Good day and welcome to the Philip Morris International Fourth Quarter 2019 Year End Earnings Conference Call. Today's call is scheduled to last about one 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 2019 fourth quarter and full year results. You may access the release on www.pmi.com or the PMI Investor Relations App.A glossary of terms, including the definition for reduced-risk products, or RRPs, as well as adjustments, other calculations and reconciliations to the most directly comparable U.S. GAAP measures, and our business transformation metrics are at the end of today's webcast slides, which are posted on our website.Unless otherwise stated, all references to IQOS are to our IQOS heat-not-burn products. Comparisons are presented on a like-for-like basis reflecting pro forma 2018 results, which have been adjusted for the deconsolidation of our Canadian subsidiary, Rothmans, Benson & 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 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 André Calantzopoulos, our Chief Executive Officer. Martin King, our Chief Financial Officer, will join André for the question-and-answer session. André? André Calantzopoulos: Thank you, Nick and welcome ladies and gentlemen. Our 2019 results continued to reflect strong underlying business performances from both our combustible and smoke-free portfolios.IQOS is performing strongly across a broad array of geographies and remains firmly on track to meet our 2021 heated tobacco unit shipment volume target of 90 billion to 100 billion units.Meanwhile, our combustible business continues to perform well underpinned by solid pricing. We achieved several important milestones in our transformation to a smoke-free future. This notably included the authorization for a version of our IQOS product from the U.S. Food & Drug Administration…

Thank you. We will now conduct the question-and-answer session of the conference [Operator Instructions]. Our first question comes from the line of Michael Lavery from Piper Sandler.

Thank you. Good morning. André Calantzopoulos: Hi, Michael.

Good morning. André Calantzopoulos: Good morning.

Can you touch on IQOS, and some of what's going on in really sort of two different ends of the adoption curve? I guess, on the one hand you see a market like Hungary, for example, that has four share points plus in just a year out of nowhere. But then you're also talking about the lower costs of acquisition per user that you've mentioned in the past comes from scale and growing word of mouth. I guess I'd love to just understand both dynamics a little bit more. One is, how are you driving some of the rapid adoption in select markets. And then second, what are some of the key drivers of your efficiencies as they get a little bit more mature. André Calantzopoulos: Yes. Well, I guess, as a learning organization, every time we launch in a new market, we apply what we learned from the previous one. So the time where we start growing faster is shorter and shorter. And I think we showed a chart like this recently and will explain that in CAGNY next week. So it's a learning organization. The deployment of more digital skills that makes that every new market, we open starts growing faster than the previous one, and that's fact of organization knowledge.Now as we have also the infrastructure in place, clearly, the cost per user will decrease and does decrease this year in 2020, we have to invest a little bit more money in retention. I would say, although the cost of retention will also go down as we have more people. But clearly, you know, and the cost of acquisition is higher, so it makes sense. Now that we have enough people in our CRM base to invest a bit more there, because losing a consumer that we have acquired is much bigger loss than not acquiring someone by definition. Okay. And also because now we have the digital infrastructure, we can start enlarging beyond over time the offering beyond accessories and just special editions and normal products to more things that can help us build a different type of business over time as we have data on consumers and so on.So I'm optimistic that, although we will continue investing Michael, incrementally in the RRP, so we grow the number of users. This cost per user is going to go further and further down and obviously you know, we retain more consumers, so that's all on the positive side and that's how I see it define. Was that clear?

No. That's very helpful. Thank you. One just quick follow-up related to that. When you look at the evolution of IQOS usage of consumers, you've shown the charts that it's pretty consistently show around 70% of users who fully convert. But obviously, you're also adding new users constantly as well who have obviously just gotten started. What amount of time does it typically take for somebody to transition and maybe related to saying it kind of a different way, for users that began using the product, say, a year or two ago, is the amount that's fully converted more like 75%, 80% or 85%, or how should we think about that dynamic? André Calantzopoulos: Well, for the new users clearly, on average, we say two weeks to a month depending on the individual, sometimes people take much more time to fully switch. Okay. They start using the products immediately obviously, because they bought it. Now, regarding retention over time, it's fairly stable, I would say, and I think with the new programs, we have in our CRM, will increase this retention. Now it depends also on the market as you know.In markets, where we have a lot of competitive activity, we get some dilution of consumption, because people buy other devices typically vastly cheaper from competition and they try a few products, but if I compare markets where the competition is not yet successful, I think we have very good retention, and I think we can further enhance this retention as we now deploy a much better CRM program during the year. So I'm really happy with what we have and we can improve from here.

That's great. Thank you very much.

Your next question comes from the line of Robert Rampton with UBS.

Hello. Three questions for me. The first would be in – outside Korea and Japan, are there any markets where IQOS volumes have declined sequentially and then on the flip side, are there any markets where sequential growth has accelerated? André Calantzopoulos: Okay. I mean, except for Korea, I would say, we have growth in every market. Okay. Korea is a particular phenomenon because there is a confusion of consumers around the heat-not-burn category that is not dissimilar to what happened in many markets on the e-vapor category and that happened at the beginning of last year in June, when the Korean FDA, although they found a very significant reduction in the toxicants of heated tobacco product compared to cigarettes, very similar to what we have communicated, they kind of confused consumers by saying yes, but the tar of this product is very similar to cigarettes, although, we're comparing apples with oranges, because there is two different paths. The one is water and glycerin, and the other is but chemical.So this has stalled the category, and I think will take a bit of time to restart the process. I think sooner, or later there is realization by the authorities in Korea that that's not the right thing to do with consumers and the alignment we have now much more with KT&G, after the agreement, I think they will help grow the category, but except for Korea, I don't see any other place where we have an issue.

Great. And then just in terms of the margin expansion. So, if we think about, how much of your 2020 expectation is driven by say cost saves, pricing and IQOS, is it fair to think that the impact of IQOS is offset by cost savings and the incremental increases pricing or how should we think about that?

Yeah, the margin expansion is driven by a number of factors. First of all, it's partly mix in that we're growing very rapidly now in the EU, which has very good margins on IQOS via tobacco units. The second piece is, as you point out, our cost saving initiatives have stepped up significantly.At this point, the investments that we're making behind RRP are now fully offset by these cost savings initiatives and that's where you get the big benefit for margin expansion and the cost saving breaks down into a couple of buckets. In the operations area, we have various productivity, especially, as we get better and better at producing the consumables for heated tobacco units with scale, better uptime on the equipment for waste.We're improving the footprint across the whole manufacturing area. You saw the factory optimizations we've done in the last year, which begin to pay off in 2020 and beyond and we also have initiatives across all of our spending categories to find ways to become more efficient intelligently and rotate money out of less efficient areas and be able to put it into reduced risk products.So that whole effort started to pay off for the last year, you saw our margin expansion last year was very strong at 1.7 percentage point increase and then this year we're committing to at least 1.5 percentage increase, and this is something that we will continue to focus on in the out years going forward as well. André Calantzopoulos: Yeah. Regarding pricing, I would say, as I explained, we foresee pricing to be a bit below this year than 2019, but is essentially due to Indonesia, okay. Because if we took 2019 we had annualization of pricing from 2018 in Indonesia, which at this stage we assume is not going to happen.Obviously, one, there was no real pricing in 2019. So you have no annualization in 2020 and we have to be a bit cautious about pricing and how it rolls out in Indonesia, there is a pretty steep increase. But we assume that this situation will resolve during 2020. So in 2021 we have annualization of pricing in Indonesia and come back to normal, okay.

Excellent. Apologies. Just one follow-up, in terms of IQOS operating margins, can you give us some color on how it compares to cigarettes in say Italy at one end and Russia at the other? André Calantzopoulos: Well, IQOS margins are higher than cigarettes. Okay. So that's basically clear and a lot of the margin improvement is coming, as Martin explained from IQOS essentially.

Okay. Thank you very much.

Your next question comes from the line of Vivien Azer from Cowen.

Thank you. Good morning.

Hey, Vivien.

So you guys sound very constructive on the momentum on IQOS that is clear. I was hoping that you could comment on your key competitor's commentary this morning for the RRP category in Japan. Specifically, they may be have a different view than you specifically saying that they're looking for more moderate growth to capture 25% of industry volumes as competition intensifies, can you comment on that. André Calantzopoulos: I think it's very difficult to comment at this stage what is going to be the precise growth of the category. Maybe I see it higher than them, but we see both growth and that's the important part. And I think we are well positioned with all the initiatives we have to capture the largest part of the growth.So we'll see as the year unfolds where exactly we end, but the key thing is that we remain focused. IQOS still has a lion's part of the segment share and the momentum is positive and accelerating. We're increasing segment share and overall market share. So that's the key thing to retail.

Perfect. That's helpful. Just a follow-up on in Japan. Can you offer any color on what your HTU mix is between HEETS and Marlboro at the end of 2019? André Calantzopoulos: I don't have the exact numbers in my head, but I would say the cannibalization is stable. We had a little bit of down-trading, I would say, after the price increase because Marlboro increased prices more than HEETS, but now it's back to stable and both are growing, but Marlboro is growing, again.

I think, Vivien, we haven't given the exact split. André Calantzopoulos: Yeah.

But I think it's safe to say that Marlboro's share, Marlboro HeatSticks share ended up being more than we had originally expected. We thought that HEETS would a bigger component by now and Marlboro HeatSticks has held up better than we expected given the pricing.On the other hand, HEETS did its job of expanding their category and making the offering available to a broader array of consumers that were more price sensitive. So we're satisfied with this performance and overall it did its job. However, more heated tobacco users opted to stay with the Marlboro HeatSticks than we originally planned, which is positive of course for our margins and for the profitability.

Sure, absolutely. Now, that's a great outcome. Last one from me. André, I appreciated your commentary on some of the e-vapor concerns that are spreading seemingly to the EU. That's certainly consistent with what we heard from one of your competitors yesterday. Are there any principal markets that we should be watching out for, in particular where consumer concern or confusion around e-vapor risk is taking hold most dramatically? André Calantzopoulos: Well, I think the maximum was after the unfortunate cases in the U.S. with the lung disease and deaths that was spun by some people in the wrong way. As you know, I think this is getting better, but we are not there out yet, because there are still people that spread confusion despite all the efforts.Myself and others are making to explain that this has nothing to do with the e-vapor category and more with misuse with cannabis, oils and so on. My – our perspective on this was in any case our plan on e-vapor was to build the capacity and go into the bulk of the market, that is the European Union towards the year end, okay, because then we have capacity at scale.We had planned a couple of markets earlier on a try basis. I think it's better not to put oil in the fire, especially, since we will put the e-vapor under the IQOS brand. So to minimize confusion, I prefer that we let a little bit time fly. We build capacity and it doesn't move in reality our plan for the European Union, which was towards the end of this year. So that's my perspective.And I think that it's about time, there are more voices here to stop misleading people and I was reading the recent Q&A by the World Health Organization and it's not my commentary, but it is so much of misleading and I would say malicious statements in there that some of the top advocates in public health came out and said, this is unacceptable. So they modified their version, but they still misleading.So I think short-term that may appear not a good thing, but long term, the more people say insane things, the more credibility they lose and the more the alternatives will become more credible because they lose their credibility. And I think we are in this phase now who are frankly speaking, you see more and more of this nonsensical thing and more and more voices saying let's stop these, have I reset now of the situation and stopped talking seriously because these alternatives are better for people would otherwise smoke. But as far as the commercial part is concerned, that's it -- that's why, it's what I said and I explained just now. Hope I'm clear.

Very clear. Thank you so much.

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

Hello, thank you very much for taking the question. As Vivien was asking about Japan, can I just ask one quick question there before turning to IQOS. And the question on Japan, is whether in your pricing variance, you're baking in any assumption for the around the tax rise that we're obviously going to get in October this year, so that's the first question. André Calantzopoulos: Well, any, pricing is all in the guidance, obviously Adam. So we're always hope there is an opportunity in Japan, when there is a tax increase to get pricing, we'll make some assumptions, we'll see how much they materialize or not.

Perfect, that's very, very clear. So the real question, the core question is obviously around IQOS and so one – and so thinking about the European to begin with, the European Union to begin with, in Q3, you had 0.1% quarter-on-quarter market share growth and then you've had a much high, really, really strong growth in Q4.And I was just wondering how you should think, how we should think about EU market share progressing going forwards, whether there is any sort of seasonality in that and how you think we should sort of smooth out those two things, slightly disappointing in my view in Q3 and then a really strong performance just in Q4? André Calantzopoulos: Okay. In broad strokes, okay, there is as on seasonality in summer pretty obviously that's favoring cigarettes hence a little bit less market share on the heated tobacco unit. The second thing, although IQOS was very marginally affected by the whole situation of e-vapor in the U.S., it was just the moment in the quarter, we had a bit of a slowdown in September I would say but we recovered as of October/November and I think we're entering 2020 with a pretty good momentum.Number of users is increasing. As I explained, I think the menthol is an opportunity for us towards second half of the year. So I'm very optimistic about the momentum and outcomes in the European Union.

And so just to summarize, I think you're saying, you expect to get more new users in the EU in 2020 than you did in 2019, partly because of a medical issue, but also the CRM that just the whole momentum is so good? André Calantzopoulos: Yeah, that's what I'm saying.

Hey Adam, I'm Martin. On the IQOS heated tobacco unit share in the EU there is seasonality there. If you look at for instance in 2018, you see the same basic dynamic, where the increase from Q2 to Q3 is relatively small with a bigger increase from Q3 to Q4 and then again in 2019 you see the same dynamic.In addition, this year we had even more pronounced effect that André mentioned with the other news flow, but this is -- this is back to the seasonality piece. Cigarettes in EU are going to be higher because it's warm weather, people go outside and they can use it more and then lower in the winter months, whereas IQOS you could use much more easily frequently without any worry as far as what the weather outside is, so you don't see the volume changes quarter-to-quarter as much as you do on cigarettes. So it's really the cigarette seasonality that's driving these share numbers to be impacted. André Calantzopoulos: Overall, I would say, Adam, we see a significant increase in the number of users overall across the market. Okay. And I think it's also due to the fact that we're getting scale, getting momentum. We see more word of mouth happening in the markets and the tools we use now are more scalable. So I hope we will see this accelerate.

And then quickly, so turning to Russia, which obviously is a very large market and you're gaining share very fast. Roughly speaking, well in Q3 last year you had roughly 1% market share, you've now got 5%, so in five quarters you've gained four percentage points of market share. I guess the question is, do you think that rate of growth can continue or would you expect it to slow slightly? André Calantzopoulos: Well, first of all we need to compare comparable things. Okay. We are still growing in cities where we started before. There is some obviously some expansion in there that helps and we still have scope for expansion. Now it's pretty clear in my mind that at a certain stage, we would need probably a second price point in the portfolio in Russia because in certain cities, we will be getting the essence of the premium and somehow, a large part of the more I would say wealthy part of the mid-price segment. I don't know that we will need this in 2020, but we have to plan at least for 2021. Okay. And that's how I see it. So we don't see a slowdown, but we need to prepare for reaching the limits in terms of affordability over time in the big cities. Now in the cities we just started clearly, we have more runway in front of us.

Okay. Thank you very much.

Your next question comes from the line of Pamela Kaufman from Morgan Stanley.

Hi, good morning. André Calantzopoulos: Hi, Pamela.

Hello, good morning.

So over the last several years, you've quantified a level of incremental IQOS investment in each year. How much incremental investment do you anticipate in 2020 relative to 2019? André Calantzopoulos: Well, in my view is going to be a bit less than 2019 and it's all variable. At the end of the day, it all depends on the number of new consumers you acquire. So I would say we would be between 300 and 350 depending on the number of new users and that we have because there are certain cost that are purely variable. But as Martin clearly said, all this is offset on a comparable basis by all the savings we have in -- from a cost saving initiatives. So that helps clearly the margin expansion plus the geographic mix of IQOS that is helpful.

Thanks. That's helpful. And I wanted to better understand your decision to partner with KT&G and how you see their products competing with IQOS and given that this partnership expands your portfolio to e-vapor and hybrid products, do you also see a need to fill the gap in modern oral? André Calantzopoulos: Yeah, I think at the end of the day I said many times, I don't think we will do all the new products on our own or invent everything and we're very open to partnership and this is a very simple principle is what can we add to the partnership. I think we have technology, we have IP that complements, we have the scientific assessment capabilities and obviously the route to market. And in my view KT&G has an interesting product like the hybrid product, which by the way is a peripheral heated tobacco product that vaporizes at the same time.When we think there is potential in certain markets and certain consumer segments, their heated tobacco product has -- is the second more performing heated tobacco product and it's also heating from the inside and I think with the know-how we have if necessary, we can improve this product. And I think we decide market-by-market, what are the right price points for this product, so that they are complementary to our IQOS strategy. And as we discussed in Japan, for Japan, there may be some cannibalization, but from Japan, for example, we did two price points with our own products. We didn't see much cannibalization. We're still much more incrementality. So that's how I see it.For the e-vapor product, we have not major plans at this stage, but a much more interested in their hybrid and the heated tobacco with the team that has potential in these markets and that's how I see it.We also have more alignment I would say overall, in Korea, that's important for the Korean market. And we also have access from a technology point of view to a country like Korea that is one of the centres for electronics. So I think it's a win-win for both companies. It's a license agreement, the financial works for both of us. So I look forward to working with them and expanding in the right markets offering consumers much more wide range of products.

Thank you. And can you give an update on the impact on new user adoption in Japan from your device price reductions and other initiatives to accelerate IQOS growth in this market over the last year? Are you seeing increasing heated tobacco adoption and trial among the harder to convert later adopters? André Calantzopoulos: Certainly, we see some. I think the IQOS DUO would help, because consecutive use for some people is important. We addressed this problem with the multi, but now we address it also with the main product and we see better adoption.The pricing is also in general to avoid all these promotions and promotional money, we think that's the right price of the product and we always prepare the portfolio for the next generation that will always come at a premium. So we always reduce the previous version price in view of the forthcoming new version. And as I explained, many times, we have a strategy of having a major innovation every two, three years and significant upgrades every year in the portfolio and that's why we're doing in Japan.So say that there is enormous reduction -- reaction just because we reduced the device prices, it helps, but there is a whole mix that works. We see actually more reaction in Russia where disposable income is really an issue. By having still the 2.4 Plus on the market and IQOS 3, where still a lot of consumers buy the 2.4, because the more price sensitive market.I think the answer is not only pricing, is much more resolving constantly the consumer pain points that are a barrier to entry in the category and that's why we're working on the current version and the forthcoming one. So that's a little bit the philosophy we apply.

Thank you.

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

Hi, good morning. André Calantzopoulos: Hi, Chris.

Hi, I just had a question for you and a bit of a follow-on from earlier question. As you said, your cost per user and acquiring users in IQOS is going down, and I guess I'm interested in that scale effect you have in RRPs. You, obviously, had to spend more money this year but I think at the same time, I'm just trying to understand how you can leverage that infrastructure you have as you think about the launch of Platform 2 or MESH. Is the lot of the same or are a lot of the same resources being used for that? Are those -- I assume they are figured as part of the $300 million to $350 million you cited for this year as you think about the launch cost of those new products. André Calantzopoulos: Well, obviously, these new products, if you go through our infrastructure, which means our own retail, third-party retail where this kind of franchises. Our own digital platforms now that are put in place, our coaches, obviously you can use the infrastructure you have in a much more efficient way.So I would say that, still the vast majority of the investment during the year is still on IQOS heat-not-burn and we assume even when we are allowed a bit more massively IQOS before it's going to be on a per user basis much cheaper compounded by the fact that we don't have to explain the category to people. We just need to explain to people what the difference is and what the benefits of MESH are compared to existing e-vapor product. So there is no category explanation effort behind. So it will be much cheaper in my view or less expensive than the heat-not-burn product.

Okay. Yeah, thank you for that. And then one of the follow-up question. And this gets to a question, a bit of a question earlier in your response. But you have seen this -- a number of markets in the EU, where IQOS market share has really accelerated and we talked in the -- couple of -- few years ago about in Japan when you got over that 2% to 2.5% threshold, you start -- started to see market share really accelerate. Are we at that point in the EU? Do we see that in the fourth quarter? Because some of those market share increases are quite notable. Are we at that stage is my question and are you seeing that in more markets, or do you hope to see that more markets in 2020? André Calantzopoulos: Well, we hope we'll see in more and more markets in 2020. As I said we expect the number of users to grow, which means compared to -- we had 4 million users, we expect a much higher number than that. So I call this acceleration on a same market basis, okay.Look it's the beginning of the year, we feel good about the fourth quarter. We have good momentum going into 2020. We'll keep you up to date on how we progress and that comes at a much lower cost. So I think we're building it pretty nicely.

Okay. Thank you for your time.

We have time for one final question and that is from Gaurav Jain from Barclays.

Hello, good morning. My question is on the Canadian subsidiary, so can you tell us where we are with the RBH creditor protection negotiations, which are happening? André Calantzopoulos: Well, they are progressing, but I cannot give you more details. Okay. Still, there is a stay of all litigation and there are discussions to resolve the issue. Once we have something concrete, I can give you more details, but things are progressing.

Sure. A follow-up, on the IQOS MESH launch, so would you consider applying for a PMTA, considering Altria changed some of the language around their Juul agreement, if Juul is not allowed in the market for a year and other things? André Calantzopoulos: I think we have a lot of plans for before. So, one day, we will probably apply for PMTA in the U.S., but we still have to finalize a few studies on P4, for we have the same type of file as we head for IQOS, but that's important also for many other countries. And in due time, we will discuss if and when we want to enter the U.S. market. The FDA is going to be very busy in the U.S. over the next you know few months on, on all the PMTAs. I don't think that's the appropriate moment to do anything.

Sure. And if I can ask one last question, can you comment on the sell-in versus sell-through trends for IQOS, both in the last quarter and for the full 2019?

I'm sorry, the in-market sales versus the shipments or in your words, sell-in versus sell-out, we are approximately equal. If anything actually, the IMS was a little bit more than the shipments. So, there was no inventory change on the year.

Okay. André Calantzopoulos: Yeah, it's in line with I said from beginning of the year.

Sure. Thanks a lot. André Calantzopoulos: Okay.

Thank you.

That concludes the Q&A session of today's call. Presenters, do you have any closing remarks? André Calantzopoulos: Yeah. I would like to thank you all for joining. First of all, I would say, we had a pretty good 2019. We're entering 2020 in a very good shape. We outlined the one unusual thing that is Indonesia. We think we'd see how this unfolds. We prefer to be cautious about this at the beginning of the year. And just something that is in the air just now, I mean this whole, this issue around the coronavirus. We have no problem today.But clearly, if that continues, there may be some impact on travel and the duty-free and in terms of supply chain; I think we're in pretty good shape for a few weeks. But if that persists for a very long period of time like everybody else, we may have some issues with device supply. Now, that's not a continuation of this like in any company is not baked into our guidance, but we all hope this is going to be soon resolved. So we put it behind us.So, thank you again and I look forward to a pretty good 2020.

So, thank you very much. That concludes the call. If you have any follow-up questions, please contact the Investor Relations team here in Switzerland. Have a great day. Thank you.

That concludes today's conference call. You may now disconnect.