rate of $4 80 per share.
Capital allocation is another topic, we will cover at Investor day.
I turn now to industry volumes, which declined around 6% in 2020, excluding U S. China.
This compares to the historic average of a 2% to 3% decline.
We estimate the street for 4% difference is almost entirely attributable to the effect of the Covid pandemic on the convertible category.
As is evident in our results the smoke free category as displayed remarkable resilience, reflecting its convenience and suitability for different use occasions.
As we have covered in prior quarters lower daily consumption and convertible has been driven by two main factors for.
First the reduction and usage occasion during confinement, especially in market with a large amount of daily wage worker and second the reduced amount of social location due to closure of <unk> settings and restriction on social gatherings.
<unk> also remains depressed in line with global travel.
We have seen a partial recovery in daily consumption since the most severe period of reduced mobility in Q2.
And we expect a gradual improvement as the pandemic recedes.
As we all know there remains considerable uncertainty on the speed shape and timing of exiting the pandemic and at present, many countries are experiencing serious resurgence and infections.
However, based on our recent experience with renewed lockdown situation, we do not expect to see a repeat of the severe drop in consumption of Q2 2020. However.
However, it is and certainly any rebound will occur this year. So we assume historic average decline of 2% to 3% to be the floor for industry trends in 2021.
And I'll come back to this when discussing guidance assumptions.
Turning now to our volume performance week combustible industry volumes were compounded by our exposure to Indonesia, and duty free and the over indexing of our premium portfolio to social consumption occasions.
And it follows that as pandemic recede, we should see a better dynamic in our market share and I'll come to this point shortly.
As expected quarterly fluctuation and inventory level, where even out over the year with no significant difference between our IMS and shipments.
The clear highlight in our volume performance was the shipment of 17, $76 1 billion edge to us in 2020. This was just above the upper end of our previously communicated and 75 to <unk> 76 billion range and represent 28% growth.
Over the prior year.
<unk> net revenues increased by plus 33% on inorganic basis, partly reflecting positive mix.
We remain well on track to deliver on our target of 90 to 100 billion units. This year and we will have more to say on the outlook beyond 2021 next week.
This strong performance from Iqos mean debt, Egypt tobacco units made up over 10% of our total shipment volume in 2020 at over 12% in the fourth quarter.
As compared to approximately 8% in the year of 2019 and 5% in 2018.
We continue to expect this proportion to grow over time as the positive momentum on Iqos continues providing a powerful driver of revenue and margin growth.
Our sales mix is changing rapidly.
Smoke free product made up 26% of our total net revenue in the fourth quarter.
Iqos devices accounted for approximately 7% of the $6 8 billion of RP net revenue for the full year, mainly due to a naturally lower ratio of new users to existing user longer replacement cycle and geographic mix.
In some geographies, we still sell a substantial amount of the lower priced original iqos two <unk> for plus device and we have now introduced real solid in eastern Europe.
Focusing now on our total international market share our volume share increased by 0.2 points before the impact of duty free cigarettes and Indonesia.
This was driven by higher share for heated tobacco units, which increased by zero debt eight points to reach 3% only partly offset by lower share for cigarettes.
And in key markets, where iqos as a meaningful presence our share increased with very few exceptions.
However, our total international and market share was negatively impacted by duty free and Indonesia.
Marlboro remains by far the worlds, leading brand with nine 5% share of cigarettes in 2020.
However, in many market it over indexes to social consumption occasion, which are naturally lower during COVID-19 related restriction.
Indeed, we saw aggregate Marlboro share movement track pandemic development over the course of the year and expect its recovery to have a similar trend.
In terms of value share our share of total industry net revenue, excluding the U S and China, which is more closely related to financial performance, we estimate to be significantly above our volume share given the premium positioning of Marlboro and iqos.
We expect our value share to grow strongly in 2021 driven by Iqos.
I turn now to Indonesia.
And.
After a difficult 2020, we enter 2021 with a sequentially stable share trend.
Supported by our leadership of the annual Kretek segment, which is growing again.
New excise duty rates will come into force on February the first with a weighted average increase of around 13% for our ports portfolio over 2021.
This is broadly in line with the average annual increase prior to 2020 and for PMI is the lower average increase and industry given our over indexing to annual critics were excise rates are unchanged.
Given these higher margin segments, which supports significant employment and Indonesia is both lower price and less taxes and machine made product we.
We expect a tailwind for our market share and financial performance over the coming year.
Despite the negative consequences for government revenue there hasn't yet been a significant move to level the playing field between the tier one and below tier one segment.
And we remain hopeful that the government will address this issue over time.
With respect to the minimum retail selling price and forsman continued to progress slowly given mobility constraints.
Ever and we expect the impact on the market is likely to be more limited.
The large majority of the industry is no above minimum level and with no change in the minimum price in 2021. The pass on of Nu X has rate would move the remainder of the industry above complaint levels.
We also saw a flattening in the growth of the below tier one segment and the fourth quarter and a gradual improvement in our shipment volume.
And in many other market daily consumption improved since Q2, but it's still below pre pandemic level and remain sensitive to social restriction.
Indonesia was a material drag on our 2020 financial result, while there remains much work to be done on the access for <unk> and ongoing uncertainty with regard to the pandemic for 2021, we expect a much less negative industry volume trend better market share I would look at a much smaller impact.
On our overall performance.
For the total international cigarette category, we assume a rebound over 2021 2022 as the negative impact of Covid on daily consumption reverse.
The fundamental of the category also remain intact, including price elasticity, which we estimate at around minus zero debt for on the global average basis.
With regard to our convertible portfolio investment levels remain adequate however, incrementally more may be needed in the immediate aftermath of COVID-19.
We will continue investing and the brand equity of Marlboro, which remains by far the worlds leading brand.
Given the economic environment, the management of price gaps and growing our share of the low price segment will also be a focus.
Pricing in combustibles remain an important driver of performance and while the carryover effect of Covid may impact our 2021 variance the pricing power of our portfolio remains strong.
Additionally, as HEU volumes grow this pricing power increases due to the higher price productivity on eats and our other <unk> brands.
I would also highlight that pricing is no longer the sole driver of our top line growth with the increasing weight of Iqos and our sales mix generating significant growth and our average selling price.
I move now to Iqos performance.
We estimate that there were $17 6 million legal age Iqos users as of December 31.
This represents the addition of around $1 2 million adults user since the end of the third quarter and over $4 million in 2020.
We have notably and user acquisition accelerate through this thing and as for the year. Despite renewed pandemic linked restriction in the fourth quarter in a number of markets.
Our accelerated pivot to digital and remote engagement combined with strong momentum for the Iqos brand is paying off.
We further estimate that 72% of this total of $12 7 million adult smoker and switched to Iqos and stop smoking with the balance in various stages of conversion.
This is again reflect widespread user growth momentum across all iqos geographies, including the EU region, Japan and Russia.
And our user base expand in markets, such as Japan, and Russia, we are increasingly and reaching our refer and segmenting the category with new product and more price points.
The addition of Lisa lead in Russia, and Ukraine, and the second as helped us to reach a broader range of legal aged smokers and these market and bring them into the smoke free category.
So at this early stage and the number of user acquired through the purchase of <unk> device is immaterial in the context of our user base.
As we have said previously we plan to bring more exciting innovation from Iqos in the coming quarters, which will elaborate on further next week.
In the EU region fourth quarter share for each switch record, 5% of total cigarette and <unk> industry volume is.
Shown on this slide this reflects strong sequential and year on year over year growth in IMS volumes.
I draw your attention to the contrast between the consistent sequential growth in IMS and the progression in sequential quarterly share, which can be distorted by seasonality of the convertible market. In addition to other fluctuation linked to the pandemic such as border closure and other social restriction.
It follows that 2021 and future years are also likely to see underling share gain accentuated in the winter months with the convert dynamic in Q2 and Q4.
This excellent performance reflects strong growth in Italy exiting the year with 10% share with the large majority of user acquisition coming organically as increasing awareness and prominence of the product build some momentum.
Germany, and Poland were also strong contributors.
We added a further 0.6 million iqos user in the fourth quarter to reach $5 2 million a continuation of recent strong performance.
In addition, we saw further progress in Spain, and in the UK, where both national and London, It's offtake shares continue to grow with the latter reaching almost 4% in the quarter.
We show year select key cities, which demonstrates the strong traction of Iqos and the excellent potential for national shares across the region.
I also refer you to the appendix, where we show shares for key EU market and globally key cities.
Strong performance continued in Russia, with our <unk> share up by two two points to reach a record seven and seven 2% in Q4.
As with the EU region, we highlight the effect of the seasonality in the convertible category on quarterly shares.
The seasonal fluctuation in Russia can be significant and we urge you to be addressed and mine when reading our quarterly results in the future.
Notable success in the latter part of the year was the expansion of our product portfolio with lesser lead and feet consumable to cater to a broader range of adult smokers across the socioeconomic spectrum.
And both Russia, and Ukraine, the majority of consumer purchasing less device, a new user with the instrumentality contributing to an acceleration in user acquisition with high level of conversion in line with Iqos.
The volume of feed consumable sold is broadly commensurate with little device ownership and at this early stage of commercialization boost are small in the context of the Iqos Venus and this market.
However, while we have successfully upgraded many legal age smokers in the medium price segment to Iqos.
This bodes well for our ability to reach consumer in certain market in the medium and below price segment for <unk>.
Purchasing power media barrier to entering the category.
The Iqos brand also resonates strongly across the eastern Europe region rapid growth and excellent market share our system and to our agile commercial model and the consumer appetite for smoke free alternative even in markets with lower purchasing power and again serve as very encouraging.
Indicators for the continued progression of our national and market share.
In Japan, our total reported share for heated tobacco unit reached 22, 1% in the fourth quarter supported by line extension for both Marlboro <unk> and <unk> such as the recent launch of Marlboro Black Menthol.
On a more representative total tobacco basis, including Cigarillos and adjusted for trade inventory movements the share for our <unk> brands increased by two nine points versus the prior year quarter and by one two points sequentially to 20%.
Both eats and Marlboro It grew market share following the October price increase highlighting the strength of our price to your portfolio.
We are especially pleased by our Q4 offtake share and Tokyo, which reached the milestone of 25% in December.
For 2020 adjusted in market sales volume for our <unk> brands grew 0.6% sequentially, which we regard as a strong performance given the pull forward of consumer uptake into Q3 before the price increase.
The overall heated tobacco category made up over 27% of the total tobacco market in Q4 with iqos maintaining its share of segment.
We are especially pleased by our Q4 of next year into Q, which reached the milestone of 25% and December a very similar picture is seen and TCT across Japan, including Sendai.
The current market as specific challenges around consumer misperception of the category.
And while we continue working to address this issue. It's notable that Kuala Lumpur in Malaysia has already overtaken sales in market share terms crossing double digit in the third quarter.
In addition to strong growth in existing market through geographic expansion of Iqos continue.
We leverage our digital capability to launch in three new market, Estonia, Kuwait and the Maldives.
This takes the total number of markets, where iqos is available for sale for 64 of which over half are outside the OECD.
Yes.
We continue the commercialization of Iclusig and <unk>, our new easy for product with the first EU market launch in the Czech Republic in December.
This follows lead market New Zealand in August 2020, and we will continue to enter new market over 2021, including Italy, and Finland, and the coming weeks.
As we have said previously the commercial and infrastructure of Iqos losers to deploy efficiently and at scale.
Both the <unk> device and the consumable will be premium position.
We also place great importance on a force to growth against youth access for all our product.
As we rollout <unk>, we will be testing age verification technology in select markets.
Switching now to sustainability I want to again and.
And for size that our corporate strategy and our sustainability strategy are deeply aligned.
ESG issues, our business issues that serve as input to our long term strategy and sit at the core of our mission.
Despite the unprecedented challenges of the global pandemic, we have not deviated from our efforts to be a more sustainable company and we achieved a number of key milestones in 2020.
By replacing cigarettes with less Armful alternative and we can significantly reduce the negative impact of our product add on.
On the health of our consumer.
That's why the core of our strategy focuses on addressing and impact of P product. The first and most critical pillar of our approach to sustainability.
This is what differentiates our company and highlight our unique value proposition as the final piece of our ESG plus P framework.
Phasing out cigarettes remain our focus and in 2020, we estimate a further $4 1 million legal aged smokers and to the smoothed free category with Iqos and with a total of $12 7 million now switched and stop smoking.
We also show year. Some recent notable achievements across ESG, which will come back to in more detail at Investor day.
And while they remain much work to do we believe our transparency and detailed approach to sustainability materiality and disclosure make PMI and excellent example of impact, which we're achieving through carefully embedding sustainability into business and addressed and understanding it as and opportunity for innovation.
And growth.
Including our planning role and tobacco harm reduction and.
In other words, our transformation is a unique sustainability story another topic, we will return to next week.
I will now turn to guidance for 2021, where we expect a significant recovery.
The main unknown is the speed and shape of the global exits from the Inc.
While COVID-19 was clearly disruptive to our performance in 2020, it is not yet over and we must factor this uncertainty into our outlook for the coming year.
With the rollout of vaccine just starting and lockdown measures currently in place across many market, we do not assume any meaningful change in the first quarter, where we also face and unfavorable pre COVID-19 prior year comparison.
Looking beyond this they are clearly a range of outcome and we are reflecting this by providing a range for our assumed organic growth and net revenue and EPS.
These ranges assume debt even in the event of prolonged restrictions, we will not see a return to the depressed consumption level of Q2, 2020, which is consistent with our observation of less severe impact in the second wave.
For duty free and rebound in global travel is likely to lag improvement of in country mobility.
Our guidance assumes no meaningful recovery in duty free this year.
Despite this assumption, we expect organic net revenue growth in the range of 4% to 7% and organic adjusted diluted EPS growth of plus 9%, plus 11% or plus 14, two plus 16% in dollar terms.
This tighter range for EPS reflect the likely higher level of growth investment in the event of a faster recovery and thus our assumption is for at least 150 basis points of margin expansion in all scenarios within the range.
This reflects the ongoing positive mix effect of Iqos and our business.
And the accretion of cost efficiency net of continued growth investment.
This projected organic EPS growth, including and estimate favorable currency impact of approximately <unk> 25 at prevailing rates translate into an adjusted diluted EPS range of $5 90 to $6.
This guidance does not assume share repurchases.
This guidance also assumes the achievement of our three year <unk> shipment volume target of 90 to 100 billion units.
Coming to some of the other key assumptions underpinning and his guidance, we expect a total industry volume progression of flat to minus 3%, depending on the speed and shape of recovery from the pandemic we.
We expect to outperform the industry trend driven by the share gains of Iqos with a resulting PMI volume forecast of plus one to minus 2%.
This also incorporates manageable excise outlook, including a positive structural change in Turkey, and above average increase in Russia, and the increase in Indonesia in line with historic averages.
As I mentioned earlier, our combustible pricing power remains strong however, given 2020 carryover effect.
And Indonesia, and the immediate aftermath of the Covid crisis, we assumed convertible pricing of 2% to 3% in 2021 or around plus 4% excluding Indonesia.
As in 2020, the biggest driver for our top line growth is likely to be the IR weight of the Iqos business, which has significantly higher average net revenue per unit.
And as laid out in this morning's press release, we assume that our full year effective tax rate will be around 22% and assume that operating cash flow will grow strongly to around $11 billion.
And at prevailing exchange rates and subject to capital.
Working capital requirement.
As I already mentioned, we assume capital expenditure of around 0.8 billion.
Let me now spend a moment on the expectation for the first quarter.
Our organic net revenue are likely to be around stable to slightly down as we lap a strong Q1, 2020, which benefited from inventory buildup in March as the pandemic began to spread in many market. In addition to being largely COVID-19 free quarter.
This incorporates continued strong year on year growth in the shipment and IMS volume of Ht us.
Due to normal seasonal patterns and the lower number of selling days in Q1, we expect this volume to be sequentially stable to slightly below Q4 2020.
We also expect strong sequential hte share gains on boost and underlying and reported basis compared to Q4, new things and seasonal factors and the convertible market I already mentioned.
We expect strong margin progression in Q1, primarily due to the positive mix effect of Iqos and the effect of the cost efficiency realized in 2020.
We believe this would result in inorganic adjusted diluted EPS growth of around 8%, which equates to around $1 40.
Including an estimated nine and favorable currency impact at prevailing rates.
Looking beyond the first quarter it will come as no surprise that the easier comparison in Q2 should enable higher than average year over year growth in volume and net revenues.
To conclude.
Our results were stronger than expected.
With plus 7% organic EPS growth delivered in the tumult of 2020.
We are building our business through iqos to deliver superior and sustainable growth over the coming years.
Continued momentum of Iqos through the challenges of the pandemic demonstrate this structural growth characteristic.
We are also maintaining the strong leadership and competitiveness of our convertible business.
We have a number of levers for growth in our top and bottom line.
First the powerful and mix effect of Iqos.
Second pricing, which remains important for convertible and where appropriate for rfps.
Additionally, efficiency in our manufacturing supply chain and SG&A cost a further lever as we continue to evolve our business model.
Moreover, with the launches of the Iqos <unk> and leaf product, we are broadening and stepping up our product offer and innovation in 2021.
You can also expect us to bring further exciting innovation to our iqos heat not burn platform.
As I mentioned sustainability is at the heart of our smoke free strategy and we continue to work tirelessly to further our mission.
Our organization demonstrated extraordinary resilience in 2020 could.
Coping and growing and miserably through one of the most challenging period in recent history.
At the same time, our business continue to transform incorporating and leveraging new skills and capabilities.
In short, we look forward with confidence and we will expand on this topic further at our <unk> Investor day on February the tense and we look forward to seeing you there.
Thank you Andre yet sick and I will now move and happy to answer your questions.
Thank you we will now conduct the question and answer portion of the conference.
Again in order to ask a question and I'll make a comment please press the star key followed by one on your Touchtone phone.
And the interest of fairness and time, we ask that participants keep to a maximum of two questions. Each.
Time allows follow up questions may be taking you may rejoin the queue by pressing Star then one on your Touchtone phone.
Our first question will come from the line of Bonnie Herzog with Goldman Sachs.
Hi, everyone.
Hi, Bonnie.
Hi.
And congratulations Andre and yeah.
And I guess.
And my my first question today would be on margins and I guess Emmanuel and I was hoping you could talk a little bit more about your expectations.
Around margins I guess in terms of any favorable fixed cost absorption you expect.
And you amortize the investment behind Iqos over this increasingly larger Inc.
<unk> volume base, and then as I'm thinking about that and the context of your variable costs going lower as you you touched upon and thinking about the progress you've made with the edge at all so could you just talk about that and and how big of an impact this could be a big jump and opportunity this could be and the future. Thanks.
Sure happy to do that.
And it's going to be on your teaser versus what we're going to sit and next week, so bear with us and and we elaborate with much more detail, but I can certainly anticipate a few headline on on what we'd share.
Next week I think what is obvious in our number for 2020 is the fact that beyond the great performance of Iqos. We have also used efficiency on cost as opposed to lever to generate performance.
And Thats really showing up very clearly in our numbers. So we are delivering in two years instead of three years. The overall you know at least 1 billion savings and what is good is that we are we are working on cost efficiency on several levels.
And many of them of course are related to.
To iqos.
But not exclusively to iqos for some of them if and if you look at the gross margin level, it's quite a view that we are being very successful in generating manufacturing productivity.
And that's a great driver for further margin improvement.
And we are working globally across the portfolio I would say on margin improvement. So it's not just on iqos, if any probably on iqos because it's.
A business that doesn't have the same maturity.
We have more runway if you want to improve the productivity and we are set and extremely good inroads in that respect that we are also generating manufacturing productivity on <unk> and then on our SG&A I think you could identified two driver on cost efficiency. One I would say is probably something you're going to find.
And many company today, we are working to be more efficient and agile company. So we work on being more digitized we work on simplifying the way we work we automate we standardize and that is allowing us not to be cost cutter, but just to take cost to be a better company and and deliver overall.
<unk> performance and then you have elements that are indeed connected with our commercial performance and not only to Iqos betterton, mainly to Iqos and you have two elements. One is all the investment that we made in the past.
And that is a great platform on Iqos and I'm, not saying that investment is over we're going to keep investing but of course, we have now and investment that we amortize over a fast growing base and we are not growing the level of investment at the speed of the growth of the <unk> business and then.
There is great work that we're doing thanks to digital and thanks of course to all the learning that we are making on the equity and this where we very nicely reduce all the variable per user cost, but I will stop there because we will elaborate on that next week.
Okay and was really helpful. I appreciate that and then.
My second question is you know all the progress you've made with Iqos and growing the base and it's sell large but you know.
As you look out could you talk about further segmentation of markets with your different platforms or possibly different price points as you continue.
And more smokers and you touched on that and I guess since youre going to touch on that more next week, but just since I looked at your business.
It implies that your user base and its probably going to need to double and the next you know maybe three plus years based on our analysis for you to hit your aspirational target if that 250 billion units by 202025, So love to hear any strategy there inside.
Because I think about it I assume more of the conversion is going to come from other and reduce risk technologies and you know how do you anticipate your mix evolving over time.
Yes, I'll give you the first shot.
I still believe over the next three years as I've said, many times that heated tobacco technology would be the prevailing technology because it is the highest ability in terms of taste and satisfaction.
To convert people now in terms of segmentation I believe and most markets, we will need one or two heat not burn technologies, if I stay with this segment.
And probably two to three over time consumable price segments. So we can cover mostly.
The vast majority of the market and there will be exclusions wherever you need to cover for price segments.
And with probably two technology and we'll talk next week about the next step and technology for the Iris authorization and heat not burn.
Which will address many of the pain points consumers have today.
Now clearly.
And hit.
For the heated tobacco product as one category I think thats the fastest growth both in terms of revenue and bottom line and volume.
The second is obviously E vapor.
We are entering this market because I believe.
As consumers.
And there that wanted to switch trade for this products. There is a lot of mobile users and we see also dual users between heat not burn.
And E vapor and that obviously, we would like capture I think we can also capture consumers for average vapor products.
Okay.
And the key there is clearly to leverage the infrastructure and the brand name of Iqos.
I think the product is very good and thats. The first reactions, we get but we need to build equity because that's a problem for the category as you know.
And also consumer loyalty because for the economics to be at best.
For the vapor you don't only need to be premium position, but you also need to have loyal consumers because if you discount just products and you sell them and then a consumer has 10 different products from 10 different competitors and consumer traffic average of your product per week, it's very difficult to make return and Morris.
Potently, it's very difficult to maintain and infrastructure now we have the advantage of having a lot of infrastructure with iqos that we can leverage the equity of Iqos is undeniably the best and the RFP. So I think thats helpful Technology is good.
Our premiums so I think we can make inroads in this category.
And then obviously, we're also going to expand.
And the pure nicotine products like nicotine pouches. So the P. Three over time, although I think this is more occasional use products and predominant use product. So.
So that's a little bit and again, sorry to cut this year, but we're going to elaborate more and.
Extensively next week okay.
I expect that that's a very helpful. Thank you so much.
Thank you Budd.
The next question will come from the line of Michael I think with Piper Sandler.
Good morning, Thank you.
Just wanted to touch on <unk>.
Iqos again and.
The Philippines.
20 basis points share, which of course is small, but it's very early there and if I can.
Understand it right.
You launched there.
Any stores. Initially you also touched on the call about some some digital launches and Estonia, and Kuwait and the Maldives and so just would love a little more sense of how some of those digital efforts work and certainly seen in the Philippines and ready to be pretty quickly and attractive can you just bring to life a little bit of.
How youre going to market there.
Yeah, and see uptick here.
So as we started this year.
Philippines to be very precise and the Manila and not even a greater amount in line.
And that product is expected actually responded pretty well. This was one of the first.
And fully digitally by my lounge, Charles sales driven by the fact that we've had to change the strategy last moment and due to the coffee tea and ours.
Restrictions and the whole COVID-19 impact.
And the product.
I think a good traction I think will still stay for a while.
And the money language is frankly speaking.
Not the major secret because we're following the same path of the same strategy for the rollout and average geographies right and especially if you will go for the sizeable geography like Philippines.
Yes.
Our product and is well received for finger faced correct floristics et cetera feeds very well we're also testing the.
Different route to consumer model losses, we enter in the countries. When you have a stick approaches.
And there was a lot of consumption on trade travel to and just off trade. So you know we need to for.
Come up with good solutions.
Very positive from the debt part of in Asia, which is still on charter.
For Iqos.
Okay. Thank you that's helpful and.
Just a second one on buybacks helpful clarity that there's no consideration on that and the guidance but.
With some currency tailwind now and the balance sheet, where it is.
Certainly seems like that could be.
Would come into play can you give a sense of what you would need to have in place for C. Before you might.
Triggered and resuming buybacks.
Look if you bear with us and and next week, we will have a global review of our capital allocation strategy and we'll address all component of debt.
Sure.
Okay, and that's no problem.
And just maybe swap that question and then could you give any sense of where you stand on that.
Form two with keeps any update on that.
On tapes on their platform.
I mean, where well be.
And then conducting.
This dive into market and commercial task.
Okay.
This year and <unk>.
Okay. Thank you very much.
Thank you.
Our next question will come from the line of <unk> with Cowen.
Hi, Thank you good afternoon.
Also.
I was wondering if you could give us some color on what that mix looks like for the consumables for.
Traditional tobacco and flavors and some of the novel flavors that you have for the market.
That's that's the uptake here hi, Vivian it varies market by market. Okay. Obviously.
And now we have a flavor for us of mental with her for some other flavors, but still iqos frankly speaking and most of the places.
Very much.
Differences are coming from a tobacco flavors and at the end of the day and are most of the.
Segments, which we are targeting at this stage and we're operating at scale and the most of the segments. Other flavor tropical flavored type of our segments rights and <unk> is evaluating proposition that also has a great propositions and our rental and other flavors.
So thats debt various bye bye.
By the country and.
And.
And.
And you can't really.
And I think if I gave you the international share of the flavors will be.
Readjustments, leading the average doesn't make everybody follows typically if you have a predominant mental market like Japan and dominance of mental Asia predominantly.
I mean.
Figure if markets without mental and you have predominantly their EBIT, sometimes over indexed and mental and general because it's.
It has a bit more impact for people so it's easier to switched.
Understood. Thank you for that and my follow up also on Iqos. Please and in terms of the market share progression that you saw in Japan.
And during the quarter over the course of the year can you contextualize the contribution from the Marlboro brand versus the heat for Brian. Thank you.
The Marlboro brand is still the major contributor of the overall volumes and the growth. So we're very pleased debt on the course of the last year will continue growing Marlboro, obviously hits, which was surprised and also below the Marlboro.
And there'll be the better dynamics, the Marlborough day above actual Australia contributing to for growth and that's very interesting via and you asking because this is the first market virtually try the dull.
<unk> dual positioning of the consumables, Marlboro and Mckinsey and Japan as you know very well and we all saw the extent.
K C and the couple of eastern European geographies, and Russia, where and offer.
First we brought the above premium propositions for fees the heats creations and.
And.
For inspiration and contributes to somebody like premium and is further changes in Russia, and I think the durations and Moscow constitute now about 10% of the overall volume for that.
For our growth and that will be complemented on the non <unk> below price segment by bringing the legal fees.
Proposition.
Wait now in Russia with testing can iqos operate on the free essentially price segments on the devices and the spread is pretty phenomenal because iqos devices will go from a $60 on the premium device and then we go down to the $20 on the lease debt.
And then we have a coverage on the consumable spreading from 170 rubles per pack for farm that authority. So it gave us the hanes how broadly we know we can go where vehicles.
Apache and the segments above medium and below median.
And this is despite as Youll note that would have a competition and Russia, but frankly speaking competition in terms of the.
Of the of the devices is essentially close to zero and so it's a little bit of that.
And our aggressive promotions, but we continue delivering strong growth for <unk> on.
And on Iqos above in terms of user acquisition as measured by the device sales and by the heat and further expansions on the on the on decades and while there's also growth in places like Russia, and we continue growing in the total <unk>, which was started for years ago. So we have a continuous growth and the cities and the expansion.
Doesn't need from that growth, which would have and the Moscow, St Petersburg and and.
The other main cities.
Thank you so much for that color I appreciate it.
Thank you.
King.
Next question will come from the line and Bronco.
And with Barclays.
Yes, hi, good morning, Thank you for taking my question.
And air.
On the organic margin improvement, which youre guiding profile and slide 21, and 140 basis points.
That is on top of 240 basis point improvement in FY 'twenty.
And this saw benefits like production and cloud and expands the patent and one that et cetera. So what I'm trying to ask for that and yet underlying margin improvement, Florida total 100 basis points, not 150 basis point and.
And that is clearly happening because of high cost debt, how we should be thinking about the next few years as well.
Yes.
So for the medium term again.
And we'll elaborate next week on them on more outlook for the year I'll, let you make your assumption I think we are clear on the kind of one off savings that we have seen because of the COVID-19. So you can factor that in in your model and then I think we're also clear on what are the driver for margin improvement. So it's about.
Positive impact the growth of <unk>.
Gross.
And Tim of Bursty revenue in terms of margin and then you know everything that is happening on the on cost efficiency that is really what is driving that has been driving the margin improvement in 2020 and that will continue in 2021 as you can imagine beyond 2021, but really.
Elaborate on that next week.
Sure. My second question is on the European beating kind of top line, which was released earlier this week and debt out of things like flavor ban and packaging increasing taxes on EBIT of our portal equal to suggest so how do you think of that and how do you incorporate these startup risks and net.
Our outlook.
Okay.
First of all this is a plan.
And there are many positive aspects also in this plan and are in <unk>.
My view.
We don't talk about taxes, and this is subject to Directv.
The tobacco excise directive that governs the excise tax and the tobacco product directive that if the regulation and the product.
Okay.
Firstly, the tobacco excise Directx today does not foresee reduced risk product category. So it has to be amended under all circumstances.
Hey.
And we're not talking about increases is creating a framework under which member states can packs.
Our view is that absence of combustion for example is a key criteria.
And how to tax differently cigarettes to other products and then within that major cliff of change and toxicity and exposure member states can have different tax rates for these products, but this product should not be by any means higher than any for basketball category.
<unk>.
As a minimum criteria, but this has to happen and nobody said that taxes will increase on heated tobacco products frankly speaking at this stage or in E vapor product. Okay. So all of this has to be defined and debt.
Discussions are going to start and the course of this year and continue and next year in any case.
So.
And Thats for advent, the tobacco product directive and serve I hope that there will be a bit more.
And at a record clarity and there regarding rfps, because and E vapor products because just now we left it up to the member states to regulate which frankly speaking is not harmonizing and directing one and secondly, as a payment for all the industry participants because every country has a different regulation.
And we're always advocated cereals regulation non res products provided that is differentiated from cigarettes. Okay. Now that our voices, let's say that these products will be the same thing of cigarettes.
At the end of the day. It was very clear also and the cancer plan at all and the Q&A that only based on science and evidence that will take decisions.
So I wouldn't be particularly worried about this at this stage and I think the outcome may be positive actually because it's an opportunity to discuss.
Now in the longer term, we discussed very often.
I believe.
Tax differentials will be maintained because it makes sense for public health it makes sense for the consumers.
And as I also explained we have room.
Even.
Two past taxes, if by any chance differentials close somehow because.
Iqos.
And also in order to pass part of the tax benefit to the consumers is mid price position essentially if you take the weighted average of the Countrys.
Number one and number two it's price productivity is much much higher than cigarettes, so passing on attacks.
Is triggering less price increases are passing on tax on ticket sales.
So that's in a nutshell the way we should look at it but we have to assume that excise taxes will increase over time also for okay.
And as governments need money and that will apply to heated tobacco products are already tax substantially and potentially in some cases towards April.
And in luxury but that's all baked in.
Okay.
And.
Sure and if I can ask one last question.
And your minority interest, which has been increasing at a higher rate than you have EBIT and that's driven by Philippines, So net and opportunity to reduce debt.
Minority interest considering a bot manager for <unk> and trades on that agenda that like some six times p/e.
Now don't envisage these.
Sure. Thank you.
Not in the period.
And if our partner wants to sell one day, we can discuss.
And we're very happy with and we're very happy and our partners should be continued growth.
Okay. Thanks for that.
And next question will come from the line of Adam Spielman with Citi.
Hello, Adam.
Hi.
So.
First question I think you and your guidance.
And you're expecting to take less processing volume on combustible cigarettes for mutual.
Now for Europe.
Yes.
Thanks.
And.
I think if for instance, we recruited.
And I'm ready for Kongsberg launch and also some of the pricing model husbands and growth.
For question.
Net pricing in.
This year 2021.
What would it take for you.
Have another LOE.
In 2022 sales.
Question.
Okay.
First of all.
We didn't say, we will take less pricing will also where is the pricing opportunity, we'll take price and I think the model still works very well elasticity to solve the same everything.
<unk> had to make some and my view.
Reasonable and Conservative you may say assumptions regarding what's going to happen and Indonesia, and Russia because of the tax increase and.
And Indonesia has never got a carryover from last year, which make the comparisons year to year problematic, Okay, plus in Germany, we had.
<unk>.
I would say tax break, which we assume is not going to continue this year. So if you exclude all these elements I think we're still back to our normal pricing and the other market zone.
Clearly in terms of.
Post Covid I would say assumptions.
We'll have to watch more carefully the price gaps and thats clear at the mid to low end of the market.
But that doesn't mean that we're going to take any severe pricing.
<unk>.
At this stage anyway.
It is a watch out.
And if there is down trading which is happening between the mid price typically and the low price segment.
And also because we will have absence of contraband and all of these statements.
That's something to watch and is in certain markets, but overall I think we're in good shape also.
Both on Iqos.
Hip not burn products.
And.
Combustible the excise taxes and now in if I'm not mistaken everywhere. So we have pretty good visibility for square.
Okay.
So I don't think it's super Covid related quite as Covid related and the guidance range we gave.
Because.
If you look.
And our medical IHOP and last year, if we assume 2% to 3% underlying industry decline even baking in Indonesia.
And we had a six 7% industry decline so we're missing consumption for.
For mathematically for seven to $4 seven and Thats on average 100 billion for the industry. So we don't that will rebound and my view one day, but once the restrictions finish.
Now we gave a guidance for this year of zero two.
Minus three which is.
At zero you have some recovery at.
And at minus today, you have super underlying negativity may be exaggerated I don't know at this stage, but that's plus minus 20 billion units for us.
So thats plus or minus 2.5 revenue points, so that's where the volatility is okay.
And if pricing comes better in Russia, and Indonesia, that's much better.
And up at the high end of the range.
Okay, well I think that leads and <unk>.
Next question.
Loans are they really understand the EPS guidance.
And there are many aspects.
And the sound again.
So first of all you're saying in Q1, while your comp is insanely hard.
And a half.
Organic sales were going to have margin expansion, we're going to have 8% like for like EPS growth.
And then say because the comp is really easy and Q2 youre going to have a great quarter and apply that.
And yet the full year.
Is there any day nine to 11.
And for me that if you can be served well and Q1 and we're going to do well and Q2, then with nine to 11 and is very conservative.
And another way of asking the same question.
Every single time, we've given guidance for any thoughts on EPS in 2019 Smith.
This quarter, we gave guidance it wasn't range it was appointed as Martin said.
Got it.
About $1 20 for the fourth quarter, and you said that and simple.
And yes, you're right.
Right very handsomely.
Now that would suggest that the way you give guidance.
Systematically Inc.
Income services, we either.
<unk> forecast, which I believe.
And that quickly incredibly conservative.
And that point.
And as being conservative.
Thanks.
Well in Q1 against a really tough comp jets.
To me that the guidance for the full year is also super Conservative is that for now.
I wouldn't say conservative, but theres, not bullish and either okay.
Adam I understand what youre, saying, but we're at the beginning of the year.
<unk>.
And many things.
And regarding Covid because there is not finished.
And last year, as Manuel said, who have Mohan and $50 million exceptional expenses.
Because of Covid.
Yes.
So you need to put some caution in the bottom line regarding unexpected costs and if we have.
Rebound I would call not a very gradual recovery, we may need to invest a bit more money for whats the end of the year to accelerate acquisition you can physically do that.
If we're physically can't.
And clearly the money will go to the bottom line.
So at this stage and we gave for visa range, Okay, which by the way if the dollar sales with disease is not bad at all because of <unk> 14 to <unk>.
16% and the revenue line would be eight to 11, which will be phenomenal.
I would say so I don't think this is conservative it's just I don't have a crystal ball to foresee everything thats happening and every month of the year and.
We're still not in normal situation, that's all so.
And I understand and but.
And just how it looks.
Blaine just and just <unk>.
Please please factor in debt.
I mean, as we say we took about a gradual recovery that we are expecting without being able to of course is and exactly what can be the trajectory.
But that would mean set and more investment in edge to remember we've been of course limited and commercial activity.
As you know, we say, it's true could be a better moment overall with a number of restrictions being eased.
It will be also more investments Q towards the second part of the year. So you have to take that into accounts and that explains as well why Q1, maybe is expected today are better than one could have expected initially, but the investments we need to open in the year.
Thank you I would love to be conservative and as the quarters unfold, we'll get more but.
But I think I gave you the parameters.
Pricing.
Oh.
Silicon and got more favorable that goes straight to the bottom line.
If we have more combustible that's fine and goes to the bottom line, but we have to assume that.
Hello.
And for Us pause.
Give you better.
Yes.
Yeah.
Okay. Thank you.
Thank you Ed and thank you Adam.
The final question will come from the line of Barbara and Paul with Wal Mart.
Net.
Okay.
Hello.
Yes.
Hello, Robert Your line is open.
I'll take him and the Q actually.
Yeah.
Okay.
Thanks, Operator, and you have other audio.
And can you put Robert Rampton and cue from UBS. Please.
His line is open.
Robert can you joined.
Okay.
Get back to Robert Zone after the call operator, if we can.
And just go to the final remarks, Andre I think you have some closing remarks.
Yes, Thank you all for joining.
Go ahead Rob.
Rather complicated to enter landscape, but the results came out much better than I would have thought when we were talking for the first time and.
March.
I think we look at that.
Very.