Q2 2019 Earnings Call
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Of our Canadian subsidiary, Rothmans, Benson and hedges Inc. effective March 22nd 2019.
Today's remarks contain forward looking statements and projections of future results I direct your attention to the forward looking and cautionary statements disclosure in todays presentation and press release for review of the various factors that could cause actual results to differ materially from projections or forward looking statements. It's now my pleasure to introduce Martin King, Our Chief Financial Officer Martin.
Thank you, Nick and welcome ladies and gentlemen.
Building on our encouraging start to the year, we delivered very solid performance in the second quarter, notably reflecting.
Positive momentum for both our combustible tobacco and smoke free product portfolios.
And strong currency neutral adjusted financial results.
Key among our strength in the second quarter was our volume performance.
On a like for like basis.
Total shipment volume declined by 6.7% in the quarter and increased by 8.1% June year to date.
This performance was better than we had anticipated, notably driven by the EU region.
Heated tobacco unit shipment volume increased by 37% to 15.1 billion units in the quarter.
Driven by the EU region, Eastern Europe region and Japan.
Second quarter net revenues increased by 9% excluding currency on a like for like basis.
Driven by higher HBU shipment volume and favorable pricing for our combustible tobacco portfolio.
Our performance was flattered by the timing of pricing in certain markets compared to the prior year.
Which contributed an estimated two percentage points to net revenue growth.
Our RP net revenues reached nearly $1.5 billion in the quarter or nearly 20% of PMI total net revenues.
I coast devices accounted for approximately 14% of RRP net revenues compared to approximately 19% in the second quarter of 2018.
We recorded a strong like for like combustible pricing variance of over 6% in the quarter, driven notably by Germany, Indonesia, Japan, The Philippines, Russia and Turkey.
We have recently increased our cigarette prices in markets, such as Mexico, and Ukraine, which should further contribute to a positive pricing variance over the balance of 2019.
On a currency neutral like for like basis, adjusted operating income increased by 15.7% in the second quarter, while adjusted operating income margin increased by 240 basis points.
The strong margin expansion was driven primarily by favorable geographic mix related to AIDS to use reflecting the increased contribution of volume from iqos geographies with relatively high unit margins, notably markets in the region.
Like for like adjusted diluted EPS increased by 15%, excluding currency driven by our strong business performance.
Our total international market share, excluding China and the us.
Increased 5.1 percentage point to reach 28.3% in the second quarter.
This growth was driven by heated tobacco units, which increased 5.5 points to reach 2.1%, reflecting broad based share gains across the EU region and in Japan and Russia.
In the markets, where I coast has been commercialized our HBU brands recorded a total combined share of nearly 5% in the quarter, despite not yet being fully distributed in many of them.
Our share performance for cigarettes in the quarter reflected continued adult smoker out switching to iqos.
As well as an estimated adverse impact of approximately 0.2 points related to Turkey.
Due to the timing of price increases vis-a-vis the competition.
We expect our share performance in Turkey to improve over the balance of the year.
Turning now to our piece, we surpassed 11 million I coast users as of quarter end.
Approximately 70% of the total or some $8 million icos users have stopped smoking and switched to iqos with the balance in various stages of conversion.
In the EU region, which continued its sequential quarterly share growth, increasing by 0.3 percentage points to reach 2.4%.
This growth reflects success across a broad range of markets with varying regulatory frameworks and adult smoker preferences.
We have achieved significant progress with ico across the region over the past year as evidenced by the heat's market shares shown on this slide.
This includes strong growth in some of our larger markets, such as Italy, Poland and Germany.
As well as even faster growth in other markets, such as the Czech Republic, Greece, Latvia, Lithuania, and the Slovak Republic.
Heats continued its strong performance in Russia in the quarter with sequential end market sales growth of over 23% and national share of 2.9%.
As a reminder, our first quarter feet share was flattered by the impact on the total market of seasonally lower cigarette industry volume.
End market sales volume progression, therefore remains a more realistic indicator of the brands trajectory.
For reference we estimate a first quarter adjusted share of 2.3%, implying sequential share growth of 0.6 points in the second quarter.
We continued our geographic expansion during the quarter and are now commercializing ico in cities, representing an estimated 40% of the market by total industry volume.
Compared to approximately 32% at the end of the first quarter.
In Japan, our total share for Heatsticks and heat increased by 1.1 points versus the second quarter of 2018 to reach 16.6% further demonstrating that the initiatives. We introduced during the second half of last year are paying off and driving a step up in our share performance.
After adjusting for the impact of estimated trade inventory movements, which benefited our first quarter share this year, our share with stable on a sequential basis.
We continue to anticipate greater competitive activity in the category as the year progresses.
While this may increase competitive churn among adult consumers over the short term as they try new products.
We ultimately view this as a positive development for the category overall and for Iqos in particular.
As I will cover later in my remarks, we are investing behind further enhancements to the Ipos three device in 2019 to reinforce the brand's leadership position.
Importantly share for both the heated tobacco category and our heated tobacco brands continued to grow sequentially in the quarter.
Based on the latest consumer offtake share data.
In Korea, the heated tobacco category continues to be highly competitive, particularly in the area of non menthol flavors and related new taste dimensions.
Share for heat declined by 0.7 points and was stable on a sequential basis as 7.3%.
This performance was flattered by the impact of inventory movements as seen from the adjusted market share progression.
We attribute the current share dynamics, mainly to competitive churn as new devices and consumables from the competition has entered the market and experienced initial trial.
We plan to broaden our portfolio of heat to better address the unique taste preferences of adult tobacco consumers in Korea.
And have related launches scheduled for the second half of 2019.
In addition, like Japan Korea will be an initial focus geography for the upgraded ico sthree device.
It is important to remember that aside from Japan, and Korea, our focus for Iqos across most launch markets remains targeted to key cities.
These city level shares compare very favorably to the corresponding national shares and provide an encouraging indicator of the greater opportunity that can come with broader focus and support and I coast markets.
Before closing on Iqos I would also like to reiterate our excitement over the prospects for Iqos in the U.S.
As a reminder, on April Thirtyth, the us food and drug administration confirmed that the marketing by coast is appropriate for the protection of public health and authorized it for sale in the us.
We are excited to bring ipos to the U.S market through an exclusive license with Ultra group Inc., who subsidiary Philip Morris USA has the market expertise and infrastructure to ensure a successful launch beginning with the initial lead market of Atlanta, Georgia.
Turning to our full year outlook, we are raising our 2019 reported diluted EPS guidance at prevailing exchange rates to be at least $4 or 94 cents.
The seven cents increase compared to our prior guidance on May onest of at least $4.87 was driven by.
Stronger business performance, primarily reflecting better shipment volume.
And a tax benefit of four cents related to a reduction in estimated us federal income tax.
On dividend repatriation.
For the years 2015 to 2018.
Partly offset by.
Asset impairment and exit costs of approximately two cents per share related to a plant closure in Columbia as part of our global manufacturing infrastructure optimization.
Our guidance continues to include an unfavorable currency impact at prevailing exchange rates of approximately 14 cents per share.
With just one cents in the second half of the year.
After excluding the 20 cents per share of reporting adjustments and tax items outlined on this slide.
Our forecast represents a projected currency neutral like for like increase of at least 9% versus our pro forma adjusted diluted EPS of $4.84 in 2018.
Our increased guidance now assumes a total shipment volume decline of approximately 1% on a like for like basis versus a decline of 1.5% to 2%.
Assumed previously.
We continue to anticipate full year age to you shipment volume broadly in line with our end market sales volume.
With any net inventory movements in individual markets essentially offsetting on an aggregate basis.
For the industry, we now estimate a total volume decline in 2019 of approximately 2.5%, excluding China and the U.S.
Which is at the low end of the previously communicated decline range of 2.5% to 3%.
Our increased guidance further assumes like for like net revenue growth, excluding currency of at least 6% compared to the assumption of at least 5% and our prior guidance.
We also now expect Iqos device net revenues to account for less than 20% of our total RPD net revenues in 2019.
The change from the previously communicated range of 20% to 25% primarily reflects the favorable geographic mix impact related to age to you shipment volume that I noted earlier.
We continue to anticipate a full year like for like combustible pricing variance above 5% supported by our June year to date variance of 5.2%.
This positive topline momentum provides us the opportunity to further increase or advance investment behind Iqos in order to.
Accelerate product and commercial development.
Expand distribution in both existing and new geographies during the second half of 2019.
Further enhance the Iqos three device in 2019 to reinforce the brand.
And strengthen our category leadership as competition intensifies.
Consequently, we now anticipate net incremental investments behind Rps this year of approximately $400 million compared to our previously disclosed estimate of approximately $300 million.
With the majority of the $100 million step up.
In investment expected to occur in the third quarter.
We believe this increased investment will reinforce the positive momentum behind iqos heading into 2020.
Despite the increased investment we are maintaining our assumption of currency neutral adjusted operating income margin expansion of at least 100 basis points on a like for like basis.
While we don't give quarterly guidance I believe it is appropriate to provide some additional visibility on the third quarter.
In which we expect currency neutral adjusted diluted EPS to be essentially flat compared to our pro forma adjusted diluted EPS.
Of $1.35 in the third quarter of 2009 to 2018.
This estimate assumes a like for like currency neutral net revenue growth rate in the quarter.
Slightly below our full year assumption.
As I noted earlier compared to last year, our second quarter net revenue growth benefited from the timing of price increases in certain markets and some of this benefit will be offset in the third quarter.
We also face a challenging combustible pricing comparison versus the third quarter of 2018, our strongest quarter for pricing last year.
Coupled with our top line assumption, our third quarter EPS estimate also reflects higher expected costs on a like for like basis.
This is primarily due to our net incremental investments behind our peace with about half of the full year total of approximately $400 million expected to come in the quarter.
Turning to cash flow, we continue to anticipate full year operating cash flow of approximately $9.5 billion subject to year end working capital requirements.
As well as capital expenditures of approximately $1.1 billion.
In conclusion.
We're building upon our promising start to the year and delivering a very solid performance in the second quarter.
The fundamental supporting our strong combustible tobacco portfolio are intact.
The favorable momentum for Iqos continues across geographies further supporting our confidence in our HQ shipment volume target of 90 to 100 billion units by 2021.
Finally.
On a currency neutral like for like basis, we have increased our full year 2019 growth assumption for net revenues to at least 6%.
And our anticipated full year 2019 growth rate for adjusted diluted EPS to at least 9%.
Further demonstrating our overall confidence in PMI short and long term growth prospects.
Thank you I am now happy to take your questions.
Thank you we will now conduct a question and answer portion of the conference again in order to ask a question I'll make a comment. Please press the star followed by one on your Touchtone phone.
Our first question comes from Adam Spielman of Citi.
Hello, Thank you very much.
I guess I have two questions could you guide age posted better volumes for the markets on mobile.
On a bigger improvement for yourself I was just wondering why what has surprised you in what geographies, you're you're talking about but seems like both in terms of the market and in terms of your own volumes.
As you think about 2019.
Yes, My first question. Thank you.
It's a.
Fairly broad based but I would call out the E U.
As the one area that is exceeding its previous run rate or.
And may be surprising us a little bit to the positive this year and Poland is one market. That's that's doing well I mean, you know it's a it's overall you run rate a used to be around 2% to 3% and now we're seeing it running more like one to two with so far this year, it's been quite encouraging but we're also seeing you know pretty good volumes across a number of other geographies the Turkish market in the first half of the year is still up.
Indonesia market is starting to grow again with the no tax increase and with limited pricing this year because of not having the tax.
And you have a couple of other markets at least for the first half of the year that are benefiting from lapping some previous big tax increases and so forth like Saudi is up compared to last year, Thailand is up pretty strongly even though it's not such a big market, but it's a pretty strong size growth. There. So it's fairly broad based but I would I would pick out the EU is the one that's probably.
A little bit more than than what we expected.
All right and that's a market and for you specifically is it just.
I guess <unk> are up he is doing better than expected or is there anything else or is it just that there was a favorable markets you, Indonesia, Turkey, you sound, a little big markets, where you have decent market shares.
Yeah, well I mean, you see our overall share is benefiting from heated tobacco units and Jim even within the cigarette category, we're doing pretty well, we called out this quarter wasnt quite as favorable as last quarter.
On a cigarette share, but Turkey was one of the one of the main reasons and beating the issue in Turkey was it we increased prices and were the only ones in the market with the higher prices for about a month the competition lagged a bit and so we lost quite a bit of share in the second quarter. However that is now reversed as the competition has has also passed the prices and we don't expect that to continue with great brands in Turkey with Marlboro in Parliament. They are recovering quite quickly so that was a bit of a.
Q2 anomaly. So overall our share in cigarettes within cigarettes is holding up very nicely and of course, we're benefiting from the overall strategy of leading the heated tobacco space as you know approximately two out of every three consumers coming of the category coming from the competition. So overall our share is holding up very nicely, we're quite pleased with it.
I'm I'm just very quickly the second point you mentioned at the beginning a couple of times.
But you had more pricing variance this quarter I'd like guess you imply there's going to be sort of slightly reverse in Q3, because the impression you gave which you took earlier prices in 2019 than you did in the corresponding markets in 20.
Are you seeing but I was just wondering sort of could you be a little bit more specific about what markets you're talking about and also why did you do that it seems just sort of rough slightly strange things too.
It's a bit more color around that got back.
Pricing variance being moved a bit further forward something yeah.
Yeah, I mean first of all with pricing you kind of take it when you can get it it's not that we try to stick to a certain schedule we read the.
The competitive situation and the overall gaps and various other measures we take the pricing is as we think we can achieve it one market to call out as having shifted from where it was in Q3 last year into Q2. This year is Mexico. So you had the trade movements benefit in Q2 and the pricing benefit in Q2 this year, where it was in Q3 last year.
And the other piece on the comparisons.
Two last year as last year's pricing variance in Q3 was what very large was the biggest of any of the quarters. It was it was $483 million. So just because of the way the timing works out and the different sequencing you get some quarters that are bigger than others and when.
Pricing moves from one quarter to another it can have a pretty significant impact on the total revenue line. So yes, 9% total revenue.
Growth in quarter, two ex currency just like for like is very very strong, but it's it is flattered by these movements by about 2%. So we wanted to call that out and also make sure people understood the impact as we make the comparison against Q3 coming up.
Okay lots of questions, but I'll leave it Bachelor Yeah first topic I think you okay. Thanks Adam.
Our next question comes from Judy Hong of Goldman Sachs.
Thank you Hi, Martin.
Hi, Judy.
So my first question is just your decision to spend incremental hundred million behind because this year I know you kind of gave the big buckets of where you think the investment will go but I guess I just wanted to get a little bit more clarity around.
You know just some of the specific programs in mind for the spending and then if we should think about this as more of a pull forward from.
Kind of the plan spending next year as the underlying momentum has come in a bit better than expected.
Okay.
Yeah, I mean, there are a couple of broad areas, where the spending will.
Help us maintain our momentum going into next year and really beyond I mean, one is to accelerate the development of innovation of both the product side and on the commercial side and that will have more of a long term benefit I mean, that's something where.
It's not likely to help us this year, but it will help us next year with some of our innovation coming out at a faster pace and some additional projects that we can we can accomplish I'm. So that's more of a long term investment and very much a a confidence on our strategy and realizing that that in order to stay ahead of the competition. We've got to continue with our innovation pipeline.
The second piece is around geographic expansion you know we've had great success in Russia, and the E U and we pointed out that geographically, we still have opportunities to expand in both areas. So accelerating those plans ahead of more competitive presence is is prudent and then we also have some new geographies that we will open in the second half of the year in funding that appropriately to get off to a really good start is I think an excellent use of of additional investments to get momentum going into next year, and that's really what I would sort of say staying ahead in the areas, where we are where we are doing well and opening up some new areas and then the third bucket is investments to address a intensifying competition I mean, I guess the best examples that are going to be Japan, and Korea, we do have new innovation improvement on our Ico Sthree device and we want to get that out there in a in a big way and benefit from it or it's it's an excellent end of.
Nation and it helps us have news and ER and the reason for Ipos users to really stick with lycos in the face of having lots of other products being offered to him and so forth and then there is also in that same bucket I think.
ER commercial activities, which I won't specify but which we will put aside some additional investments for a given that the competition is putting more intensity into into these markets as they realize that they need to try to catch up in the reduce risk space that we've we've built so those are I think prudent investments, it's about momentum and.
No. It's it's a bit of success breeds success, because we've been able to do well this year and get ahead, and then that allows us to up the any and keep our momentum going not just you know, finishing this year, well, which which we need to do but more importantly for next year and beyond. These are these are long term place. So I hope that covers that Judy.
Yeah. That's helpful. I guess a bit of a follow up and my second question was actually going to be on Japan, and Korea, and some of the the competitive dynamics that you've talked about.
I guess in Japan, you know you've had some.
New activities in place now for I guess, six six months plus market share being kind of flattish how would you.
Think about that in the context of some of the investments that have already been made and then can you be a little bit more specific in what the improvement on Ike was three devices that that we'll see with with the launch in the back half. Thanks.
Okay, So for Japan.
I mean, you have to keep in mind that were up 1.1 share points year to date over last year or so yes sequentially. We only had very slight growth on an offtake basis from Q1 to Q2, but that's already on a base thats well stepped up from about run rate last year. So our initiatives are clearly working the introduction of heat.
At the at a different price point and with the different taste lineup to attract a different consumer group is definitely working it's incremental share we're getting.
And it's a more mainstream brand it opens its access to more consumers are we've had very good feedback on the ico psthree and multi the battery what works better charges between usage for Icls three much quicker the design.
Is well received and the evidence is that despite the priced hearing where 2.4 plus is available in the market at a lower price nearly all of the purchases and all the volume.
The vast majority have gone tyco's three a multi so it shows that the consumer there is appreciated that innovation.
And I you know our Salesforce is working effectively to convert adult smokers. The overall category has grown and our I mentioned before our heats and Heatsticks share has grown and we expect that to continue going forward and obviously there is going to be some more competitive activity in the second half. So we'll see how that plays out there may be some short term impacts of consumers trying other products and so forth, but were convinced that our product is still the best choice in the marketplace and we're going to keep investing behind it.
And the Ico Sthree.
Improvement, we think will help consumers see new.
Innovation from us as well as the competitive offerings I'm not going to give any further details on what that improvement is as you can imagine we'd like to keep it as a surprise for now but I think it's a significant.
Improvement that consumers were really appreciate so we're actually.
Pleased with Japan's performance, obviously, we're watching very closely the competitive situation and that certainly you know it's the first half of the year only behind US we saw the second half to go and I think Thats, one area, where we have to keep our eyes, a sharp and make sure we're addressing the competitive situation in Japan as well as in Korea.
Great. Thank you so much.
Yeah.
Our next question comes from the line of Bonnie Herzog of Wells Fargo.
All right. Thank you Hello. Thanks.
Hi, Bonnie Hi, Hi, I wanted to also ask about a little bit further on set of things that you were just discussing and I kind of wanted just maybe more specifically.
How consumers have been responding to warranty the competitor.
Innovation, that's been rolling out in the market you know are they simply trying to new innovation, and then possibly coming back to heico's or.
Do you think you're experiencing some share losses. These consumers are switching or is it possible that some of the new innovation by your competitors is helping to convert more smokers and driving a larger reduce stress markets.
I would say that we have is different between the two markets between Japan and Korea in Japan, I think we have we have seen the period of churn and we have more consumers that are actually settling back with heico's, obviously, there's the new wave of expansion coming from some of the device sales, especially from J.D. So there may be another another phase, but overall in Japan I think the Indian initiatives. We took are having a good effect our share growth. This is up from last year nicely and we see that our position is pretty firm and that we're growing the category and growing our share moving forward. So in Japan, while obviously, we'll keep an eye on the competition we feel.
Pretty confident going forward.
In Korea, it's it's a little bit more intense competition Kt ngs.
Device has a lineup of consumables in a taste directions.
Non menthol flavors that are that are kind of unique to Korea. If you will Korea as a country that has.
An overall trend not just in tobacco, but in other categories of all kinds of exotic flavors and it it's present, the tobacco area as well and KPMG has done a very good job of capitalizing on this it's not just by the way in the area of heat not burn. It's also in the cigarette category that they have put out a.
A large number of new offerings with all kinds of exotic flavors, but within the heat not burn area, we feel more.
Confident to two to respond and offer some additional flavors in in our line up and we will come with that in the second half of the year. So we'll have to see how those competitive responses get traction. We think we will do better going forward and we're also putting more attention to conversion and some of the other activities in the market place in Korea, but right now our results in Korea are are you need of some remedial action and that's what we're taking going forward in the second half of the year, whereas in Japan, I think we're on firm footing and we are in.
Quite confident going forward.
Okay. That's helpful and then in light of all gas has the competitive landscape intensifies.
How or where are you seeing pricing heading for reduced risk products.
How concerned are you that pricing is going to start to roll back.
In an effort for possibly you could defend share just trying to get a sense of the evolution of pricing and reduce stress markets overtime.
Well I think you need to step we need to separate out consumable pricing versus device pricing on the consumables, we have absolutely no indication of any sort of pricing issues or skirmishes and it in fact for example in Japan win win overall prices went up last year with the tax increase the pricing went through on Rps as well as on cigarettes, and we don't see any sign anywhere of the actual consumables being a big issue from the pricing perspective now on the devices. There are some countries where the competition has offered very low prices on devices, we are always priced well above competition, and surgically and where necessary we have and will continue to.
Offer discounts or promotions to keep our devices from being too high on price and we will need to keep doing that but that's that's a much more manageable issue mean the value of converting a consumer it's really in the consumable and making sure that you're in the mix for devices on device pricing is a relatively more manageable.
Economic challenge than than having to do with the consumable side. So overall I would say pricing in the category.
It is not a major issue, it's small skirmishes in certain countries certain places with the devices, where we're going to have to continue to make sure we're being competitive.
Okay. That's helpful and just one final quick question your guidance for me.
You are increasing your spending slightly like you noted you still expect your margins to be just as strong so.
Can you highlight for us what the key offset is or you know what is expected to perform better specifically as it relates to your margins.
Well I mean, I think the topline increase allowed us for a bit more spending while keeping the margins still.
Where it was before and I think that if you if you put that through the model I think you'll see that that's more or less what it is I mean, obviously, we're very mindful of our spending and working hard to get efficiencies you see us moving forward on our footprint.
As we've announced.
Some factories, we did Pakistan before we're doing Columbia, now we've announced the attention that beginning of consultations on Berlin.
We're working hard internally.
On our.
Cost categories, and wringing costs out and so forth, but most of those benefit you'll see more going forward in the next few years is not not showing up so much already this year because you have to.
Take the actions and of course incur the costs.
And treat people fairly and properly and then you get to the lower.
Cost base in this in the out years. So I think the 100 million is really.
Within the realm of that higher revenue and keeping the the EPS growth, 1% higher as well.
All right. Thank you.
Our next question comes from the line of Pamela Kaufman of Morgan Stanley .
Hi, Thanks for the question.
In your comments about step up investment in Q3, you alluded to accelerating investment.
Behind innovation will this happen specifically within heat not burn or will you be investing more behind vaping product.
And also what are your thoughts on M&A anything to extending our presence in the category.
Yes, and that the the investments are across several platforms, including E vapor, we continue with our plan.
Two.
Uh huh.
Roll out the first.
Initial market with the the improve the cigarette and with the mesh technology and the improved form factor and we're very confident that that product will be superior to what's in the marketplace. So we're continuing to invest behind the capacity ramp up for that and we want to ramp the capacity as fast as we can get to as many markets as we can on next year.
As far as timing on spending.
If you take the total 400 million that were now communicating on spending.
About $120 million has been spent in the first half, leaving us about $280 million and then we said about 200 or half of the 400 will come in Q3, it's across various categories not just the innovation, you're asking about but it's a broad based commitment to the smoke free future and all of our activities across commercial as well as product platforms as well as commercialization.
Thanks, Hi, how are you thinking about Ipos is ramping the U.S. can you help us think about the potential contribution to your results as it scales.
Well I mean, I think if you start with looking at the prospects for Ipos in the U.S. and I think it starts with the consumer receptivity.
And then in our estimation us consumers are very open to trying new products not just in the area of reduce risk tobacco products by the way, but also all products in general as compared to many other countries you as consumers tend to embrace innovation pretty readily.
You certainly see it with the cigarette category and some of the other categories in the us where consumers are trying new products. So that's that's a plus.
There is a pretty clear regulatory approach and we got clear guidance from FDA on on some of the aspects of of introducing this product in the U.S., there's good communication freedom.
That'll help build awareness and trial amongst the adult smokers and then you've got outreach and PM USA. They have excellent execution ability there well prepared they've got a very strong plan, we've been working with them to share all the learnings very good cooperation.
So we expect the us to perform quite well I mean, we would expect it to be faster on average than the E. U has developed I mean, I think you have to be realistic I wouldn't assume that it's going to take off like Japan did or Korea, initially et cetera.
But we expect us to have very solid results now of course, you know has yet to be started we'll find out a lot from the Atlanta, beginning and then we'll take it from there, but we have very high hopes and we're working very well together without you have to make this a success.
Thanks, and one last question for me.
Just curious about your early read on the competitive dynamics from Jos International expansion in Europe and Asia.
Well it is early days for jewel I'm, we're not seeing certainly any impact.
From a jewel on our overall results as you can see there's really no where that were having any issues with it but it is early days, we're watching it closely.
I mentioned staying ahead of competition with expansion and staying ahead of competition.
It's mostly we're talking about heat not burn, but its also quite frankly with an eye towards jewel as well and making sure that we get as much.
Uh huh.
Awareness and trial and presence throughout the EU in Russia and places like that as we have this great momentum and we are doing extremely well and it's with an eye also to the fact that others are coming amongst them a jewel. So we have our eye on it we're taking steps including with the.
The E cigarette platform for.
Investment in rollout that we've talked about and I and I mentioned earlier to make sure that we're going to compete well with jewel. Nonetheless of course, there's there's room for more than one.
A successful product in this category and Joe will likely get some success. So we're realistic about it as well.
Thank you.
Our next question comes from Robert ramp than VBS.
Hi, Good morning, three quick ones for me possible. The first question is so you will disclose markets are down around 1%. If you could help me with the bridge to the 2.5 for the full year.
The 2.5 as a reference to the total market for tobacco isn't heated tobacco units worldwide and the 1% of our shipment.
Right.
So I'm not sure maybe I Didnt get your question.
So I'm, referring to your key market day through the back which says the total market units were down 1.1% I appreciate that doesn't cover 100%.
Yeah.
I guess, what I'm asking is what did the industry do in one H and then how do we bridge from that to the full year.
The total industry in the first half was down a bit less than the two and a half.
And would be down a bit more than two and a half obviously in the second half to bring it back to that.
I don't have the exact number of.
Yeah, I mean, there's going to be probably nothing after a year you have you know normal decline rates throughout various countries turkeys. Good you know pricing that went into effect in April .
In Turkey, Turkey was growing quite rapidly.
Last year and into the first quarter, but obviously it was a pretty big tax and we've we've now taken pricing to Turkish lira per pack, so that market probably won't grow quite as fast as it was I mean, there are various.
Market events that you know infer that the second half will be a bit weaker.
Then the first half for both total market and for our own shipments too by the way because we're more or less flat in the first half, we're saying we're going to be down one for the year. So obviously, our second half shipment volume will be.
Down roughly the 2%.
Does that help create Albert.
That's very helpful. Indeed, So next question was on a inventory in Japan. So last year. There was a full three Q. There was a 4 billion gap between your shipment number in your in market sales I mean, clearly some of that will be loading ahead of the tax change, but how should we think about the lapping of that in the context of a difficult pricing comparative you flagged.
Yeah, I mean, there there are a couple of moving parts in Japan that have impacts on inventories, especially in one quarter. The next.
I mean as you point out we had the pricing last year.
We obviously drew down the inventory because we had a different projection for the market than what we started the year. This year you have a V.A.T. increase expected October 1st going from 8% D.A.T. to 10% be 80, that's across the whole market not just tobacco, but all products.
But obviously you know consumers are going to expect that there might be some pantry loading and trade movements from that Ah Theres also a health warning change coming next year. So inventories have to be managed to deal with that so there there are quite a few moving parts I mean, obviously, we made the statement that overall worldwide. We expect total heated tobacco unit.
Shipments to be more or less in line with within market sales in other words, if theres no inventory up in one market down in another market, but overall it should be more or less flat and I can't really give you that individual where each market is going to end up even Japan. Given these needs. These many moving parts and you have to remember inventories are really set.
As we go into the end of the year with an eye towards what we think is going to happen in the next year. That's the whole reason that the inventory is decided to what's coming and what events are coming as well. So it's a bit difficult to give you any more details on what's coming up for inventories other than that broad statement that we expect in in market sales and shipments to be approximately the same this year and not have the inventory.
Differences.
Okay.
That makes sense. So sorry, one last question just in terms of I cost share in Greece in Bulgaria that move backwards quote from course, obviously I'm not trying to say anything about.
Proposition, but I'm just wondering in those markets is that.
A function of the big away to two Q versus other quarters or is it a case.
You get to a certain point in the development of a market where you start getting the initial trend or is it you've redirected resource.
Well I mean, you have anymore you have to maybe.
You have to keep in mind, there's some volatility in the numbers, but if you look at Greece. The shares 8.1 up four from the prior year. So it doubled <unk> right. So you know there might be just like we saw in Russia. For example, where the overall IMAX is growing at a very steady very nice rate, but you saw the share moving around you know Q1 was overstated because of cigarettes seasonality and now you know when you when you look at the underlying and understand the situation the Russia share growth has been.
Growing and growing steadily but it's distorted by these other movements in the similar things happened in other markets, but when you look at the longer term.
You know both you called out Greece, it's doubled in the last year to 8% up for Bulgaria is up more than double has grown two and a half to four and a half.
So when you look at one quarter to another quarter with those kind of growth rates.
I mean, I I don't think that's really the best way to look at it but we are growing well in in a in both of those locations.
Okay, great. Thank very much appreciate the time.
Our next question comes from one of Michael Lavery of Piper Jaffray.
Thank you.
Could you just unpack the third quarter, a little bit more and especially in light of the VHP increase in Japan, and what should be relatively profitable.
For trade loading the how should we think about the revenues is still in the quarter being below your full year range and why would that be the case.
Well I mean.
One of the biggest impact is this timing that we talked about where the Q2 is benefiting by about two percentage points and that's obviously you're going to drag on Q3 on the top line and then when you look at it year over year. We had this very large pricing variance last year of 483 million.
And while we'll we'll have decent pricing this year as well it won't be nearly that big in the quarter and you add to that the spending step up.
Which is very much concentrated in that quarter.
And that's how we get to the overall picture of.
Of essentially flat with the pro forma from last year at 135.
I mean, that's pretty much the basics of it I mean, obviously there are individual events in certain countries like Japan, and so forth. The one year. The next year, but if you look at the bigger picture those are pretty big movements and significant numbers that.
So to that effect.
I remember last year, Japan had a price increase in the same.
Pattern right. It was October Onest, So you had trade loading.
And et cetera, So when you do it this year, you're you're the have the VHP instead of the price instead of the tax I'm, sorry, but you have a similar potential for trade dynamics that have really the same date. So so I don't think that that's going to be a big driver of it.
And do you expect to have year over year.
Are you anticipating having pricing go through with this tax like as well.
We never discuss forward pricing.
No. The VA. He is going to go up that's all we can really know at this point in time, we'll have to see what happens as far as any anything else.
And just on that usually have to discuss with the government. Your pricing ahead of time and and so forth. So it's not always very clear as to what's going to happen.
Yes, no of course, and then just back on the spending piece of it.
Can you unpack the incremental 100 million a bit.
You mentioned that half of it is going to fall in the third quarter.
Is the rest in the fourth or has some of that already happened.
Just to be clear, we took the 100 million increase added it to the 300 million that we had already said would occur that's a total of 400.
Half of that 200 million step up will occur we believe in the cure in the third quarter. That's why it's a pretty big impacts not just the $100 million.
It's $200 million of step up out of the total of 400 million that we expect to hit in Q3.
That's why it's a pretty big impact.
No thats it thats helpful clarity and as some of the timing just driven by opportunistic ability to to reinvest some of the momentum ahead of your plans was that how the Threeq you get a surge hits from the pacing perspective.
Yeah I mean.
We have we've only spent $120 million so far this year in the first half some of it was by design and some of it was some timing slipping and some things like that as it turns out Q3 is actually a very good time for us to step up this investment because we get.
Some time during the year to benefit from the geographic expansions that we're going to do and we have been planning them already now there's much of that's out of the original 300, the the 100 million on top as we go and try to address better some of the competitive situations and work on our longer term innovation.
Q3 is when we can get things rolling and get.
The commensurate spending that goes with it.
It's the timing so yeah. It just so happens that the concentration of the 200 out of the four falling into one quarter.
But its a.
A variety of different things driving that.
No. That's that's helpful. And then just one more on the UK, obviously, it's been a good theres theres some severe restrictions on your ability to communicate and market much about high cost but.
If you are starting to expand that Bristol in Manchester now.
It also was in the news, but there's been a 100000 devices sold in London over the last couple of years and some of those obviously could be.
In the hands of multiple so people could have more than one no question, but that might be something in the neighborhood of a high single digit share of London smokers. How is your progression in London as it is it gaining a little bit more traction and starting to have some some good chevron weather.
Yeah, I mean, our share in London is relatively small it's above 1%, but it's relatively small it's bigger in certain pockets are like around Canary Wharf West London, we have pretty significant share we have really good conversion rates.
In UK in London at 70%, so the people who do buy the devices successfully convert and and for the most part quit smoking and switch.
Ah completely the heat not burn we're continuing to invest as you pointed out by opening stores in Bristol in Manchester. So, we're making headway as you pointed out it's it hasn't been easy due to the regulatory setup and some other issues.
You have to keep in mind in London is like a crossroads of the world. So you have a lot of people to visit London that might buy did a device, but not actually consume heatsticks in London. So when I give you market share I'm talking about Heatstick offtake share, but obviously you would have devices that will.
Ill be purchased by people visiting London.
From various countries you you might have also londoners, who travel quite a bit buying heat sticks in the EU and bringing them back as long as they stay within certain limits. They can do that and prices are much lower say in Italy.
Your price for Heatsticks in Italy is about a significantly lower than than what it is in London. So you get a lot of that going on so I think probably London has a bit of a unique situation where the number of devices sold doesn't match up very as closely as you might think with the off take share of the consumables, but I think its a worthwhile endeavor for us to keep working on awareness and conversion of people in London, because it is a leading city in the world and one that helps set worldwide trend. So we keep chipping away at it and we are making progress we will continue to do that.
That's helpful. Thanks, a lot.
And ladies and gentlemen, we have time for one more question. Our final question will come from the line of grafting of Barclays.
Thank you.
For taking my question.
This is a follow up on that question that was earlier.
On the sequins share the market share in Bulgaria in Greece. So if I look at Japan, I caught start after having penetrated the early adopter traffic and the overall HTM category share.
Has been stable at around 20, 122%.
Nine roominess into Tianya, you are already at 20, plus and shared in Q1.
And if we look at Delhi to any market share they are up.
Very slightly so what I'm trying to ask is.
You had in the limits of early adopters and some of these eastern European cities and countries already.
Well I mean, you only one that would be kind of at the level, where you might think that there might be some challenging would be Vilnius, which is it as you said, 20% and it really all depends on the dynamics.
Of the pricing of the offer if you're running out of people that are in the premium category that can sometimes have an effect.
But overall when you look at you.
And even Russia, we still have quite a bit of a runway to go before I think we'll start to hit issues, where you say ive converted the vast majority of premium smokers are converted.
The vast majority of the early adopters and innovators and even now even when that starts to happen. We're now much more prepared for that because we know obviously you need to be prepared.
To make sure you have offerings that span the different price tiers, you need to be prepared to have the messaging in place for different groups. So obviously, it's something we keep an eye on him and we build the tool box to be able to move to a different strategy. When you start hitting those levels, but in the EU frankly, I think we're still in aggregate any way far far away from it keep in mind, a Lithuanian Vilnius are relatively small geographies within the EU. So I don't see it as an overall.
Issue for our growth rates in the EU, we're on a good trajectory and I expect us to continue to be.
Growing nicely for for quite some time to come but we are prepared and aware of it.
And as have the tool boxes, and and strategy for those sorts of situations.
Thank you for your question Okay.
Okay can I ask one follow up question.
Yes, you are increasing your revenue growth guidance this year to 6%, but not the three year guidance some greater than 5%.
So it shouldn't that be also increased but now because you're increasing that item from the first deal itself.
Well, that's not how we've set up the three year. We gave it has a compound annual growth rate.
Obviously, when we get into next year, we'll give some guidance for next year and.
We'll see how things are going before we do that we're not prepared to do that and we wouldn't change the three year overall.
Based on you know just this.
Yes.
This period.
Sure. Thank you thanks a lot.
Thank you very much.
And that was our final question I'd like to turn the floor back over to management for any additional or closing remarks.
Yeah I just wanted to leave three key takeaways first one being we've got very strong momentum.
As evidenced by our total volume, which is which is actually slightly positive on a like for like basis in the first half and it's both the conventional and the heated tobacco units, which are performing well second is that our strategy is working for the shareholders.
We've got the top line benefits that are flowing through with our margin expansion of at least a 100 basis points currency neutral that we expect for this year.
And this has given us the confidence to increase our investment.
To maintain this momentum into 2020 and beyond.
We're focusing on the longer term with the product and commercial.
Our development, we're focusing on geographic expansion, we're addressing competition to maintain our favorable competitive lead and when you put all three of those things together, we're in pretty good shape for the first half of the year, we definitely have still the second half to go and there are some.
Countries and areas that we have to make sure we're keeping an eye on amongst them, Turkey with the pricing and Indonesia with some down trading and so forth. We've got the increased competition on heat not burn, but when you put it all together, we're we're confident in the future and we are ready to.
Have a good second half and move into 2020. So thank you very much for listening.
Thank you very much for joining us today on the call. If you have any follow up questions. Please contact the IR team again, thank you very much and have a great day.
Thank you for joining the Philip Morris International second quarter 2019 earnings Conference call.
You may disconnect at this time and have a wonderful day.
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