Q1 2021 Philip Morris International Inc Earnings Call

April 20, 2021

We continued converting adult smokers at very good pace and reached an estimated total of $19 1 million users of which $14 million of switched to iqos and stopped smoking.

HD shipment volumes grew plus 30% compared to the prior year quarter with record market share in key Iqos geographies 12 markets with double digit national share and a share of seven 6% overall in iqos markets, excluding the U S.

Our operating margins were also significantly above the prior year quarter, and while somewhat flattered by timing factors. The bulk of this improvement reflects strong underlying performance.

The resulting combination of strong organic net revenue and adjusted diluted EPS growth leads us to raise our outlook for the year.

From a product standpoint, we continue to broaden our smoke free portfolio and saw encouraging progress from new device and consumable offerings across multiple markets.

We expect to benefit from further innovation through the course of 2021.

Okay.

Turning to the headline numbers, our Q1 net revenues grew by plus two 9% on an organic basis. This was an excellent performance in the context of an essentially pre COVID-19 prior year comparison and incorporates better than expected HEU, IMS and shipment volumes, which drove.

Plus 32% organic growth in RFP net revenue.

We also saw some earlier than expected pull forward of shipments predominantly cigarettes in the EU region and have the Easter period and in Russia.

The average of the first discount batten.

We saw strong organic growth of plus six 9% in our net revenue per unit driven by the increasing weight of iqos in our sales mix and pricing on both convertible and Rfps.

Combustible tobacco pricing was plus two 7% of prior year convertible net revenues, reflecting solid pricing in many markets, partially offset by Indonesia, excluding Indonesia.

<unk> pricing was over plus 4%.

Our adjusted operating income margin increased by 590 basis points on an organic basis. This reflects the increasing weight and profitability of iqos.

Positive impact of pricing productivity savings, including lower device cost lower commercial spend due to the pandemic a favorable comparison in eastern Europe and certain other timing factors.

Combined with a lower effective tax rate, our resulting adjusted diluted EPS of one.

There are 57 cents.

<unk> represent plus 21, 5% organic growth very strong performance.

We estimate the timing factors in the quarter, such as the earlier shipment mentioned and cost phasing and the positive impact of around plus eight cents.

Although one time factors accounted for an estimated further price to increase.

This brings me now to guidance for 2021.

While the speed and shape of the global recovery from the pandemic remains uncertain the strong business results and underlying momentum of the first quarter, notably from our Iqos business led us to raise our outlook. We continue to account for a range of outcomes in our outlook for organic growth in net revenue and EPS.

Yes.

This range assumed that even in the event of renewed or prolonged restriction, we will not see a return to the depressed consumption level of Q2 2020.

While we have not been affected thus far by us the current global shortage of semiconductor.

Guidance assumes a limited impact on the supply of electronic devices to consumer.

This is a fluid situation, which we're monitoring closely.

And where any constraint may arise, we intend to manage our inventories accordingly, and prioritize device sales to adult smokers, who are new to the category.

Regarding duty free a rebound in global travel is likely to lag the improvement of in country mobility.

Our guidance continues to assume no meaningful recovery in duty free this year.

We now expect organic net revenue growth in the range of plus five to plus 7% versus plus four to plus 7% communicated previously and organic adjusted diluted EPS growth of plus 11%, plus 13% or plus 15% to 17% in reported terms.

The strength of Iqos is the main driver for this revision, we now expect to deliver <unk> shipment volume of between 95, and <unk> billion units, representing the upper us of our previously targeted range for 2021.

Given the continued strong momentum across our market the need to maintain inventory duration and preparation for the rollout of Iqos Illumina that uses different consumable we expect our full year shipments to be slightly ahead of our <unk>.

Ms Williams.

We also raised our assumption for organic adjusted Oi margin expansion to around two.

200 basis point. This includes the expectation of greater investment in the second half as our innovation and commercial activities step up.

As detailed in this morning's press release, our other main assumptions remain unchanged.

This projected organic EPS growth, including an estimated favorable currency impact of approximately plus 20 at prevailing rates versus plus 25 as from previously.

Translate into a raised adjusted diluted EPS range of $595 to six five.

This guidance does not include any impact of share repurchases. However, we remain on track to resume repurchases in the second half of the year subject to board approval.

Looking forward to the second quarter, we now expect adjusted diluted EPS of $1 50 to $1 55, reflecting strong topline growth against a weak prior year comparison continued margin improvement and the partial reversal of certain Q1 timing benefit.

For the second as assuming that many of our key market will have largely emerged from Covid restriction. We expect continued robust top line growth. This includes a contribution of <unk>.

Your expected device shipment, which will result in less gross margin expansion compared to the first half.

New product launches investments in distribution and the phasing of productivity.

We will also play a role.

We will also step up our commercial investment in the future growth of RP through portfolio and geographic expansion, including product launches such as Iqos illumina.

We anticipate around plus 300 to plus $400 million of incremental commercial investment compared to the first half and consequently expect our organic oi margin expansion to be lower in its too.

Net overall to deliver a strong expansion of around plus 200 basis points for the year.

Before discussing our results in more depth I want to highlight a few of the positive regulatory development in the quarter.

Recognition of the armed reduction potential of smoke free product continues to gain traction.

Example, so far this year includes the reversal of long standing import ban on each of tobacco products in Uruguay.

And the integration of the armed reduction principle in the Chinese tobacco control agenda.

We also note. The recent reports from an all party parliamentary group of MPS in the U K coding for the W. H O to return to the founding principle of the FTC, which includes <unk>.

Reduction rather than the current provision expense.

In New Zealand, we are reviewing the content and detail of the consultation paper published last week.

<unk> recognizes the role of innovative product in <unk> reduction.

At the same time, ensuring strict control to prevent us Texas.

In the EU, we continue to be hopeful that the revision of the tobacco excise directive will lead to greater amortization in the approach to smoke free product taking into account the relevant good practices and experience gained by member states in this area.

Year and around the World, we continue to support differentiated regulatory and fiscal framework based on the relative risks to health.

While they will on occasion the actions our proposal that do not incorporate armed reduction objectives. We believe that fact and science will guide policy over time, and we continue to see positive changes in many geographies.

Turning back now to our resort Q1 shipment volumes declined by three 7% on the total PMI basis.

This reflects continued strong growth from <unk> to us of plus 30% to reach $21 7 billion units driven by the EU region, Japan, Russia, Ukraine, and an encouraging start from recently launched market in the middle East.

<unk> shipment and IMS volumes were broadly in line for the quarter.

While pandemic related restriction persisted around the world total industry volume declines of 0.7% were relatively benign incorporating over plus 25% growth.

Tobacco category, where we continue to have a share of over 80%.

The less severe than in Q4 2020, our cigarette volume declines reflect specific share Edwin in certain market, which I'll come back to.

We expect better combustible share and volume trends in both the second quarter and second half of the year.

The strong performance from Iqos led to heated tobacco units comprising 13% of our total shipment volume in Q1.

As compared to nine 6% in the prior year quarter, 11% in the year of 2028% in 2019 and 5% in 2018, we continue to expect this proportion to grow over time as the positive momentum on Iqos continues providing powerful <unk>.

River of revenue and margin growth.

Our sales mix is changing rapidly putting us on track to achieve our aim of becoming a majority smoothed free company by 2025.

Smoke free products made up 28% of our total net revenue in the quarter compared to 21, 7% in Q1 2020.

Iqos devices accounted for approximately 6% of the $2 $1 billion of RP net revenue.

Perfect in longer replacement time for existing users due to improving battery life.

And reliability.

And lower device price in certain market as we are preparing for Iqos illumina.

The first two 9% organic growth in Q1 net revenue on shipment volume decline of three 7%.

Reflect the twin engine driving our top line.

First is pricing on Congress table and in certain market on <unk> net of the lower device pricing I just mentioned.

Second the increasing mix of edge to us in our business at <unk> net revenue per unit continued to deliver substantial growth.

And as explained at Investor Day. This is an increasingly powerful driver as our transformation accelerates.

Let me now go into the driver of our first quarter margin expansion, starting with gross margin, which expanded by 390 basis points on an organic basis.

This is driven by multiple levers as shown in green on the slide including the mix effect of <unk> with an iqos impact.

In particular, our significant efforts on manufacturing and supply chain efficiency.

<unk> more than offsetting the effect of convertible volume declines.

With around $150 million of growth productivity savings delivered in Q1.

While somewhat frontloaded in the context of 2021. This represents a strong start on the journey towards our target of $1 billion over 2021 2023.

As part of these savings our gross profit increase was boosted by better absorption of manufacturing costs.

Given the level of production in the quarter and lower device cost, we combined impact of around plus $60 million.

Gross margin expansion was also accompanied by strong SG&A efficiencies with our adjusted marketing administration and research costs 200 basis points lower as a percentage of net revenue on an inorganic basis.

Does this reflect the ongoing digitalization and simplification of our business processes, including our Iqos commercial engine and more efficient ways of working.

We delivered around $60 million towards our 'twenty, one 'twenty three targets of $1 billion in growth SG&A savings before inflation and Reinvestments.

The pandemic also impacted SG&A cost in the quarter through the later timing of certain project and reduced commercial and overhead cost due to ongoing restriction.

These latter factors accounted for around $100 million of the organic improvement.

Focusing now on Comverse table, we continue to all the leading international portfolio by market share and by brand strength as covered at Investor Day.

This gives us a formidable platform to accelerate the growth of Iqos via our commercial infrastructure industry expertise and ability to communicate with adult smokers where permitted.

It is therefore imperative to maintain our leadership through selective investment as we also drive returns through pricing and efficiency.

Our cigarette share underperformance in Q1 can be attributed to the combination of several factors. These include the COVID-19 impact on social location, where Marlboro over indexes.

Order closures and reduced travel and instances of down trading and competition in the mid and low price segment in certain markets, such as the Philippines and part of the EU region.

This performance does not reflect our objective to maintain our share of cigarette net of cannibalization.

We expect a strong sequential cigarette share recovery through the remainder of the year supported by portfolio initiative and the enduring strength of Marlboro, especially as pandemic restriction is okay.

Accordingly, we target cigarette share to be about stable on a year over year basis for the next nine months, despite the impact of cannibalization.

Share gains from Ht us will come on top of this.

I will now turn to the South and Southeast Asia region.

After a difficult 2020, notably in Indonesia headwinds are now moderating in Indonesia volume trends are improving with double digit growth in enrolled critics, where we are the market leader supporting stable PMI share in the tier one segment.

Indeed with industry volume recovering we are targeting volume growth for our business year in 2021.

Pricing remain the main Edwin in Indonesia, New excise duty rates came into force on February 1st and while all major players have taken some pricing progress Nonetheless remained slow.

Despite the negative consequences for government revenue.

Not yet been a significant move to level, the playing field between the tier one and below tier one segment, which continues to grow.

We remain hopeful that the government will address this issue over time.

The Philippines has performed well in recent years for this quarter further industry pricing initiative 2020, a slow economic recovery and pandemic linked restriction.

<unk> rise to a double digit market decline.

Our shell us reflect down trading from the mid to low price segment with premium price Marlboro, which makeup over two third of our volume growing share.

Notwithstanding these challenges we have plans to address the share decline and are targeting close to stable organic net revenue in 2021, despite the total market weakness.

Im also pleased to say that Iqos is off to an encouraging start in Metro Manila.

With an exit share of almost 1% for <unk> after full launch in Q3 2021.

Overall this region delivered strong growth pre COVID-19.

While it may not be a meaningful growth driver in 2021, we expect far less of a drag on group results compared to 2020, we target regional organic net revenue to be at least stable over the next nine months.

Moving now to Iqos performance, we estimate there were $19 1 million Iqos users as of March 31st. This represents the addition of around one and a half million dollars either user since December building on the step ups in the second half of 2020.

Our accelerated pivot to digital and remote engagement during the pandemic.

Combined with strong momentum for the Iqos brand is paying off.

We further estimate that 73% of this total of 14 million adult smokers and switched to Iqos and stopped smoking with the balance in various stages of conversion.

Strong conversion rates, notably reflects increased prevalence of Iqos three duo which offers superior user expands to previous device version.

As we mentioned at Investor day, we seek to achieve even higher conversion rate over time with introduction of innovation such as Iqos volume.

Yes.

This user growth again reflects widespread momentum across all key iqos geographies, including the EU region, Japan, and Russia. It also reflect the enrichment of our offer and the segmentation of the category with new product and more price points, both above and below our initial hte offering.

Okay.

In the EU region.

First quarter share for <unk> reached a record five 7% of total cigarette and <unk> industry volume.

Adjusted for estimated trade inventory movements this reflect 46% year over year.

I am us growth and around 10% sequential <unk> growth accounting for fewer selling days in the period.

I would also remind you of the sequential quarterly share dynamic, which can be distorted by seasonality of the convertible market. In addition to pandemic related situations such as border closure and also social restriction.

With the original likely to reopen somewhat in Q2 and increase the total market. We expect further strong underlying <unk> growth, but for share to be broadly in line with Q1.

This excellent performance include strong growth in Italy, surpassing 10% share with the large majority of user acquisition coming organically as the increasing awareness and prominence of the product built its own momentum.

Germany and Poland were also strong contributors we added a further 700000 EU region Iqos user in the quarter to reach $5 9 million a continuation of strong performance.

We continue to see phenomenal progress in key cities across the EU region with a number of examples on this slide <unk> share in Rome is no approaching 20% Wausau and Lisbon reached 15% Munich, 8% and London, 5%.

While a smaller city the progress in leading us at 36% share is also a global standouts.

As covered at Investor Day key cities are a good indicator of national share growth potential and I would also refer you to the appendix, where we show shares for key EU market and global TCT.

Strong performance continued in Russia, with our <unk> share up by one two points to reach a record seven 7%.

Adjusted for estimated trade inventory movement is reflect plus 35% year over year <unk> growth at around plus 810% sequentially once estimated consumer pantry loading effect a factoid.

We continue to see sequential sequential share growth for both our <unk> and fit lineup with good traction for the regular east and Super premium its creation variance. Moreover, real solid and fit consumables continue to supplement user acquisition.

In both Russia, and Ukraine, the majority of consumer purchasing a little device are smokers entering the smoke free category for the first time with high level of conversion in line with Iqos.

This bodes well for our ability to reach either smoker in the medium and below price segment for purchasing power may be a barrier.

Margins on mainstream price it to us such as fit remain attractive compared to cigarettes sold at the same price and while the volume of fleet remained small compared to our total hte volume in this market given our large iqos user base, we expect Lilly to grow further in 2021.

With this success in Russia, and Ukraine, we plan to offer lease to lead in additional market later this year.

In Japan.

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

The share for our <unk> brand increased by three points versus the prior year quarter and by Europe seven points sequentially to 28%.

Both eats and Marlboro each day grew market share following the October price increase.

Lighting, the strength of our price tier portfolio.

We expect to see further edge to your volume growth in Japan over the remainder of the year underpinned by ongoing user acquisition.

For the second quarter in particular, we expect robust sequential <unk> growth. We also expect a recovery in the total tobacco market as the elasticity effect of the substantial October price increase fade, including on consumer pantry loading.

As such while year over year share growth is still likely to be strong Q2 share may not reflect these underlying sequential growth performance and maybe broadly stable versus Q1 on an adjusted basis, including Cigarillos.

In Q1, the overall heated tobacco category made up over 28% of adjusted total Japanese tobacco market with Iqos, maintaining a high share of segment Iqos Ht US also reached an offtake share of 26, 1% in Tokyo after surpassing the 25% <unk>.

One in December.

In addition to our strong growth in existing market. The geographic expansion of our smoke free product continues. This allows us to provide access to better alternative to uneven increasing amount of adult smoker and as communicated at Investor day, we aim to be in market by 2020.

Five.

After launching 12, new market with Iqos in 2020, we added Aruba in the first quarter and launched our new E vapor product Iqos Ziv in Finland, which takes the total number of market, where PMI smoke free products are available for sale to <unk> 66 of which of our alpha are outside of the OECD.

Yeah.

We are continuing to commercialize iqos <unk> with Q1 launches in Italy, and as I just mentioned Finland.

This follows the initial launch market, New Zealand and the Czech Republic in 2020.

One of our key priorities is guardi against us access for all of our product and we are targeting for all our electronic smoke free devices to be equipped with edge verification technology by 2023.

We will be testing this technology with Iqos in select markets. This year.

Yes.

<unk> is a premium product, providing a superior experience and as we explained previously the commercial infrastructure of Iqos lose us to deploy efficiently and at scale through a bespoke route to market approach.

Our order market major innovation for 2021 is the launch of Iqos Illumina. The next generation of Iqos as announced at Investor Day.

Building on the success of Iqos three duo we believe the simple and intuitive device will support easier switching and IR condition for legal age smokers using smart core internal induction heating technology.

We continue to plan for the launch of Illumina in the second half of the year.

As we rollout both Iqos <unk> and Iqos Illumina, we carefully plan, our manufacturing and supply chain activities to manage expected demand.

External factors such as the current tightness of global semi conductor supply that I mentioned previously.

The ongoing success of Iqos, we do more than two years. After launch demonstrate that significant innovation can have a lasting positive impact on growth and both our recently announced 2023 <unk> shipment volume target and Yoplait revision of our HQ target for this year.

Reflect this confidence.

Our transformation is the bedrock for both business and sustainability performance, we do not have separate strategies.

King <unk> cigarettes by replacing them with better alternative such as Iqos drives our growth and addresses our biggest impact on society.

Our unique commitment to phasing out cigarette is underlying but the new transformation targets announced at Investor day, which are aligned with the 27 business transformation metrics provided for stakeholders to measure and verify the pace and scale of our progress.

This includes our ambition to become a majority smoothed free company by 2025.

Our aim to commercialize smoke free product in under the market and to generate at least $1 billion in net revenue from beyond nicotine product as we move into adjacent business areas with a net positive impact on society.

Our best in class performance on ESG allows us to further our leadership in sustainability.

I am proud to see increasing external recognition for example on our efforts to develop a fully sustainable supply chain and our commitment to address gender inequality.

Further we recently updated our zero deforestation manifesto strengthening our ambition and they are taking to conserve conserving forests across our entire value chain.

We remain strongly committed to providing the highest level of disclosure of the key ESG and product impact areas of our company via integrated reporting and we released our 2020 disclosure on may 18th.

We recognize that ESG analysis can provide valuable insight about sectors with significant potential impact on financial performance and thus better informed investment decisions.

To further maximize the value of investor engagement and aid understanding of the significant positive impact PMI transformation can have on society, we plan to old assistant ability webcast in early June building on our recent Investor Day. Please do Mark your calendars.

To conclude.

We've had a strong start to the year and look forward with confidence. Despite the continued uncertainty on the operating environment due to COVID-19.

This is the same concluding slide I presented at Investor Day in February as I believe our start to 2021 demonstrates all of the key elements of our longer term trajectory.

Through Iqos, we are building a business with multiple levers to deliver superior and sustainable growth over the coming year through improved volume dynamic excellent top line growth strong margin expansion and fast growing earnings. Moreover, while every adult smokers, who switched to Iqos is good for our business.

It is also a clear positive for our impact on society and public sales.

We manage our transformation with care and responsibility for our stakeholders guided by our sustainability mentality framework to maximize our positive impact across our tier one ESG and product areas.

This is essential for sustainability of our business and for delivering superior returns for shareholders over the long term.

The increase in our organic growth outlook for 2021 is another step on this journey also putting us nicely on track to achieve our 2023 financial and hte shipment target.

Thank you I am more than 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 or make a comment please.

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 day.

Tom allows follow up questions may be taken.

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

Our first question comes from Vivien <unk> of Cowen.

Good morning.

Good morning Vivien.

He can give you.

Coming out of the U S. Yes.

Yesterday.

Helpful. Please.

First question, if you could just level set on Iqos is designation in your international markets in terms of the type of tobacco products.

GAAP perspective thanks.

So I guess you and if I understand your question is our is our eternal.

Offer and product classified versus combustible cigarette in our non U S geographies correct. That's correct, yes. Please right.

So I'm not sure that I am going to be able to give you one general answer because the classification can be.

Different from one country to the other I would say today, probably the fact that the.

Excise duty applied to our Iqos product is.

Differentiated in the vast majority of the market show that the treatment is differentiated so the product is address already in a distinct manner on that particular element recognizing that it's a different product.

With different feature than the combustible cigarettes. So we are of course going to see some situation that can be different from one market to the other we are certainly welcoming a regulation that will further clarify the fact that this in advance product are clearly different and better alternative.

These two convertible.

The future and as I think I mentioned, we see the regulation progressing nicely country after country to take that into account have been taking a few example during my previous speech.

We expect that to continue so we expect more and more government regulator to further clarify distinction between at Melbourne, and other reduced risk product and convertible cigarette.

And come as well with different regulation and as you know we are calling for a differentiated approach on two items certainly on the way we can communicate on these better alternative and better product than the convertible cigarette and also of course on taxation to make sure that we have an incentive.

To push the smokers to this a better alternative for their health.

That's helpful. Thank you very much and then my follow up.

If you could provide your assessment of the risks.

Other countries potentially implementing a nicotine cap on combustibles alright. Thank you.

Well I think that is something that as you rightly say it again is not implemented anywhere today.

And I.

I think it's an idea that.

Certainly we would have to be investigated in all its a.

Dimension.

I think that.

That could have a number of impact in term of illicit trade in term of people.

Smoking actually more combustible product to get to the same kind of nicotine.

Does and of course, therefore with negative impact. So I think at this stage frankly, it's too early to say whether this is something that could have the right intent in any case that would have to be coupled with very strong awareness availability of better alternative and certainly starting with it.

If we were to work and that should be perceived as an incentive for people to quit smoking ought to switch to us is better alternative and certainly not burn being the first one that could be perceived as a nice and satisfying alternative for smoker wanting to go for.

For better products, So I think that is.

It's not new because I think the FDA had put the idea on the table right in 2017, I don't think that much work has been done so far on all the potential consequences. We believe that a lot of work with us to be done.

On the impact and a lot of scientific evidence, we would have to be gathered and study on that and in any case for us that would have to be coupled with a very strong awareness availability.

And present that as an alternative for people, who don't want to quit but want to keep consuming nicotine.

Understood. Thank you very much.

Youre welcome.

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

Manuel have Oh, well.

How are you.

Okay. Thanks, Steve.

I just wanted to focus on the incremental commercial spend in the second half.

King.

And so most inc.

And well.

It will be behind us.

We'll be focused on that will allow us to be even.

Okay.

And then link today, just wondering how many market realistically are you targeting.

And by the back end of the day. Thank you.

Yeah, so on and so on the commercial spending.

Of course, it's.

Im expecting we believe.

<unk>.

That in many market the situation on Covid will gradually improve so everybody believes that in many markets with a vaccination and and positive evolution starting in the summer.

Are we going to see switch to a gradual improvement. So as you know during a significant period of time because of Covid, we have been somewhat limited restricted in commercial action.

I'd say across the portfolio, but of course, starting on our Iqos business. So as we see the market opening up it will in a general manner in a bad time to be back.

On our communication on making our.

On Iqos product known build awareness again around Iqos is absolutely key in.

Building, our Iqos business, and obviously that will trigger more.

Commercial and marketing activity on top of that you're absolutely right.

That will be a period of very important launch with illumina.

And we've although veeva has been started to be to be launched we expect a number of markets in the second part of the year, we see exactly what is the final number.

We want to make sure that we do that well with the right focus on Illumina you can expect key market to be first you know on the priority list for launch so I'm not going to disclose at that stage. The names, but you should expect a key market for us on iqos to be coming very <unk>.

First on on the on the list and of course that will require.

Pacific <unk>.

Investment to make sure that.

Smokers or us.

Other.

Already.

RP user understand what is the benefit of.

Why it is.

Even greater product than Iqos three duo.

And and generating more conversion and more loyalty to our product. So that will require nice nice investments in the second part of the year. So that is really what is behind US 300 to 400 million that were mentioned in Europe.

Well, thank you very much very helpful.

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

I wanted to ask maybe a little follow up hi, a follow up on <unk>.

Just trying to understand as you roll. This out you know what's the expectation of how incremental this can be I mean, I guess I'm wondering from your expectations internally are you expecting to see a lot of you know.

Our dedicated Iqos users upgrade to this device are you <unk>.

Expecting for a lot of new users coming into to Iqos and then.

<unk> share introducing.

This broad range of consumer and both with alumni.

Should we assume that there is some level of income on a cost for you related to that and therefore, a margin drag or not necessarily just trying to think about how accretive this.

Could be for you.

Yes, sure when the happy too.

The answer on this two two points so on on the impact of volume.

We broadly expect illumina to be positive well first of all of course on acquiring new smokers and converting new smokers, because theyre going to find a more intuitive easy to use product and we make convinced with illumina smoker that we did not manage to convince so far so that's the first element.

Second of course, we're going to also have a number of iqos user or other Ethernet burn.

Echo product user switching to illumina, because it's really severe product with a lot of benefit for us for the consumer.

And lastly, because we believe that in terms of loyalty and people you know fully adopting it.

It not burn.

Practices and and not moving back to cigarette.

The fact that it's a better product is also going to play a very nice rules. So we expect to us.

People are abandoning and switching back to cigarette to be to be nicely lower once again, because it's much easier to use it as an overall better experience and we think he is going to be really asking.

Nice impact on that one so as you can see we expect several driver.

Beyond these illumina innovation to further boost our performance.

On Iqos globally rig.

Regarding consumable and globally is the launch I would say you should expect like always when you launch a new product you are coming with.

That is not fully optimized in terms of manufacturing productivity, it's a new product at the beginning of the volume are lower you have made some investment. It takes some time to be fully optimized. So there will be beyond the cost of launching the product for for marketing and commercial reason there will be some impact at the gross margin level at the beginning.

Because it's a new product and there will be a ramp up on the profitability of this new product and on the consumable margin on this new product.

And that is of course, taking into account in our guidance.

Okay.

Very helpful. Thank you and then I wanted to circle back to some of the news that came out yesterday regarding a potential cap on nicotine levels in cigarettes from the us. So I guess my question is wondering if theres anything you can do to accelerate the rollout of Iqos in the US you know since I imagine yes.

Okay, nicotine cap would ever be implemented.

I see it iqos would have a distinct advantage so.

Love It if you could touch on that and then maybe your latest thoughts on potentially entering the us market, where it can be you know wondering if that might now.

<unk> a possibility and if so will you or have you submitted a P M.

So just on the second one on <unk>. It is certainly our intention at a certain point in time to submit <unk>, we have not done it yet.

And I don't have the timely timeline, yet when we do that but yes. It is certainly our intention to do that at the at a certain point in time now on growing.

The Iqos business of course, we will work.

With our partner Altria. There remember we are not commercializing iqos in the US we have license the iqos commercialization to Altria.

Let's not overreact to what even net news I think it's a press article yesterday.

And therefore, we.

We should net.

Run too fast to conclusion or believe that the world is going to change.

Overnight I think it's just a press article but no. We are convinced that the FDA is one key objective, which is to promote a policy for arm reduction.

We'll go through us through innovation and based on scientific evidence and they want to supervise that.

The MLP that we received on Iqos.

For cig.

Signal that they see iqos as a positive contribution.

According to their own words, you know that it's appropriate to promote public else. So that means that we have with iqos a role to play.

That we believe that this vision of the FDA.

Is something that we can accompany them that we can foster and al to develop with our innovation and with Iqos and of course, we will make sure that with with Altria and we try to maximize what we can do there.

Alright, Thank you again.

Thank you.

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

Hi, good afternoon, I have two questions.

First one is on Iqos market share now as opposed to couple of years, we've seen very good growth.

For Q versus Q1 Q4 Q.

Market share is strong and you can see that for example on slide 19, and slide 21, <unk> and <unk>, it's been no growth in Japan or in or little growth in Europe.

Russia I.

And I guess the question is should we expect the same sort of person in 2021 in other words, great growth from <unk> just delivered great growth from Q1.

But then the market share will be pretty stable from next couple of quarters.

In your key markets.

Hi, Ed well I think.

Certainly the element that I'm sure you have that in mind that you need to take into account.

Is first of all that there is an underlying seasonality in many market that is impacting the volume on <unk> and therefore, the denominator being impacted that is even if iqos continues to grow globally and continue to grow very nicely that is impacting the overall market share and in addition to that.

The Covid impact.

<unk>.

Border closure impact no impact on EDC and some market that was not tracked that emerge and that was mainly cc business of course, they are again changing the denominator.

Impacting the market share. So it is going to be a mix. We believe in 2021 still with impacts from the Covid of this normal seasonality plus the specific impact linked to the Covid now we target the progressive growth overall, but it is true that on.

On certain market, we may have after a very strong acceleration in one quarter for all these reasons the following quarter that could be with the lower growth and even stable without of course year on year. It's still it's still a very strong growth, but you appreciate that.

Sequentially that the market share is is potentially not growing at the same pace.

It doesn't mean of course, the volume even sequentially I'm not giving you that you can volume growing as well with the market share stable, so I think market share us.

To be taken with a pinch of salt and should be appreciated you know over a longer period of time to be meaningful in what they say.

Thank you rich censoring amongst us.

Yes, yes.

That's helpful and my second question is around your quarterly EPS guidance.

The question is whether your words that people.

But getting us to disregard it and sort of consensus is just sort of consensus.

The way the market thinks about us.

Longer on your control now, let me try to try and expand that question a bit more.

In the past two or three years every time, you have given guidance on the quarter.

All of US frankly, no longer take much notice of it or at least if you give a guidance or something out of EPS I think is probably going to come into the 12% growth and it started again this quarter.

And yet the share price.

Our fundamentally flat now there might be other reasons for us.

It looks to me as if the market is sort of just regarding your EPS guidance from the quarter and to me that seems quite a dangerous situation.

And so I was wondering if you think that's right if you're worried about why you didn't actually if you kind of beat from new ships more at the end of the course, you can tell the markets and.

And how you think this dynamic is going to play out going forward.

Yes so.

Taking your your.

Challenge on guidance on what we deliver.

Identify.

Two sources for two reason to driver for beating.

Often the guidance the first one and I think it's a good one is the fact that we are.

Often surprised by is the strength of the Iqos business. So we expect something and it's come in even stronger which is the case in this Q1 for some of the beat so we are trying to make us.

Fair assessment of what we can expect and then when things are coming better we take that as good news, but its true we have been too cautious in the way we have been.

Forecasting the other one which I hope everybody understand is that in today's environment, it's more difficult to.

Anticipate predict things because you have a lot of volatility.

And we've been it's true surprise.

By things that we didnt necessarily anticipated well.

And that can be.

Spending that we thought we would do even in March and that inventories in the due.

And in terms of investment and we are.

Going to do that later in the year or some movement in market that were net well anticipated again with the COVID-19 impact, creating a lot of nervousness volatility and frankly somewhat of a roller coaster in some of the attitude of.

Off of the.

The trade and even.

Pantry loading from from customers so.

That would be really the two driver explaining why we have been beating.

On the few occasion.

Our guidance and when we know early in the quarter that we're going to beat I mean, we share with us when it really happened at the end of the quarter I think we believe that it's.

It become clear at this stage, where we say we're going to we see that.

Very close to the to the communication issue one now on your challenge of all your question does it mean that the market is no longer.

Following you.

Well I don't think this is the case I think everybody understand the specificity of this COVID-19 situation and accept that there can be volatility in things that we don't anticipated don't anticipate well.

And then on the strength of Iqos I think everybody can have a view on on what we can deliver I think we are today.

<unk> plus the guidance on the.

A number of us its peak for the year to 95% to one on $1 billion.

I think based on the Q1, that's really sharing with all investor shareholder analyst.

The best possible assumption that we can make them.

And really reflecting our and our vision at this stage.

Okay. Thank you it was a tough question.

Thank you.

Yes.

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

Good morning, Thank you.

Hi, Michael.

Just wanted to come back to your comment about pricing on heat sticks, and how you've done to differentiate a little bit more there.

So I thought I heard you right you said, you're now doing both above and below the original price points, you've had obviously in Japan, we saw with the heat launch a lower price point introduced but can you give a little more color on how youre doing above where you have been price point and is there additional.

New brands you have or.

And the third one and just how that's positioned and if it's not too early what youre seeing so far with that.

Sure Mike happy to do that.

What is happening on our Iqos business and the consumable is typically what you would expect in a.

Market.

Consumer market, we're seeing start to mature a little bit and I'm using this word with a lot of cautiousness of course, because it's a very young market steel, but in a few markets like.

Japan for instance, and a few of our markets, where we are now double digit market share, it's matching a little bit so typically.

The consumer or the customer will expect based on its purchasing power is pushing further based on.

Personal lifestyle and what he wants to.

Enjoy or what do you want to say about.

Eli for a life around <unk>.

We want to have different.

I would say positioning on what is consuming so when you go for innovation, what we did with it consumable you have one single reference at the beginning and then rapidly you see the need for segmenting. The market. There is a category of the consumer that will be very.

<unk>, two <unk> and even superior experience so to get to an even better.

Consumable and ready to pay more for that so to have our expense. So thats, what we have with whether the Marlboro each day in Japan or east creation and in Russia, you keep the premium below the IPR premiums you want and then at a certain point in time there is.

So our need for medium and probably you know.

Later in the future for our medium minimum positioning because no other consumer will be keen.

To us.

And inferior overall experience, but still great rewarding versus where they used to us with this.

Same category of combustible and of course.

At a lower price point, so I think we're just doing the right.

Commercial marketing job to make sure that we give satisfaction to all the expectation of our customers up and gradually so that's relevant yet in every country, but as more and more country are becoming a bit mature that will be that.

Will become increasingly relevant in more and more markets in the future.

Okay. That's really helpful color and then on your share.

Sort of quote mature, Japan market, where you grew from three or four share points year over year, just wanted to make sure I understand some of the dynamics. There you gave the adjusted share which of course.

<unk> some trade moves, but also cigarillos and then the other share the GAAP between those.

Widen a little bit over the five quarters you show its like 131569, and then and then two six.

Fortunately, we don't have great visibility on Cigarillos is it just growth in that segment.

The key driver there or is there also a little bit of an inventory build we should have in mind as we think about modeling <unk> and beyond.

No macro there is no concern of inventory build whatsoever that certainly the level of CRE low remember there is a specific category the tax advantage will fully disappear.

Next October but they are still.

Until now.

Dynamic category.

In Japan.

So what we are as I said, we are seeing in Japan has been following the October Inc.

Size duty increase in price increase.

Very very nice reaction from our Iqos business altogether boost mobile reached peak and it's we've been gaining very nicely market share at the end of the of the year 2020 in Q4. It continued.

In Q1, and therefore, we are.

Disclosing very positive and genuine market share growth during the last two quarter and we are very happy with it.

Okay, great. Thanks, so much.

Thank you.

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

Hi, good morning.

Hi, Chris questions were asked I have just two quick ones for you I was just curious in relation to Iqos, you've had really strong development of market share in Russia and the EU are those are also markets, where you continue to build your availability of the product do you have a rough approximation of how widely available Iqos is say in the EU and Russia is there still more.

<unk> distribution.

Potential in those markets to get it in front of more consumers.

Well.

Clearly, we said it in Russia, we have full coverage of the of the country yet.

In the EU.

We have a number of country, where we are in the big cities, but not yet with an important full coverage I would say with a lot of capillarity.

I think you get sick.

At the time of the Investor day highlighted the market share that we have in key cities and signal that if we look backwards the market share.

A few years.

Upstream.

In <unk> are a good indication of where you can get the whole market.

A few years down the road so.

I think that that's a pretty good indicator of the fact that we manage of course to get.

Even our market share in key cities in the overall country and the fact that we have done that in TCT means that we are very likely if we continue to do a good job to reach the same kind of market share globally for the country, but of course it at the end of the road because at the same time, we will kept increasing share in the big cities. So it's an ongoing improvement if you want but that's I think that.

You should be looking at things. Okay. That's helpful. Thank you and then just one other question in relation to.

Combustibles in Europe.

An area, where you've had a little bit of share pressure again this quarter and there's some reasons for that but I. Just was curious when I think about commercial investments in the second half of the year I always think of that in relation to iqos in.

Reduced risk products.

Do you need to apply more money more attention whatever the right word us towards combustible cigarettes to try to shore up some of that market share decline I know some of us as being generated by the success of Iqos, but just curious how youre looking at that and is there any kind of change in the competitive dynamic youre seeing in combustibles.

I mean, we're certainly seeing competition quite active on the convertible because for many of them. They have only little presence in RFP. So they are trying to protect and build our business, there and especially sometimes they are under pressure because of the of the growth in the Eaton adult category Chris.

We are just reminding everybody that maintaining our leadership in <unk> is an absolute priority we need this leadership in order to make sure that we keep the link with the smoker that we want to convert.

To keep the impact with the trade to bring our RP offering to customers and of course for <unk>.

The financial resources that it provides in order to invest behind <unk>. So you should expect us to continue to invest on cc to maintain.

This market share it is clear that although it's not going to be.

The majority, but there will be some investment in the second half on the Cc business as we defend our business and as we see some of the markets, where we've been sometime it or.

By the Covid and we took about.

The social consumption that has been eating malibu growth, while as we think the world is back to more social life in the second half that would probably be a time to be back on making sure that we maintain and further strengthens our leadership on mobile as an example.

That's very helpful. Thank you for that color.

Thank you.

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

Okay.

So I just wanted to come back to understanding your guidance and the cadence for the year.

Yeah.

Given the strength in the first quarter and the outlook for Q2 EBITDA guidance.

For EPS.

A moderation from about mid 20% growth in the first half to high single digit growth in the second half.

And obviously you've added incremental investments, but are there any other factors impacting the second half.

Because even when adjusting for the added incremental implies a notable moderation in growth.

And what's considered us.

In 19.

Happy to take that one so.

I'm sure we've highlighted the fact that the.

Q1 margin has been out of course by some deferral of investment on SG&A and we signaled the fact that we'll be much more active in <unk> two in the $300 million to $400 million.

Extra investment versus the first us, but we also signaled that gross margin.

I mean, the performance on gross margin is absolutely impressive in Q1, and we're going to deliver a very strong performance on gross margin rate improvement through the year, but we flagged. The fact that Q1 has been boost as well by nonrecurring element on manufacturing productivity.

And therefore, we think that as it is not going to be reproduced we're going to have a moderation. We also are going to face and bonnie's question previously some impact coming from the launch of Illumina and the consumable of Illumina, where there will be some.

Pressure on gross margin because of it is of the launch and the time for the ramp up on manufacturing productivity and we will have also a number of investment that will be in the gross margin.

On distribution.

Second as so if you combine the fact that Q1 was exceptional for US few reason.

And the fact that there is both at the gross margin level in Q2, some element that will be.

Impacting negatively plus increased investment that is driving the outlook for the margin in the second us although as I said, we're going to keep.

He is a very nice margin improvement, but I'm sure you've noted that.

<unk> already.

Thank you.

Just wanted to ask about.

Deep learning outperforming your initial launch market.

And your lagging Europe.

Nicholas.

So, yes, you're right across the day.

Yes.

Yeah.

Average Pamela it's very early stage few market very preliminary.

Very good feedback from customers.

Afflicting, the fact that hit us a superior experience versus most of our traditional vaping experience.

So we are collecting the data we are reviewing.

The.

First information coming from.

These markets.

And when we have a bit more.

Element to share we do that I would say.

For the time being on the limited number of markets and with very small volume we are happy with the qualitative feedback that we're getting from these markets.

Okay. Thank you.

And ladies and gentlemen, we have time for one more question. Our final question will come from the line of Gaurav Jain of Barclays.

Alright, thank you.

IRA.

Yes.

Coming back from our questions, which have been added on repeated <unk> beat on earnings coming in ahead of guidance.

How does this impact your thought process around the magnitude and timing of share repurchases.

Yeah.

I don't think that this is having a meaningful impact gaurav I think we've signal preview.

Previously.

We are absolutely on track.

<unk> of course that we received board approval to start.

Share buyback in the second half of the year as announced at the time of the Investor Day.

I'm not sure that at that stage you know we are building a strategy based on on that as I said, you know I'm hopeful that.

With with the Covid.

Edwin Abating, we're going to be.

Better forecast or in the future for our quarterly guidance. So I don't take that as a kind of element that would be here to stay.

Yes.

Sure. Thank you.

Second question is.

And maybe I can correct and what I am saying, but.

I understand the back of high cost us about six grams of tobacco.

Central to us 16 Gram of tobacco.

Does it imply that the back of Iqos sales lower nicotine versus a pack of cigarettes.

Therefore, being something that helps you in this debate around nicotine caps.

No.

Not necessarily it doesn't impact on sometime in some countries not everywhere on the excise duty because excise duty is on the weight of tobacco in several countries in the world that the weight of tobacco is not directly going to guide.

Nicotine content that youre going to E mail.

Through iqos consumption or versus convertible consumption.

Okay. Thanks.

Thanks, a lot.

Thank you very much.

Yeah.

That was our final question I'd like to turn the floor back over to management for any additional or closing remarks.

Well. Thank you very much. Thank you everyone that concludes our call today, sorry Emmanuel.

Unless you had a comment.

I will just thank everybody for attending the call today, and we look forward to talk to you soon.

Thank you if you have any follow up questions. Please contact the investor relations team.

You again and have a great day.

Bye Bye bye everybody.

Thank you ladies and gentlemen, this does conclude today's conference call you may now disconnect.

Okay.

[music].

Good day and welcome to the Philip Morris International first quarter 2021 year end earnings Conference call.

Today's call is scheduled to last about one hour, including remarks by Philip Morris International management, and the question and answer session.

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 Rolli, Vice President of Investor Relations and financial Communications. Please go ahead Sir.

Welcome and thank you for joining us.

Earlier today, we issued a press release containing detailed information on our 2021 first quarter results you may access the release on Www Dot PMI dot com or the PMI IR app.

A glossary of terms, including the definition for reduced risk products or rps as well as adjustments other calculations and reconciliations to the most directly comparable us GAAP measures and additional heated tobacco unit market share data are at the end of today's webcast slides, which are posted to the website.

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

All references to smoke free products are to our our piece.

Please also note that growth rates presented on an organic basis reflect currency neutral underlying results.

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

Direct your attention to the forward looking and cautionary statements disclosure in today's presentation and press release for a review of 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.

My pleasure to introduce semiannual by both our Chief Financial Officer Manuel.

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

Our business delivered strong performance in the first quarter of 2021.

Well ahead of expectations, reaching a record high quarterly adjusted diluted EPS of $1 57.

Despite the continued challenges of the global pandemic.

Most impressive was the continued strong growth of Iqos, which made up 13% of our volumes and 28% of our net revenues compared to 21, 7% in the prior year quarter.

We continued converting adult smokers at very good pace and reached an estimated total of $19 1 million users.

Of which $14 million of switch to Iqos and stopped smoking.

Its shipment volume grew plus 30% compared to the prior year quarter with record market share in key Iqos geographies 12 markets with double digit national share and the share of seven 6% overall in Iqos markets, excluding the U S.

Our operating margins were also significantly above the prior year quarter, and while somewhat flattered by timing factors. The bulk of this improvement reflects strong underlying performance.

So Richard King combination of strong organic net revenue and adjusted diluted EPS growth leads us to raise our outlook for the year.

From a product standpoint, we continue to broaden our smoke free portfolio and saw encouraging progress from new device and consumable offerings across multiple markets.

We expect to benefit from further innovation through the course of 2021.

Yeah.

Plus 32% organic growth in RFP net revenue.

We also saw some earlier than expected pull forward of shipments predominantly cigarettes in the EU region, the eastern Europe and in Russia, but ahead of the App free the first discount batten.

We saw strong organic growth of plus six 9% in our niche revenue per unit driven by the increasing weight of iqos in our sales mix and pricing on both convertible and Rfps.

Convertible tobacco pricing was plus two 7% of probably a convertible net revenues, reflecting solid pricing in many markets, partially offset by Indonesia, excluding Indonesia convertible pricing was plus 4%.

Our adjusted operating income margin increased by 590 basis points on an organic basis. This reflects the increasing weight and profitability of iqos.

Positive impact of pricing productivity savings, including lower device costs Lower commission expense due to the pandemic the favorable comparison in eastern Europe and certain other timing factors.

Combined with a lower effective tax rate our original king adjusted diluted EPS.

One.

There are 57 reps.

Represent plus 21, 5% organic growth with very strong performance.

We estimate the timing factors in the quarter such as the earlier, she didn't mention and cost phasing and the positive impact of around plus eight cents. Although one time factors accounted for an estimated further plus two <unk> increase.

This brings me now to guidance for 2021.

While the speed and shape of the global recovery from the pandemic remains uncertain the strong business results and underlying momentum of the first quarter, notably from our Iqos business.

It is to raise our outlook.

Continued to account for a range of outcomes in our outlook for organic growth in net revenue and EPS.

This range assumed that even in the event of renewed a prolonged restriction, we will let us see a return to the depressed consumption level of Q2 2020.

While we have not been affected this far but has the current global shortage of semiconductor. This guidance assumes a limited impact on the supply of electronic devices to consumer.

This is a fluid situation, which we are monitoring closely and where any constraint may arise, we intend to manage our inventories accordingly, and prioritize device sales to adult smokers, who are new to the category.

Regarding duty free a rebound in global travel is likely to lag the improvement of in country mobility.

Our guidance continues to assume no meaningful recovery in duty free this year.

We now expect organic net revenue growth in the range of plus five to plus 7% versus plus four to plus 7% communicated previously and organic adjusted diluted EPS growth of plus 11% plus 13% or plus 15, two plus 17% in reported terms.

The strength of Iqos is the main driver for this revision.

Now expect to deliver <unk> shipment volume of between 95, and Android billion units, representing the upper us of our previously targeted range for 2021.

Given the continued strong momentum across our market the need to maintain inventory duration and preparation for the rollout of Iqos volume out the truth is different consumable we expect our full year shipment to be slightly ahead of where I am is Williams.

We also raised our assumptions for organic adjusted Oi margin expansion to around plus.

200 basis point. This includes the expectation of greater investment in the second half.

Our innovation and commercial activities stepped up.

As detailed in this morning's press release, our other main assumptions remain unchanged.

This projected organic EPS growth, including an estimated favorable currency impact of approximately plus 20 at prevailing rates vessels plus 25 assumed previously.

Translate into a raised adjusted diluted EPS range of $595 to six five.

This guidance does not include any impact of share repurchases. However, we remain on track to resume repurchases in the second half of the year subject to board approval.

For the second as assuming that many of our key market will have largely emerged from Covid restriction. We expect continued robust topline growth. This includes a contribution of <unk>.

Your expected device shipment, which will result in less gross margin expansion compared to the first us.

New product launches investments in distribution and the phasing of productivity.

We will also play a role.

We will also step up our commercial investment in the future growth of RP through portfolio and geographic expansion, including product launches such as Iqos illumina.

We anticipate around plus 300 to plus $400 million of incremental commercial investment compared to the first half and consequently expect our organic oi margin expansion to be lower in its too.

That overall to deliver a strong expansion of around plus 200 basis points for the year.

Yeah.

Before discussing our results in more depth I want to highlight a few of the positive regulatory development in the quarter.

The recognition of the armed reduction potential of smoke free product continues to gain traction.

Example, so far this year includes the reversal of long standing important then on tobacco product in Uruguay.

And the integration of the armed reduction principle in Lithuania tobacco control agenda.

We also note. The recent reports from an all party parliamentary group of MPS in the U K.

For the WH or to return to the founding principle of the FTC, which includes.

Reduction rather than the current prohibition instance.

In New Zealand, we are reviewing the content and detail of the consultation paper published last week.

Policy recognizes the role of innovative product in our reduction.

While at the same time, ensuring strict control to prevent us axis.

Year and around the World, we continue to support differentiated regulatory and fiscal framework based on the relative risks to us.

While they will on occasion, the actions or proposal that do not incorporate reduction objectives. We believe that fact and science will guide policy over time, and we continue to see positive changes in many geographies.

Yeah.

Turning back now to our results Q1 shipment volumes declined by three 7% on a total PMI basis. This reflects continued strong growth from <unk> to us of plus 30% to reach $21 7 billion units driven by the EU region, Japan, Russia, Ukraine.

Wayne and an encouraging start from recently launched market in the Middle East.

<unk> shipment and I am as volumes were broadly in line for the quarter.

While pandemic related restriction persisted around the world total industry volume declines of 0.7% were relatively benign incorporating over plus 25% growth in heated tobacco.

Category, where we continue to have a share of over 80%.

The less severe than in Q4 2020, our cigarette volume declines reflect specific share Edwin in certain market, which I'll come back to.

We expect better convertible share and volume trends in both the second quarter and second half of the year.

The strong performance from Iqos led to heated tobacco units comprising 13% of our total shipment volume in Q1.

As compared to nine 6% in the prior year quarter, 11% in the year of 2028% in 2019 and 5% in 2018 net.

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 putting us on track to achieve our aim of becoming a majority smoke free company by 2025.

Smoke free products made up 28% of our total net revenue in the quarter compared to 21, 7% in Q1 2020.

Iqos devices accounted for approximately 6% of the $2 $1 billion of RP net revenue, reflecting longer replacement time for existing users due to improving battery lives.

And reliability.

And lower device price in certain market as we are preparing for iqos in Luna.

The past two 9% organic growth in Q1 net revenue on shipment volume decline of three 7% reflect the twin engine driving our top line.

First is pricing on convertible and in certain market on each day net of the lower device pricing I just mentioned.

The increasing mix of edge to us in our business at <unk> net revenue per unit continued to deliver substantial growth in.

And as explained at Investor Day. This is an increasingly powerful driver as our transformation accelerates.

Let me now go into the driver of our first quarter margin expansion, starting with gross margin, which expanded by 390 basis points on an organic basis.

This is driven by multiple levers as shown in green on the slide including the mix effect of hte within Iqos impact in particular, our significant efforts on manufacturing and supply chain efficiency.

Bearing fruit.

Then offsetting the effect of convertible volume declines.

With around $150 million of growth productivity savings delivered in Q1.

While somewhat frontloaded in the context of 2021. This represents a strong start on the journey towards our target of $1 billion over 2021 2023.

As part of these savings our gross profit increase was boosted by better absorption of manufacturing costs.

The eye level of production in the quarter Andover device cost, we combined impact of around plus $60 million.

Gross margin expansion was also accompanied by strong SG&A efficiencies with our adjusted marketing and administration and research costs 200 basis points lower as a percentage of net revenue on an inorganic basis.

Does this reflect the ongoing digitalization and simplification of our business processes, including our Iqos commercial engine and more efficient ways of working.

We delivered around $60 million afterwards, our 'twenty, one 'twenty three targets of $1 billion in growth SG&A savings before inflation and Reinvestments.

The pandemic also impacted SG&A cost in the quarter through the later timing of certain project and reduced commercial and overhead cost due to ongoing restriction.

This latter factors accounted for around $100 million of the organic improvement.

Focusing now on Comverse table we.

Continue to all the leading international portfolio by market share and by brand strength as covered at Investor Day.

This gives us a formidable platform to accelerate the growth of Iqos, our commercial infrastructure industry expertise and the ability to communicate with adult smokers where permitted.

Therefore imperative to maintain our leadership through selective investment as we also drive returns through pricing and efficiency.

Our cigarette share underperformance in Q1 can be attributed to the combination of several factors. These include the COVID-19 impact on social location, where malware over indexes.

Border closures and reduce travel.

<unk> instances of down trading and competition in the mid and low price segment in certain markets, such as the Philippines and part of the EU region.

This performance does not reflect our objective to maintain our share of cigarette net of cannibalization, we expect strong sequential cigarette share recovery through the remainder of the year supported by portfolio initiative and the enduring strength of Marlboro, especially as pandemic restrictions ease.

Accordingly, we target cigarette share to be about stable on a year over year basis for the next nine months, despite the impact of cannibalization.

Share gains from edge to us will come on top of this.

I will now turn to the South and Southeast Asia region.

Indeed with industry volume recovering we are targeting volume growth for our business here in 2021.

Pricing remain the main Edwin in Indonesia, New excise duty rates came into force on February 1st and while all major players have taken some pricing progress Nonetheless remains slow.

Despite the negative consequences for government revenue.

Not yet been a significant move to level, the playing field between the tier one and below tier one segment, which continues to grow.

We remain hopeful that the government will address this issue over time.

The Philippines performed well in recent years for this quarter further industry pricing initiative 2020, a slow economic recovery and pandemic linked restriction.

<unk> rise to a double digit market declines.

Our shell us reflect down trading from the mid to low price segment with premium price Marlboro, which makeup over two third of our volume growing share.

Notwithstanding these challenges we have plan to address the share decline and are targeting close to stable organic net revenue in 2021, despite the total market weakness.

I'm also pleased to see that Iqos is off to an encouraging start in metro Manila with an exit share of almost 1% for its after from launch in Q3 2020.

Overall this region delivered strong growth pre COVID-19.

While it may not be a meaningful growth driver in 2021, we expect far less of a drag on group result, compared to 2020, we target regional organic net revenue to be at least stable over the next nine months.

Moving now to Iqos performance, we estimate there were $19 1 million Iqos users as of March 31st. This represents the addition of around one and a half million either user since December building on the step ups in the second half of 2020.

Our accelerated pivot to digital and remote engagement during the pandemic.

Combined with strong momentum for the Iqos brand is paying off.

We further estimate that 73% of east total or 14 million adult smokers and switched to Iqos and stopped smoking with the balance in various stages of conversion.

Strong conversion rates, notably reflects increased prevalence of Iqos three duo which offers superior user expands to previous device version.

We mentioned at Investor day, we seek to achieve even higher conversion rate over time with introduction of innovation such as Iqos volume.

This user growth again reflects widespread momentum across all key iqos geographies, including EU region, Japan, and Russia. It also reflect the enrichment of our offer and the segmentation of the category with new product and more price points, both above and below our initial.

<unk> offering.

Okay.

In the EU region.

First quarter share for <unk> reached a record five 7% of total cigarette and HBU industry volume.

Adjusted for estimated trade inventory movements this reflect 46% year over year.

<unk> growth and around 10% sequential <unk> growth accounting for fewer selling days in the period.

With the original likely to reopen somewhat in Q2 and increase the total market. We expect further strong underlying <unk> growth, but for share to be broadly in line with Q1.

It is still momentum.

Germany and Poland were also strong contributors we added a further 700000 EU region Iqos user in the quarter to reach $5 9 million a continuation of strong performance.

While smaller cities the progress in genius at 36% share is also global standouts.

As covered at Investor day cash it is a good indicator of national share growth potential and I would also refer you to the appendix, where we show shares for key EU market and global key cities.

From a performance continued in Russia, with our <unk> share up by one two points to reach a record seven 7%.

Adjusted for estimated trade inventory movement is reflect plus 35% year over year <unk> growth at around plus 810% sequentially once estimated consumer pantry loading effects of victory.

We continue to see sequential sequential share growth for both our <unk> and sheet lineup with good traction for the regular east and Super premium its creation variance. Moreover, Neil solid and fit consumables continue to supplement user acquisition.

In both Russia, and Ukraine, the majority of consumer purchasing a little device.

Smokers entering the smoke free category for the first time with high level of conversion in line with Iqos.

This bodes well for our ability to reach either smoker in the medium and below price segment for purchasing power may be a barrier.

Margins on mainstream price it to us such as fleet remain attractive compared to cigarettes sold at the same price.

And while the volume of Fitch remains small compared to our total hte volume in this market given our large iqos user base, we expect Lilly to grow further in 2021.

With this success in Russia, and Ukraine, we plan to offer is to lead in additional market later this year.

In Japan on a total tobacco basis, including Cigarillos and adjusted for trade inventory movements. This.

Share for our <unk> brands increased by three points versus the prior year quarter and buys Europe seven points sequentially to 28%.

Both east and Marlboro each day grew market share following the October price increase.

I think the strength of our price to your portfolio.

We expect to see further edge to your volume growth in Japan over the remainder of the year underpinned by ongoing user acquisition.

As such while year over year share growth is still likely to be strong Q2 share may not reflect this underlying sequential growth performance and maybe broadly stable versus Q1 on an adjusted basis, including Cigarillos.

In Q1, the overall heated tobacco category made up over 28% of the adjusted total Japanese tobacco market with Iqos, maintaining a high share of segment Iqos Ht US also reached an offtake share of 26, 1% in Tokyo after surpassing the $25.

<unk> milestone in December.

In addition to our strong growth in existing market the geographic expansion of our smoke free product continues.

This allows us to provide access to better alternative to uneven increasing amount of adult smoker.

And as communicated at Investor Day, we aim to be in the Android market by 2025.

After launching 12, new market with Iqos in 2020, we added Aruba in the first quarter and launched our new E vapor product Iqos. These in Finland, which takes the total number of markets, where PMI smoke free products are available for sale to <unk> 66.

Each of our Alf are outside of the OECD.

We are continuing to commercialize iqos <unk> with Q1 launches in Italy, and as I just mentioned Finland.

This follows the initial launch market, New Zealand and the Czech Republic in 2020.

One of our key priorities is guardi against us access for all of our product and we are targeting for all our electronic smoke free devices to be equipped with edge verification technology by 2023.

We will be testing this technology with Iqos <unk> in select market this year.

Yes.

Our order market major innovation for 2021 is the launch of Iqos Illumina. The next generation of Iqos as announced at Investor Day.

Building on the success of Iqos three duo we believes the simple and intuitive device will support easier switching and other condition for legal age smokers using smart core internal induction heating technology.

We continue to plan for the launch of Illumina in the second half of the year.

As we rollout with both Iqos and equity Luna, we carefully plan, our manufacturing and supply chain activities to manage expected demand.

External factors such as the current tightness of global semi conductor supply that I mentioned previously.

The ongoing success of Iqos three duo more than two years. After launch demonstrate that significant innovation can have a lasting positive impact on growth and both our recently announced 2023 X <unk> shipment volume target and revision of our <unk> target for this year.

Reflect this confidence.

Our transformation is the bedrock for both business and sustainability performance, we do not have separate strategies.

I think I would cigarettes by replacing them with better alternative such as Iqos drives our growth and addresses our biggest impact on society.

Our unique commitment to phasing out C. Garrett is underlying but the new transformation target announced at Investor day, which are aligned with the 27 business transformation metrics provided for stakeholders to measure and verify the pace and scale of our progress.

This includes our ambition to become a majority smoothed free company by 2025.

Our aim to commercialize smoke free product in 100 markets and to generate at least $1 billion in net revenue from D. On nicotine product as we move into adjacent business areas with a net positive impact on society.

Our best in class performance on ESG allows us to further our leadership in sustainability.

I am proud to see increasing external recognition for example on our efforts to develop a fully sustainable supply chain and our commitment to address gender inequality.

Further we recently updated our zero deforestation manifesto strengthening our ambition and they are taking to conserve consulting for us across our entire value chain.

We remain strongly committed to providing the highest level of disclosure on key ESG and product impact areas of our company via integrated reporting and we released our 2020 disclosure on may 18th.

We recognize that ESG analysis can provide valuable insight about sectors with a significant potential impact on financial performance and thus better informed investment decisions.

To further maximize the value of investor engagement and aid understanding of the significant positive impact PMI transformation can have on society, we plan to old assistant ability with GAAP in early June building on our recent Investor Day. Please do Mark your calendars.

To conclude.

We've had a strong start to the year and look forward with confidence. Despite the continued uncertainty on the operating environment due to COVID-19.

This is the same concluding slide I presented at Investor Day in February as I believe our start to 2021 demonstrate all the key elements of our longer term trajectory.

Through Iqos, we are building a business with multiple levers to deliver superior and sustainable growth over the coming year through improved volume dynamics excellent top line growth strong margin expansion and fast growing earnings. Moreover, while every other smokers who switched to Iqos is good for our.

Business. It is also a clear positive for our impact on society and public sales.

We manage our transformation with care and responsibility for our stakeholders guided by our sustainability materiality framework to maximize our positive impact across our tier one ESG and product areas.

This is essential for sustainability of our business and for delivering superior returns for shareholders over the long term.

The increase in our organic growth outlook for 2021 is another step on this journey also putting us nicely on track to achieve our 2023 financial and hte shipment targets.

Thank you.

More than 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 or make a comment please.

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 day.

Tom allows us follow up questions may be taken.

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

Our first question comes from Vivien <unk> of Cowen.

Good morning.

Good morning Vivien.

So he can give you from a J.

The headlines coming out of the U S. Yes.

Yesterday it might be.

Be helpful. Please from my first question. If you could just level set on Iqos is designation in your international markets in terms of the type of tobacco product from.

Cash perspective thanks.

So I guess, you and if I understand well. Your question is how is our eternal.

Offer and product classified versus combustible cigarette in our non U S geographies correct. That's correct, yes. Please.

So I'm not sure that I am going to be able to give you one general answer because the classification.

It can be different from one country to the other I would say.

Day, probably the fact that the.

Excise duty applied to our Iqos product is <unk>.

Differentiated in the vast majority of the market showed that the treatment is differentiated so the product is address already in a distinct manner on that particular element recognizing that it's a different product.

With a different feature then the convertible cigarettes. So we are of course going to see some situations that can be different from one market to the other we are certainly welcoming a regulation that will further clarify the fact that this in advance product are clearly different and better alternative.

Two convertible.

The future and as I think I mentioned, we see the regulation progressing nicely country after country to take that into account has been taking a few example during my previous speech.

We expect that to continue so we expect more and more government regulator to further clarify distinction between Melbourne, and other reduced risk product and convertible cigarette.

To push the smokers to this a better alternative for their health.

Okay. That's helpful. Thank you very much and then my follow up.

You could just provide your assessment of the risk.

Other countries.

Implementing a nicotine cap on combustible cigarettes. Thank you.

Well I think that is something that as you rightly saves us again is not implemented anywhere today.

And you know.

I think it's an idea that.

Certainly we would have to be investigated in all its.

Dimension I think that the.

That could have a number of impact in term of illicit trade in terms of people you know smoking actually more convertible product to get to the same kind of nicotine.

It does.

Of course, you know therefore with negative impact so I think at this stage frankly, it's too early to say whether this is something.

That could have the right intent in any case that would have to be coupled with very strong awareness availability of better alternative and certainly starting with heat not burn if we were to work and that should be perceived as an incentive for people to quit smoking all to switch to us is better.

Alternative.

And certainly it not burn being the first one that could be perceived as a nice and satisfying alternative for smoker wanting to go for.

For better products, So I think that is.

And it's not new because I think the FDA had put the idea on the table already in 2017, I don't think that much work has been done so far on all the potential consequences. We believe that a lot of work with us to be done.

On the impact and a lot of scientific evidence, we would have to be gathered and study on that and in any case for us that would have to be.

Coupled with a very strong awareness availability.

And present that as an alternative for people, who don't want to quit but want to keep consuming nicotine.

Understood. Thank you very much.

Youre welcome.

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

Our scenario Manuel Hopewell.

How are you.

Thanks, Steve and I, just wanted to focus on the incremental national spending in the second half.

And so most inc.

Round.

This will be behind us.

I think you focused on that will allow us to be even.

Today I was just wondering how many markets realistically are you targeting for the even if they make opinion and by the backend EBITDA. Thank you.

Yeah sure so on the commercial spending.

Of course, it's.

Hum.

<unk>, we believe.

Realistically.

That in many market the situation on Covid will gradually improve so everybody believes that many markets with a vaccination and and positive evolution starting in the summer.

Are we going to see switch to a gradual improvement. So as you know during a significant period of time because of Covid, we have been somewhat limited restricted in commercial action.

I would say across the portfolio, but of course, starting on our Iqos business. So as we see the market opening up it will in a general manner in a bad time to be back.

On our communication on making our.

On Iqos product known.

Build awareness again around Iqos is absolutely key in building our Iqos business.

And obviously that will trigger more.

Commercial and marketing activity on top of that you're absolutely right.

That will be a period of very important launch with illumina.

In vivo Veeva has been started to be to be launched we expect a number of markets in the second part of the year, we'll see exactly what is the final number.

First on on the on the list and of course that will require specific.

Investment to make sure that.

Smokers or.

Other.

Already.

RP user understand what is the benefit of.

Why it is.

Even greater product than Iqos three duo.

And generating more conversion and more loyalty to our product and so that will require nice.

Nice investments in the second part of the year. So that is really what is behind US 300 to 400 million that were mentioned in Europe.

Well, thanks, very much very helpful.

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

I wanted to ask maybe a little follow up hi, a follow up on <unk>, just trying to understand as you roll. This out whats the expectation of how incremental this can be I mean, I guess I'm wondering from your.

Expectations internally are you expecting to see a lot of.

Our dedicated Iqos users upgraded to this device are you.

Expecting for a lot of new users coming into to Iqos and then.

Share introducing.

This broad range of consumer and both with Aloha.

Should we assume that there is some level of bank from a cost for you related to that and therefore, a margin drag or not necessarily just trying to think about how accretive this.

Good day for you.

Yes, sure when the ERP too.

From this two two points so on on the impact of <unk>.

We broadly expect illumina to be positive well first of all of course on acquiring new smokers and converting new smokers, because they're going to find a more intuitive easy to use product and we may convince with Illumina smoker that we didn't manage to convince so far so that's the first element.

Of course, we're going to also have a number of iqos user or other it not burn.

Co product user switching to illumina, because it's really severe product with a lot of benefit for us for the consumer.

And lastly, because we believe that in terms of loyalty and people you know fully adopting it.

It has not been.

Practices and.

And then moving back to cigarette.

The fact that it's a better product is also going to play very nice rules. So we expect to add people.

People are abandoning and switching back to cigarette to be to be nicely lower once again, because it's much easier to use it's an overall better experience and we think he is going to be really as inc.

A nice impact on that one so as you can see we expect several driver behind us illumina.

Innovation to further boost our performance.

On Iqos globally.

Regarding consumable and globally is the launch I would say you should expect like always when you launch a new product you are coming with us.

That is not fully optimized in terms of manufacturing productivity, it's a new product at the beginning of the volume although you've made some investment. It takes some time to be fully optimized. So there will be beyond the cost of launching the product for for marketing and commercial reason there will be some impact at the gross margin level at the beginning.

Because it's a new product and there will be a ramp up on the profitability of this new product and on the consumable margin on this new product.

And that is of course, taking into account in our guidance.

Okay.

Okay, nicotine cap would ever be implemented.

As I see it iqos would have a distinct advantage so.

Love It if you could touch on that and then maybe your latest thoughts on potentially entering the us market share can be wondering if that might now.

More of a possibility and if so will.

Are you or have you submitted a pan J. Thanks.

Thanks.

So just from the second one on <unk>. It is certainly our intention at a certain point in time to submit <unk>, we have not done it yet.

And I don't have the timely timeline, yet when we do that but yes. It is certainly our intention to do that at the at a certain point in time.

Now on growing.

The Iqos business of course, we will work.

With our partner Altria. There remember we are not commercializing iqos in the US we have licensee iqos commercialization to Altria.

Let's not overreact to what it's been net news I think it's a press article yesterday.

And therefore, we.

We showed net.

Run too fast to conclusion, all believe that the world is going to change.

Overnight I think it's just a press article but no. We are convinced that the FDA is one key objective, which is to promote a policy for arm reduction.

We'll go through us through innovation and based on scientific evidence and they want to supervise that.

The MLP that we received on Iqos two four.

Signal that they see iqos.

A positive.

Contribution and according to their own words, you do that it's appropriate to promote public else. So that means that we have with iqos a role to play.

That we believe that this vision of the FDA.

<unk> is something that we can accompany them that we can foster and al to develop with our innovation and with Iqos and of course, we will make sure that with us with Altria and we try to maximize what we can do there.

Alright, Thank you again.

Thank you.

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

Hi, good afternoon, I have two questions.

The first one is on the Iqos market share now as opposed to a couple of years, you've seen very good growth.

For Q3, Q1 Q4 Q.

And then market share is strong and you can see that for example on slide 19, and slide 21 that <unk> been no growth in Japan or in or little growth.

Russia I.

And I guess the question is should we expect the same sort of person in 2021 in other words, great growth in <unk> just delivered great growth from Q1.

But then the market share will be pretty stable for the next couple of quarters.

No.

Your key markets.

Hi, Ed well I think.

Certainly the element that I'm sure you have that in mind that you need to take into account.

Because it impact.

<unk>.

Border closure impact no impact on EDC and some market that was not tracked that emerge and that was mainly cc business of course, they are again changing the denominator and has been impacting the market share. So it is going to be a mix. We believe in 2021 still with impacts from the Covid of this new.

No more seasonality plus the specific impact linked to the Covid now we target the progressive growth overall, but it is true that on certain market. We may have after a very strong acceleration in one quarter for all these reasons the following quarter that could be with a lower group.

Rose and even stable with that of course year on year, It's still it's still a very strong growth, but you appreciate that.

Sequentially that the market share is is potentially not growing at the same pace it.

It doesn't mean of course, the volume even sequentially undergoing you that you cannot volume growing as well with the market share stable. So I think market share is to be taken with a pinch of salt and should be appreciated you know over a longer period of time to be meaningful and what they say.

Thank you very favorable censoring amongst us.

Yes, yes.

That's helpful and my second question is around your quarterly EPS guidance.

The question is whether your words that people.

Is it getting us to disregard it and sort of consensus is just sort of consensus.

The way the market thinks about Europe is no longer under your control now let me try and explain that question a bit more.

In the past two or three years every time, you have given guidance on a quarter net massively.

All of US frankly, no longer take much notice all of us or at least if you give a guidance for certain amount of EPS I think is probably going to come into the 12% growth in it.

Started again this quarter.

And yet the share price.

Fundamentally flat now there might be other reasons for us.

It looks to me as if the market is sort of just regarding your EPS guidance from quarter to me that seems quite a dangerous situation.

And so I was wondering if you think that's right if you're worried about why are you actually if you thought you were kind of feeds from you shipped more at the end of the course, you Didnt tell the markets.

And how you think this dynamic is going to play out going forward.

Yes, Adam so.

Taking your your.

Challenge on guidance on what we deliver.

Identify.

Two sources.

For two reason to driver for beating.

Often the guidance there.

The first one and I think it's a good one is the fact that we are.

Often surprised by the strength of the Iqos business. So we expect something and it's come in even stronger which is the case in this Q1 for some of the beat so we are trying to make a thorough assessment of what we can expect and then when things are coming better we take that as good news, but it's true.

We've been too cautious in the way we have been.

Forecasting the other one which I hope everybody understand is that in today's environment, it's more difficult to.

<unk>.

Anticipate predict things because you have a lot of volatility.

And we've been it's true surprise.

By things that we did not necessarily anticipated well.

And that can be spending that we thought we would do even in March and that we eventually did not do that.

And in terms of investment and we are.

Going to do that later in the year or some movement in market that were net well anticipated again with the COVID-19.

<unk>, creating a lot of nervousness volatility and frankly somewhat of a roller coaster in some of the attitude of <unk>.

Of the trade and even.

Pantry loading from from customers, so that would be really the two driver explaining why we have been beating.

On the few occasion.

Our guidance.

And when we know early in the quarter that we're going to beat I mean, we share with us when it really happened at the end of the quarter I think we believe that it's.

It become clear at this at this stage, where we say we're going to we see that.

Very close to the to the communication issue one now on your challenge of all your question does it mean that the market is no longer.

Following you.

Well I don't think this is the case I think everybody understand the specificity of this COVID-19 situation and except that there can be volatility in things that we don't anticipated don't anticipate well.

And then on the strength of of Iqos I think everybody can have a view on on what we can deliver I think we are today.

<unk> acquired the guidance on.

The number of us its peak for the year to 95% to one on $1 billion I think.

Based on the Q1, that's really sharing with all investor shareholder analyst.

And the best possible assumption that we can make them and really reflecting our and our vision at this stage.

Okay. Thank you it was a tough question.

Thank you.

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

Good morning, Thank you.

Hi, Michael.

I just wanted to come back to your comment about pricing on heat sticks, and how you've gone to differentiate a little bit more there.

And if I heard you right you said, you're now doing both above and below the original price points you've had.

In Japan, we saw with the heat launch.

Price points introduced but could you give a little more color on how youre doing above where you would have been price point and is there additional new brands you have or us.

Second or third one in just how that's positioned and if it's not too early what youre seeing so far with that.

Sure Mike happy to do that.

What is happening on our <unk>.

Iqos business and on the consumable is typically what you would expect in a market.

Consumer good market, we're seeing start to mature a little bit.

I'm using this word with a lot of cautiousness of course, because it's a very young market steel, but in a few markets like Japan for instance, and a few of the markets, where we are now double digit market share, it's matching a little bit so typically the consumer or the customer will expect based on it.

Empower, especially in browser based on.

Personal lifestyle and what he wants to.

Enjoy or why do you want to say about it.

Eli for a life around he.

We want to have different.

And I would say positioning on what is consuming so when you go for innovation, what we did with it consumable you have one single reference at the beginning and then rapidly you see the need for segmenting. The market. There is a category of the consumer that will be very.

King <unk> and even superior experience so to get to an even better.

Consumable and ready to pay more for that so to have our expense. So that's what we have with <unk>.

The Marlboro each day in Japan, or east creation and in Russia.

Keep the.

Premium below the <unk> IPO.

<unk> premiums you want and then at a certain point in time. There is also a need for a medium in Portland.

Later in the future for our medium minimum positioning because no other consumer will be keen.

To us.

And inferior overall experience, but still great rewarding versus what they used to us with the SEC.

The same category of convertible and of course.

At a lower price point, so I think we're just doing the right.

Commercial marketing job to make sure that we give satisfaction to all the expectation of our customers.

Up and gradually so that's relevant yet in every country, but as more and more country are becoming a bit mature that will be.

As we become increasingly relevant in.

More and more market in the future.

Okay. That's really helpful color and then on your share.

Sort of quote mature, Japan market, where you grew three or four share points year over year.

Just wanted to make sure I understand some of the dynamics. There you gave the adjusted share which of course excludes some trade moves, but also cigarillos and then the other share.

GAAP between those.

I did a little bit over the five quarters you show its like 131569, and then and then two six.

Unfortunately, we don't have great visibility on Cigarillos is it just growth in that segment.

The key driver there or is there also a little bit of an inventory build we should have in mind as we think about modeling <unk> and beyond.

No Matt because there is no concern of inventory build whatsoever that certainly the level of CRE low remember there is a specific category the tax advantage will fully disappear.

Next October but there still.

Until now.

Dynamic category.

In Japan.

So what we are as I said, you know seeing in Japan has been following the October Inc.

Size duty increase in price increase.

Very very nice reaction from our Iqos business altogether, both mobile reach peak and it's we've been gaining very nicely market share at the end of the of the year 2020 in Q4. It continued.

In Q1, and therefore, we are.

Disclosing very positive and genuine market share growth during the last two quarter and we are very happy with it.

Okay, great. Thanks, so much.

Thank you.

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

Hi, good morning.

Hi, Chris questions were asked I have just two quick ones for you I was just curious in relation to Iqos, you've had really strong development of market share in Russia and the EU. Those are also markets, where you continue to build your availability of the product do you have a rough approximation of how widely available Iqos is say in the EU and Russia is there still more.

<unk> distribution.

Potential in those markets to get it in front of more consumers.

Well.

We said it in Russia, we are not a full coverage of the of the country yet.

In the EU.

We have a number of country, where we are in the big cities, but not yet with an important full coverage I would say with a lot of capillarity.

I think you get sick at.

At the time of the Investor day highlighted the market share that we have in key cities and signal that if we look backwards the market share.

A few years.

Extreme.

<unk> are a good indication of where you can get the whole market.

Few years down the road so.

I think that that's a pretty good indicator of the fact that we manage of course to get.

Even our market share in <unk> and the overall country and the fact that we have done that in TCT mean that we are very likely if we continue to do a good job to reach the same kind of market share globally for the country, but of course it at the end of the road because at the same time, we will kept increasing share in the big cities. So it's an ongoing improvement if you want but thats I think the.

You should be looking at things. Okay. That's helpful. Thank you and then just one other question in relation to.

Combustibles in.

Reduced risk products.

To keep us impact with the trade to bring our RFP offering to customers and of course for the financial resources that it provides in order to invest behind your RFP. So you should expect us to continue to invest on cc to maintain.

This market share it is clear that although it's not going to be.

The majority, but there will be some investment in the second half on the Cc business US we defend our business and as we see some of the markets, where we've been sometime it all by the Covid and we talk about.

The social consumption that has been eating malibu growth, while as we think the world is back to more social life in the second half.

We'd probably be a time to be back on making sure that we maintain and further strengthens our leadership on Marlboro as an example.

Okay. That's very helpful. Thank you for that color.

Thank you.

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

Okay.

So I just wanted to come back to understanding your guidance.

Cadence for this year, given the strength in the first quarter and the outlook for Q2.

For EPS implies a moderation from about mid 20% growth in the first half to high single digit growth in the second half.

And obviously you added incremental investment.

Are there any other factors impacting second half outlook, because even when adjusting for the added incremental.

Notable moderation in growth.

I understand what's considered also.

Yes.

I'm happy to take that one so.

I'm sure. We've highlighted the fact that the Q1 margin has been out of course by some deferral of Inc.

Investment on SG&A, and we signaled the fact that we'll be much more active than it's two and the $300 million to $400 million.

Extra investment versus the first us but we.

We also signaled that gross margin.

I mean, the performance on gross margin is absolutely impressive in Q1, and we're going to deliver a very strong performance on gross margin rate improvements through the year, but we flagged. The fact that Q1 has been boost as well by nonrecurring elements on manufacturing productivity.

Pressure on gross margin because of it is of the launch and the time for the ramp up on manufacturing productivity and we will have also a number of investments that will be in the gross margin.

On distribution.

Second as so if you combine the fact that Q1 was exceptional for US few reason.

And the fact that there is both at the gross margin level in Q2, some element that will be.

Impacting negatively plus increased investment that is driving the outlook for the margin in the second us although as I said, we're going to keep.

A very nice margin improvement, but I'm sure you've noted that.

<unk> already.

Thank you.

I just wanted to ask about Iqos.

Deep learning and performance and your initial launch market.

And you're leveraging your existing iqos platform to commercialize.

Right across the various product yeah. So at this stage, it's very early stage few market very preliminary we are very good feedback from customers, reflecting the fact that hit us a superior experience versus most of our traditional.

<unk> experience.

So we are collecting the data we are reviewing.

The Ah <unk>.

First information coming from <unk>.

These markets.

And when we have a bit more.

Element to share we do that I would say.

For the time being on the limited number of markets and with very small volume.

Our IP with the qualitative feedback that we're getting from these markets.

Okay. Thank you.

And ladies and gentlemen, we have time for one more question. Our final question will come from the line of Gaurav Jain of Barclays.

Thank you good morning.

Yes.

Coming back from our questions, which have been added on repeated earnings beat on earnings coming ahead of guidance.

Does this impact your thought process around the magnitude and timing of share repurchases.

I don't think that this is having a meaningful impact growth.

I think we've signaled.

Previously.

We are absolutely on track and provided of course that we received board approval to start.

Share buyback in the second half of the year as announced at the time of the Investor Day.

I'm not sure that at that stage you know we are building a strategy based on on that as I said, you know I'm hopeful that.

With the Covid.

Edwin Beijing, we're going to be.

Better forecast or in the future for our quarterly guidance. So I don't take that as a kind of element that would be here to stay.

Yes.

Sure. Thank you.

Second question is.

And maybe us and correct and what I am saying, but.

I understand the back of high cost us about six grams of tobacco.

Signet has 16 gram of tobacco.

Does it imply that the back of Iqos has lower nicotine versus a pack of cigarettes.

Therefore, the something which helps you in this debate around nicotine caps.

No.

Nicotine content that youre going to E mail.

Through iqos consumption or versus combustible consumption.

Okay.

Thanks, a lot. Thank you. Thank you very much.

That was our final question I'd like to turn the floor back over to management for any additional or closing remarks.

Yeah.

Well. Thank you very much. Thank you everyone that concludes our call today, sorry Emmanuel.

Unless you had a comment.

No no I will just thank everybody for attending the call today, and we look forward to talk to you soon.

Thank you if you have any follow up questions. Please contact the investor relations team.

You again and have a great day.

Bye Bye bye everybody.

Thank you ladies and gentlemen, this does conclude today's conference call you may now disconnect.

Q1 2021 Philip Morris International Inc Earnings Call

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