Philip Morris International Inc. (PM) Q4 2017 Earnings Report, Transcript and Summary

Good day, and welcome to the Philip Morris International 2017 Fourth Quarter and Full Year Results Conference Call. Today's call is scheduled to last about 1 hour, including remarks by Philip Morris International management and the question-and-answer session. [Operator Instructions] Media representatives on the call will also be invited to ask questions at the conclusion of questions from the investment community. I will now turn the call over to Mr. Nick Rolli, Vice President of Investor Relations and Financial Communications. Please go ahead, sir.

Welcome, and thank you for joining us. Earlier today, we issued a press release containing detailed information on our 2017 fourth quarter and full year results. You may access the release on www.pmi.com or the PMI Investor Relations app. During our call today, please note the following, unless otherwise stated. First, we will be talking about results for the fourth quarter and full year 2017, and comparing them to the same period in 2016. Second, references to total industry, total market, PMI volume and PMI market share performance reflect cigarettes and heated tobacco units. A glossary of terms, adjustments and other calculations as well as reconciliations to the most directly comparable U.S. GAAP measures are at the end of today's webcast slides, which are posted on our website. Reduced-risk products, or RRPs, is the term we use to refer to products that present, are likely to present or have the potential to present less risk of harm to smokers who switch to these products versus continued smoking. 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 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. It's now my pleasure to introduce Andre Calantzopoulos, our Chief Executive Officer. Martin King, our Chief Financial Officer will join Andre for the question-and-answer period. Andre?

Thank you, Nick. And welcome, ladies and gentlemen. Before I get into a discussion of our 2017 results, let me share my thoughts on last month's Tobacco Products Scientific Advisory Committee or TPSAC meeting in the U.S., which I recognize is top of mind for investors. For reference, we have posted our full presentation to the committee on www.pmiscience.com. The meeting was part of the U.S. Food and Drug Administration, FDA's review of PMI's request to commercialize IQOS in the U.S. as a Modified Risk Tobacco Product or MRTP. To advise the FDA on PMI's applications, the committee gathered a wide range of scientific, technical and consumer communications topics, address questions and probe the likelihood and magnitude of potential benefits as well as how best to address possible unintended use. We believe that committee's interactions with presenters and its discussion reflected respect for the integrity of our scientific data and our commitment to bring IQOS to the U.S. Although the committee did not agree with some of the specific language related to consumer communications, it confirmed that the evidence supported the statement that switching completely IQOS significantly reduces exposure to harmful chemicals. The meeting with TPSAC was just one step in a broader ongoing review of our MRTP applications by the FDA. And the recommendations and votes of the committee, while important, are advisory. In order to make a final decision, the FDA will now consider the topics discussed at the meeting, including public comments, along with the totality of the evidence we submitted in addition to information we had already planned to submit. In the immediate future, we look forward to working with the FDA to clarify any outstanding point, while recognizing that some questions can only be realistically answered in a post-market scenario. In this regard, in 2018 we will complete an exposure response study, designed to measure clinical risk markers in adult smokers who switched to IQOS over a 12-month period. The results of the first six months term were received at the end of 2017. And the related report is under preparation. We expect to submit the report to the FDA in May. Separately, PMI has submitted a pre-market tobacco application or PMTA to the FDA which if granted will permit the commercialization of IQOS in the U.S. without modified-risk messages. This application was not before the committee as it follows as parallel regulatory pathway. Finally, I'm deeply grateful to my colleagues, for their exceptional work on our applications to the FDA and for the presentations last month. Our science and the commitment of our people, gives me confidence in achieving a vision of a smoke-free future. I would also like to thank the FDA for the time that it invested to review our application, as well as the many members of the public who took their time to provide thoughtful comments. Turning to 2017, it was a landmark year for PMI, reflecting better than anticipated performance of our flagship smoke-free product, IQOS, which drove a positive annual profit contribution from our RRP portfolio for the first time, encouraging early feedback from a range of government agencies and advisory committees regarding the scientific substantiation of IQOS, including a growing recognition of a risk continuum for tobacco and other nicotine-containing products. The accumulation of valuable learnings that are driving organizational changes to support and accelerate our smoke-free ambition and our highest annual net revenue growth excluding currency and acquisitions since becoming a public company in 2008. Full year net revenues increased by 9.4% excluding currency, driven by higher heated tobacco unit volume and IQOS device sales across all IQOS launched market. This reflects a favorable volume mix variance of $1.1 billion, our best ever performance on this measure. RRP net revenues reached $3.6 billion or 12.5% of total net revenues. Of which, IQOS devices and accessories accounted for approximately $0.9 billion. Net revenue growth also reflected favorable pricing for our combustible tobacco portfolio, partly offset by the growth in RRP allowances, which resulted in a total pricing variance equivalent to 5.2% of prior year net revenues, despite essentially no net pricing in Russia. Adjusted OCI increased by 7.4% excluding currency, driven by higher net revenues, partly offset by the adverse impact of higher sales of IQOS devices and increase investment to support the commercialization of IQOS. Consequently, our adjusted OCI margin decreased by 0.8 points to 41%, excluding currency. As outlined in today's press release, our reported diluted earnings per share when impacted by tax items, primarily related to the enactment of the U.S. Tax Cuts and Jobs Act. Excluding these tax items and unfavorable currency impact of $0.21, our adjusted diluted EPS increased by 10%. The negative currency impact was $0.04 higher than we had assumed in our previous forecast in October, notably due to the euro and the Japanese yen. Operating cash flow reached $8.9 billion, an increase of 10.3%, or 5.5% excluding currency. Capital expenditures increased by $376 million to reach $1.5 billion, reflecting higher investment behind heated tobacco unit production. These strong currency-neutral financial results were achieved despite 2.7% decline in our combined cigarette and heated tobacco unit shipment volume. The volume declined was principally due to lower cigarette industry volume notably in Indonesia, Philippines, Russia and Saudi Arabia, partly offset by strong growth in heated tobacco volume particularly Japan. The sequential improvement in our quarterly volume performance continued in the fourth quarter with heated tobacco unit growth driving a total shipment volume increased of 3.8% or 1.4%, excluding inventory movement. For the year, heated tobacco unit shipment volume nearly quintupled to reach $36.2 billion. The sequential growth in our total international market share, excluding China and the U.S., also continued in the fourth quarter. Since the first quarter, our quarterly share for heated tobacco units and cigarette increased by 0.7 and 1.1 points respectively. For the full year, our total international share was essentially stable. Lower share from our below premium cigarette brands, notably in Indonesia and Russia was almost entirely offset by the growth of our premium products led by HeatSticks and HEETS. Within the below premium segment, we continue to strengthen our portfolio through brand consolidation in 2017 with the morphing of local brands into international brands such as Chesterfield and Philip Morris, which gained 0.3 and 0.5 share points, respectively. Marlboro cigarette share was up slightly, a notable achievement given the disproportionate impact of out switching to our heated tobacco products in IQOS large market. The brand cigarette share increased in the Asia and the EEMA regions, reflecting robust growth in the Philippines and across markets in North Africa such as Algeria and Egypt. I will now discuss a few of our key geographies beginning with European Union region. Total industry volume for cigarettes and heated tobacco units declined by 1.9% in 2017 slightly better than our forecast decline range of 2% to 3%. Relatively modest decrease in industry volume largely reflected the improving economic environment across most markets. Our total regional market share in 2017 was stable, reflecting a gain from HEETS, which reached a share of 0.3% for the year and 0.6% in the fourth quarter, offset by the decline of our cigarette brand portfolio. Among the largest EU markets by industry volume, we gained total share notably in France and Poland, driven by higher share for Marlboro and Chesterfield, respectively. Share declined in Spain, mainly due to Marlboro's passing of the round €5 per pack price point in the vending channel at the end of 2016. The share performance in Italy is also worth mentioning, while down for the full year, the favorable sequential share progression continued in the fourth quarter, led by HEETS. Currency-neutral adjusted OCI declined by 4.4% in 2017, mainly due to unfavorable volume mix and higher investments behind the commercialization of IQOS. Fourth quarter adjusted OCI increased by 6.1%, excluding currency, supported by higher heated tobacco unit shipments. During the quarter, we observed an acceleration in HEETS share growth in IQOS markets across the region, which I will cover later in my remarks. Turning now to EEMA, our 2017 results for the region were significantly impacted by two markets, Russia and Saudi Arabia. In Russia, total industry volume declined by 7.2%, primarily due to the impact of excise tax driven price increases coupled with higher illicit trade. Despite continued down trading, our cigarette share was essentially stable, reflecting growth for Philip Morris, net of portfolio consolidation, offset by declines for Chesterfield, L&M, Next and Next/Dubliss. Net pricing, i.e., pricing above the excise tax increase was a significant challenge due to the competitive environment. Consequently, we were unable to offset the financial impact of our volume decline, which was essentially market driven. For 2018, the excise tax increase is scheduled to take effect in July rather than January, as in the past. The weighted-average total excise tax pass-on for the industry is approximately RUB5 per pack, compared to RUB13 last year. We are optimistic that we will return to profit growth in Russia this year. In Saudi Arabia, the excise tax driven price increase in June 2017, which resulted in the doubling of retail selling prices, drove a cigarette industry volume decline of approximately 28% in the second half and 17% for the year. The volume decline primarily reflected a reduction in adult smokers' average daily cigarette consumption, coupled with a surge in the consumption of illicit products. The structure of the excise tax increase resulted in the widening of price gaps and led to significant down trading to low price brands. This can be seen in our quarterly share performance, with sequential declines in the third and fourth quarters for premium Marlboro and mid-price L&M, partly offset by gains for low-price Chesterfield. These factors weighed heavily on our profit in the market during the second half of 2017, and we expect continued pressure this year, particularly during the first half. Moreover, the other five GCC countries are in various stages of introducing a similar excise tax increase, with the United Arab Emirates having already done so in the fourth quarter of 2017. As a result, we anticipate considerable volume and profit pressure across the area this year. For reference, Saudi Arabia and the United Arab Emirates accounted for approximately 60% and 20%, respectively, of the GCC's cigarette industry volume prior to the 2017 tax increases. In Japan, the spectacular performance of IQOS drove our results in 2017. Total shipment volume increased by nearly 30%, driven by the strong growth in HeatSticks demand and the increase in HeatSticks inventory levels. Excluding estimated inventory movements, total shipment volume increased by 13.1%. The favorable inventory movements primarily reflected, the increasing demand for HeatSticks, which we expect to grow further in the first quarter following a planned lifting of the restriction on IQOS device sales. The establishment of appropriate distributor inventory levels of heated tobacco units, given the current high dependence on a single manufacturing center; and the transition from air to sea freight of heated tobacco shipments, largely completed in the fourth quarter of 2017. Our total market share increased by 5 points to 32.1% with HeatSticks share up by 7.9 points to 10.8%. In the fourth quarter, HeatSticks share grew by 9 points to 13.9% and reached 14.1% for the month of December. Total industry volume decreased by 4.2% for the full year, broadly consistent with the secular decline rate for cigarettes prior to the introduction of IQOS. In Indonesia, the economic environment showed signs of recovery over the end of 2017, though consumer-spending remain soft. Against this backdrop, full-year cigarette industry volume declined by an estimated 2.6% compared to a forecast of approximately 3%. The shift of industry volume into the Machine-Made Kretek continued in 2017. Share for Marlboro Filter Black increased 1.4 points, driving overall share growth of the brand. While our cigarette share declined by 0.4 points, 33% for the year, we essentially recorded stable sequential share at that level across all four quarters. The 2018 excise tax took effect in January 1, resulting in a weighted average excise tax increase of 10.8% industry-wide, compared to 10.3% last year. This included a reduction in the number of excise tax tiers and we are encouraged by the government's roadmap to further reduce the number of tax tiers over the coming years. In the Philippines, higher pricing across our portfolio drove further profit growth in 2017. Price increases at the bottom of the market in particular resulted in the narrowing of price gaps between Marlboro and lower price brands. This contributed to the brand's strong performance, with share up 4.6 points to 33%. While our total cigarette share declined by 3.7 points last year, we recorded strong sequential share growth, beginning in the second quarter. Full year cigarette industry volume declined by 5.6%, mainly due to the impact of excise tax driven price increases on lower price brands. In fact, volume in the premium segment, which is essentially Marlboro, increased. As a reminder, the first step of the revised cigarette excise tax increased for 2018, took effect on January 1 with the second step scheduled for July 1. The industry weighted average total increase is expected to be in line with the increase of approximately 14% last year. Importantly, while the increase is higher than the government's original plan, a single-tier specific pack structure remains unchanged. Heading into 2018, we believe that we have finally turned the page on the multiple challenges that we faced in recent years and we are very optimistic about the outlook of the important market. Turning to the Latin America and Canada region, cigarette industry volume declined by 3.8% in 2017, mainly due to the impact of retail price increases in Brazil and Canada. Despite the cigarette industry volume decline, and essentially stable regional share, we recorded very strong currency neutral adjusted OCI growth, driven by higher pricing, notably in Argentina, Canada and Mexico. To close, on 2017, I will gather in more detail, the strong momentum of IQOS across geographies, beginning with Japan. As seen on the slide, HeatSticks recorded strong sequential quarterly share growth throughout the year, despite capacity limitations, first related to HeatSticks, and then on IQOS devices, as well as the increased availability of competitors' heated tobacco products. We thus begin 2018 in excellent shape, with the supply of HeatSticks no longer an issue. The shipment of HeatSticks now shifted from air to lower-cost sea freight, and the capacity limits on IQOS devices behind us as of this month. While the presence of competition in the heated tobacco category at the national level in Japan remains in the early stages, the Sendai prefecture offers insight into a competitive environment, where multiple established heated tobacco products are present. In this environment, IQOS is performing very well, as illustrated by consumer offtake data. During the fourth quarter, HeatSticks weekly offtake share increased by 1.4 points to 19.9%, while also growing PMI share of the total heated tobacco category by 4.4 points to 67.3%. In Korea, IQOS continues to perform exceptionally. Fourth quarter market share of HEETS more than doubled sequentially to 5.5%, reflecting growth in existing launch areas coupled with the impact of national distribution expansion. Outside Asia, we recorded strong market share growth for HEETS in the fourth quarter, with notable accelerations compared to the prior quarter across many markets. We believe that these share gains primarily reflect our relentless focus on building quality awareness, improving commercial execution and continuously applying our learnings across markets. Building adult smoker comprehension of the heated tobacco category generally, and IQOS specifically is key to the product success. The ability to do so is very dependent on the regulatory restrictions in place in a given market, particularly with regard to adult smoker communication. This in turn impacts the speed at which we are able to grow IQOS. Italy is a good example of a market that has required a relatively longer time period to gain traction. In this regard, we are very pleased by Italy's share growth acceleration in the fourth quarter, which provides evidence that our efforts to build the category are bearing fruit. The favorable fourth quarter market share progression is also visible in our focus area offtake shares, in markets where our launch of IQOS remains more targeted geographically. The performances in the Czech Republic and Slovakia, where IQOS was only launched during the third quarter of 2017, were particularly impressive, with focus area offtake shares already reaching 1.8% and 1.6%, respectively. Turning now to this year, our reported diluted EPS guidance for the year, at prevailing exchange rates, is a range of $5.20 to $5.35 versus $3.88 in 2017, and includes a favorable currency impact of approximately $0.16. This guidance represents a growth rate, excluding currency of approximately 7% to 10% compared to our adjusted diluted EPS of $4.72 in 2017. This forecast assumes currency-neutral net revenue growth of over 8%, driven by RRPs. The robust growth is underpinned by sizable upfront investments that while having an adverse impact on our near-term profit outlook reflect our growing optimism for the RRP category broadly, and IQOS, in particular. The incremental RRP spending in 2018, net of lower spending on our combustible portfolio is projected to be approximately $600 million, excluding currency. This equates to a drag of approximately 6 points on our projected EPS growth compared to adjusted diluted EPS of $4.72 in 2017. The incremental spending comes on top of introductory discounts on IQOS devices to accelerate adult smoker switching. We plan to provide further detail on consumer acquisition, commercial deployment and the economic model for IQOS during our presentation at the CAGNY conference on February 21. The $0.16 of favorable currency, at prevailing exchange rates, included in our 2018 guidance is driven primarily by the Euro, Russian Ruble and Japanese Yen. We have currently hedged approximately 50% of our 2018 forecast sales to Japan, which at prevailing exchange rates, translates to an effective rate of ¥110 to the Dollar versus ¥111 in 2017. This is the first time since 2011 that we entered the New Year with guidance that reflects a positive currency impact. While we are encouraged by this development, we should caution that spot exchange rates remain volatile. We are aware that investors would appreciate increased clarity on the phasing of our full-year results. While we don't provide quarterly guidance, I do believe that it is appropriate for us in this instance to share additional visibility on our expected first-quarter 2018 results. Despite strong anticipated currency-neutral net revenue growth in the first quarter, we expect reported diluted EPS of approximately US$0.87, at prevailing exchange rates, including approximately $0.03 of favorable currency. Our results in the quarter will reflect unfavorable comparisons versus the first quarter of 2017, primarily related to: the impact of the excise tax-driven cigarette industry volume decline and related down-trading in the GCC, principally Saudi Arabia; higher RRP investments, primarily in the EU region; and our 2018 contribution of $80 million to the Foundation for a Smoke-Free World, which is fully expensed in the first quarter. In addition, given the heightened interest around the recent corporate tax reform in the U.S., I will provide a general overview of the related impact on our estimated effective tax rate in 2018. I must begin with the caveat, however, that our estimate reflects our current capital structure, as well as our current interpretation of the new tax law, which may change as implementing regulations and clarifications become available. For 2018, we expect an effective tax rate of approximately 28%. The difference between this rate and the 21% statutory rate under the new law, reflects the fact that PMI operates in markets outside of the U.S. and is driven by three main factors: foreign tax rate differences, the non-deductibility of interest expense and the partial disallowance of foreign tax credits related to the application of the rules for global intangible low-taxed income. It is important to know that under the new territorial-based system, we may face greater variability in our effective tax rate going forward, largely reflecting any changes in earnings mix by taxing jurisdiction. With regard to the impact of tax reform on our shareholder return priorities, we remain committed to restoring, over time, our leverage multiples to the ranges associated with our single-A credit rating. Importantly, the new tax law provides us with greater flexibility on cash repatriation. We are targeting operating cash flow of over $9.0 billion in 2018. This is above last year's level, despite our initial payment of approximately $130 million related to the repatriation tax on our unremitted earnings under the new tax law. We plan to use this cash flow primarily for capital expenditures to support the growth of our business and for dividends, at the Board's discretion to our shareholders. We do not forecast any share repurchases in 2018. We anticipate capital expenditures of approximately $1.7 billion this year, versus $1.5 billion in 2017. The projected increase is driven by higher investments to support RRP capacity expansion. In conclusion, our robust business performance in 2017 underscored the enormous promise of reduced-risk products, the enduring strength of our combustible product portfolio and the commitment of our employees to lead the transformation of our industry. We recorded strong full-year currency-neutral adjusted financial results, highlighted by our highest annual net revenue growth, excluding currency and acquisitions, since our spin-off in 2008. IQOS is performing exceptionally, demonstrating the importance of our investments and our ability to transfer and apply learnings across markets. We estimate that over 4.7 million adult consumers around the world have already stopped smoking and made the change to IQOS. To support our business transformation, we have reorganized into six regional segments, up from the previous four, effective January 1. This change aims to enhance our executional focus and our ability to exploit business opportunities in an accelerated manner. The outlook for our business remains strong. Our 2018 EPS guidance reflects a growth rate of approximately 7% to 10%, excluding currency, compared to adjusted diluted EPS of $4.72 last year. This includes significant incremental investments behind RRPs, as outlined earlier. Our guidance including currency reflects a growth rate of approximately 10% to 13%, also compared to adjusted diluted EPS of $4.72 last year. Thank you. Martin and I will now be happy to answer your questions.

Thank you. We will now conduct the question-and-answer portion of the conference. [Operator Instructions] Our first question comes from the line of Matt Grainger of Morgan Stanley.

Hi, Matt.

Hi, good morning. Thanks, Andre. I guess, I wanted to start by asking a few follow-ups on the reinvestment guidance you communicated for IQOS. This is something that's obviously been highlighted and sort of directionally talked about in recent months, but can you just address the decision to sustain that reinvestment phase and what the implications are for investors as they think about modeling out the profitability you expect from your RRP platforms relative to those initial 2020 targets?

Okay. First of all, I think you have very strong momentum behind IQOS clearly and we want to accelerate this momentum, okay. So the investments I outlined, around $600 million incremental, obviously, behind IQOS that is more amounts of money, but there is a reduction that is coming from the fact that we are reinvesting some of the conventional business back to IQOS. And some of these costs are pure incremental and may be also repeated to a certain degree in the forthcoming years as volume grows and we gain more consumers. Some of them are infrastructural costs, including digital infrastructure, increasing the number of retail shops we have in different market. And the number of IQOS coaches we increase and so on. And this I consider them as necessary this year in order to accelerate our growth in the acquisition of new consumers that switch out of cigarettes, but they will stay rather in the base in the years to come. So I don't expect them to expand at the same rate. We also need to understand something that - and I appreciate it's the new business model and we'll explain more in CAGNY. But let's understand one thing, in any given market you need a certain infrastructure to start. So as I said shops, a number of coaches in place, a number of contracts with retail outlets, call centers, you name it, okay, that we didn't have to have under the previous business model. Then, during the year, let's assume you go from 100,000 to 500,000 people that switch to IQOS. You need the acquisition costs in the first year, because they vary between, say, $400 and $2,000 depending on the market at the beginning and the infrastructure cost. But you get revenues only from the equivalent of 250,000 converted people during the year. So next year, however, you get revenue from the entire 500 in my example. So there is always a period when you build the infrastructure and acquisition cost, but the revenues come the year after. And obviously, the year after you don't have acquisition costs on this particular consumers, but you have your retention cost that are notoriously low. So in our logic, I think in the years after, you have to see the benefit of what you invest this year and I would assume that 2019 results would be better 2018. Having said that, there will always be new markets that we open and there will be commercial costs. But as we get ahead of the curve, as we seen in Japan, where clearly the bottom line is positive from RRP, you will see it in other markets. So I think that's the right business model to grow the business. And when we see momentum, we have to put the money behind the momentum. And that is exactly what we're doing.

Okay. Thanks. I agree, I agree regarding the business model and the momentum in Q4 was definitely encouraging. I guess, just to help us with the modeling of all the moving parts on this, to that end, based on the capacity - from a capacity standpoint, you may talk about this at CAGNY, but can you give us a sense of where you plan to be by yearend 2018? And given the magnitude of incremental spending, how closely would you expect shipments to track relative to capacity? And, I guess, the last part is you've had 14% organic sales growth in the second half of the year, you're talking about 8% for 2018. Is that just your reflection of conservatism or can you help us think through any other big offsets that we should be thinking about?

Okay. Look, we are explaining in detail the progress of capacity build in 2016 and 2017, because of the constraints. I think in 2018 we have to assume, unless we have some real explosion of IQOS sales somewhere that we were not bound by capacity constraints in 2018, okay? So I think that becomes less relevant going forward. Of course, we have to build capacity as volume grows. But - and we have an increase in capacity because the capital expenditure clearly is up compared to this year. But it should not something that should be worrying investors going forward, because I think we are ahead of the curve just now. So that's the first thing. The second thing clearly is - I gave a range and we gave a range of 7% to 10% EPS, despite all the investments, which I think it's pretty good growth. Clearly, the most - the biggest variable I think we will agree is the sales of IQOS, okay. I think the minimum I expect is 65%, around - increase rather than 60 billion plus, okay. But you appreciate we start, we have many markets that are open. There are some of there at the beginning. All markets have very good signs of growth. But it's very difficult to anticipate the speed and that will the variability and that's how we look at it. Now, to finish, to give you the other rules of thumb, we said that devices and you have some indication, will always be something between 25% to 30% of the revenue growth. And devices at the beginning of the journey, they are not bottom line accretive. I mean, actually we lose money on those, but that's for a very good reason. Over time, I hope we will get there. So that part does not really contribute to the bottom line at this stage. And it may sound volume - margin dilutive, but the thing is they're necessary investment in order to switch the smokers. And the rule of thumb is always what I gave last year, for every 1 billion of incremental HeatSticks sales you need to count rather 330,000, 350,000 units. So that gives you a little bit of color on how to calculate this thing. Now, sorry guys and ladies, I understand this is a bit more complicated than before, okay. So we'll try during CAGNY to give a bit more color on how to better calculate this thing. But I hope I helped.

Yeah, that's definitely helpful. Thanks again, Andre.

Okay.

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

Hi, guys, how are you?

Hi, very good.

And a couple of questions please. First of all just on IQOS, it seems to be kind of really accelerating in Europe now. I'm just wondering if you could talk us through these dynamics a bit more, and what sort of market share you think it's doable in your - for fiscal year 2018, especially given the heightened investment? And I'd also be keen to hear what has changed in Italy to see the pickup in share there, which is encouraging. And then secondly, just coming back to the spending expectations, you talked about lowest spending on the combustible portfolio. Could you give any details on the areas of combustible? This reduced spending will be focused on what brands? And will it be local portfolio brands, et cetera? Thank you.

Okay. I think, what is happening - and of course, what - as I said in my remarks, different markets get different amount of friction, so it takes a bit more time. I think, there are three things: first of all, we learned a lot during these last two years, I mean, we have to be very fair. There are many new things for us from much more consumer centric, marketing, logistics, call centers, coaches, you name it. But as we learn we deploy and apply the learnings. So that's the first thing. We are much more efficient in the way we approach smokers to convince them to switch, I think very understand better and better. And of course, as we work, there is more awareness. So at a certain stage all of these are conducive to higher market share and an acceleration in that number of smokers that switch to the product and the category. So it's not a surprise to me that we see acceleration and more. I will not venture a forecast of market shares here going forward. And I think Italy, as you mentioned is a very good example of a lot of patience, a lot of work, a lot of infrastructure in terms of the amount of coaches and training of the coaches. But now we start seeing results, and in some cities we are much higher than the national share. So all this is baked into the guidance. And hence as I said, the range is well, because the speed by which things are going, I cannot forecast. I wish, I had a crystal ball, but I don't precisely have it. But all - everything is moving in the right direction and upwards, so that's what we'll all be happy about it.

Good. Thanks. And just on the spending around the combustible portfolio?

Yes. Some of the - what we try to do is in every market is strike the right balance between what is necessary to maximize support for IQOS without clearly living around to our competitors on the existing portfolio. We also are much more focused in the number of new product introductions, we do in this market, because we have increased efficiency and focus, and actually we have much higher success rates by being much more focused, which is very good news. So we are not moving money out of the business unnecessarily, but clearly the feel for focus and our investment is on IQOS. But I don't see in the markets, where we have dual existence of the products, because I am not talking here, the markets where IQOS is not available like Indonesia, where we continue with normal investment in the business. In this markets, we don't see any negative on our existing portfolio in the country, but also focused us on consolidating as I said, morphing local brands into international brand, an increase overall efficiency. And that's how I would look at it.

Okay. Cool. Thank you very much. Very helpful.

Our next question comes from the line of Judy Hong of Goldman Sachs.

Hi, Judy.

Hi, how are you?

Good.

So first, it just bit of a follow-up to Matt's question about revenue guidance for 2018. So I think based on the commentary around IQOS - the things like IQOS could contribute maybe about 10% of revenue growth. So I'm just wondering within that 8% plus revenue growth guidance, what are you expecting in terms of the combustible revenue sort of breaking out volume versus price?

Okay. Clearly, we see a decline in the volume of combustible, both because of the secular decline, but also because of the switching to IQOS, okay. So the mix - and the volume mix there is going to be negative. Now I try to say this in my remarks is important to notice that the pricing variances that you will see going forward. I have two components, because of the way they work and I think it's important for everybody to understand. There is the combustible price increases, on which I think we have pretty strong power and nothing has lost there, the model is robust, and I will explain. However, as the allowances on the devices and sometimes other incentives we give for IQOS. For example, going against the pricing variance, the net variance is lower on what the combustible bringing. Assuming no price increases obviously on the IQOS HEETS. Okay. The second element is to give you an example of what happened in Korea, just to give some color. Okay. In Korea, we had a higher net ex-factory price, there was a tax increase, the net ex-factory price during 2017 went down. The way you report variances is that you take this difference of the lower net ex-factory price, but we multiplied by the volume projected in the current year. And that variance maybe heartbeat in the hundreds of millions, but it's nothing dramatic, because you didn't have this business before. So it's not the current model, where we have a price variances as real price variances, it's just a little bit. I wouldn't say hypothetical, but it's a bit theoretical. Okay. So if we take last year, we reported pricing variance of 5.2%, but if I exclude the allowances on the devices will be in the range of 5.8%, 5.9%, which is not different with the price variance we had in combustibles in the past. And next and that is despite the fact that we didn't have real pricing in Russia. So next year is going to be higher, so nothing is broken in the model, just for you to understand, okay. I don't have if I am helpful.

I guess the 6% you're referring to the consolidated pricing variance for IQOS and combustibles, right?

It's 5.2% this year we reported, okay. So that's consolidated, if I deconsolidate 5.9% is combustible and the negative is coming from the allowances on the devices and other incentives, okay. And obviously, this is going to increase next year, the allowances. But as I said, if you take combustible to combustible comparison is going to be higher next year compared to this year, okay. If that makes sense to you.

Yes. That makes sense.

To 2018 versus 2017. What did I say? I was in 2017. I'm sorry. I missed the chronology.

All right. I think, I guess that. Just separately into Japan, so first on IQOS, it sounds like, if you kind of look at the retail market share performance and your shipment figures there is sort of a $12 billion or so in terms of additional shipments in 2017 related to favorable inventory movement. And I think the way, we should model this is the space in the base, and so we are not going to see an adverse impact in 2018. So I just wanted to clarify that number one. And number two, JT's view of the total market decline in 2018 seems pretty sizeable. So I'm just wondering what you're thinking in terms of the combustible pass the HeatSticks volume outlook for Japan, if there is anything changing from a secular perspective that you see.

Yeah. I look, we have to build these inventories, for the reasons I explain. So I don't see this decreasing. If I see anything at the volume goes up and it has to be adjusted, obviously, upwards overtime. I'm talking our HeatSticks inventory. Obviously, we have reduced the combustible inventory to reflect the volumes of combustibles going down. And we will continue adjusting this during the year as it unfolds. So that's to answer your first question. The second one is, look, we have own projection for total market in Japan, including obviously HeatSticks, and there is nothing in the horizon that would affect - that would goes any change in what happened in the previous years. Now we are now various discussions about an excise tax increase in Japan towards the end of the year. But this will be implemented, if anything in October. And I don't think, it will affect particularly 2018 and we have more effects in 2019, okay.

Yeah, got it. Okay. And then just finally, Andre, I understand your comment about the TPSAC recommendation, not binding and it's more advisory nature as we think about the modified risk application. But I am just wondering if that is affecting sort of your conversations with other governments as you discussed tax structures and regulations. I think some of the headlines talking about the recommendation, potentially could be viewed as something that the other governments may considering, so I am just wondering if that shape of the conversation is changing at all post the TPSAC meeting.

Well, I think we need to separate the regulatory discussions from fiscal, although, you're right, sometimes, they are related. I think, we see across the world very encouraging signs of various governments and agencies, embracing harm reduction through innovative products. I don't know, if I am right, there is in Public Health England report that is a clear endorsement of the new product, and talks about the harm reduction potential of electronic cigarette and of heated tobacco product. So there is an increasing movement, and faster than I expected in favor of the category. Okay. And despite - irrespective of TPSAC that I will come back, I think the policy announcement of the FDA is very clear, okay. That the new category has a very significant role to play in the policy of FDA. So even in countries you may refer to Korea potentially, but there were some discussion about excise taxes, I think they all recognize that this products are not cigarettes and they left open adjustments, and Martin can correct me here, because he was much more involved in this as President of Asia, open in revising the tax rates, if there is more evidence about the harm reduction potential of this product. So I don't think the dynamic here is changed, there will be some degree of volatility potentially, and I think the signs overall at very encouraging. Now, clearly there are some people of goodwill that take the discussion around the TPSAC out of context and you've seen titles saying FDA rejects IQOS MRTP, we all need to know that FDA has neither approved nor rejected anything. This is an ongoing process, okay. But clearly, outside the U.S., we are very attentive and we correct with governments and other people, when necessary to put the situation to the right context. But as you know, there are a lot of people out there, that would take any opportunity to discredit RRPs, because it is not in their interest. But I don't think that's a subject of our conversation today.

Got it. Okay. Thank you.

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

Hi, good morning.

Hi, I just had a question for you to follow a bit on Judy's question, and your response to her. I just want to think about the pricing and how that will flow through in the year. Is that right to think about, if we can separate combustibles from the totality of the company to think about 6% type pricing. As I think about it, your allowances are going to grow for IQOS and for devices. And the more your HeatSticks volume growth at least to this point you haven't taken much in the way of pricing against that, that would also likely way on that percentage of pricing. If I'm thinking about it the right way, is that the way to think about that?

Yes, except that as I said many times. We have to be very careful with the pricing of the RRPs. Because, there is always the right price in order to maximize speed of switching. Make sure that governments do understand that we are not greedy and trying to benefit from more favorable tax regimes. Not making them too cheap, because that also worries some in terms of unintended use by young people and that balance and also making them available over time, so our portfolio of products to all people in any country. As I said initially, I think it's the right approach to make innovation rather premium, because that's more credible, and we've seen that this is correct. We also try as you know IQOS not at the premium segment, but in mid-price segments in certain places. We, frankly speaking, don't see any difference in the speed of conversion at the initial stages, because that's not the biggest consideration. But over time, we need to offer smokers a variety of products at different price. And as I explained as we have new versions also of IQOS coming on stream over time, we may decide to keep some devices and variance at a lower price, and some of the higher. So we have access to a larger part of the smoking population. At the same time, we also fulfill our promise that will give the product to as many people as possible. We also need to know that as we gain economies of scale, the cost of the devices themselves is going down. Already this year, we see a decrease, but if I take to where we started kind of commercial production to today, we have 15% to 20% reduction in the cost, which you may decide to pass-on the consumers are not over time. So there are number of variables in here and the same you'll see on the HeatSticks as we gain experience and more efficiency in our production. So these are on the positive side, but we cannot put them all in the pocket in 2018. But I think these benefits coming on more and more in the years to come.

Okay. That was good. Thank you for that. And then, just a question for you on strategy behind IQOS for 2018. Is your goal to get into the most markets you can or to be deeper into your existing markets. And if I could also ask like how do you factor in Platform 2, for example, on the expansion of that product throughout the year, is that factor into your assumptions?

Yes. I think for 2018, our priorities to focus and go deeper into the existing markets. It doesn't preclude us from opening new markets, it make strategic sense, okay. But I would rather put more effort and go deeper in the existing markets rather than expanding more. And I think that makes sense, because we are in a sufficient number of markets now, okay. So I don't know if I answer your question on this if it's clear.

That is clear. And just is Platform 2, is that like a meaningful contributor, I guess, the way to ask that for 2018? Is that just something still fully developing?

Okay. We are just testing in a couple of places, we started in Dominican Republic, a small scale test, learn better about the product. I can't exclude we will do another few market tests, and - but I don't see any large expansion in 2018. As I said, we need to build the category understanding in the existing markets, get the momentum with IQOS and then we can envisage all these things in the years after. Now bearing in mind that as we add platforms to our infrastructure, clearly, they are not incremental, because the infrastructure can support all the other platforms, the retail shops, the coaches everything, so - but as I said, our job this year is focus and that's what we are going to do.

Okay. Thank you for that.

Our next question comes from the line of Bonnie Herzog of Wells Fargo.

Hi, Andre.

Hey, Bonnie.

Hi. I wanted to go back to TPSAC in the comments and get a sense from you about the potential timing of when, you are expecting the FDA to, I guess, approve hopefully your PMTA for IQOS? Just trying to get a sense of when that could happen?

Well, the short answer is, I don't know exactly. There is a statutory time that points to the first quarter, but it's up to the FDA to decide, okay. I have no indication from the FDA, or when they will take a decision, okay. And then for the MRTP clearly, we know this is a one year, but they can stop the clock at any time. As I said in my remarks, we will - we have now the results of the first six months of the long-term exposure response study that our final reports are written and as soon as we have them, we'll submit them to the FDA, latest May this year. And I think that will - this study will answer some of the questions that are raised also on the TPSAC, okay. So we will see how this goes. And as I said, we stand ready to continue working with the agencies in order to answer any questions they may have, so that we help them with the final approval. As we are seeing from the TPSAC there was - because I think overall the TPSAC was encouraging, and I think the dialogue, as you've seen was very cordial and with a lot of respect to our people. I think, it's a great job. There was some questions raised regarding in particular the specific margin or how you communicate this products to consumers. But I think, can be addressed. So we'll see how we deal with this - with the agency. But the process is ongoing.

Okay. Understood. And then on IQOS, you touched on this a little bit, but curious as you step up spending behind IQOS, can you give us a sense of how long it is taking to convert a consumer from combustibles cigs to IQOS? And is that conversion process shortening as either you're getting better at it or word of mouth is increasing? And then should we anticipate that the stepped-up spending this year will be evenly spread throughout the year or will it be more first-half weighted.

Obviously, as the product becomes more visible, the word of mouth is helping. Okay. So the effort initially is not different, because you need to contact people, and you need coaches to take them through. And, sorry, it takes the initially the initial two to three to four weeks for every person to fully switch. Okay. But if I - and as I said, it also depends on the restrictions we have in the market. Now, if I take - what we are doing also is implementing digital tools, so that some of the consumer explanations and let's call it handholding during their conversion period can be done digitally and not by physical coaches, which clearly can both accelerate the number of people and reduce costs. And that to certain degree recollected in our current projection. Now, if I take market like Korea for example, the amount of coaches we used compared to the market share we have is much lower than what we had in Italy for example. That's also because there was already a high awareness and comprehension of the product because of Japan. So it went much faster. And I think this momentum will build over time. Also as we have more and more markets, for example, in Europe with sizeable share. But it's a bit early for me to take into the projection. So we have a more conservative probably approach to this for this year.

Okay. But in terms of the spending, Andre, that you talked about you're stepping up.

Bonnie, I don't really know. I think it's evenly spread, but probably can somebody help me. There is a lot in the first quarter, because we are building infrastructure in Europe in particular and hence the results. But if you ask me how it goes by quarter, honestly, I don't know. I guess, the guys can find out and let you know.

Okay. It'd be great. And then just a final question on competition in our RRPs and really how IQOS has performed. Again, you touched on this a bit, but I'm curious where competitor products had been introduced, curious to hear more about the consumer behavior in terms of trial of these competitive products, possible stickiness factors of IQOS and then what's been happening to the promotional activities to drive trial behind all of these new technologies and how much are you guys willing to step up spending to retain share?

First of all, I think it's a good thing that competitors are coming into the category because so far we were the only ones bearing all the cost of educating people about the category. And I think also from an overall public health perspective that's a great that is happening. Then I've always said that this is going to happen is welcome. I don't think that our spending just now is about defending our share against competitors, okay. It's much more about continuing to move people into the category. And I think after that, the better product and better ecosystem will always prevail. Okay. And this is what we're staying focused on or continuously upgrading the product that consumer experience the interaction we have with them through our call centers, coaches, retail shops, accessories we offer, so an experience ecosystem that brings the brand equity. Okay. And I don't think we change anything there, because we have competition. Obviously, we're not going to have 100% of the segment. That's pretty clear, but I think there is enough room for everybody. And as we've seen in Japan, despite everything and the limitations we had, even in Sendai, we have 67 something share of the segment despite the fact that all the competitors are there, and the whole category is constantly growing, and we're growing share. So I'm fairly optimistic and I think it's very good that others are in - are coming in. As I said, because we're bearing the whole burden on our own just now.

Okay. Thank you.

Thank you, Bonnie.

Our next question comes from the line of Michael Lavery from Piper Jaffray.

Thank you.

Hey, Michael.

I'm wondering if you can just give us a sense of how you think about beyond 2018. I believe you've said before that you would revisit that and I'm not sure if that's still the plan or is there a time we could expect an update there or how you think about what some of the investments you're making this year can get you going forward.

Yes, I think we'd discussed this in our Investors Day in September if I'm not mistaken, Nick. As I said, a part of the cost that are in our base for this year are going - are not going to be incremental or by any means proportional to the volume growth in the years to come. And as we have fully converted people or fully switched people, clearly we should see the benefit next year. Also this year in the base for example, we have two elements, we also have the foundation that is going to be in the base of $80 million per year. And we also have the drag from the GCC that should abide by the yearend. So 2019 should be better in my view. And then we'll give you a bit more color about the thing going forward, bearing in mind all the uncertainty about, yeah, the volumes of IQOS and the speed of the category. But we'll do this towards the end of the year when I think we have a better reading than we had so far. Although I think as I said, things are going very much in the right direction and faster than I expected so.

Okay. That's helpful. Thanks. And then, just back on TEEPS, with the Dominican Republic launch, it seems like that's certainly generally a lower priced market. Without that upfront cost for the device does that give you more flexibility and where that products - looks like it has opportunities relative to IQOS.

It's not a question of price, okay, at this stage. First of all, this is not a launch, just a test to understand - small scale test to understand how people use the product and gain the experience, okay. I think the TEEPS or Platform 2 can also address a category of more conservative consumers where - because the ritual closer and because all these electronics and all the hassle that's quite around this is lesser. That I think can attract much more conservative smokers. Yes, it gives you also a pricing flexibility, but frankly speaking, if we take the device, if you take it per day, it's probably $0.15 per day. So on a pack of cigarettes, even in developing market, it's not exactly an insurmountable amount of money, okay. Don't forget it lasts for 8,000 experiences and as the batteries get better it will last longer. So I think that we have this flexibility to go both directions. But for sure, there is a category of smokers that will feel much more comfortable with Platform 1 that they will feel with Platform 1. And I see much more impact there just on only pricing, using as a pricing proposition.

Okay, great. Thank you.

Our next question comes from the line of Vivien Azer of Cowen and Company.

Hi, Vivien.

Hi, good morning. First off, thank you so much for the incremental color around the first quarter. I think that will prove incredibly helpful. My first question also on IQOS of course is can you offer any updated views on kind of how you're seeing cannibalization in your portfolio with IQOS continuing to gain momentum. I'm thinking specifically about Japan, where it does look like the rate of Marlboro market share losses accelerated throughout the end of the year. Thank you.

Sorry.

Vivien, you asked about cannibalization?

Yes, please.

Sorry. I think cannibalization rates are coming down over time, as obviously the product become more known. And if we take Japan or Korea it attracts smokers that switch, do it from different price categories and up-trading, okay. Clearly, as it is premium position it will always disproportionately attract people from the premium segment, not only because of price, but also because the most progressive smokers are in the premium segment typically, okay. So - but if we look at the initial cannibalization rates and where we are just now in Japan, if I'm not mistaken, Martin, they have come down quite substantially. We are still slightly above our market share.

Just a few points above.

Just a few points above. They used to be 10, 15 points above our market shares. Okay.

Okay. Thank you. And then on to South Korea, could you add any commentary around the competitive landscape there given there is a third heat-not-burn player in that market? Thanks.

As you've seen from the last quarter, I mean, IQOS is booming is Korea. Now, KT&G announced their product and that - they don't have full national availability at this stage if I'm not mistaken. Maybe Martin can explain a bit better this.

Yeah, KT&G is still selling through one C store chain. I'm sure they will expand it as their capacity becomes more available. And it's competition, as Andre said, it helps accelerate the overall category. And it comes down to the whole ecosystem. The quality of our product versus theirs. And we're confident that we have a great product.

Terrific. Thanks very much.

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

First of all, thank you very much. I realized time is going quickly. And thank you also to your openness. It really is appreciated. So my first question, can you just give us the latest CVS share in Japan? That would be helpful. Thank you.

Let me find this, Adam. Okay. National…

Please.

So it went from - if I take - I have the numbers here. July 2 was 12.8, 14.7 in October, 16.2 in December and 16.7 the third week of January. That's very - it continues increasing. Okay. Tokyo is faster and [for Qualco] [ph] faster, but we're around these numbers, okay.

Okay. Thank you very much. That's very helpful. And the second question, I suppose, follows on from that. I think in answer to Matt, you said, you'd hope to do at least 60 billion of IQOS in 2018. And I was just wondering, should we think this main increment is equally balanced between Asia and Europe or do you see the incremental, it's twisted either to Asia or Europe?

In terms of absolute incremental, it's still Asia. In terms of percent incremental it's vastly more in Europe.

I was thinking in absolute terms.

In absolute it's still Asia. But…

This is - so it's really dependent on Japan and Korea and I guess any other markets you may choose to launch in is what you're saying.

But in Europe, it's a very big incremental.

In - as well. Okay. Thank you. That's very helpful. And my final question is around TPSAC. So the thing that really surprised me was the data that came out that the intent to purchase in the U.S. doesn't seem to be affected by any health claim. And I was wondering whether you think, whether the experience in other markets where you've tested shows that making a health claim on the packs, does that have any influence? Or is it the case that actually health claims are not what's important, what's really important is coaching and what you're doing already?

I mean, the experience is very simple. Smokers ask a very simple question, is this better than cigarettes for me and for the people around me? And the more clear you are in this answer, the more convincing you are and when people subsequently ask you what are the key reason to believe that if they are. But that's a fundamental question, okay. Now, it's pretty clear, based on the cultural characteristics of people and we should put as we said also the TPSAC, pre-market surveys are as good as they can be, but only post-market you can have actual understanding of how people behave, okay. What we see at them is in different countries people have different drivers. In Japan, the key driver is the perception that you convey to other people, okay. Much more than me and everybody who knows Japan understands their cultural difference. So, Japan, the fact was we could communicate that this is vastly better for the people around you was an important driver. It doesn't mean that the health is not an important driver as well for people. Now, the other thing that sometimes people in public do not understand is, first of all it's not about label on the pack, it's about what you tell people. Okay, and also, the fact that consumers that adopt the product talk about it. Okay. I mean, there are plenty of testimonials in Japan of people saying I feel much better. That has changed my life, and so on. So even if there is not an explicit health communication, people do experience a difference with the product. And that we should take into consideration and regulators need to understand that. I mean, this is how people behave in real life. So I think having the ability to say that this is better than cigarettes for you and the people around you is a fundamental importance and it's various importance in different cultures. It's more important in Europe for example than it is in Japan. And I don't think the U.S. is very different fundamentally from what we see in Europe, okay. And even within Europe, you see various degrees in various countries. All these things has to be much more granular. It depends on how you communicate to the individual person, because each person has different needs. That's what's called market and it's how you build the category. Okay.

Okay, that's very helpful. Thank you very much indeed.

Thank you, Adam.

Our final question comes from the line of Jon Leinster of Berenberg.

Oh, hi, good morning. Thanks for taking the question. Actually a couple of quick ones. Just out of interest, what do you think the total heated tobacco segment is within the Japanese market as in the fourth quarter?

How much, it is probably 16%, 17%?

What you said…

I would guess about 17% national, 18% - I'm not sure. I don't have the numbers.

So you would compare that against the 13.9%, so you think the rest of the market is 3.1%.

Something like that.

Yeah, I mean, in Sendai, we have the more or less two-thirds share. In the rest of the nation our SKU is higher because of the availability of the other products isn't completely nationwide. So that could be a good benchmark.

Okay. Okay. And just, secondly, the - in terms of the - I think at the - in terms of the Korean product, there was a sort of discussion about whether or not it broken any patents belonging to Philip Morris International. Is that something you can comment on? Is there any developments there or is that something that's not being pursued.

I would make a general comment here that we look at any - I think that we evaluate any competitive product and look at if there is any infringement to our IP. And we will act upon this. But I will not make any public comment further on this.

Okay. Just a question on Japan and IQOS then, just is the - was it fair to say that the vast majority of the IQOS HeatSticks sold are flavored, whether it'd be menthol or other flavor? What sort of - is that a very much an obvious dynamic within the marketplace?

Well, Japan has a very high proportion of menthol smokers, so it's natural to have a high proportion of menthol also in IQOS. It is higher than the average market. But, because…

Is it the majority?

Yes, it is the majority. Okay. But it's also looking up where the smokers come from, okay. As I said, the more progressive and lighter smokers are also menthol smokers so you have this kind of combination. But, yes, it's menthol. It is not other flavors.

And then is that experience the same in Europe or is that not the case? Do you find people switching across to menthol?

Yes, in Europe also you have kind of higher menthol than non-menthol compared to the relative markets. I think the key reason is very simple, okay, for people who move to the new category there is a taste difference obviously between IQOS and conventional cigarettes, partially, as I explained many times, comes from the fact that to reduce many of the toxicants. And some of the toxicants have flavor and nice smell, like formaldehydes and so on. So it's probably easier from time to time to move to a different taste category. But that's fine. I mean, there is nothing wrong with it. And whether they continue with non-menthol or menthol IQOS, the essential thing is to switch them to these products and that's exactly what we're doing.

Okay. Okay, all right. And just of interest, in terms of France, what - obviously, the French government seem to be sort of telling everybody there is going to just a €1 a pack price increase in March. Given the base for that, I mean, what do you think - is there any estimate you can give on sort of - is that something that you've taken into account and do you - what would you expect in terms of French volumes?

Well, as in many markets, in France our pricing is based on the same factors. It is what is the price productivity of a price increase, versus price gaps and versus volume impact overall in the market, okay? So in the situation of France, where we have a pretty significant increase, in our pricing, we try to balance the three elements and don't forget that France has a low-price productivity traditionally and on the new regime that has not improved. So that's why we try to balance now. Overall, I think there will be, given the size of - given the magnitude of the price increase, a reduction in overall volume, and unfortunately, an increase in illicit trade which the government seems to not have taken into consideration. But on the other side, we've gained market share in the past and I think we'll continue gaining some share. So, overall, we have baked all this in our guidance. But, yes, France will have an overall total market decline. Okay. That's inevitable.

Okay. Okay. Thanks very much. Cheers.

You're welcome.

And that was our final question. I would now like to turn the floor back over to the management for any additional or closing remarks.

Well, thank you all for joining us today. That concludes our call. If you have any follow-up questions, you can contact the IR team. As a reminder, we will begin reporting results based on our new regional structure that Andre outlined in his remarks. As of the first quarter of 2018, we plan revise three years of historical data reflecting the new structure by the end of March. Thank you and have a good day.

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