Q3 2021 Philip Morris International Inc Earnings Call
Sam I added the other category in the third quarter of 2021.
Business operations for the other category are evaluated separately from the geographical operating segments.
Today's remarks contain forward looking statements and projections of future results.
I direct your attention to the forward looking in <unk>.
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.
It's now my pleasure to introduce some annual buy Bowe, our chief Financial Officer Emmanuel.
Thank you, Nick and welcome ladies and gentlemen, I hope everyone listening to the call is safe and well.
Our business delivered another strong performance in the third quarter of 2021.
Looking ahead of our expectation to achieve a record.
Luckily just diluted EPS of $1.58.
Most notable was the continued excellent growth of heico's, driving plus 33% Q3 organic growth in RP net revenue and plus seven 6% for total TMI.
S T U shipment volumes grew plus 24% compared to the same quarter last year to reach 23.5 billion units with broad based goes for both our volume and the category across key geographies.
This was delivered despite ongoing tightness in device supplies due to the global semiconductor shortage, which impact the iqos user growth rates.
And convertibles further sequential share gains supported totaled PMI, including growth of 2.1% in two three.
And we continue to expect to put a cigarette and it's to your brain goes for the year.
We are firmly on track for a strain 2021 again gross performance with unexpected currency tailwind, providing additional growth in the laptops.
We also delighted to share outstanding initial reserved for my consumer in Japan and grow in traction for <unk> in early lunch markets.
In the quarter, we made three my stood acquisition as we build our business for the long term to include product that go beyond tobacco and nicotine.
Our smoke free transformation is no also reflected in our financing with the launch of an industry business transformation need financing framework and we continue to Prioritise returned to shoulder through 4.2% increase in the dividend and ongoing share repurchases.
Turning to the headline number two three net revenue grew by plus 7.6% on and all getting basis or plus 9.1% in good out there.
This reflect the continued strength of Iqos and the recovery of the Congress people business in many markets.
Weakness good organic growth of plus $5, 4% in our net revenue per unit driven by the increasing weight of iqos in our techniques and pricing on both H T use and convertibles.
Our adjusted affecting the margin decreased by 10 basis points on inorganic basis.
Reflect the expected initial Ah unique cost of Iqos, illumina and increased commercial spend partly related to its launch of setting. The continued particular effect from the increasing weight and profitability of vehicles.
<unk> and productivity saving.
Our resulting adjusted diluted EPS of 158 represent plus eight five organ gross and plus 11.3 in the loft M's very good performance.
Looking out to that performance our adjusted net revenues grew by almost plus 11% in the loft dams and plus seven 3% organically.
This ah reflect the consistent growth of cycles, where progress swelled with the pandemic has been impressive.
We delivered strong again growth of nearly plus 6% in our net revenue per unit again, reflecting our shifting business mix and pricing with pricing unconverted bullet just over 3% or around 5% excluding Indonesia.
Our year to date I, just had a pet income margin increased by 280 basis points and I'm not getting babies, an excellent performance driven by our top line growth engine of vehicles and pricing combined with operating leverage and productivity savings.
Our adjusted diluted EPS room, plus 15.8% organically and plus 20.4% in the last them also obviously a very strong results.
This brings me to guidance for 2021, we are revising our organic growth outlook for a niche revenue two plus 652, plus 7% representing the upper alpha of the previous range and reaffirming the strong outlook for organic or.
Margin expansion of around 200 basis points.
We also confirm our currency neutral adjusted diluted EPS growth forecast.
Upper end of our previous wrench, reflecting plus 13, two plus 14% growth or for 16% to 17% in good outcomes.
This translate into an adjusted diluted EPS range of 6012606, including an estimated February world currency impact of 17 cents at prevailing rates.
Following on from our most recent there'll be comment as the tightness in device supplies persists. We know expect our extra you Shipman, who are you to be around 95 billion unique.
As we prioritize devices for user retention.
Given the continued growth of edge to use and the need to maintain inventory duration. We continue to expect our full year shipments to be slightly ahead of IMS Williams.
These guidance does not include any material impact of share repurchases or acquisition.
Share repurchases through October the 15th amount to around $117 million. After some limitation during two three from from blackout restriction.
In terms of other assumptions, we are assuming only limited to for recovery in duty free following a modest improvement in Q3 with Intercontinental and is your travel still very subdued.
We continue to assume fully a convertible pricing of plus two two plus 3%. We just software expected queue for reflecting continued pandemic creator changes in certain markets, notably in south and southeast Asia as well as tough comparison in Germany and Australia.
Lastly in 2021, we continue to expect around 11 billion. There are of operating cash flow at preventing exchange rate subject two year and working capital requirements.
We also that our expectation for affiliate capital expenditures to around Europe, and 6 billion that are reflecting latest launch plans and pandemic related training factors.
Before discussing.
That I am pleased to report some recent positive regulatory development further to shed in previous quarters. For example, Switzerland adopted a new federal law on tobacco product, Andy cigarettes, defining dedicated product category and differentiated as warnings.
In New Zealand. The government is now published new regulation for smoke free product, which allow brenda packaging to be re introduced with a specific text as warning.
In a gypped earlier this year small pre product were clearly differentiated from convertible cigarettes, and booze fiscal and regulatory treatment.
There is a growing body of scientific and real world evidence of the substantial risk reduction potential of non-convertible identities compared with smoking.
Wi fluctuations across different market are to be expected, we continue to support regulatory and fiscal frameworks that recognize this critical reduction opportunities.
Turning back now too.
That's true three total shipment volume increased by plus 2.1% and by plus 1.5% year to date.
This reflects continued strong growth from hte use of 24% driven by your region, Japan, Russia, Ukraine, and encouraging progress from recently launched market in the Middle East.
Extra you shipments were around the 1 billion units below IMS volume for the third quarter, primarily reflecting timing around the August.
Launch and your total tax driven price increase in Japan.
We expect this dynamic to reverse in queue for.
The minus all 4% decline in our Q3 cigarettes or use reflect the continued sequential recovery of total industry volume and of our market share.
Due to the impressive performance of Iqos.
Tobacco unique comprise certain percent of our total she's been holding here today.
As compared to 11% in full year, 2028% in 2019 and 5% in 2018.
Our sales mix is changing rapidly putting us on track to achieve our aim of becoming a majority smoke free company by 2025.
Smoothly product made up almost 30% of our adjusted net revenue year to date compared to 23% for the same period in 2020.
I could devices accounted for over 6% of the $6 $7 billion of art in net revenue with a step up in two three reflecting the iqos into my lungs, which outweighed the effect of supply constrained on other acquisitions.
The plus seven 3% organic growth in near to the net revenues on shipment volume growth of plus 1.5% reflect the twin engines driving our top line to.
The first is pricing on convertible in certain market on each to use.
Second is the increasing mix of edge to use in our business at <unk> net revenue per unit, which continues to deliver substantial growth and increasingly powerful driver as our transformation accelerates.
Let me now go into the driver of our year to date margin expansion, starting with gross margin, which extended by 240 basis points on inorganic basis.
While expansion was lower in Q3 is in my devices were shipped to Japan for the launch the multiple positive liver discussed in prior quarter's continue.
Our significant a fourth on manufacturing and supply chain efficiencies are also bearing foods with around 400.
And $50 million of gross productivity savings delivered.
This was accompanied by a robust SG&A efficiencies with our adjusted year to date marketing and nutrition and research costs 40 basis points lower as a percentage of adjust that niche revenue on inorganic basis.
This reflects the ongoing digitization and simplification of our business processes, including our Iqos commercial engine.
And more efficient ways of working.
Lee offset by increased commercial investment interest rate.
With SG&A saving of more than 200 million that are before inflation and reinvestment does this mean that we have generated over $650 million in overall growth efficiencies year to date. This is strong progress toward the combined target of $2 billion for 2021 2023.
Moving to market share sequential gains for both our iqos and convertible portfolios give us strong momentum going into Q4 and next year. Despite an approximate opened three points year over year drive in Q3 for market mix.
Importantly, we expect further improvements in the fourth quarter for Hte us with Rico chairs across key icons geography's.
Four convertible he improving total market volume backdrop includes notable recovery in Indonesia, Turkey, and Mexico, and close to stable history industry volume in the region.
Our share of the convertible category as strongly recovered on a sequential basis moving us one step closer to our target of federal sure as our property initiatives bear fruit and pendant niggling restriction receipt in many markets.
In South and Southeast Asia renewed currently measures of somewhat dampened the recovery.
Though industry volume of nonetheless improved sequentially in Indonesia, and in the Philippines, where the year of the trend is impacted by a challenging prior year comparison.
Our share in the region grew sequentially albite less than expected primary primarily given pandemic relate to development in the Philippines.
Let's now turn to the tightness in device supply due to the global semiconductor shortage.
As we communicated in September.
We demand continuing to grow this as already affected the availability an assortment of haiku devices in certain market in Q3, which impact our ability to run at full commercial and competitive capacity and fulfill consumer demand.
Device shipments outside Japan, where limited to a 7% year over year increase significantly below the growth in its use.
Resulted in slower user growth of civil Andrew Southern in the quarter, notably in Russia, given limitation on the Iqos to the four plus device as flag in recent communication.
At this stage semiconductor supply forecasting remains volatile so we assume that the tight supply see tuition will persist into the first half of 2022.
We will continue to carefully prioritize necessary device replacement for existing users followed by device sales targeted at acquisition.
The successful start a cycle similar main Japan confirm it would be a significant driver of acquisition and retention. Nonetheless at the beginning it triggered significant upgrade from the existing lodge.
User base, many of whom don't really need to replace the devices.
This is a highly design consumer visually normally supply circumstances that increases constrained in a shortage.
Therefore, we now assume that additional major launches with only take place in the second of.
Of next year.
Given this evolving situation, we have continued important commercial investment in key area.
This include popular expansion in products on shows such as Iqos.
Japan, and <unk> smoke free category understanding and awareness campaign and a number of commercial development project.
Including the investment already made into three we anticipate around 300 million dollar of incremental itch to spending compared to the first half.
Overall this is a temporary phenomenon and we demand remaining strong we expect user growth to re accelerates once shortages ease.
We have a pipeline of exciting innovation on devices, and consumable, including but not exclusive through email and a number of new market centuries plan.
However.
We are short term shortage scenario under which the transitory supply impact on user growth could result in 2022 August gross below our 2021 2023 targeted average rate for net revenues, Hawaii margin expansion and it just diluted EPS Nonetheless with.
Strong 2021 is the base and a robust reacceleration post shortage, we confirm our confidence in our 2021 2023 growth targets.
Moving now to Iqos performance.
Estimate their way out $20 for a million iqos users as of September 30th.
Excluding the impact of international sanctions, Belarus. This reflect growth of around 1.4 million user in the quarter with the rate of growth subdued by the tightness of device supply and the time needed to adjust our commercial programs.
As demonstrated again by the room alone in Japan.
Underlying momentum of the Iqos brand remains strong full.
Following adjustment of our program an assortment, we expect queue for user growth to improve by a few hundred thousand compared to the growth in two three.
The reduced you the growth of the second AD should therefore be broadly consistent with a potential two to 3 billion HEU impact flagged in recent communication.
We estimate that 73% of total user or 14.9 million adult smokers have switched to iqos and stopped smoking with the balance in various stages of conversion.
The user growth again reflect acquisition across key icons geography, despite device constrained.
In the region.
Third quarter chef for each reached 5.3% of total cigarette and hte industry volume plus one for a year then Q3 last year.
As mentioned last quarter, we expect a sequential sure for edge to use to be broadly stable due to the effect of seasonality and pandemic related free tuition on the conductivity market.
Underlying IMS growth trends remain excellent and as in probably a year, we expect a strong Q4 in both volume and market shutdowns.
Very good performance include strong growth across the region.
Italy, Germany, and Poland as multiple contributors.
Rover performance continued in Russia with our two three S to your share of by just one one point to reach six 9%.
Lower than Q too, notably due to the severity of the Congress keyboard market. We expect further sequencer gross in IMS to deliver a strong question sure increase in queue for as in the prior year.
We have the largest limitation on lower price devices unrelated commercial program in Russia, and we have seen some increase consumer trial of this content competitor offering and disposable is April product.
However, we continue to see interest in the category and with both our existing priced your portfolio and future innovation supporting our clear category leadership, we see ample room for further strong growth over time.
There is also broad hte moves across the eastern Europe region, We Ukraine, Kazakhstan in southeast Europe contributing.
This slide shows the positive overall regional growth trend in adjusted IMS albite somewhat dampened on a sequential basis by the 14th of shipments to dinner is due to international sanction and timing factor in Kazakhstan.
In Japan, the adjusted total tobacco sure four hour Hte brands increased by plus two points versus the prior year quarter due to 28% and adjusted IMS grew sequentially to reach a record of 8.2 billion unique reflecting the strength of our ports.
And the launch of a consumer.
Adjusted sequential sure fell by 0.2 points sequentially, reflecting volatility in the total market. The head of the October the first excise increase in addition to normal seasonality.
While consumer country loading effects may wait on two four IMS, we expect further robust underlying growth in volume and a nice sequential improvement in market share.
The overall Ethan tobacco category continues to grow making up almost 30% of yeah. Just a total Japanese per vehicle market in Q3 with iqos, maintaining a high share of pigment and capturing the majority of the categories growth.
In addition to strong growth an existing market, we continue to drive the geographic extension of our smoke free product as we aim to be in one of the market by 2025.
During the quarter, we launched Iqos in Egypt.
Africa and reached an uptake exit share of 2% in European Carol.
We also know at Norway and Iceland.
Where a recent acquisition of <unk>, new give us a presents and just news and nicotine poached category.
This takes the total number of market square PMI smoke free products are available for sale to 70 or width of which 28 are in low and middle income market, which we are introducing as a more robust measure of making smoke free product available to either smoker in emerging countries.
Again, we may have some delays in this market extension program in the first half of 2022.
Yeah.
Given our smoke free leadership and global reach let me pause and share a few words regarding the strengths of our intellectual property.
Across all our smoking product, we are strong patent and has been the period, leading innovator in Egypt tobacco category over recent years.
Despite attempts to disrupt our business through litigation by your competitor lags behind on R&D and innovation.
We have been at University successful in defending output against IP changes in all 11 ruling outside of the U S, including the UK Eyecode and at the European Patent office.
Do you see as the U S. ITC is a federal agency, which among other things deals with import came to insure domestic industry Ovulate, you can take to property rights.
We also note the two pets I mentioned the ITC final determination. We're both drafted after iqos had been launched.
FDA fulfilling the excuse to be interest mandate given to me by Congress for tobacco product as already found that Iqos is appropriate for the promotion of public health and expected to benefit the health of the population as a whole we are hopeful in the current presidential.
Review period that the U S trade representative will consider the impact on current American Iqos users and the many more that would be denied access.
In the scenario, where the ATC determination is upheld while the financial impact of this is in material given the early stage of the U S. Iqos followed this would unfortunately means at U S consumer would be unable to buy iqos for a period of time.
Meanwhile, our contingency plans are underway and include domestic manufacturing.
The US patent office is also reviewing certain claim of the patterns in question with initial ruling expected in 2022.
Subject to an appeal process.
While the ITC really make those near term disruption to the U S availability of vehicles, we continue to see the large opportunity for iqos in the United States over the coming years.
The global Iqos inhibition story took a historic step forward in August with the launch of to illuminate devices and a range of Syria hte used in Japan.
Building on the success of Eyecode Street do we believe this simple and intuitive device.
Will support easier switching in Iowa conversion for legal ex smoker, using smartcore internal induction eating technology.
Wow.
Who is a national rollout taking place at the start of September initial results were outstanding.
With device says well ahead of all comparable test launches at the same stage. Despite some limitation on device availability.
And the proportion of new users growing to 18%.
Theory approaches are growing rapidly exiting the quarter at over 10% of total PMI S. T U of take value.
Consumer feedback as also been very positive with mid teens increases in the net from this call.
Following the success, we plan to launch in our second market of Switzerland next months and look forward to additional major launches in 2022 when circumstances allow.
And continue to commercialize icons Z with good progress in the first group of market.
We started in our own channels with a limited range of test variants in nicotine level.
<unk> is a premium product.
Providing a superior experience and the commercial infrastructure of Iqos allows us to deploy efficiently and that scale through a bespoke route to market approach.
As we start to expand distribution of the consumable offering we see signs of increased uptake and clear positive consumer feedback really too competitive product.
We see encouraging early success in Italy, where we've reached an estimated 7% national exited volume of sticks sure of course system product system put three.
Despite not kidding available nationally.
And in the Czech Republic, with an estimated 8% national volume of steak easy chair.
We also launched in Croatia in Q3, Canada in October and plan to launch in Ukraine before year end.
We also continued preparations to apply for a piano ta from the U S. FDA in the second half of 2022.
Turning now to our strategy to moving to new business areas beyond tobacco, and nicotine, which focuses on leveraging and complementing our existing capabilities in Z as care and wellness space, we see significant opportunity in adjacent area with our.
Two focus corridors of <unk> were less including but then he calls and inhaled therapeutics expected to have an addressable market of around $65 billion by 2025.
The acquisition of setting farmer, Archie topic, and Victoria, and Nevertheless, two more rapidly expand our development capabilities with over 250 scientists infrastructure technology and expertise in innovative emailed animal product formulation, while continuing to grow CD.
More activities.
As shown on this slide this opens up a number of highly complementary opportunities and new focus areas.
This acquisition will fully leverage pmi's existing capability life science product innovation and clinical expertise related to inflation.
We look forward to updating the more in the future on our plans and progress in these exciting new areas.
Moving to sustainability on our ESG priorities, we continue to make good progress to Rob our proposed through advancing our transformation and addressing our most material impact on society.
We broaden access to our small free product by increasing the availability to other smoker around the world with new product launches across the green range of market and smoke free categories.
In addition, our recent acquisition build our human intellectual and social capital, adding smoke free capabilities and laying the foundation for a strong business in areas beyond Quebec, when nicotine as we strive to develop commercially successful product that seek to have a net.
Positive impact on society.
I am trout to highlight the recent indication of our business transformation need financing framework and subsequent refinancing of our revolving credit facility.
The framework, which follows Icm's principal and receive a second party opinion from SMP links our financing to metal assistant target in our transformation.
Last we remain on track to achieve carbon neutrality of our Derrick operation by 2025.
Five years ahead of our 2030 dug it.
In addition, with the United Nations Climate change conference approaching we plan to publish a robust low carbon transition plan and the white paper on climate Justice, which I liked the connectivity between environmental and social issues.
Overall.
We are on track for excellent top and bottom line growth performance in 2021, with a strong underlying momentum for iqos and robust cash generation.
We are investing in the broadening of our smoke free product portfolio and geographic reach.
This is critical as we seek to accelerate the number of other smokers, we switch to better alternative with growing positive impact on society.
In addition, we are investing in the capabilities of tomorrow.
As illustrated by our three recently announced acquisitions.
Which provide a comprehensive development platform in Cescau wellness and al therapeutic and strengthen our position in Modena rule nicotine.
We have increased cash returns to shareholders in Q3 through higher dividend and our share repurchase program in line with our objective to deliver sustainable value and return to investors as we continue our journey to a bikini the majority will frequent.
Four 2022, we have a pipeline of exciting innovation for both devices and consumable and we expect <unk> to reaccelerates when device shortages.
We continue to see a full feature of our business and remain confident in our 2021 2023 organic growth targets.
Thank you very much and I know I try to answer your questions.
Thank you we will know conduct a question any interest portion of the Katherine Okay.
In order to ask a question or make a cabinet. Please practice starkey followed by the one on your Touchtone style ending in Chester vanished and time, we ask that participants. Please keep a maximum of two questions. Each is Pamela follow up question to nanny taking.
He may rejoin it can you again by pressing the star than the one on your Touchtone phone.
And we will take our first question from whereas can with Barclays.
Hi, Good morning, Thank you for taking my questions.
So my phone number.
Hi, Randall So my first question is under two.
2022.
Sort of comments around growth rate being lower.
Then.
Angel, giving for 2021 to 23 because of the fever.
Issues around device supply now if device supplies lower and your eye cause acquisition is lower than doesn't imply that your commercial investments are also lower and so it should be beneficial to Europe, yes.
Is that a correct way and correct, we're thinking about things.
So thank you will go further questions first of all let me repeat that this is wants to know you decided that the constrained are going to stay with us in each one next year's isn't that the only one so you have more favorable scenario and at that stage frankly, it's a fast moving superfluity tuition. So we don't know.
But I think it was really important to share the possibility that the pressure on availability that we are seeing in H, two 2021, which are going to see it in in each one 2022. So that's the scenario you are referring to end in this situation yeah, we would see.
And after this six months second as of 2021, another six months period with reduced acquisitions, such as the underlying potential.
Potential that we have seen in in in in each one in this situation no doubt that of course.
Spending.
Would be impacted.
By the fact that the number of launchers are a number of commercial activities.
Anthony.
That's very clear, but at the same time as I think we've been very clearly, saying today. We are absolutely sure of the very strong potential of Iqos and we think that this potential remain absolutely and change about what's going on so they will be when the shortage is.
A very nice acceleration on top of that we will be coming at the same time with <unk>.
Very exciting innovation you know illumined there is more in the pipe. So we're gonna make sure even when there is some limitation on availability that we keep building awareness, we keep building the.
Category, but also the <unk> franchise, so not all the cost will go away because we're going to I mean, we are here to make a success as you know on the long time and I'm not managing only six months. So yes that would be in this scenario. Once again, it's one scenario among other there would be reduction in investment.
But as you can see into three we continue to invest even when there is some limitation.
Because we are building these long term success.
That is.
Extremely clear in the outlook that we ask.
Thank you and you know a follow up question on and a sort of your U S. A strategy and there are a number of almost like cross currents going on that you're partnering with altria.
Four I cause in there now.
You have lost the lawsuit versus.
And there is a potential that you have to do domestic production of your devices than you are also planning to a file a b M. P. F. R. I cost me later next year, so that could also be.
Potential new product in the U S market and then you are all set Quired Fulton, which also gives you capability to potentially launch a mono oral product in the U S. If you filed for that BMT as well so how should we think about.
Some parts you will be partnering with Altria and some other parts you could potentially be competing with altria. So how does it all fit together.
Thank you <unk> for the question well, let me clarify it again, so we have a commercial partnership with Altria on each of the tobacco products. So that's that's very clear.
And we're going to see what is the final outcome of this ITC question.
I wouldn't address to the final conclusion, we are at the time of the presidential review.
We frankly thing is going to be a defining moment for the objective of the idea of tobacco reduction.
I think the administration as a group.
Great opportunity ear.
To flag how important these tobacco harm reduction quality of policy is and that would mean to protect <unk>, which is the only email.
Nicotine.
Product that is today benefiting from any market in the us. So we are still of food that we're going to get.
<unk> conclusion after the President's for a reason for it.
In the case that even though it was it was it was not the final outcome.
Of course will continue to work with with Ikea developed months will be a bit delayed will find a solution.
To overcome the the ITC decision and we've been flagging. The fact that it could go for it.
Local.
Production and as I think I've been saying during my my notes.
Remain absolutely convinced of the very strong potential of <unk>. So that's one thing and then he was the other arty category, where did we have ambition I mean, you've said it. We we are going to file for a P. M Th Aviv, we could be considering launching.
Modem or product at a certain point in time as well and on this one all the options are open. So we don't have any commercial agreement today and we will decide in due course, all we want to launch an with which kind of setup.
Our partnership but no decision has been made at that stage.
Thanks, a lot of manual.
Thank you.
Well, we'll take our next question from body hurts as well.
Well.
I apologize calm in fact can I just now asked him.
Thank you Hi, Danielle.
Yeah.
Couple of questions on April.
Performance, China Carter.
First.
Is there any chance of how like Thunder lifestyle could've been in the corner with Apple supply chain.
In other words, you know curious to hear from you how strong Margaret Eaton.
And you invite device it you know.
And then maybe if you could share how big of a backlog there is.
And then.
Rounding that.
<unk> I guess, it's Kari K can better understand what can they come back send that these questions are going to abide by the second half and just thinking about.
Yeah.
His last longer and then finally on the topic either any.
Contained in case, you know you guys might be working on.
Yeah anyway.
Dependent on.
Connected suppliers going forward.
Thank you and so.
First question on the.
The.
Mm mm.
Cause potential in terms of selling device.
During Q3 without the constraint. We are we are seeing that we've been missing civil.
Under a thousand.
Of of sale of devices. So, it's obviously very very material and we've been reporting the fact that I would try Japan and and really we have to look outside Appendical, Japan with the launch of a funeral now was a specific situations. So outside Japan devices have been growing bye bye.
By 7%, which is of course very very significantly below the underlying growth of our market.
And we are going.
She'd close to 25% even in Q3 so.
I think given idea of of the kind of depth that we may have been facing.
Doing during this quarter.
We believe.
I said.
During two four as we know better.
Better I would say grip on things we've been managing on the reassortment yellows meant we have a better understanding of the kind of commercial election that are giving the best possible return that we are very clear view on how are we going to prioritize. So we believe that we are going even still with severe restriction on.
Devices, I'm, not able to say, whether they forget exactly the same level that let's tackle the spigot that does an assumption descendible is two three we believe that in terms of user growth, we could do better than two three and we mentioned a few hundred southern better user groups acquisition, so altogether that mean that.
You know if you believe that the provisi underlying growth rates was between $4 five to 5 million a year that we have seen in each one we're going to miss anywhere between one to 1.5 million user growth image to all together and that is absolutely.
Consistent so that was something that was already here in September at the beginning of September that is consistent with $2 billion to $3 billion.
In fact that we mentioned at the beginning of September.
But I hope it helps you you know have some some some understanding better understanding of the impact of the device shortage an hour you should you should see it.
On.
We are working continue around the clock to manage this shortage we are using all possible.
So of course, we are in in very intense discussion with our suppliers.
Exploring all possibility we are dominant optimizing the planning and of course, it's quite complex because we took a boat shortages on various type of icy, but and they are not all entering into the same kind of reference of our rental we are managing that as well. We are looking at just put by market as well.
And we've been buying a little bit and maybe we could be able to to to have even more success. There and so we are really putting all the reason we can to minimise.
In fact and today, what we are hearing is that the number of capacity should kicking in in the first half of next year and.
I would tend to the days of kind of.
Consensus on the fact that urge to next year should be a much better in terms of constraint is not fully back to normal. So this is.
An assumption that we have today.
But I have to admit that we've seen the situation moving fast rapidly and and as I said, maybe these things are going to improve faster because something is going to happen is a whole day manners economy in the next six months, so maybe that could be even and implement in each one.
That's the scenario.
Does it mean that another scenario that age too could be with more question Mark well, maybe that's not what we are hearing when we talk with our partners and suppliers, so fast, but I have to admit that.
Nothing is is is to to declare that stage.
Okay Super helpful. I may I like maybe squeeze in a another quick questions yet.
During that period.
So right now.
And many units or acquisition, how shall we think about your total volume crowd. So is it.
And your basketball, thank volume well the elevated during this period is why writers device out and essentially get strong enough to more than that.
<unk>.
And then given this dynamic how should we think about this neck and attacks on your marriage hands in the next few corners. Thanks.
Sorry, but in the line wasn't very good that you were you were asking are we should expect the impact.
On on user acquisition.
Justice volumes correct.
Sorry, if they can't country.
So on the next Ah manual cause I'm thinking okay, Harry Potter slower acres Tonight, now basketball sake volume could be elevator.
Well that makes dynamic an impact on Martin.
Look.
We continue to two two.
To target very nice growth of of Iqos. In modern you know is is a billion category altogether and of course as you as leader of this category.
We see that.
Continuing in the coming quarters, and as you know as well that is coming with a very nice meeting them of revenue Plastique and it's still very much visible in our Q3 numbers and we also flag. The fact that that was positive.
In time off.
Gross margin right for the consumable business.
Yea cause business so.
Maybe you know if the growth is a bit weaker because of the situation.
Cities mix.
Continuing to evolve February but at a lower pay is that they are going to continue to be nicely positive and on top of that of course. Then there is a question of okay. What are we going to spend in terms of SG&A in these kind of situations. So it's difficult to say that is going to be necessarily as being a negative impact on the margin and we are talking about very.
Powerful driver on our financial performance and even once again is the growth rate is going to decrease a bit seemed to be significantly higher than any evolution on <unk> and it's going to still continue to deliver the positive impact on the mix.
Alright, thank you so much again.
Thank you have been.
And we will take our next question from Pamela Kaufman with Morgan Stanley and mine is now open.
Hi, good morning.
I have that morning.
Morning.
I have a follow up question about the outlook for next year and it scenarios that would drive the red.
Bieber allow your midterm target.
Sounds like you are anticipating week or one eight supply and an improvement in the second half.
Okay scenario drive your results to fall below the side at 9% revenue and earnings growth target or with supply can get me to western relative to be for Samsung.
Of course, we can play.
Without limits with the very scenario, we have to admit that we've been seeing.
Seniority two three we can of user growth and as.
As we said justice, even if we expect into foreign improvement versus Q3, it will still be below the underlying trend.
And then in the center of the square, describing we say if the shortages continue in each one next year.
When we're going to face this a pressure on the on growth. So it's difficult for me to to to just come in one scenario, but really that's the accumulation of what has been happening and it's two this year 2021, and what could happen the beginning of next year so edge.
One 2022 that could drive.
A reduction in the potential growth rate next year, which would be temporary once again and when there is a rebound the vexation will come but that would be the combination that would trigger something that could be below our average growth targets.
He did it alone.
Yeah. Thank you that was helpful.
My next question is on the I T. C decision can you elaborate on your contingency plans for making iqos available in the U S.
That would be the timing of manufacturing icons in the U S.
And just to clarify that that ruling also 15th.
Acknowledging.
And in terms of bringing illuminated the U S market is there an opportunity to bridge Iqos PMT application for a little not to accelerate its entry and said are you at.
So regarding the I T. She.
Contingency plan you know if eventually the presidential review was not.
That's a horrible that I want to repeat before entering you that.
We are hopeful that this presidential review reliable predictability.
Confers for the reason I mentioned previously I cannot elaborate further unfortunately, but clearly.
Part of what we describe the fact that.
We could have.
Some local production.
As an element that I won't elaborate further on all of this could happen and we would get there on the.
<unk>.
Frankly, we would need two of.
Discussion.
On the process and all.
The process would be carried the DFT <unk> and at this stage I'm not able to answer you. So.
We would certainly require.
<unk>.
One time, but I'm not in a position today to comment on timing.
Okay that.
Thank you.
And coupons.
Oh I'll take our next question from Pythian as a coward.
Yeah, I understand well paid.
Hi, Thank you good morning.
One vision.
I apologize for blade burying the at the I T C issue, but I've got a question on that kill you. You've noted your topic of success in terms of defending against litigation internationally.
Questions play is number one.
Their current cases that are still pending internationally around I'd be litigation itself me outline where does exist and and number two can you just clarify that the location that you successfully defended addresses the exact same planes that were reviewed by the I T. C. Thank you.
Well there are a number of cases spending I won't elaborate on that all of them are are public.
And notably in Europe, and I, just want to repeat that so far in Europe, we've been.
11 cases trial or.
Appeal, we've been successful so I think he tells a lot about the strengths of what we've been doing.
Yes, some of the.
And on which the ITC based.
They're a decision before presumed to review.
And that has been.
Reviewed by a number of court in Europe, and it'll be the UK.
Court.
And they already have the symphony and the UK Coke precisely as invalidated the too.
Lee of pattern that are at the origin of the ITC decision.
And the European Patent office already and then you said one of these.
Many of pattern, so even though.
Mentally on the merit of the patterns and the validity of the patent.
We have been going through success.
In Europe.
That's helpful. Thank you.
My follow up question has an income basketball cigarettes.
The outlook is getting modestly better pricing reiterated.
If I recall correctly as we kind of started the year I think there was a point of caution around pricing will cover that uncertainty et cetera et cetera, what what is your view of of Ah consume right now with the broad question you operate in a lot of markets, but if you were a little bit conservative or cautious on pricing. When we started the year what what is your feeling about in your belly Python today.
Thank you.
Where we can still gives me the remaining weeks for the year before I can elaborate on next year I think it's it's too quiet and clear we're going to be the environment.
One might think that inflation.
Clearly accelerating in many countries.
Will.
Maybe build a global environment that could be.
Better than what we thought initially but still early time.
So I'm not able to come in at that stage. So I will keep a cautious tense, which was built you probably remember on the aftermath of the Cozied and the impact of many economy being into shock. So we were seeing that that was probably not.
Making a great landscape for price increase.
But I have to admit that I don't know what is going to be the impact coming from what seems to be.
A general increase in inflation and maybe that's going to create.
More favorable situation, but there was still a couple of months before we can we can have a clear view on that one.
I understand thank you very much.
Thanksgiving.
And we will take our next question from Chris crowd with Stifel, and let us know okay.
Thank you good morning.
I had a question hi manual. Thank you I just had a quick follow up on the supply shortage, sorry to keep going there, but I did hear some effect on the two four device I know, it's limiting aluminous launched in some markets is this shortage true for all your products. So it's three point O and duo though just to be sure are those also affected by the chip.
<unk>.
Well Chris.
You know.
You mean that we would need to enter into great detail of all we are prioritizing our portfolio and I don't think I want to do that because of course, that's quite strategic for us.
What is very clear is that we have one north star if you want which is to first.
Protect our existing iqos user and to make sure that we make devices available when they want to renew the device.
And second of course, we want to optimize any congressional election to make sure that we have the highest return on a new device that we are sending in that we avoid as much as possible selling device with a very low percentage of utilization.
Afterwards.
By the by.
By the consumer and certainly for us.
Moving and taking the benefit of that to step up the bless technology and and move Iqos Street as a priority instead of course.
<unk>.
Plus was one of the move that we have decided to make.
And that explains why we have some more information on top of the fact that due to component issue. There was also a more pressure on 2.4, but obviously in this kind of a moment, where a lot of things are on the table.
Managing constrained and and long term strategic vision as well so that's what we're doing.
Thank you. Thank you for the color of their and just a separate question in relation to some of your beyond nicotine in tobacco acquisitions off the topic in Ventura in particular respiratory drug companies I just had a simple kind of high level question do you need more pieces to fit that vision you have for respiratory drugs and just.
To understand kind of what's stage rat in terms of your acquisitions.
To understand if you need to do more here in the short term. If this is a good base to which you can build this element of your beyond nicotine sales.
So globally, we think that we have put on the on beyond nicotine great.
Great Great platforms, you want and literally in term of R&D.
And and I think there is a lot we're gonna be able to do already with this with this acquisition now does it mean that in the future. We could think of all the bottom acquisition that would bring additional capacity that we don't have.
Ear, maybe but I think for the time that you were going to focus on making sure that we integrate this acquisition.
And and we maximize the synergy with a b as I said you know in terms of R&D, which were already too big objective to combine strengths on R&D and we optimized by putting more skeels Talon together, we optimize what we can do already in.
But I could make a comment as well for 415 in the sense care witness.
And just to be clear these acquisitions should not take you away from your separate goal.
Refresh senior shares does that's kind of the main thing I'm looking at is just to understand future capital commitments.
Nothing no absolutely nothing has changed on our buyback program up thinking that that's great. Thank you. So much have a good day.
<unk>.
And we will take our final question it from Canton Oh, Yeah weapons seen your line is now open.
Thanks for the question.
I was just telling them annually could you talk pleased about the <unk>.
Tax situation for Iqos in Germany.
Recognizing the political landscape is still shrouded in.
Among certainty that seemed like the proposed tax act changes would be a material headwind to price mix and profitability next year, sorry, just hoping that you could frame the magnitude of this impact.
And then maybe sort of slightly bigger picture do you see an increased risk of contagion for this kind of.
Big Iqos tax increase in other markets.
Well on Germany kind of what I can certainly you repeat is the fact that.
It's a kind of mixed feeling the squeeze about the German decision because on one side, we are very happy with such a permanent country is Germany, putting that allows a flag that.
These products are better and should be treated differently than cigarettes, and I think it's really great that this.
Tobacco harm reduction you know.
Principal is recognized at the same time, a 20% differentials into low.
Yes of course, it will have impact.
As we are.
Are progressively impacted by each.
I'm sorry for me to you know give.
Give an idea of what is going to be the impact next year.
B.
Some some impact of course not as.
The case I'm going to derail fundamentally the trajectory on on my course and profit growth.
But we believe that 20% is not in us. So we are at a certain point in time and it's too early to say of course, the nuclear edition isn't it yet form.
Things are getting Ah clarified that we know whether there is the possibility that starting from these 20% differential there is a plan to grow it with you all the time and that that could be a possibility now in terms of contagion, what we don't we don't see that today.
We see on the contrary when we look at the latest country.
Now coming to differentiate the treatment.
When it comes to.
Versus Tc, we see normally.
Most of the cases.
She cantley a year even.
Differential versus Germany, so more than 20% effective just one example of education energy for instance, so in the recent decision taken by authorities. They are clearly, making a bigger difference, which no I think to a large extent is much more in line.
Z.
Reduction in exposure to toxic into the 90% to 95%.
She wanted to of a room to determine what could be the difference.
Well, maybe that would be the guideline.
And I think we are happy to see a number of country regulator government moving to differentiate the treatment between <unk> and and it and the bill and taking a bigger.
A big Big difference.
On tax treatment.
Okay. Thank you.
Thank you.
Yeah No further questions at this time I would kind of program back over to Nick currently for any additional are closing remarks.
Actually I think a manual has a few brief remarks.
Yes. Thank you and you just can you just wanted to to to wrap up with some brief closing comments.
First of all 2021 is on track to be a great here for the growth of vehicles and the financial performance of our business.
We see continuation of a strong underlying fundamental tools, a demon and momentum for vehicles brand and last but certainly in the case despite near term changes.
This device supplies, we remain on track for our three year growth target supported by reach innovative innovation pipeline. So thank you very much for your time today and we look forward to talking to you soon.
Right.
Thank you very much a manual that concludes the call. If you have any follow up questions. You may contact the Investor Relations team. Thank you again have a nice day. Thank you bye bye.
That does conclude that set up Morris International Q3, 2021 earnings call you may disconnect at any time.
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