Q1 2022 Philip Morris International Inc Earnings Call
As a group and OTA topic.
On March 31, 2022, we launched a new wellness and health care business, Victoria, FERC in pharma, which consolidates these entities.
The operating results of this new business are reported in the other category.
Business operations of our wellness and health care business, our managed and evaluated separately from the geographical segments.
<unk> remarks contain forward looking statements and projections of future results.
Direct your attention to the forward looking and cautionary statements disclosure in today's presentation and press release for a review of the various factors that could cause actual results to differ materially from projections or forward looking statements.
Now my pleasure to introduce theatrical check Chief Executive Officer, and Emmanuel <unk>, Chief Financial officer over to you and Thats it.
Thank you unique and welcome everyone I.
Hope you all are safe and well.
Recent months have been extremely challenging for many of us given the tragic events related to the loading youre correct.
I would like to express our fitness and solidarity for the people of Yoplait.
Our primary concern is for our employees and their families and we have 1 billion, averaging quicker and to support them with three priorities.
First about Kuwait, thank our colleagues.
What type of isolated about a thousand colleagues and family members from the country and supported more than 2700 others.
From conflict zones to locations away from the heaviest fighting.
Second we are delivering critical aid to people that kind of belief or who decided to remain in Ukraine.
We have provided.
I think accommodation you need the assistance and a path forward so those called out of the country.
In addition, we have already contributed around the $10 million out of <unk> funds and the native essential items and kudos to that country directly to humanitarian organization and through our own employee led initiative projects.
This includes providing <unk> food clothes, and a variety of other items to our colleagues and to the broader population.
The purchase of 25, Unbilled ounces and the setup of our mobile hospital.
Based on our current visibility, we estimate an additional cost of around $25 million for additional support to employees. This year.
Our colleagues in neighboring countries continued to provide vital support to all pupils arriving from Ukraine to seek refugee.
Our catapult gratitude goes to everyone involved in this general effort to help at such a difficult time.
Sure.
Yes.
In terms of the impact on our business operations.
Production at our Ukraine manufacturing facility Mocatta keep will remain suspended.
While business activities in eastern Ukraine have been mostly heavily impacted we have seen some resumption scenario for weather conditions allow as we seek to maximize product availability and started with the constant noise.
Didn't get because they think inventories on hand.
We also now planning to input products from other manufacturing location. Although this may involve higher costs.
We continue to pay salaries per library, or creating young employees and to provide substantial in kind support to them and based hamleys.
As communicated in our March 24 press release.
Pmi's board of directors and senior executive team.
We're working on options to exit the Russian market in an orderly manner in the context of a complex and rapidly changing regulatory and operating environment.
This is no easy task in view of recently introduced complex legislation.
We are committed to seeking a viable path to exit the monotype wireless supporting our employees in the Russia.
This period.
It is also clear that we cannot continue business as usual in light of our regulatory and supply chain disruption, which has already impacted the Russian business in the Q1.
We have taken concrete steps to scale back our operations such as the cancellation of ordinary investments and product launches, including <unk> and <unk>.
We have done is 10, 25% of our cigarette products, including Marlboro and Parliament. This chaos.
We have also consult a $150 million investment in capacity.
Timna.
Manufacture more than 20 billion Ted speaks for Iqos in other Russian factory.
Clearly the impact of the conflict has also created disruption in global supply chain, and then exacerbated inflationary pressures in center in Samsung materials and services.
However, the Q1 performance and outlook.
Outlook for our business, excluding Russia, and Ukraine remained strong.
On a reported basis, our outlook conservatively assumes no further contribution from Russia, Ukraine from April 1st.
To provide a consistent view given the uncertainty and the volatility of the steel market will now also provide adjusted results and the guidance on a pro forma basis, excluding Russia and Ukraine from both the prior and full current year.
I will now hand over to Manuel to cover this in more detail.
Thank you <unk>.
We delivered a very strong performance in Q1 with double digit organic net revenue and currency neutral adjusted diluted EPS growth on a pro forma basis, excluding Russia, and Ukraine from both the current and prior year quarter.
Overall currency neutral results were also ahead of our expectations.
Our <unk> business.
An excellent quarter, continuing the reacceleration in last quarter as device supply constrained continue to ease.
Our iqos user base grew by more than $1 million, excluding Russia, and Ukraine, marking a very strong performance RP pro forma net revenues grew by plus 23% with pro forma smokefree units revenue over 30% of the total company.
Importantly, pro forma Ed to your shipment volumes grew plus 18% compared to the prior year quarter.
This reflects excellent progress in the EU region.
Continued growth in Japan, as well as over 50% growth in low and middle income market.
PMI Ht US now the second largest nicotine brand in markets, where Iqos is present as our efforts on innovation portfolio and geographic extension drive consumer trial and adoption.
The impressive start for Iqos Newmark continues in Japan, and Switzerland, with very encouraging initial ticket in our latest launch market of Spain.
The initial success in these three very different market reaffirms our confidence in the Newmont has an exciting future growth driver for our company.
Meanwhile, our convertible business performed robustly exceeding our objective of stable typically share and delivering positive volume and organic net revenue growth.
In addition to supporting strong financial performance. This also and then since our ability to maximize the switching of adult smokers to smoke free alternative.
Overall, our business is off to a strong start and wild currency unfavorable in 2022, we expect to deliver another year of robust organic top and bottom line growth.
Turning now to the headline numbers, our Q1 net revenue grew organically by plus 9% in total and plus 10% on a pro forma basis. This reflects total volume growth driven by the underlying strengths of Iqos.
Ongoing recovery of the convertible business in many market against the pandemic affected comparison, and some positive timing impacts including inventory movements.
Our total organic net revenue per unit grew plus five 3% and plus four 9% on a pro forma basis, driven by the increasing proportion of Iqos Ht using our sales mix higher device volume and pricing.
Combustible pricing was above expectation at plus two 9% pro forma or around plus 6% excluding Indonesia.
Okay.
Our total Q1, adjusted operating income margin declined organically by 30 basis points and by 40 basis points, excluding Russia and Ukraine.
This reflects a lower gross margin compared to a tough prior year comparison, where productivity was mostly due to timing factors.
Flagged in our full year earnings Q1 margins were impacted by higher device sales for increasing Iqos user acquisition channel replenishment and Iqos in two months.
I've mentioned previously the unit cost and wait a few more consumable and device cost is initially higher as we ramp up production with improvement expected from next year.
Inflation in certain elements of our supply chain, including energy wages and direct materials and an increase in the use of air freight was also exacerbated by the impact of the war in Ukraine.
Despite these temporary margin challenges, we saw positive effects of the increasing size of iqos pricing and cost efficiency combined with our strong net revenue growth.
This enabled us to deliver adjusted diluted EPS of $1 56, including unfavorable currency of 23.
Representing <unk>, 14% currency neutral growth.
This was comfortably ahead of our currency neutral expectation, even accounting for taming benefit of around 6%.
Excluding Russia, and Ukraine, our pro forma adjusted diluted EPS of $1 46 grew by plus 16%.
Turning now to our 2022 outlook.
<unk> mentioned, given the lack of visibility on Russia, and Ukraine. We are now providing an adjusted outlook on a pro forma basis.
Excluding these two market for the entire year.
With our underlying business re accelerating our growth fundamentals remain strong.
Importantly, we expect to deliver organic net revenue growth of plus four 5% to plus six 5% compared to 2021 pro forma adjusted net revenue of $29 2 billion.
This is above our previous forecast trajectory for total PMI, despite an approximate <unk> <unk> drag from the shift to hyper inflationary accounting in Turkey.
This range incorporates the risk of supply chain disruption for certain materials.
What slower air pollution capacity buildup due to the production constellation in Russia, part of which part of which was designated for export the remaining uncertainty on full device availability and.
The pace of the ongoing pandemic recovery.
We expect our pro forma adjusted operating income margin to be organically zero to plus 100 basis points higher for the full year.
As mentioned at full year results, we expect a lower gross margin as we invest in new innovation and Intuit temporarily.
You need and transportation cost for the fast growth of humor.
Since then we have observed increased inflation in raw material and energy prices and additional supply chain costs due to weather related disruption.
A temporary increase in the afraid for booth, HEU and select Sierra product.
Unexpected devices from the tremendous uptake of Iqos in mind easing of device supply constrained also initial dilutive margin impact.
Despite these added Edwin and further expect that Cogs increase of around 300 million compared to our initial expectation. We remain confident that we will achieve organic pro forma margin expansion.
Our strong revenue growth several reporting mix and cost saving initiatives deliver sustainable accretion.
We forecast pro forma currency neutral adjusted diluted EPS growth of plus 92, plus 11% also above our prior year total PMI full year guidance.
This translate into our pro forma adjusted diluted EPS range of $5 35 to $5 46, including an estimated unfavorable currency impact of around 63.
At prevailing rates.
This compares to our previous 2022 adjusted diluted EPS guidance of $6 12 to $6 30 provided in February with the difference primarily reflects the exclusion of Russia, and Ukraine, and an incremental unfavorable currency impact.
The underlying equity growth outlook remains excellent on the pro forma basis, we expect to deliver between 88 to 92 billion <unk> shipment volumes, representing plus 22, plus 25% growth over the pro forma prior year of $73.
5 billion unit. This exclude the nearly 5 billion unit shipped in Russia, and Ukraine in Q1, and while we conservatively assume no further such contribution from <unk> through the first these imply a total outlook of 93 to 97 billion unit.
For the year.
We continue to expect pro forma <unk> shipment to be modestly.
Of IMS for the year is still lagging behind in the second quarter as I will explain later.
As outlined in today's release, there are a number of other assumptions underpinning our outlook.
We expect the total industry volume of CDI rate in each to use excluding Russia, Ukraine U S and China to decline by up to minus 1%.
Given our leadership in Mercury product.
Structural growth of the category and is growing proportion of our business as well as stabilizing share in convertible we expect to gain share. We therefore target positive total PMI pro forma shipment volume within the range of flat to plus 1%.
We assumed full year Congress table pro forma pricing of around plus 3% now.
First impact from hyper inflationary accounting in Turkey.
The pricing environment is improving including Indonesia, although challenges remain due to ongoing pandemic related impact and disposable income thresholds.
Our other assumptions include around $10 billion.
Operating cash flow and an effective tax rate of 21% to 22%.
We continue to expect full year capital expenditure of around 1 billion.
Despite the impact of the war in Ukraine, our balance sheet remains strong and we remain steadfastly committed to returning cash to shareholder through dividend and opportunistic share repurchases.
With regard to the phasing of pro forma performance. This year, we expect a robust X one overall with margin expansion and adjusted diluted EPS growth weighted to the second.
In large part this reflects the reacceleration of Iqos.
Device supply constraints ease with a sharp recovery in device volume as we replenish channel inventory for user acquisition and we supply the accelerated illumina replacement cycle in Japan.
In addition, our average device price.
The prior year, reflecting stepped up commercial activity to drive acquisition, including the broadening of our device portfolio with Lilly and the lunar one.
While our devices continue to be priced at a meaningful premium to heavily discounted competitive offering we have already seen encouraging signs in stabilizing our <unk> category share.
Moreover, as we adjust our supply chain flows to prevailing global disruption in various meta and logistic services.
With the effect of the war in Ukraine.
May be a risk of short out of stock situation on certain senior it skews in select market.
And we are making adjustment to some product to reflect the availability of specific material.
The reorganization of supply chain flows will contribute to the later timing of shipments to certain markets.
We notably expect Q2 to be impacted by a number of temporary or specific factors, including the reversal of certain Q1 timing benefit.
Organic pro forma net revenue growth is expected to be low single digit with other multiple factors, including the delayed timing of HEU and cigarette shipment to Japan with an approximate two point drag on growth and a further impact from the shift to hyper inflationary accounting in Turkey, where.
The Q2 exit rate comparison is accentuated.
We expect total PMI pro forma <unk>.
Shipments of around $20 billion in Q2, partially reflecting around 3 billion less <unk> shipment to Japan than originally planned.
This compared to $18 7 billion pro forma in Q2 2021.
We expect these 3 billion unit to move towards to generating a further growth acceleration in the third and.
Fourth quarters.
For Q2 pro forma operating margin.
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Yeah.
Currency neutral growth of 5% to 7% compared to $2 86 in the prior year.
In combination with our strong third quarter.
Pro forma top line performance is expected to deliver organic growth of five.
And overall.
And it's true with powerful drivers of pricing scale and efficiencies and revisiting of temporary cost headwinds should outweigh inflationary pressures to deliver strong top line growth.
Margin expansion and an acceleration in bottom angles.
Our strong 2022 outlook places us firmly on track to deliver our 2021 'twenty two 'twenty three CAGR targets on a pro forma basis of more than 5% in organic net revenue growth and more than 9% in currently in currency neutral adjusted EPS growth.
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Percent of the $2 1 billion of Q1, RFP pro forma net revenue.
Reflecting a year a year over year device volume a supply constraint is in television performed strongly.
We delivered organic growth of plus 10% in Q1 pro forma net revenue on shipment volume growth of plus four 9%.
This growth reflects the twin engine driving our top line.
The first is pricing led by convertible.
Second is increasing mix of registry product in our business at a higher net revenue per unit, which continued to deliver substantial growth and increasingly powerful driver as our transformation accelerate.
Let's now turn to the driver of our Q1 pro forma Oi margin, which declined by 40 basis points.
Our pro forma gross margin decreased organically by 250 basis points, reflecting the factors I mentioned earlier.
Firstly, our pro forma adjusted marketing administration and reserves costs were 210 basis points better again due.
Due to the positive operating leverage of Iqos growth.
Successful cost efficiency programs.
We generated around $118 million in gross cost savings in the first quarter.
$18 million in Cogs productivity and $100 million from SG&A.
This makes over 1 billion since the start of 2021 already over half way.
Towards our target of around $2 billion.
For 'twenty, one 'twenty three.
This allows us to invest in topline growth and mitigate inflationary pressures, while continuing to deliver solid margin progression.
We continue to accelerate investment in our commercial programs digital engine and R&D as well as a number of growth opportunities across categories and geographies.
As reflected in our full year guidance, we expect our operating margin progression to improve over the course of the year as temporary headwinds and tough comparisons.
Our convertible portfolio performed well in Q1 with robust pro forma growth in volume and organic net revenue.
W reflect a further recovery in Indonesia, and the Philippines, supporting an expectation of organic net revenue growth and broadly stable volume.
South and Southeast Asia region this year.
Increased travel also supported volume growth in Spain and duty free.
Our share of the convertible category continued to recover with a placebo control point pro forma gain in Q1 on a year over year basis.
This includes gain in Japan, Turkey and duty free.
Our portfolio initiatives bear fruit and social consumption resume with Marlboro share.
Plus 0.3 points higher.
While the category is declining over time, our leadership in combustibles edge to maximize switching to smoothly product and we continue to target a stable category share of the time, despite the impact of Iqos cannibalization.
In terms of our overall market share now ongoing gains for our Iqos portfolio create continued positive momentum.
We delivered pro forma share growth in Q1 as expected, including gains in Italy duty free edgy, Germany and Poland.
PMI Hte use are now the second largest nicotine brand in the market, where they are present with <unk>.
Seven five.
Excluding Russia and Ukraine.
This includes the number one position in six.
<unk> markets.
Moving now to the Iqos performance, we estimate there were approximately $17 9 million iqos users as of March 31st, excluding Russia, and Ukraine, which add an estimated $4 8 million user at December 31 2021.
Reflect pro forma growth of more than 1 million user a phenomenal performance by historic Standouts. This was driven by the resumption of consumer programming many market as defined.
He did capitalizing on the strong underlying demand for the brand is also evident in the very interesting start of equity number.
We estimate that 71% of total iqos user outside Russia, and Ukraine are $12 7 million adult smokers.
Which to Iqos and stopped smoking with the balance in various stages of conversion.
We were also very encouraged by the Fda's recent and LTP order for Iqos three with a full range of authorize iqos product now classified as modified risk tobacco product.
In the EU region first quarter Hte share reached seven 6% of total cigarette and <unk> industry volume, representing our first quarter share gain of two point, including a small benefit from the timing of inventory movement.
Adjusted IMS volume also continued to exhibit robust sequential growth and we expect this to continue in the second quarter, noting that the usual seasonality of the convertible market combined with the reversal of Q1 inventory movement is expected to result in a lower sequential share in Q2.
This very good performance include strong user and volume growth across the region.
Especially notable contribution from Italy and Poland.
So want to again highlight and Gary and Lithuania, where our Q1 national <unk> share exceeded 25%.
To give some further color on our progress in the EU region. This slide shows the selection of the latest TCT offtake shares.
While <unk> continues to lead the way of approaching 40% sure Budapest Rome in essence are also well into the mid to high <unk>.
And square, we are especially pleased by <unk> more than doubling to 5% with strong traction in London at over 6% share and further acceleration in Zurich within selection of edema.
In Japan the.
Adjusted share for our <unk> brands increased by plus one nine points to a record 22, 7% in Q1.
This performance reflects the strength of our portfolio and the launch of Iqos in MA, which is also driving notable gains into Q and other key cities.
We expect strong of tech trends to continue into two reaching around 24% market share despite seasonality effect.
Conversely, as I touch on supply.
Supply chain constraint will likely result in Q2 HBU achievement below the prior year with Etsy inventory Consequently, reduce in the second quarter, we expect the replenishment image due to deliver substantial recovery.
Notwithstanding such quarterly volatility with substantial commercial activity plan, an excellent underlying momentum, we expect strong double digit X to shipment volume growth in Japan. This year.
In addition to strong progress in developed countries, we see very promising eyecode growth in low and middle income market.
The share of our Ht brands into 28, such market launched by December 31, 2021, excluding Russia, and Ukraine grew by plus 0.8 points compared to the prior year to reach two 7%.
Given the large size of this market the premium positioning of the existing iqos portfolio and the relatively early stage of commercialization. This represents excellent progress.
As mentioned last quarter, we also intend to bring a new complementary range of heat not burn devices and achieved tailored to emerging market towards the end of this year.
Yes.
A prime example of this is Ajay.
We're uptick exit share in Taro is approaching 5% within eight months of launch as compared to total Q1 share a four 3%.
Other notable successes, including the recently launched market of more roku as well as Lebanon, Jordan, the Dominican Republic, and the Philippine Despite pandemic restriction in Manila.
Sure.
Moving now to Iqos Luna, we are delighted to report the further outstanding success since its launch we sense performance and consumer reaction still exceeding our expectation.
In Japan, the uptake of <unk> devices, and consumables among both existing iqos user and legal at smoker has been rapid with more than 30% of the large user base of <unk>.
Trading since the August 2021 launch and over 20% of sales remained to legal age smokers to iqos.
Moreover, the enhance and consistently I quality user experience better reliability and new neutral King.
Led to significant observed increases in conversion rates retention rates and net promoter score.
This bodes well for volumes with premium priced there are consumables the fastest growing launched in the smoke free category, reaching an offtake share of 12% within six months of national launch overtaking Marlboro <unk> and <unk> combined to become the number one most rebrand.
We now have all three iqos devices in the market. Following the launch of <unk>, which provides multiple consecutive use at a more affordable price point. We are also introducing a new <unk> brand called Cynthia for use with <unk> and select prefectures.
Mainland price point comparable to <unk>.
Whereas that in Switzerland.
Again, being even more remarkable with significant sales to new user and Terry I'm, making up almost two thirds of HBU sales after only five months of commercialization.
Our SBU share growth accelerated from less than 6% in Q3 to 9% this quarter with notable success in the German speaking majority of the country.
Our newest luma launch was in Spain last months, while very early days. The signs are also very positive with device sales to user increasing plus 50% compared to the prior run rate 10% of existing user upgraded within the first months anterior exiting march at over one quarter.
Of total Hte offtake.
These results across three markets with different consumer characteristic and level of RP maturity are clearly very encouraging for the wider rollout of sigma around the world.
While device supply constraints are easing the timing of HQ availability for new Illumina market.
Somewhat.
Delayed given the rapid uptake in the initial market and the resulting need for greater supply for each new market than was originally anticipated in.
In addition, the completion of our investment in the collection of Purion H to use in our Russian facility as a short term impact as a result further market launches are now mostly expected towards the end of <unk>.
With Illumina Iqos redo and mill now of three is not done technology under the Iqos umbrella to serve different consumer needs and segment the market.
An exciting pipeline of innovation on devices and consumables at different price tier.
In E vapor.
These promising results in the subgroup of market continue.
This is a premium proposition with an average price premium to competitive device of 20% to 30%, making these results are especially encouraging as we pursue a differentiated and profitable category leadership position over time.
We see further success in Italy, reaching almost 20% of <unk> share of true system Puds with rapid progress also visible inflation within eight months of launch.
In the Czech Republic are still some temporary supply disruption at the start of the quarter, which affected Q1 share rapid growth as resume.
<unk> was present in seven markets at March 31st and we plan to add more this year with timing subject to device availability.
Separately, our relaunched confusion of nicotine pouches and the <unk> brand in the Nordic is progressing well.
Positive consumer feedback.
Moving to sustainability and our ESG priorities I'm happy to share two important development published in our 2022 proxy statement.
Firstly, our board of directors of data our company statement of purpose <unk>.
Spending would be on smoke free to better reflect the rule of wellness and a scare in our corporate strategy and transformation.
Second the collection of bespoke system ability index.
Politically links our ESG performance to 30% of long term compensation.
Further details will be shared in our integrated report on mid Seventeens and further dedicated disclosures.
Further tax impact remains one of our most critical ESG priorities and the growing penetration of monthly product around the world is accelerating at the end of cigarette as legal age smokers switch to better identities.
There is a growing body of scientific and real world evidence of the substantial risk reduction potential of smoke free products compared with smoking.
While changes in some market ought to be expected, we continue to support regulatory and fiscal framework that recognize the positive impact tobacco harm reduction policy can add on public health.
A recent example of this is Italy, which is establish distant excise tax category for even a burn.
<unk> and nicotine pouches.
Thank you and I will now turn it back to get sick.
Thank you Manuel.
Despite the challenges in Russia and Ukraine.
<unk> delivered an excellent start to the added with a strong recovery in iqos user growth and exceptional initial results from the groundbreaking innovation of Iqos Shlomo.
As recovered recently at Cagny will have a rich pipeline fatter, smokefree innovations to expand and grow across new and existing categories and geography.
Our combustible business is now stabilizing category share despite the impact of Iqos cannibalization.
It allows us to accelerate further switching of smokers that alternative.
We also continue to invest for long term growth for the development of innovative wellness and healthcare products, which seeks to deliver a net positive impact on society.
Our 2022 fundamentals are strong of a profile of my expectation of Fortinet half to six and half organic net revenue growth and 9% to 11% currency neutral adjusted diluted EPS growth.
Despite the significant inflationary pressures and disruptions in our global supply chain affecting first half and the full year real estate, we expect our organic operating income margin to expand to up by 100 basis points.
In addition, we have taken the conservative assumption in our reported guidance of no further contribution from Russia audio Crane from April 1st.
Overall, we are very confident in the near and midterm growth outlook and we remain committed to sustainability rewarding shareholders over time as we continue our transformation.
Thank you and we are now happy to answer your questions.
Thank you we will now conduct the question operator operator.
Operator. This is Nick Rolli can I just interrupt for one second I understand we had some technical difficulties with the webcast.
And I apologize for that the full script and slides are posted on our website. So please access www dot PMI dot com.
And we will correct. The replay on the webcast. Following today's presentation. So you can go back to the website.
And if you missed any of the audio sound, but you can get the script and slides on our website. Thank you go ahead, operator with the questions.
Thank you we will now conduct a 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 one on your Touchtone phone and the interest of fairness and time, we ask that participants keep to a maximum of two questions. Each.
If time allows follow up questions may be taken you may rejoin the queue again by pressing star one on your Touchtone phone. Our first question comes from Chris Growe with Stifel. Your line is now open.
Hi, good morning.
Good morning, Hi, Chris Hi.
<unk>.
I just wanted to ask if I could first as I think about your iqos guidance for the year, and obviously, reducing that for Russia, and Ukraine I just wanted to be sure as you think about it.
The new guidance incorporates our expectations, excluding Russia, and Ukraine is that the only adjustment you made for <unk>.
For volume in that estimate the new 88 to 92 billion sticks is that just taking out your expectation for Russia, Ukraine for this year.
That's correct, we're just talking for the entire year for volumes from Russia and Ukraine.
But then obviously, we now project carillon were recognized.
Being solid in both geographies, which is the <unk> 5 billion.
Four on a pro forma for the full year, excluding Russia and Ukraine, we're looking into 88 to 92, but if you add back the five which will with it.
All right.
The first period the first quarter.
The factories at fleet translates to $93 97, which would assume or is it still means that there is no further sales of iqos as of April one.
Neither Russia to you Chris.
Got it. Thank you and then I just wanted to.
I understand a little better about the second quarter, you've talked about higher device shipments in the quarter I think that'll be a stronger driver of revenue growth at the same time, you have some timing differences it sounds like at least in Japan, where that will weigh on revenue overall, I think youre expecting more like a low single digit increase in revenue. So I just want to understand.
I guess.
You can help us in terms of the magnitude of those two factors it sounds like the Japan timing, maybe a larger factor on <unk> revenue and then just to understand also the availability of devices is it the second half and Thats back to like a I'll call. It full availability of devices and is that a function of not having devices committed to Russia and Ukraine is.
Adding more availability for the rest of the World I Hope that's clear. Thanks, yes, Okay. So I'll go first.
Quarter shipments of the devices and <unk> contributes to the better up to the growth of revenue, but remember that the devices are putting a pressure on the.
<unk> right. So thats the started between the devices and the impact on one hand on the revenue or the margins the big impact, which we expect to have in Q2.
On the supply of the shipments of the consumables, so the heat sticks and it cut out.
And as.
As a result, among other constraints on the supply chain, although stopping the investment in Russia would need to resource that leasing capacity to our locations and it will take us a while and therefore, we expect that we're going to go lower of data with the inventories in Japan, mainly.
Japan.
Are there to ensure that on the manufacturing side the appropriate resourcing, where we'll have when we expect quite a robust growth on IMS into market share and I think the amount of 11 per slide indicating that we should think of the way I mean, the 20, Florida around 24% market share for the quarter inch up answer is nothing.
On the consumer level on Bell state level, but we need to do this operations for their inventories in order to resume to the to that.
Normal course of our shipments in Q3 and Q4.
This will drive the better performance on stronger performance in the second half than the first half.
Which will be what we estimate to be impacted by the Q2 difference in Nash in the shipments now with regards to the devices.
I mean, the way there is this continued sale of the devices in the exclude the geographies right. So it's not that we stopped selling we stopped recognizing this whole thing dear to their visibility and.
The other factors, what's happening in Russia, and Ukraine, but.
In reality, we need to keep it at least a replacement.
Devices right. So it's not that you can take the volume out of Russia and Ukraine.
Two.
Re directed them to our locations, we do have actually getting better and better but not perfect visibility with regards to the device supplies.
Remember, we've been very cautious about.
Second half of last year.
And.
The moment when we have had there.
Better order fulfillment and also better visibility with regards to the future.
Orders for this year, we feel more confident about how we can realize the full.
Fully realize the opportunity of Iqos.
That looks okay, it's not clarified but anyone can be glad to anybody is not perfect but it's.
It's better than let's say at the beginning of the year and you solve at the moment that we're regaining some how long.
Full fledged availability of devices, Hawaii gross growth.
Accelerated growth for the user acquisition and the market's short progressions in extra bonds. So we know that we have it by Deborah infringes on the continually TNMP started about mid interrupted supply of both devices and acoustics and increasingly just to complement I think it's really important that everybody understand the evolution of the.
Gross margin in Q1, Q2, and H, one versus edge too I'm sure you remember that last year. The gross margin in the etch one was extremely high.
70% gross margin was lower and probably more normative in H. Two so what we have seen in Q1 was first of all facing very icons I think we've been describing in the presentation. The various driver for the F 250 basis point reduction in the gross margin what you can expect for Q.
Two is this element to continue knowing that the gross margin reference, 70% as well last year in Q2.
And on top of it we will have more devices even than in Q1, which I think is good news because it was a success.
Of Iqos, we have increased.
Our freight cost.
For the reason that we mentioned and retention on the supply chain and that's going to have an impact on the margin and last element UF. This mix, which is a temporary element of course like a fed by the way.
The fact that the volume will be lower.
For Japan into two with the recovery and the compensation in two and with that you have the reason for increased pressure gross margin pressure in Q2, but with the compensation that will become an issue.
And it was great color. Thanks, so much.
Yeah.
Okay.
Well take our next question from Pamela Kaufman with Morgan Stanley . Your line is now open.
Hi, good morning.
Martin.
Yes.
2023 outlook and how you're thinking about that target for next year.
Particularly on the <unk> side should we assume a similar reduction to your heated tobacco targets as the guidance reduction for this year of about 20%.
Given Russia has significant contribution to the overall business. How are you adjusting your strategy for achieving our target for 15% of revenue coming from Sanofi products by 2025.
Thank you.
We'll continue with that geographical and portfolio expansion of Iqos in the existing and the new geographies and.
Obviously this week, we're confronted with all the supply chain constraints and availability of devices et cetera.
Nowadays.
The good way of one of the rate might be to look at that 'twenty three targets I believe youre, referring to the absolute volume target for Iqos is that okay lets assume that we don't have the Delaware assumptions you can make is that we will not realize MSR sale a slice of that widening.
Both Russia, and Ukraine, and that's essentially the floor of that.
But we land I think everyone will appreciate we need a little bit over time to really have the full visibility.
We will build on our business and our intentions about the exiting the Russia and also what's the whatever might be the longer term outlook for our Ukrainian etcetera, there will be a band in absolute numbers is no questions about it the way I look into this whole thing.
May be in a situation that will deliver this target, but with about 12 months of delay.
I have not been a position.
My thinking has not changed the target just recognize that you may be a little bit of additional time to deliver on this started that all other part of amicus that relative growth targets beyond the top line bottom line and.
The relative growth of the <unk>.
Relative contribution, which is very important target for us of the Noncombustible for combustible business they remain.
As we have said before.
Im confident we should be in a position to deliver but in absolute volume yes.
We might have there.
Ms, but delay again sort of repetition I look at this maybe I need a couple of months.
In order to deliver the same kind of good for other geographies that don't have any growth in existing geographies.
And depending on your question on how do we get to more than 50% in 2025 I'm sure you've seen that in Q1 on a pro forma basis, excluding Russia, and Ukraine will be below the full perimeter of the group, but not that much below so we are 30% versus around 31%. So yes, there is a bit more.
Ground to cover to get to 50%, but given the dynamism that we see in our <unk> business and the opportunity we've been clearly putting in low and middle income countries.
We think we can we can.
Ketchup and delivers is more than 50%.
Okay.
A question on new Iqos user acquisition goodwill.
Good recovery this quarter.
Despite taking out the impacts from Russia 2 million user over 1 million users.
Do you expect to see a similar pace.
User acquisition over the course of the year and how much of a role did illumina play and that would there be any impact from the supply disruption on that Korea consumables.
Please standby we are having technical difficulties.
Yeah.
Hello.
Yeah.
Just one moment, we are experiencing technical difficulties.
Okay.
Okay.
Yes.
We do have that backup line connected now.
Sure.
Yes.
Yes.
Did you hear my question.
Yes, I think your question was higher because of the oil.
Your question was what can we expect the same dynamics of the user acquisition right going forward.
Yeah.
Okay.
Dominion above million acquisition, this quarter, which are where the Gulf sequentially about close to $1 million acquisition. Thank you Paul.
They are directly correlated to our availability of the Barracuda.
<unk> ability of devices in a whole portfolio of devices.
So playing out there.
The different price segments gain.
Expensive device devices <unk> devices lower price devices, so as long as we have.
Availability of devices by accelerating the number of ships.
We shouldn't repeat the same software varieties mailbox, Charlie higher because you could see from that comparison prospectively.
The light consumer liking measured by NPS and other parameters of what we're offering today what is the mobile app.
Our meeting.
Consumer expectations so.
There's also a bridging somehow.
The quality question that long so we see the visibility on the device it's right in the next quarter or so and all the dynamics to which we can achieve outside the Russia, and Ukraine, and we would be in a position to revise what Australia will deliver formalities.
Now in terms of our proposal Iqos volume.
Thank you.
Thank you.
We will take our next question from Vivien <unk> with Cowen Your line is open.
Hi, good morning.
Hi, good morning again.
Wanted to follow up on Japan, I'm, just having a hard time reconciling to your comments that you guys made number one that there was negative device mix in the quarter, but that you had device growth from Oklahoma, because last quarter I thought the launch of a limb with mix accretive in Japan. So.
Am I misunderstanding, something or did something change thanks.
Hi.
Saying that the device mix with talking dead.
We're signing up right as of now three versions of Iqos Zillow MA Yoga train the meat in the lower price lower price would suggest.
<unk> now to the market to the consumer so obviously that shipments we already had them in the Q1 right. Because this is all recognize on shipment and second that.
These devices I mean, the BLM alignment, which is the lowest priced the values goals at attractive price in the market higher than the competition by attractive in a lower than the price that we used to have on that one.
One of Edison of Iqos, three before when <unk> when you look at it.
Yes.
Emmanuel speaking.
It's a positive in the mix within the device because it has come at a higher price, but any growth in device is negative to the mix in terms of gross margin because it's coming with of course, a much reduced gross margin versus the consumables. So the more device. We sell you have some impact on the revenue.
As positive, but it has a diluted impact on the gross margin rates to be very clear.
Understood I think had failed to grasp the pricing tiers. So thank you both for that for my second question I was hoping to get some incremental color on Germany, you had meaningful share growth both on a year over year and sequential basis is there anything to call out there from an activation standpoint, because the results were very strong.
Now, it's again Thomas the way a post price increase price change environment in Germany.
One thing and second is again a into Germany.
And from that now.
No not the restricted access with the devices. So does again all onto the same story.
Have a continuous broad range of inability of the devices. We can go into the portfolio.
Yeah.
Uh huh.
The performance and business.
One extra com, one additional comment that which might be a news that Joe Mondays during the writing on the Iqos three one Nevada ship, which is ablaze version.
And the reasons why we went for example to Switzerland robotic cause Zillow lies before opening the larger market, which obviously.
Take a lot of volume of the devices.
No model too.
But following that.
In the similar sort of a geography, so I am very pleased with the success so far of Iqos in low lying suites Orlando, partially the German speaking because our yields there.
We could use.
As the proxy for Fairmount <unk>.
The acceleration of the further acceleration of the growth in Germany, now now going to start a new life, but I think this is as far as we can.
Growth of consumer reactions and treats them.
Understood. Thank you very much.
Yeah.
We will take our next question from Bonnie Herzog with Goldman Sachs. Your line is now open.
Alright, Thank you hi, everyone I am.
Two questions on Russia, I guess I was hoping you could share maybe just a few more details on your exit from the country and really what the mechanics of that are I guess.
Could you help us understand what's being manufactured in the market currently and then what about the volume.
Manufacturing facility in St Pete and in St. Petersburg exports can you share with us roughly what percentage of the volume is exported and then where you plan to maybe shift that volume two and win and I guess I'm just trying to think about all this.
In terms of any costs associated with that and then is that being reflected in your in your guidance.
So bundling the uptick here.
<unk> bye.
Judging by the number of details you mentioned in that question you will appreciate how complex the situation you have in that.
Russia surrounded by a lot of Russia in terms of the.
So far production and export allocation was not really that significant but had a much more significant plans of expanding garage.
One of the key comp key suppliers of <unk> carcinoma.
And our decisions to immediately stop the investment as a result, we created a temporary call. It for the rest of the market partially for the for Russia launch of the low mortgage we also cancelled but also that Russia was supposed to contribute for the supply of the below market.
Consumables that out into other markets, including in Japan.
Scott.
So does that capacity there.
Yes with that capacity means that will have an equipment installed in Russia.
And to a con redone pierce's equipment today, what will happen to the deck with them going forward.
We're working on a certain plan but.
Stop here I will not go into more detail now exited Russia.
Our daily manner.
For us it means that we need to reconcile the interests of all of our shareholders.
Employees in Russia, and you will note that the average.
Solving the legislations in Russia towards the significant risk of constrained our ability to add Eric.
This is all in the context, so they know that.
Got it.
Evolving regulatory environment, both on the international.
As with the sanctions, but also the legislations.
Our legislation.
In the interim.
In Russia so.
Our significant presence in Russia as we all know it we're in.
In the market organically built that business over the last two.
<unk> hundred percent business the PMI international that we don't have any partners contributing for the core business. We are addressed we are connected with the local supply chains, and wholesale and distribution components, but PMI Zora and Philip Morris sells in distribution and <unk> percent senior mortgage business.
We have some charter holding in addition to those with a key distributor in the market.
Together, along with our <unk>.
Major Tabaka company and two on Hawaii in orderly manner, all the strengths, which would have been Russia.
Is the complex and therefore by the way.
We are committed to the vessel.
Our guidance and the decision to look at the PMI.
The rest of the business, which is.
Absolutely great despite the headwind which would have.
And so on.
Rather than <unk>.
<unk> promoted with its something which would have been.
Limited visibility and ability to act accordingly.
I know that my answer is no.
It gave you more color.
Larry.
But is the best we can say at this moment, we are working on it but.
Okay, presumably running.
The most complication complicated transactions in the history of the group, which would have been profitable.
Yes, I can only imagine I appreciate the color and just to be clear just in terms of the exit do you have a target date, the full exit of the market that you can share.
While our China would not delay beyond what is necessary is longer.
Despite.
They're all there.
The groups and the like and again I repeat it.
We have a responsibility to shareholders. We also have responsibility for employees in Russia.
<unk>.
And but all in all.
The growth of our stakeholders with the various expectations and you're trying to solve that equation.
The selection of a good one.
That's becoming complex complex.
But <unk> been working relentlessly our plan to move forward with that.
Appreciate that if it does we'll then have a size of the business and presence in our markets things could look differently, but this was a very big business for us.
Got it.
And honestly that kind of brings me to my second question is I think about your new pro forma hte volume guidance.
8% to 92 billion units for this year, which is you know assuming 22% growth at the midpoint I guess I'd like to understand the key drivers of that since you know the growth outlook is now I guess above your previous guidance.
Russia really I thought with such an important driver of that and for your your future. So I just kind of want to understand what gives you the confidence, especially also on top of the uncertainty related to the semiconductor chip shortage situation.
Yes. Thank you. So obviously you need to make some we're making some general assumptions from the supply chain as I said earlier.
Are we done leak survey and have perfect visibility.
Related to all the remaining quarters of this year, but that would have been above the country bands too.
Come up with this proposal.
The estimate book this pro forma guidance now.
Okay.
Look you'll start you'll see that continuous trajectory of iqos growth in essentially all geographies, including the geographies that can stomach relative tougher for us where do you have to look at the progress, but there were noteworthy call you'll get the group level the growth and now we see that Japan was that below mine.
Albert locations with a low model, where theyre, having a massive acceleration of that growth. We know what we have in our plants for days.
Thereafter with Illumina, we also know that Iqos three one which is the condensate the mostly some device also continues to be very attractive and business continuously. Despite the fact that we are.
Elsewhere in our portfolio a bulk of the devices in the consumer bullets at a significant premium to any other market.
Proposition I think we're getting this confidence that can continue to take a golf and we're looking forward also to the moment when it will be an accelerated growth will iqos in EMEA, excluding Russia and Ukraine. So did the rest of the geographies.
The lack of Russia and Ukraine.
I think over longer period of time, where once notice was in shorter periods of time it might be too challenging okay.
Making down the promises that.
Page.
Okay. Thank you.
Thank you.
And we'll take our next question from Galvan.
Jane with Barclays. Your line is open.
Okay.
Got it.
Got it.
So I have a quick.
Follow up questions.
Right.
Yeah.
So we cannot really we can't we can't hear you could you repeat the question. Please sure is this better.
Yes, it's been a better yes. Thank you.
Sorry about that so my first question is your guidance on industry volume and your own volume ex Russia, and Ukraine. So it seems to have become better and if I look, especially auto European volumes. They are quite strong. So you know if you have those sort of the macro pressure on consumers and inflationary pressure in Europe might be in recession not in.
Recession.
Oil price impact. So my question is it why are you seeing stronger volumes and is it that.
And then separate prices historically used to be up forward in Europe and wage growth towards one subsidiary becoming less avoidable.
And right now cigarette pricing is still a forward while wage inflation is probably four or five so cigarettes are actually becoming more affordable.
And Thats, where youre seeing better volume trends.
Well.
I think we should I mean, we have the information of Q1 that are pointing to this evolution. It is true that there are no uncertainty on what's going to be.
The growth of the global economy in the coming quarters.
I suppose there is.
Some trend in the market.
Our.
Underlying trends in terms of demographics and behaviors, but let's face. It. There is also still a continuation of rebound after the COVID-19 . So last year was not a normal year.
We are becoming much more normal let's say, we're there yet in clean beauty, if we were not but in other markets. We can hope that for the coming months to be more normal and that's going to be a positive so I.
I don't know what is going to be the impact of a potential slowdown of the economy is at Baidu. We are going to have an impact on volume or more on down trading.
Some countries in consumer going for cheaper offering today, what we see and we've been highlighting that is Michael recovery market share.
We see Chesterfield being very successful and we see of course, great success with all our Iqos brands. So that is what is driving for us.
The outlook for growth in volume and of course, starting Q1.
Very nice growth.
Even if reflect the fact that there were some maybe some anticipation, but I think that the Q1 numbers out there.
It shows the dynamism that we are seeing in our portfolio.
Sure.
Coming to the.
The EPS guidance and the dividend. So you got a dividend payout ratio will now be north of 90%. So how does that impact how you're thinking about share repurchases and we keep seeing these cycles with PM. Every three as you know you have massive adverse FX.
We go back to any of you who used to be 150 yen was 70, then we had one cycle in 2014 and 2017 now we have another cycle of ethics and clearly a lot of your costs are in Swiss franc and so is there something you can do so that the cost mismatch the transaction FX mismatches lesser and.
We again get into the situation where dividend payout ratio is becoming very tight.
Well.
So yes of course, you know on the basis of the data that we've been giving.
We'd have a payout ratio that would.
Significantly increased versus.
Yes, it's 2021.
I think we've shown in the past the capacity to grow into a profit overtime and reduce debt. Our objective is to go down over time, and we didn't give any kind of precise precisely to go down to 75%, we see there I agree that.
Given the adverse event that we are facing is going to take a bit more time to get their legs became so much that the currency is playing but it's really the accumulation of currency and <unk>.
Russia easy the parameter of.
Pleasure.
Sure.
Now on the Forex there is two elements one is a pressure on margin and we continue to work on trying to equalize better.
Currency in which we are engaging in the currency in which we have a robust we do that with the supply chain the alpha limitation because.
A number of things that you buy.
But of course, we do that through.
Everything we buy but there is one element that we get a change that we have limited invoicing in dollar so when the dollar.
<unk>.
Most of the currency there is an impact which is mechanical and on which there is not much. We can do so we can work and I think we continue to work on the margin dimension, we cannot work on the subject.
Limited invoicing in there now.
Sure. Thanks, a lot.
Thank you.
We'll take our next question from Owen Bennett with Jefferies. Your line is now open.
Yes.
And do you have a question.
It appears Mr. OOO Mr. Ben It has dropped we will go ahead and take our next question from Jared <unk> with Jpmorgan. Your line is open.
Hi, guys I just wanted to ask him.
Hi, guys.
I just wanted to ask about the pricing environment given inflation in places like Europe is reaching levels not seen for a long time and do you think there could be more of an opportunity to put through additional price increases given.
You are seeing cost inflation as well on a global basis, especially post.
Russia, and Ukraine, maybe we can see a bit more of a margin offset.
However, we are taking care price increase enterprise body.
The opening of the latter.
Tobacco shall we call it.
See what.
The remaining part of the especially the second half.
<unk>.
When we look at the inflation I mean, we also have local what is the inflation of the.
Yeah.
So.
The cost of living and wealth is the inflation of the income right because.
Yes.
The inflation on the income level or at the comfortable level.
Buying the right product the right balance of variability, but in most of the geographies.
Pricing environment I would characterize it.
Yes.
Ed.
I mean I'm on my way to talk about the Indonesia.
We have a very strong rebound in the volumes in Indonesia.
And suddenly all of a sudden.
Indonesia, which used to be.
Alright.
Product and a significant contributor to that.
The pricing.
Hopefully tomorrow.
At the end of this year.
Finished 23 with that.
So the pricing contribution.
You know what kind of price increase in German that flow into the market.
In your opinion.
Got it okay.
So the hyper inflationary accounting, but we're trying to.
Or is it widely looking at the inflation pressure.
As I said at the beginning of the enrollment has started.
Sure.
My expectation is pricing.
Right.
Let's see how about this general continue.
Yes.
Yes.
Got it and maybe just to follow up on Southeast Asia, clearly is a very very strong start to the year in terms of volumes.
What are your expectations there on the volume side for the rest of the year.
While there is this continue.
Remember this is the part of the leg, which is still not out of the awards with regards for coffee unfortunate.
Situation.
<unk>.
That didn't get back to that pre coffee Scott I believe there is some underlying but also opportunities.
You bet.
Continued recovery from the Covid situation, we should start to see that.
It continues to do better.
And as I said.
It took the.
The price increase in PV premiums were taking some pricing taking pricing.
They can be accelerated in Indonesia on the other hand.
We still in that you'll remember Indonesia.
Couple of around let's back up a price increase to pass on that.
The beginning of <unk>.
Great.
We still need to be done at that time.
The next.
Alright.
Very much changes the franchises of Fitbit charter film continuous of that kind of body of knowledge that they should prices look like at the Kobe.
The coffee situations and.
And as we said, we expect to grow nicely revenue in the region. This year.
Which would be a very nice evolution.
That's great. Thanks, guys.
Thank you.
Thank you that was the last question operator.
And there are no further questions on the line I will turn the program back over to Nick Rolli for any additional or closing remarks.
Yeah.
Thank you Jessica Schoen closing remarks.
Okay. So thank you everyone for your attention and their patients.
Quarter three.
Complex and complicated for us and it seems there.
Some technical problems the earnings calls sometime cover adjustments to the situations in a quarter.
I have one on the comments on February and I Hope is still on the on the line I would like to take this opportunity to thank Mr. <unk>.
Sure.
Spending contribution from PMI and our part of my Department company over the past 35 year.
In particular as the Vice President Investor Relations since the 2000 and a piano Philip Morris International.
As you all believe will agree with me he has been a critical contributor for the journey of our company.
Now that you our investors and analysts who will join me in congratulating Clinique and to wish him all the best policies.
Well deserved retirement.
Same time I would also like to congratulate James Bushnell.
His new role I have the pleasure because I personally was higher than the Mr. Bushnell some years ago to PMI in his new role as the success of the neutrality and I believe you will receive the same support than the warm welcome as any good already enjoyed from your for the last 35 years. So welcome James and thanks unique.
Thank you Emmanuel congratulations James.
Thank you. Thank you all on the call because I know we've had long relationships with.
With many of you would argue that relationship.
Thank you very much shrinking that concludes the call and again, we apologize for the technical difficulties on my last call, but we will resolve everything and look forward to.
To deal with your follow up questions. Thank you very much so too soon guys. Thank you.
This does conclude today's program. Thank you for your participation you may disconnect at anytime.
Okay.
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