Q2 2021 Philip Morris International Inc Earnings Call
Adjustments as described in today's press release.
Please note that due to U K takeover code requirements, we do not intend to provide further information on this call regarding our offer to acquire Victoria Group plc that has not already been disclosed in the rule 2.7 announcement on July 9.2021.
A copy of the rule 2.7 offer announcement is available on www Dot PMI dot com.
Today's remarks contain forward looking statements and projections of future results.
Direct your attention to the forward looking caution 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.
Now my pleasure to introduce Emmanuel by BOE, Our Chief Financial Officer Emmanuel.
Thank you and H and welcome ladies and gentlemen, I hope everyone listening to the call is safe and well.
Our business delivered a very strong performance in the second quarter of 'twenty 'twenty, 1 coming slightly ahead of our expectation too much Q1's record I quickly adjusted diluted EPS of $1.57. Despite the continued challenges of the <unk>.
Mobile pandemic.
Most impressive was the continued strong growth of Iqos, which made up 13% of our volumes and nearly 30% of our adjusted net revenues compared to 24% in the prior year quarter.
As to your shipment volumes grew plus 30% and plus 12% compared to the same quarter last year and the previous quarter sequentially to reach to $24.4 billion units with strong growth across key geographies.
We also continued converting adult smokers at a good pace.
So passing an estimated 20 million users of which almost $15 million of switch to iqos and stop smoking.
Combustible net revenues grew by plus 4% in Q2 on an organic basis risk.
Reflecting our commercial volume rebound against a weak prior year quarter and solid pricing.
Partly offset by market mix.
Our adjusted operating income margin expanded significantly in both the second quarter and first half overall and while we expect commercial investment to step up in the second half. This puts us firmly on track for a strong 2021 performance organically with.
And expected currency tailwind, providing additional growth in the lockdowns.
Importantly, this outlook also allowed us last months to confirm our share buyback program, where we target $5 billion to $7 billion over 3 years.
We are also delighted to announce that Iqos illumina. The next generation of Iqos will be launched in Japan next months.
As we covered at Investor Day in February this represents a major step in category innovation as we seek to accelerate our journey towards a smoke free future.
With regard to long term growth. We also took important steps to build our model overall and deal nicotine business in recent weeks through the proposed acquisition of <unk> pharma in Victoria, which I'll come back to later.
Turning to the headline numbers our Q2 adjusted net revenue grew by plus 11, 6% on an organic basis or around plus 18% in dollar terms.
This reflects both the recovery of the convertible business in many markets compared to the heavily distributed second quarter of 2020, including the need for your inventory levels and the continued strength of Iqos with plus 35% organic growth in RFP net revenue.
For combustible or certain geography, and channel remained significantly affected by the pandemic, notably in South and Southeast Asia, South America, and global duty free reopening in much of the world have led to partial recovery in social location and a sequential recovery in our market share.
We witnessed good organic growth of plus 5.1% in our net revenue per unit.
Driven by the increasing weight of Iqos in our sales mix and pricing on both Congress Diebold and Rfps.
Our adjusted operating income margin increased by 270 basis points on an organic basis.
This reflects the increasing weight and profitability of Iqos.
Our convertible volume.
A positive impact of pricing.
Productivity savings, including lower device cost and lower commercial spend due to the pandemic.
Our resulting adjusted diluted EPS of 1 day or a 57 represent plus 17, 8% organic growth and plus 21, 7% in dollar terms a very strong performance.
Looking at the first half overall, our adjusted net revenue grew by almost plus 12% in dollar terms and by plus 7.1% organically.
This was achieved despite a tougher Q1 comparison and reflect the Q2 factors I just mentioned and the consistent growth of Iqos, where progress through those the pandemic has been impressive.
Notably, including the doubling of user in the EU region since the end of 2019.
We delivered strong organic growth of nearly plus 6% in our net revenue per unit again, reflecting our shifting business mix and pricing.
Our etch 1 adjusted operating income margin increased by 440 basis points on an organic basis.
While we plan to increased commercial investments in the second half as we noted at Q1. This remains an excellent performance.
Our etch 1 adjusted diluted EPS grew plus 19, 6% organically and plus 25, 6% in dollar terms also a very strong result.
This brings me to guidance for 2021, we now expect an even stronger organic performance for the year than previously supported by improved total industry volume for combustible following the easing of pandemic restriction.
For net revenue, we are revising our organic growth forecast to between plus 6 and plus 7% representing the upper end of the previous range.
We continue to expect organic adjusted Oi margin expansion of around plus 200 basis points and we are raising our organic adjusted diluted EPS growth range to plus 12 to plus 14% or plus 15, 2 plus 17%.
In dollar terms.
We also continue to expect hte shipments volume of between 95 and <unk> billion units.
Given the strong momentum across our market the need to maintain inventory duration and preparation for the rollout of Iqos <unk>, which uses different consumable we expect our full year <unk> shipment to be slightly ahead of IMS volumes.
This projected organic EPS growth, including an estimated favorable currency impact of approximately 18 at prevailing rates translate into an increased adjusted diluted EPS range of $5.97 to 6 zero.
Zero 7.
This guidance does not include any material impact of share repurchase or acquisition.
We recently received board authorization for the launch of our 3 year share repurchase program, where we target $5 billion to $7 billion starting in the period following our Q2 earnings release.
Please note. This program is not affected by the proposed acquisition of <unk> pharma or fix Europe.
Turning now to some of the key assumption underpinning the guidance.
We assume that many of our key market will have largely emerged from COVID-19 restriction supporting better industry volume.
We have significant pandemic related challenges remain.
<unk>, Indonesia, the Philippines, and certain markets in South America, we assume no significant further deterioration from the present situation.
We continue to assume no meaningful recovery in duty free this year with Intercontinental and Asia travel still subdued.
A rebound in travel within custom areas such as the European Union.
<unk> limited effect.
In addition, following combustible pricing of around 3% in the first Alf.
We anticipate a somewhat softer second half progression.
We continue to expect the full year volumes to be plus 2.3%.
This reflects continued pandemic related changes in certain market, notably in south and Southeast Asia.
It's 2 also faces tough pricing comparison from the 2020 via reduction in Germany, and new excise tax stems in Australia.
The global semiconductor shortage continue to put constraints on device supply.
And while the overall impact to remain manageable, we have adjusted our device assortment to limit the effect on consumer availability.
This dynamic is included in our guidance and we continue to monitor the situation closely.
Despite these factors we have multiple growth drivers in our business and we are confident in our ability to deliver continued robust top line progress.
This revenue assumption includes our expected device shipment and the launch of Iqos, Illumina, which will contribute to less gross margin expansion compared to the first half.
As mentioned previously we will also step up our commercial investment in key areas, including portfolio expansion and product launches such as <unk> and <unk> small free category understanding and awareness campaign and a number of commercial development project.
We anticipate around 300 to 400 million debt are of incremental spending compared to the first half, which will impact our edge to oi margin, but overall still expect to deliver a very robust expansion of around plus 200 basis points for the year.
For Q3, specifically, we expect EPS of $1.50 to $1.55.
Lastly, we continue to expect around $11 billion in 2021 operating cash flow at prevailing exchange rates and subject to year end working capital requirements.
Before discussing our results in more depth I want to highlight some of the positive regulatory development in the quarter.
Recognition of the arm reduction potential of smoke free product continues to gain traction.
Example, in recent weeks include the passing of a broad differentiated regulatory framework for RP by the Philippines House of representative.
And the institution of differentiated excise treatment for heated tobacco product in Pakistan.
In Mexico, the ban on the import and export of electronic nicotine delivery system no longer applies to EBIT tobacco devices, which will allow us to resume imports of iqos devices.
While we are encouraged that the German government as recognized the important principle of differentiation between convertible cigarette and smoke free product on the basis of potential ex impact.
We view the announced excise tax changes on heated tobacco as misguided, providing less incentive for consumer to switch away from cigarettes to less harmful alternatives.
We also note the differing views among the key political groups in the country.
The fall election, and we are a new government could revisit the decision.
In the EU more generically, we remain optimistic that the revision of the tobacco excise directive will lead to greater amortization in the structural approach to nonconvertible product taking into account the relevant good practices and experience gained by member states.
Turning back now to our quarterly results Q2, total shipment volume increased by plus 6.1% and by plus 1.1% for each 1.
This reflects continued strong growth from edge to use of plus 30% to reach $24.4 billion unit in Q2.
<unk> owned by the EU region, Japan, Russia, Ukraine, and encouraging progress from recently launched market in the Middle East.
<unk> shipments were around $1.4 billion units.
Of IMS volume for the second quarter, reflecting the need to maintain inventory duration in the growing business.
<unk> lead times and the first shipment of Illumina consumable.
The plus 3.2% growth in our Q2 cigarette volume reflect the recovery of a number of key markets compared to a notably weak prior year quarter when pandemic related disruption was at its peak.
While our cigarette share improved sequentially, we continue to face some specific market share Edwin in addition to market mix effect, which I'll come back to.
Due to the impressive performance of Iqos heated tobacco units comprised 13, 3% of our total shipment volume in each 1 as compared to 11% in the year of 2028% in 2019 and 5% in 2000.
18.
We 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 product made up nearly 30% of our adjusted net revenue in the quarter and in each 1.
Impaired to 23% in each 1.2020.
Iqos devices accounted for approximately 5% of the $4.4 billion.
Of RP net revenues, reflecting longer replacement time, and fewer second device pictures for existing user due to improving battery lives.
<unk> and reliability.
And lower device prices in certain market as we prepare for Iqos illumina.
The plus 7.1% organic growth in each 1 net revenue on shipment volume growth of plus 1.1% reflect the twin engines driving our top line.
First is pricing on combustible and in certain market on <unk> net of the lower device pricing I just mentioned.
Second the increasing mix of each to use in our business at iron net revenue per unit continues to deliver substantial growth and as explained at Investor Day. This is an increasingly powerful driver as our transformation accelerate.
Let me now go into the driver of our first half margin expansion, starting with gross margin, which expanded by 340 basis points on an organic basis.
This is driven by multiple levers as explained in prior quarters, including the mix effect on HQ and pricing across our portfolio.
Our significant efforts on manufacturing and supply chain efficiency.
Bearing fruit more than offsetting the effect of convertible volume declines.
Around $300 million of gross productivity savings delivered in each 1.
This represents a strong start on the journey towards our target of $1 billion over 2021.2023.
This was accompanied by strong SG&A efficiency with our adjusted ex 1 marketing administration and research cost 90 basis points lower as a percentage of adjusted net revenue on an organic basis.
This reflects the ongoing digitalization and simplification of our business processes, including our Iqos commercial engine and more efficient ways of working.
We delivered around $120 million towards our 2021.2023 target of $1 billion in growth SG&A savings before inflation and reinvestment.
Focusing now on combustible we own.
All the leading international portfolio by market share and by brand strengths.
This gives us a formidable platform to accelerate the growth of Iqos via our commercial infrastructure industry expertise and ability to communicate with adult smoker where permitted.
It is therefore important to maintain our leadership through selective investment as we also drive return through pricing and efficiency.
Despite good result in markets like Mexico, Saudi Arabia, and Turkey, Our Q2 cigarette share remained below the prior year with over half of these shallows due to market mix.
Reflecting our exposure to markets like the Philippines, and low presence in certain emerging market with a strong rebound such as Bangladesh.
Importantly, our share improved sequentially compared to the first quarter and we expect this positive trajectory to continue through the second half.
This reflects a partial recovery from the COVID-19 impact on social occasion, where marlboro over indexes.
<unk> closures and travel.
However, the expected recovery is also supported by portfolio initiative, including in the value segment and the enduring strength of Marlboro.
We continue to target stabilization in our cigarette category share overtime with hte gains coming on top.
I will now turn briefly to the South and Southeast Asia region.
As covered last quarter after a difficult 2020, notably in Indonesia volume headwinds has been moderating. However, the pandemic remains a major issue in the region with renewed lockdowns in a number of areas.
Daily consumption patterns are still below pre pandemic levels and the pricing environment remains challenging.
We continue to expect volume growth in Indonesia. This year as the industry improves with encouraging recent share gain within the tier 1 segment, where we participate.
Our overall share in both Indonesia, and the Philippine was sequentially broadly stable in Q2 with our portfolio initiatives geared at further share recovery over the balance of the year.
In Rfps Iqos continued to grow strongly in Metro Manila with an exit share of over 1% for eats.
For the region overall, we remain on track to deliver positive organic net revenue growth over the April to December period as outlined on our Q1 call.
Moving now to Iqos performance, we estimate there were 21 million iqos users as of June 30th.
After the exceptional edition of around plus $1.5 million adults user in the first quarter. We added a further plus $1 million in Q2, and plus $2.5 million year to date.
Building on this step up seen 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 $14.7 million adult smokers have switched to iqos and stopped smoking with the balance in various stages of conversion.
Strong conversion rates, notably reflect the increased prevalence of Iqos 3 duo which offers a superior user experience to previous device version.
We seek to achieve even higher conversion rate over time with the introduction of innovation such as Iqos in Luna.
This user growth again reflect widespread momentum across all key iqos geographies, including the EU region, Japan and Russia.
It also reflects the enrichment of our offer and the segmentation of the category with new product and more price point boost above and below our initial hte offering.
In the EU region second quarter share for <unk> reached 5.5% of total cigarette and <unk> industry volume.
1.6 points higher than Q2 last year.
As mentioned last quarter, we expected sequential share for each to you to be broadly in line with the first quarter.
Due to the effect of seasonality and pandemic related fluctuation on the convertible market.
Underlying trends remain strong with Q2, HD, you IMS volume growing plus 50% year over year and around plus 11% sequentially when adjusted for estimated trade inventory movements.
We expect to see similar dynamic in the third quarter with broadly stable headline share versus robust underlying growth.
This excellent performance include strong growth across the region with Italy, and Poland as notable contributors.
We continue to grow our EU region Iqos user base.
<unk> since the start of 2020, despite the pandemic to reach over 6.3 million.
Yeah.
Strong performance continued in Russia, with 8% sequential user growth in Q2, and our <unk> share up by 1.3 points to reach 7.3%.
As in the EU sequential share can be distorted by the convertible market adjusted.
Adjusted for estimated trade inventory movements this reflect close to plus 30% year over year <unk> growth.
After the excellent progress and geographic expansion of Iqos in recent year the EBIT.
Tobacco category in Russia is now large and growing.
This very positive dynamic naturally attract competition and as seen before in markets like Japan heavily discounted competitive offering can generate initial consumer trial.
We continue to grow our user base and with both our existing price tier portfolio and the future launch of Iqos Illumina, we see ample room for further strong growth.
While we have historically focused on Russia in our earning calls there is broad hte growth across eastern Europe region, with Ukraine, Kazakhstan in South East Europe significantly contributing.
We show here the excellent overall original growth trend in adjusted items.
Note that following the recent international function Iqos is no longer available for sale in Belarus, where we achieve a Q2 offtake share in means.
Almost 7%.
We continue to see sequential volume growth for both our <unk> and CIT lineup in Russia and Ukraine.
Moreover, as solid and fit consumables continued to supplement user acquisition.
In both Russia, and Ukraine, the majority of consumer purchasing a little device.
Our smokers and training is more free category for the first time with high level of conversion in line with Iqos.
<unk> from our Iqos conversion infrastructure.
With this success, we also introduced real solid in 5 further market in eastern Europe. This quarter with additional markets planned later this year.
Japan.
Adjusted total tobacco share for our <unk> brands increased by plus 2.3 points versus the prior year quarter and by 0.2 points sequentially to 21%.
Highlighting the strength of our price tier portfolio and broad range of SKU following Europe to about 2020 price increase.
IMS volume adjusted for estimated trade inventory movement.
<unk> grew by around plus 5% sequentially after accounting for fewer selling days in the first quarter.
We continue to expect robust underlying progress in user growth and consumer offtake supported by the launch of Iqos Illumina in August.
As in prior years with an additional excise increase in October 2021.
There may be volatility on the timing of IMS and consumer off take between the third and fourth quarters.
In each 1 the overall EBIT tobacco category made up around 29% of the adjusted total Japanese tobacco market with Iqos, maintaining a high share of segment and capturing the large majority of the categories growth.
In addition to strong growth in existing market the geographic expansion of our smoke free product continues.
This allows us to provide access to better alternative to an ever increasing amount of adult smoker as we aim to be in Android market by 2025.
Our second quarter launches in Kyrgyzstan, and with Vicki Stern with both Iqos and <unk> offerings.
The total number of market, where PMI smoke free products are available for sale to 67.
Of which over half are outside the OECD.
The core driver of our continued success is mostly product is innovation.
We are very excited to launch Iqos Illumina. The next generation of Iqos next months in Japan.
Building on the success of Iqos 3 duo we believe this simple and intuitive device will support easier switching and IR conversion for legal aged smokers using smart core internal induction heating technology.
As outlined at Investor Day, <unk> will come in multiple device format and its own range of HEU consumables.
The ongoing success of Iqos 3 duo almost 2 years after launch demonstrates that significant innovation can have a lasting positive impact on growth.
We plan for further market launches of Iqos volume through the remainder of this year and in 2022.
Naturally for a major new innovation and as seen with earlier version of Iqos. The unit cost profile of Iqos volume devices and consumables begin at a higher level, but we expect this to improve over time as scale increases.
This dynamic is included in our guidance assumptions.
We are continuing to commercialize iqos vive with good progress in the first group of market, where we started in our own channel with an initially limited range of test volume and nicotine level.
<unk> is a premium product, providing a superior experience and as we explained previously the commercial infrastructure of Iqos allows us to deploy efficiently and at scale through a bespoke route to market approach.
As we start to expand distribution and the consumable offering we see signs of increased uptake and clear positive consumer feedback relative to competitive product.
We plan to launch in further market later this year and we'll continue to test edge verification technology in select markets.
In addition to heated tobacco and E vapor, we announced in February our intention to enter as a small but fast growing nicotine pouch category. This year.
To complement our internal development, we have 2 important acquisition to establish a base of capability in science technology, and manufacturing and build our platform in more down the road.
The first of these was Ags news completed during the second quarter.
<unk> news is a relatively small branded portfolio of modern oral product, which provide us a foothold in the category.
In addition, the proposed acquisition of <unk> pharma will give us access to a range of promising oral delivery technology and capability some of which could be applied to the modern oral nicotine space.
We will return with further news on our commercial plans in this area later this year.
I also want to come back to our beyond nicotine strategy, which we first outlined at Investor day.
We see significant opportunities in adjacent areas.
Our 2 focused corridors of self care wellness, including both Nicole and enhance therapeutic expected to have an addressable market of around 65 billion by.
By 2025.
The proposed acquisition of <unk> pharma, and Victoria can enable us to more rapidly expand our development capabilities in innovative inhaled and oral product formulation, while continuing to grow their respective CDM or activities.
13 is a range of promising overall delivery technology, including pouches gum, and Los Angeles, which can be applied in boost the mud and oral nicotine and beyond nicotine areas, notably for self care wellness product.
With Victoria, we would gain access to differentiated proprietary technology and pharmaceutical development expertise.
To deliver a broad range of complex inhaled therapies.
Victoria as highly complementary human capital technology.
High quality infrastructure and deep new out of enable formulation and device design development and analysis drug device combination and pharmaceutical management processes and systems.
This proposed acquisitions would fully leverage <unk> existing capability in life science product innovation and clinical expertise related to emulation.
Such acquisitions can also enhance our progress on important sustainability priorities.
Firstly building our capabilities in Modena rule is a key enabler of broadening the reach in excess of our smoothed free alternative to adult smoker <unk> World and secondly building a strong beyond nicotine business is a major objective as we strive to develop commercially successful product with <unk>.
Net positive impact on society.
On ESG and sustainability more broadly we are firm believers in the power of investor engagement to drive positive change.
Given <unk> unique sustainability and transformation story, we have increased our own outreach.
We published our second integrated report in May which provides a comprehensive detailed and transparent disclosure of our we create sustainable value in how we are progressing towards our purpose and target, including our most important commitment of all to phase out.
Garrett.
We also add a dedicated sustainability webcast from Jordan the second.
Where we cover the fundamental alignment of our transformation and financial performance.
Addressing our impact on society.
We share the latest studies using real world data on the placebo Association between accelerated cigarette volume decline and certain this is reduction in Japan.
We also reaffirmed our commitment to diversity equity and inclusion as an essential enabler of future success.
We continue to make progress on our 2025 roadmap with notable development in Q2 being our second certified carbon neutral factory in Switzerland.
Taking us 1 step closer to achieving carbon neutrality by 2025.
And the publication of our Eco design principle as we seek to play our part in the circular economy.
In closing.
After delivering 1% total volume growth and 7% organic revenue growth in each 1 we have raised our 2021 organic growth expectation to plus 6 to plus 7% in net revenue and plus 12 to plus 14% in adjusted diluted EPS.
We are on track for an excellent performance.
Moreover, we continue to invest in the future.
Most immediately this means the launch of Iqos in Japan next month and in more markets later this year.
We are also investing in the broadening of our smoke free product portfolio and geographic reach.
This is critical as we seek to accelerate the number of adult smokers, who switched to better alternative with the growing positive impact on society.
In addition, we are investing in the capabilities of tomorrow as illustrated by our 2 recent proposed acquisition, which provides a comprehensive development platform across our beyond nicotine focus areas.
Finally, we are also committed to returning cash to shareholder through dividend and share repurchase in line with our objective to deliver sustainable value and return to investors as we continue to as we continue our journey towards becoming a majority smokefree business.
Thank you very much I am no 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 press the star key followed by the 1 on your touch downtown and the interest of fairness and time, we ask that participants keep to a maximum of 2 questions. Each.
Our first question comes from the line of.
Chris Growe with Stifel.
Please go ahead.
Hi, good morning.
Hi, Chris Hi.
Nice quarter, there I just want to ask 2 questions if I could please.
Want to start first with Iqos alumina launching soon.
<unk> and I assume will go into more markets I think in this quarter you had shipments above consumption.
That still be the case I know you mentioned.
Building inventories would that still.
It happened in second half of the year are we've already built inventories sufficiently to handle that launch.
Thank you Chris No I think there was an element of preparation for the launch in Q2.
For the rest of the year at that stage, we expect.
And shipment to be more aligned so we don't expect to have further material differences at that stage emerging in its true.
Okay.
Just a question on the combustible business and I know you gave some good detail on that I guess my question would be that you did have a softer market share overall in combustibles. I think you mentioned you expect your share to stabilize their overtime I just want to get a sense of your thought that you could stabilize your combustible market share this year and I think related.
To that.
Just maybe give a little more color around the.
The pricing environment, how competitive it is right now in combustibles I think there may be a factor.
Moving to less pricing from your business net area.
Sure Chris.
So on this objective to stabilize our market share in the <unk> segment of Cc category.
That's a clear objective that we have.
Of course.
A.
A year on year stabilization that we want to reach.
Stabilizing sequentially quarter on quarter, and it's good to see that the Q2.
Market share is is showing this kind of improvement versus.
Q1, where net debt there yet in terms of stabilization year on year. That's an objective that we have gradually for the coming quarters, we will see when we are able to reach it.
That's clearly something that we want to pursue on the pricing environment. As you have seen we started nicely. The year Q2 was still quite good outside Indonesia, we are reporting.
Price impact.
About 5% so clearly positive ex 2 is more difficult as we have been flagging. It in term of basis of comparison, there was a <unk>.
The decrease in Germany, there is a different pattern in excise duty increase in Australia. So that is going to play and we are also going to monitor what is the situation as hopefully we are exiting the COVID-19 crisis, we see exactly what is the timing and always the exit but we know that many.
Economy will still stay quite impacted by debt. So we'll be of course monitoring the capacity of our customer to follow a price increase and that will be certainly driving our decision. When it comes to price increase so I would say, we're going to monitor situation, we're going to see what is happening there would be certain <unk>.
<unk> on.
Evolution of inflation year end, there as well that we're going to take into accounts. So a lot of unknown at that stage, but we'll take that into accounts to monitor and decide on price increase. Nevertheless, we have been flagging. The fact that after a 3% increase in each 1 we do confirm.
The overall bracket of 2% to 3% for the full year, which mean that we expect notably and partially because of tougher comps in its too and it's true that could be less favorable in terms of price increase than each 1.
Thank you for all the perspective.
Thank you.
Our next question comes from Michael Lavery from Piper Sandler. Please go ahead.
Thank you and good morning.
Hi, Michael.
I just wanted to ask a couple of questions on Indonesia..1 follows on some of the pricing discussion I guess you called it out obviously as an offset to some of the favorable pricing can.
Can you just help us understand a little bit better the dynamics, there and what to expect looking ahead.
Really hit hard by the pandemic doesn't mean, unfortunately that the country.
The crisis and until recently, there has been new announcements of Lockdown and restriction.
Probably that the impact.
Was so strong last year that we are comparing to.
The favorable basis of comparison that the situation is certainly not back to normal there. Nevertheless, what we have seen is certainly an improvement.
The situation again based on probably favorable comparison, we are doing well our sales when it comes to the premium market, what we call the tier 1 with more excited duty and we are gaining share there and that explain that we are able to grow our volume this year.
But we are also unfortunately at the same time seeing the tier 2 category. The 1 enjoying lower taxes that is still gaining ground and probably getting close to 30% market share. It used to be at the end of last year around 25, 26%. So that is playing the other way around and hopefully.
This is going to be corrected with evolution on the excise duty policy put in place by the government, but of course, we don't have any news on debt and we don't know.
If and when it's going to happen. So that is a situation that we are facing in Indonesia. There is clearly improvement versus last year, which doesn't mean that the environment. When it comes to possibility of price increase is becoming favorable but at least it's no longer have the kind of very negative.
The oriented market that it used to be for us last year.
And just to confirm then on Europe pricing or are you, saying that you are not getting any increases or have you actually lowered prices.
We are impacted by the increase in duty. So we are an increasing price, but it's still having a negative impact and thats why there is a difference between what we are reporting in term of price impact with Indonesia, and without Indonesia. So overall, it's still having.
A bit of a negative impact.
Got it so your increases arent fully offsetting the <unk> debt.
That's correct.
And then just on Iqos in Indonesia, I know you haven't called out a launch there.
And the Internet can be a funny creature.
And about a dozen stores in Jakarta.
Quite proper and have really official sounding language.
Those resellers of products Theyre getting somewhere else or do you have a sort of a quiet launch there can you just give us a status of.
Iqos fits in Indonesia today.
So there is no.
Efficient laundries, and Iqos club, where we may gather.
Some user as you know, Indonesia is first and foremost a critic market and.
While we certainly have the objective to develop a specific device 4 critic we havent been launching it yet so we do that of course addressing only part of the population the 1 with the purchasing power.
Can afford.
The current devices.
And also a small group of people that are non kretek, if you want smoker, but thats a very small fraction.
Of the consumer so that could be the element that you are referring to but there is no official global launch if you want at that stage.
Okay. Thanks, so much.
Thank you.
Our next question comes from Gaurav Jain from Barclays. Please go ahead.
Hi, good morning.
Hi, Gaurav.
So couple of questions from me 1.
On the guidance that you had at Investor day.
Greater than 9% EPS growth over 2021 to 23, and you're clearly coming quite ahead of that this year at almost 18%. So how should we interpret it is what I'm trying to understand that.
There is a slowdown in the next 2 years because you have these past GAAP closures in Germany, which will impact the high cost realization in that market next year and potentially in some other European markets.
Sure.
These items.
By next month.
Yeah.
Well. Thank you for the question growth I think you are going too far.
We have been sharing this 3 year guidance and objective at the time of the Investor day.
More than 9% we are off to a strong start because we are targeting indeed for the first year, 12% to 14%.
Clearly above the <unk>. So I think we are compliant from the time being with the overall beyond 9% and <unk>.
That means that we are certainly on good track to deliver the more than 9% debt I don't see a contradiction between the more than 9 and what he set a new good news, which is the strong start in 2021.
Sure.
As more of these past GAAP closures in Europe.
Would that impact your.
In a potential to achieve EPS growth guidance.
I mean.
Of course, you can make whatever scenario.
And it's difficult to react to the most extreme scenario, but I think we are taking into account and we always said that that there could be some reduction gradual reduction too.
The GAAP between BT.
Between <unk> and <unk> product when it comes to excise duty that is absolutely factored in in our guidance.
We have the capacity to increase price.
We have been repeating the fact that iqos and the consumables that are coming with Iqos is a premium product.
That is really a superior expense for the customer and that is commanding a premium in term of price positioning us well today. Thanks to the lower excise duty very often you're going to have consumable at a cheaper price than the premium convertible.
Product like like Marlboro that is something that of course could be a change and we could increase price and at the same time, we continue to see more and more governments.
And regulators are saying that there should be a difference.
Between combustible and it not done because <unk>, a better product and that should be used certainly as an incentive to a smoker switching to 2 eternal brand category and to move to better product for them. So we certainly believe that there will be some decrease in some country.
But it's not going to be initially the case everywhere. We could also envisaged increase in the GAAP, we havent seen debt recently in the EU, but we've been seeing debt being installed in other country and on the long term, we continue to believe that.
There will be still some some some nice difference between the 2 that is fully justified.
By the fact that these are better products. So.
Long answer to say that we are ready to cover for certain the possible reduction in the GAAP. We think that some of that is going to happen anyway for sure Germany being 1 example.
And at the same time, we believe that there will be a growing I would say consensus on the fact that there should be a clear differentiation.
Convertible and is not 1 product.
Sure. Thank you and if I could ask a quick 1 on Japan. So as we have the Africa.
GAAP closure that task GAAP closes in October and that will throw up a lot of volumes.
And the market, which will be moving and youre launching iqos the newmar.
The potential to launch a lower price and cost variance maybe lead position Iqos 3 duo at a lower price point to capture these volumes from the cigarette category mix from.
Probably move.
Certainly garage with Iqos volume.
Going to enrich the premium category for Eaton outbound product and as we keep saying theres going to be a real.
I would say.
A major change for customers and it's going to represent for them clearly a big big progress, killing the remaining papers pinpoints.
And therefore of course, we focus on debt for the time being we believe the potential is huge.
As we've been highlighting now depending on all of the market is evolving.
Certainly we'll see.
What is the interest of launching.
New devices with a different positioning.
<unk> goal as we also said in several instances is certainly in any case to have a full coverage of the spectrum of the market from the most premium positioning to certainly more value from M&A.
Designed to cause simple product that are of course, delivering an experience that is not at the level of the premium experience, but that is value from <unk> and good enough experience for all the type I would say of customers. So Japan will make new exception in our willingness to cover once again the full market from premium.
2.2 medium and even low price positioning.
Thanks, a lot.
Thank you.
Our next question comes from Bonnie Herzog from Goldman Sachs. Please go ahead.
Thank you Hi Manuel.
Hi, I wanted to circle back just on guidance I just have a couple of questions.
And thinking about this.
You raised your EPS guidance for the full year as you expect industry volume.
Our improving but it still does imply a decent step down of growth in the second half despite lapping a relatively easier comp and you did call out a few things like you called out incremental costs associated with the rollout of <unk> and maybe some gross margin pressures as you expect to sell more devices.
In the second half so I just want to make sure I understand all of the puts and takes or any incremental pressures you are expecting in the second half and then I just wanted to also clarify as it relates to buybacks.
You did mention your guidance doesn't include a material impact from any share buybacks, but just wanted to verify.
Does this mean.
Youre not going to be buying back as aggressively.
In the second half this year or are you just not inc.
<unk> buybacks at all in the guidance I just wanted to make sure I understood that.
Sure.
So maybe starting with the buyback to make it clear no no we're not making any kind of guidance on what is going to be the buyback our assumption and as we said we want to be really super flexible and frankly, all scenario for the magnitude of the buyback in edge too can be envisage.
Precisely because we want to keep flexibility, we don't want to put any kind of assumption.
The amount of buyback for a true so that's really the way we should you should understand it.
Now on the etch to margin vessels, Sichuan because I guess, that's really your question.
I think you started to summarize well the reason for a different margin evolution profile, but I'm happy to go through all the elements.
Anthony was going to be come in between each 1 and its true is strong dynamism in topline.
Continued.
Favorable evolution of course on our Iqos business, we are still facing on the Cc business also some relatively easy comp last year. So that should have an impact on the evolution of our cc business, we continue to.
The nice mix impact driven by the Iqos growth on our revenue per stick, so that is going to stay and.
Of course, that's the reason why we are raising the guidance on the revenue organic growth 2.6% to 7 I mean, it's our confidence.
On the continuation of strong dynamism on revenue growth.
And then on other element that could be different there is as I said it.
In your previous question on price, we see <unk>, possibly being more challenging than the 3% price increase on the cc business that we delivered in at once so that's clearly 1 element. Another 1 is the level of productivity you have seen the number $300 million in each 1.
We target 1 billion over a 3 year period, obviously, the $300 million is not necessarily a sustainable amount. If you want for a 6 months period. So there was some front loaded element in productivity. This year. It doesn't mean that we don't intend to generate a nice productivity net.
But not necessarily at the same level as the $300 million.
In each 1 so that's going to be another element then they are all the impact of the launch of Illumina and IC Indeed on the margin to impact.
1 is the fact that when you launch a new product it's true for any business any industry. Your cost our net optimize you don't have yet the volume to fully amortize all the investment you haven't been optimizing audio processes. So there will be an impact on the gross margin coming from increased cost as well.
Launched luma this is going to of course disappear overtime.
Able to tell you exactly how long its going to take but let's say 18 to 24 months is the typical.
I would say horizon to to get to full <unk>.
Productivity when you have some some some innovation. So this is going to have an impact on its true.
Then we said it as well as the fact that we're going to sell more device and illumina device that is going to boost our revenue, but it's not going to.
The sales impact as consumable on the growth margin and of course with an impact on the growth margin rate.
<unk>.
And last element that I have certainly top of mind.
This is this $300 million to $400 million increased investments.
And it's true versus H 1.
And.
These investments are going to be obviously, where it's going to make an impact for the company. So it's about innovation, it's about commercial and marketing capacity. It's about digitizing further our business and the company, that's where we're going to put that money. So you need to take all these elements into account to understand the diff.
1 profile of margin evolution between <unk> and its true, but having said that obviously, we are still targeting a very nice growth.
Our revenue.
And.
The EPS in edge too obviously.
Okay that was really helpful and I appreciate all that so obviously theres a lot of puts and takes that broadly given the range guidance you feel pretty darn good about the momentum and just the improvements in industry volume. So that's encouraging.
If I may I wanted to ask a second question just on the competitive environment.
Especially as I think about what Japan tobacco is doing by launching their new clone ex <unk>.
And it sounds like they plan to launch it at a pretty steep discount to drive trial now this sort of coincides with the launch of <unk> in Japan. So just wanted to understand your strategy in terms of positioning alumina, especially as it relates to price.
Maybe overall, how concerned are you with stepped up cockpit competition and how confident are you that youre going to be able to maintain share and ultimately continue to take share. Thanks.
Yes, Muni certainly that's of course.
Very good question and happy to elaborate on it.
First and foremost and Thats, probably the most important <unk>. So we are really happy to see competition.
Really taking now the Eaton <unk> category as a big priority and showing I think increased commitment engagement beyond the category, we think debt.
The shared vision on the fact that we need jointly too.
2 phase out cigarettes, and develop better product for smokers.
<unk> is a way certainly to accelerate.
<unk>, 2 and smoothed the world so to see competition.
Realizing that this is a great category. This is answering smokers need and expectation putting more innovation more investment day in the category Thats, just great and I think we can start.
<unk>.
In some geography, where competition increased investment we can see the overall growth of the market accelerating and of course as we take a lion's share of that debt is that is very good news.
Having said that.
Obviously.
What is important for the smokers is capacity too fine with it not technology and proposal is something that is mimicking.
The closest way possible.
<unk> experience versus combustible cigarettes, and Thats, where our technology, our capex is to innovate.
<unk> is making a big difference and Thats where probably.
Some of the competition is struggling a little bit and that is the reason why some of them believe that they have to discount their product too.
Get some traction so what does it generate what at the end of the day generate the fact that you may have a trial because the devices coming almost for free as a consumable is cheaper, but then if it is not satisfactory if it doesn't provide the same pleasure.
The same benefit as what you have with <unk> experience and we have no further more with Iqos illumina.
And then whether you should get you back to Iqos or you may just day back to combustible cigarette because you have the feeling that.
That's that's not satisfactory vessels, what you really enjoy and therefore, it's not whether playing the role of converting smokers to witness burn and you create laws are lower.
Average consumption per device and lower loyalty. So we continue to be firm believer that at the end of the day just the right technology.
Right experience.
We will convert the majority of the smokers to switch to better product and 2 did not 1 category and we believe that this is exactly what we're offering with iqos and debt make us confident on our company to retain big market share.
It doesn't mean that we're not going to propose also simpler device always with our capex it to innovate.
Targeting as I said different purchasing power different expectation.
But certainly we will continue to lead the way when it comes to.
Premium product delivering a superior experience.
Alright very helpful. Again, thank you so much for all of that thank you. Thank you.
Our next question is from Pamela Kaufman from Morgan Stanley.
Hi, good morning.
<unk>.
I was hoping you could elaborate on your plans for increased investment in the second half income is that what initiatives you will be spending behind.
That will be for.
Or any other distressed offerings.
In terms of the level of spending $3 million to $400 million is that primarily related to the launch in Japan and should we think about annualizing. This level of incremental investment for next year as you expand into international market.
Thank you.
I have to say I fully understand your curiosity and debt.
You want to know more about this extra Australia to 400 million debt.
Im afraid I will have to disappoint you because as you can imagine that is super sensitive and we don't want to disclose the detail of that nevertheless.
To say that we are putting investments in places that are going to move top line.
<unk> growing more volume more conversion.
On a smoker switching to iqos.
Certainly.
Part of the amount is going to be behind the launch of iqos in tumor, but not only that also commercial activity as we see a number of market returning to a certain normalcy I would not say we are fully there, but certainly more reason to reaccelerate, a number of marketing and commercial act.
DVT and Thats going to be important we are also accelerating in terms of innovation and.
We are putting more money in life science and to build more presence in RP category.
Notably so that's part of the acceleration and we also signaled he is going to be much more marginal debt.
We may have to very selectively reinvest yearend they're on.
C C.
It's possible I would say, it's going to be a small fraction of the extra investment that we have this objective of stabilizing our market share so I think with that.
You have really what is behind Australia to $400 million no you don't need to necessarily annualize that but.
Let's be clear, we're going to launch in Lima in many more countries next year in 2022, and I'm not able to elaborate at this stage on what is going to be the plan in terms of investment that I would expect that yes, we'd certainly want to invest with a great return on this new offering and new technology. So that we would have some impact.
On our investment next year remember Nevertheless, we have a very ambitious program to generate 1 billion efficiency on SG&A, we have ambition to be very dynamic on revenue and therefore, our goal over a 3 year period is to reduce net.
Nicely SG&A on revenue ratio to create a driver for increased profitability.
And of course, including all this investment that absolutely remain a big ambition that we have.
Thank you that's very helpful.
And my other question is can you discuss the rationale behind the new management structure in EMEA.
Okay.
Just curious how if at all it influences the company's priorities in the region should we anticipate any changes to the way that I can give.
<unk> rollout is conducted or any changes in the company's strategy towards the U S market, particularly given that Deepak Mishra. His background is in strategy and M&A.
Well, thank you for highlighting the great talent of Deepak and we're all very pleased to see him taking his new responsibility.
I think it just highlights certainly the potential that we see globally for Americas, but notably of course for the U S. We want to keep working in close.
Interaction with Algeria.
On Iqos, we flagged the fact that we.
We could have.
Certainly for Iqos, we have some ambition. So you will illumina to elaborate more on that but it certainly means that we see the U S. As clearly a country where reduced risk product is.
Great potential and we want to participate in the potential.
Thank you.
Youre welcome.
Our last question comes from Vivien.
From Cowen. Please go ahead.
Hi, good morning, Thank you.
Ivan again.
Hi.
My question is on the I was wondering if you could expand and offer any preliminary insights I know, it's still early days, but for the consumers that are engaging.
With that product.
Skewing towards legacy items.
Are they newer iqos consumers new consumers to the platform in general any other insights.
Very helpful. Thank you.
Sure Vivian so I mean, indeed, we.
This is what I call a soft launch for a number of reason we want to learn the category. We are learning in many dimension, including edge verification, which we see is absolutely paramount.
And.
Obvious initial move from us was too.
<unk> as a nice complement for some of the already Iqos didn't had been user and in the case of of fully usage.
That was a natural move from people were knowledgeable of Iqos already the technology.
Great expand the Iqos brand can can provide I think we are moving now to new dimension. We have beyond this initial move some great feedback coming from consumer that show that it's not only the elegance of the design, but the overall expands the quality of the product.
That is comparing very well when we do test versus competitors. So time to certainly accelerate in our ambition that we come with more launches of co develop development of of more flavors. So after this zone.
The first step in the category you should expect us to certainly increase ambition on vaping.
Perfect. Thank you and my follow up question is just on.
Capital allocation.
It's been a while since we've seen the company.
Acquisitive.
In short order it do you feel comfortable debt you've filled white space, our knowledge gap in your portfolio or should we expect more bolt on acquisitions going forward. Thank you.
My view would be vision that with the proposed acquisition of <unk> and Victoria, We would certainly really build a very strong platform on which 4 hour too ambition on immuno therapeutic and on self care wellness, we would have indeed, very strong platform and notably from.
A life science perspective, so for the life science debt would be great. So that certainly.
The view that we have today.
On the topic.
Thank you.
Thank you.
This concludes the question and answer session I will turn it back over to management for closing remarks.
Alright, let me leave you with some key messages then first.
Despite the slower recovery from the pandemic in certain markets. We are happy to reported very robust first half performance with a record adjusted diluted EPS and raised 2021 guidance.
Second the impressive growth of Iqos continues.
And we remain on track to deliver our target of 95 to 101 billion unit for the year.
Third our convertible business is improving sequentially.
As the recovery from the pandemic instruction in many key markets.
Lastly, we are building towards important milestone in our beyond nicotine strategic vision.
Part of our business transformation.
Thank you again for joining us and talk to you soon.
This concludes today's conference call you may now disconnect.
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