Philip Morris International Inc. (PM) Q2 2020 Earnings Report, Transcript and Summary

Good day and welcome to the Philip Morris International Second Quarter 2020 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 2020 second quarter 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 additional heated tobacco unit market data 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. In addition, please note our estimates for total industry and market share for the quarter are subject to limitations on the availability and accuracy of industry data in certain geographies during pandemic-related restrictions. Comparisons presented on a like-for-like basis reflect pro forma 2019 results, which have been adjusted for the deconsolidation of our Canadian subsidiary, Rothmans, Benson & Hedges Inc., effective March 22, 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. Please also note the additional forward-looking and cautionary statements related to COVID-19. It's now my pleasure to introduce Emmanuel Babeau, our Chief Financial Officer. Emmanuel?

Thank you, Nick and welcome, ladies and gentlemen. I hope everyone listening to the call and those close to you are safe and well. Our main focus remains the health and well-being of our employees, their families, and the communities in which we operate. During restrictions, we have implemented stringent policy and measures to minimize risk for those who continue to work in our facilities and offices. For all our employees, including those working from home, providing guidance and support is also essential. We are now facilitating a gradual, carefully managed return to the workplace in some location, where local condition and authorities restrictions allow. The strength and spirit shown in this challenging time by the people that make up our organization continues to be a real inspiration to me and the PMI management team, and I'd like to take this opportunity to thank them for their outstanding efforts. I now turn to the business, which delivered a robust performance in the first half of the year despite the unprecedented circumstances of the pandemic. Most importantly, the continued momentum of IQOS was excellent with an estimated 15.4 million users at the end of the second quarter. Our commercial model pivoted rapidly to digital and remote engagements, while preserving high rates of IQOS' user acquisition and brand retention. With volumes of heated tobacco units growing 24% in Q2 2020 compared to the prior year, RRPs made up almost one quarter of our net revenues. In addition, after two very difficult months in the quarter due to the pandemic, our combustible business is now improving. Industry volumes started to recover in June and the beginning of July, reflecting the gradual easing of confinement in many countries. The improvement was particularly driven by the EU, our largest region in term of net revenue and adjusted operating income. The main enduring headwinds linked to COVID-related restrictions are the absence of recovery in duty-free; and in Indonesia, where this is compounded by pricing dynamics. Economic uncertainty remains and we all hope for no major resurgence of the pandemic. Notably, despite additional COVID-related expenses, our operating margin has been strong in both the second quarter and first half. This reflects the increasing mix of RRPs in our business and their improving profitability. Productivity savings in manufacturing across RRPs and combustible, SG&A savings from the pivot to digital, the elimination of -- or postponement of certain lower priority projects and the operating leverage of higher RRP volumes all contributed. Indeed, it is no coincidence that the three regions where RRPs have a strong presence are driving this margin performance. We reached a truly historic milestone for IQOS, our mission and our future growth prospect on July 7 with the FDA's authorization of IQOS as a modified risk tobacco product. IQOS is the first electronic nicotine product to receive an MRTP order. Following a review of our extensive scientific evidence package, the agency found that an exposure modification order for IQOS is appropriate to promote the public health in the United States, demonstrating that IQOS is fundamentally different product from combustible cigarette and a better choice for adults who would otherwise continue to smoke. The agency concluded that issuing the order for IQOS is expected to benefit the health of the population as a whole taking into account both user of tobacco product and person who do not currently use tobacco product. A critical enabler for the future growth of RRPs is the implementation of differentiated regulatory framework that can help encourage adults who would otherwise continue to smoke to instead switch to better alternatives, in line with the harm reduction principle. The authorization allows a version of IQOS to be marketed with information confirming the validity of our scientific studies with regard to the significant reduction of exposure to the harmful and potentially harmful chemicals contained in cigarette smoke. The FDA decision and subsequent comprehensive post-market controls and monitoring, focusing on use prevention provide an important example of how government and public health organization around the world can implement an inclusive, science-based approach to help rapidly shift adult smokers who would otherwise continue smoking to better options while simultaneously guarding against unintended consequences. With investors increasingly focused on environmental, social, and governance aspect, I would like to highlight our recently published Integrated Report for 2019. The report covers a variety of important ESG topics and measures, including our business transformation metrics. Notably, our expanded aspirational targets now include new goals for the number of users of our smoke-free product in non-OECD countries and youth access prevention. The report is available on our website at pmi.com. Let's turn now to our strong performance over the first half of the year. This was clearly a very challenging period with disruption to many aspects of our operations, including our supply chain and route-to-market. I am proud to say that our organization has the strength and agility to withstand this with limited impact on supply to our consumer and trade partners. Despite these unprecedented headwinds across many of our key markets, our currency-neutral net revenues helped by a strong first quarter were close to flat versus the prior year on a like-for-like basis. Driven by pricing in combustible, manufacturing and SG&A efficiency and the dual RRP margin effect of growing weight and improving profitability, our adjusted operating income margin increased over 200 basis points to deliver 8% adjusted diluted EPS growth, all on the like-for-like ex-currency basis. I focus now on our second quarter performance. The effect of confinement on mobility impacted daily consumption pattern in certain markets, including those of daily income workers in developing countries and disrupted the retail trade. This led to significant industry volume decline in a number of geographies during April and May, which primarily impacted our combustible business. As expected, duty-free sales were weak. The March build-up of trade and distributor inventory largely reversed in the first part of the quarter, and we had to delay a few pricing decisions. This period also coincided with a challenging prior year comparison. Notwithstanding these challenges, our performance was better than we expected when we last updated our guidance on June 11. Currency-neutral net revenue declined 9.5% compared to our assumption of around the high end of minus 8% to minus 12%. Given this net revenue decline and the strong prior year profitability, we were pleased to maintain a stable adjusted operating income margin. This was supported by growth in the net revenues and profitability of RRPs and cost efficiencies. Combustible pricing of 3.3% also contributed and reflect robust pricing in many markets, partly offset by Indonesia and a strong prior year comparison in Turkey. Reported diluted EPS of $1.25 was notably better than the upper end of our previous guidance range, including a lower currency impact of $0.06. Our adjusted diluted EPS was $1.29, excluding reporting adjustment for asset impairment and exit cost, which represents an ex-currency decline of 7.5% compared to the prior year. There were three main drivers of this better-than-anticipated performance. First, the recovery of industry volume in June, notably in the higher-margin EU region, benefited our net revenues and margin. Second, IQOS user acquisition grew substantially in the same month with markets such as Russia back to pre-COVID rate and overall IQOS acquisition for the quarter only 35% below pre-pandemic levels. Last, we had the benefit of certain non-underlying factors. These include trade inventory movement in June ahead of tax and regulatory changes in Germany, Russia and Saudi Arabia, cost phasing, and a lower tax charge, largely driven by a reduced corporate income tax rate in Indonesia, as well as changes in our earnings mix. These data [ph] factors accounted for approximately $0.10 of the better EPS performance. Before we come to guidance, I will outline some of the dynamics for the second half of the year. We expect a gradual underlying improvement in the combustible business coupled with continued robust growth for IQOS. The pandemic continues to present an uncertain operating environment with a potential for tightened restriction in localized areas. While not included in our guidance assumption, there also remain a non-negligible risk of a resurgence in the virus and the return of national lockdowns. The full economic fallout of the various restriction is also unclear. This said, we observe relative stability in term of pandemic restriction and improving visibility across a number of geographies in recent weeks. Conversely, visibility remains lower in some areas such as Indonesia and Latin America, in addition to the absence of any recovery so far in Duty Free, which as a reminder represented close to 4% of our net revenues in 2019. In term of our cigarette business, while underlying industry volumes are gradually improving as restrictions ease, we assume that the return to a normal level of consumption occasion for consumer will take time. We do not assume significant widespread increase in down-trading with such dynamic currently concentrated in markets were a trend already existed due to elevated price gaps. It is reasonable to expect some delays in the timing of pricing in certain markets due to the pandemic situation. In RRPs, sales of devices and HTUs are performing strongly, reflecting the better-than- expected IQOS user acquisition and continued strong brand retention and conversion. Our unique commercial model has demonstrated the flexibility to accelerate the shift to digital and remote activity and we continue with high level of such engagement in markets where stores are reopened. Despite the exceptional headwinds of 2020, we expect to grow our full year adjusted diluted EPS between plus 2% and plus 5% on the currency-neutral like-for-like basis. This corresponds to an adjusted diluted EPS range of $4.92 to $5.07, including an estimated unfavorable currency impact at prevailing exchange rate of $0.31. This forecast assumes a total industry decline of 7% to 9%, excluding the U.S. and China, and a decline in total PMI shipment volume of 8% to 10% on the like-for-like basis due notably to Duty Free and Indonesia. With regard to net revenue, in like-for-like ex-currency term, we assume low-single digit growth, excluding Duty Free and Indonesia. Due to these two factors, our overall net revenue may see a modest decline. The forecast also reflect expansion in our ex-currency like-for-like adjusted operating income margin of more than 150 basis points. We expect the full year effective tax rate to be in the range of 22% to 23%, 2020 operating cash flow of at least $9 billion and $0.7 billion of capital expenditures. All these estimates assume that national lockdowns will not recur in our key international markets in the remainder of the year. Specifically for the second half, while underlying trends should gradually improve, we expect the recovery in our growth to be skewed towards the fourth quarter. This assumes the progressive easing of restrictions across the remaining markets with commensurate greater industry recovery towards the end of the year and the compound effect of increased sequential IQOS user acquisition. In the third quarter, we expect the reversal of certain one-time benefit from the first half, with an EPS impact of approximately $0.10 and a net revenue impact of around 1%. The continuation of headwinds in Duty Free and Indonesia, the timing of 2020 pricing in certain markets and the phasing in of costs are also included in our assumptions. We expect to see a good sequential improvement in reported net revenues in the third quarter, but a decline compared to the challenging prior year comparison. For adjusted EPS, also due to the timing of certain SG&A cost and the one-off item of the first half, we expect Q3 2020 to be broadly in line with Q2 2020. Sequential improvement in reported net revenue should continue in the fourth quarter although likely still in slightly negative territory compared to 2019. Growth in adjusted EPS will also be driven by a greater expected realization of cost efficiency from new initiatives. I will now cover our second quarter performance in more detail. As expected, our shipment volumes were weak, driven by the effect of marked industry declines on our combustible volume due to pandemic-related lockdown measures. Notable market contributors to this decline were Indonesia, Mexico and the Philippines, all of which were impacted by restrictions, loss of income for daily wage workers, and significant price increases. Conversely, our HTU shipment volumes continued to grow strongly to reach a record 18.7 billion units, driven by the EU region, Japan, and Russia. While overall volume in the quarter was weak, the sequential recovery seen in June and the beginning of July is more encouraging. Our combined June in-market sales volume was the highest monthly total this year and grew 2.8% compared to June 2019. Though this growth includes an estimated 3 billion unit effect from inventory movements, it mainly reflect better industry dynamics across many geographies, notably the EU region, which declined by 7.3% in Q2 overall, but grew in June. We are also encouraged by the sequential improvement in HTU volumes, which exhibited positive year-on-year growth throughout the quarter. This strong performance from IQOS mean that heated tobacco units made up over 10% of our total shipment volume in the first half of the year as compared to approximately 8% in 2019 and 5% in 2018. While somewhat flattened in Q2 2020 by weaker combustible volume, we expect this proportion to grow over time as our positive momentum on RRPs continues. RRP net revenues reached $3.2 billion in the first half, reaching almost one quarter of PMI's total net revenue in Q2. IQOS devices accounted for approximately 8% of RRP net revenue in the second quarter due to a lower ratio of new user to existing user, given pandemic effect, longer replacement cycle and geographic mix, as in some countries, we still sell a substantial amount of the lower priced IQOS 2.4 Plus device. Turning now to market share. Our total international share declined by 0.1 point to 28% in the second quarter with higher share for heated tobacco units, which increased by 0.9 points to reach 3%, offset by lower share for cigarettes. Our market share was negatively impacted by Indonesia and the market mix effect of Duty Free, where volumes dropped sharply and our share is typically much higher than our overall international share. The cannibalization effect of out-switching to IQOS were essentially offset by positive impact elsewhere, and in markets where IQOS has a meaningful presence, our share increased with almost no exceptions. It follows that our combined market share increased notably in the EU region, Japan, and Russia. It's also true that in many markets Marlboro over-indexes to social consumption occasions, which were naturally lower during COVID-related confinements. We expect Marlboro share to recover as restrictions ease. Indonesia cigarette market saw an accumulation of headwinds in the second quarter. A pronounced impact from pandemic-related restriction on daily consumption added to the effect of tax-driven pricing and retail disruption. Industry volumes declined by 22%, excluding trade inventory movement whereas our shipments declined 28%. Our share decline can be attributed to three broad dynamics. First, within the Tier 1 segment, price gaps remain elevated, given our price leadership of the past 18 months and the delay in the enforcement of the minimum retail price. Combined with COVID effect, this has contributed to the end of performance of our premium-skewed portfolio despite better sequential performance from A Mild. The process of minimum selling price enforcement has started. Government inspectors have returned to the field. However, the full enforcement and subsequent trade flow-through of compliant product may not be complete until the fourth quarter. Second is the strong growth of the tax-advantaged below Tier 1 segment, which in conjunction with the tax-driven pricing and pandemic situation of 2020, has led to increased down-trading. This was designed for small players with production below a certain volume threshold. However, the segment is not operating within the spirit and intent of the law. With the segments now at approximately 25% of the market, this represents a serious threat to government excise revenue and the correction of volume-based tax tiers become urgent. Third, the stricter public mobility restriction in urban areas, where our share is higher, has disproportionately impacted our portfolio. However, our market share sequentially improved in June, supported by strength of our brands. While we see sign of improvement in the market, the situation remains challenging. We now assume the total industry decline will be approximately 15% for the full year, reflecting progressive sequential improvement in daily consumption from the particularly weak second quarter. We are fully committed to improving our performance in this key market. We have a number of ongoing commercial initiatives to leverage equity of our brand portfolio through the remainder of the year. This includes the introduction of new variants in the growing SKT and full-flavor SKM segments such as the Dji Sam Soe 12 launched in March and Marlboro Filter Black 16 launched this month. However, with enforcement of the minimum retail price now underway, the main outstanding structural issue is the volume-tiered tax system, which clearly advantages growth of the super-low segment. In the status quo, this will have a significant impact on government excise revenue this year. We concur with the public policy expert and economist that urge the government to create more predictability and a level playing field by reforming the multi-tier excise tax structure and enforcing the minimum retail selling price without exception across Indonesia. Overall, while short-term challenges remain, the structural headwinds in the market are addressable through government action. The headwinds directly related to the pandemic are likely to be temporary in nature and our brands are strong, giving us a solid platform to rebuild our share. I shift now to our RRP performance. We estimate that there were 15.4 million total IQOS users as of June 30, compared to an estimated 14.6 million last quarter. This represents the addition of around 4 million adult users since the same time last year, a phenomenal achievement given the circumstances. This reflects widespread user growth momentum across all key IQOS geographies, including Japan, the EU region, and Russia. We further estimate that 72% of this total or 11.2 million adult smokers have stopped smoking and switched to IQOS with the balance in various stages of conversion. We observe early indication that the propensity of smoker to switch to RRPs is trending positively since the pandemic began, and we will see how this develops in the coming period. We are also optimistic that the FDA's granting of the modified risk tobacco product order for a version of IQOS will contribute over time to better understanding of the heated tobacco category and the benefit of switching to IQOS compared to continued smoking. The overall share performance of IQOS HTUs continues to see excellent progress. Indeed, in international markets where IQOS has been commercialized, IQOS HTUs were again the third largest brand in the second quarter with 6.3% share, increasing from 4.5% in Q2 2019 on the comparable market footprint. This was achieved despite not having full national distribution in many markets. In the EU region, we added a record number of IQOS users in the second quarter to reach 4.3 million, an impressive performance given the context of the pandemic. This includes strong growth in Italy, the Czech Republic, Poland, and Germany, and in historically slower markets such as the U.K. where HTU volumes increased more than five-fold over the prior year quarter and Spain. National offtake share surpassed 1% in both of these latter markets despite limited disruption -- distribution, sorry. Second quarter share of HEETS reached 3.9% of total industry volume, which was depressed by an estimated 0.2 points, due to consumer pantry loading effect. Sequential share increased by 0.3 point on an adjusted basis, with in-market sales volume 5% higher compared to Q1 2020. I also refer you to the appendix, where we show share for key EU markets and global key cities, which serve as a useful indicator for national share growth potential. IQOS continued its strong performance in Russia with its share up by 3 points to reach 5.9%. On a sequential basis versus the first quarter of 2020, HEETS share decreased by 0.6 points, reflecting a higher combustible market in the quarter due to increased daily consumption in the warmer months and a trade inventory build-up ahead of the July introduction of the track-and-trace system. A more reliable indicator is a sequential in-market sales, which increased by approximately 12% compared to 3% sequential growth in the first quarter. In Japan, our total reported share for heated tobacco units reached 20% in the second quarter, supported by line extension for both Marlboro HeatSticks and HEETS. IQOS user grew to an estimated total of 5.8 million, of which an estimated 4.3 million have stopped smoking and switched to IQOS. On an adjusted total tobacco view, including cigarillos and adjusted for trade inventory movement, the share for our HTU brands increased by 2 points versus the prior year quarter and by 0.7 points sequentially to 18.5%. Q2 2020 adjusted in-market sales volume for our HTU brands grew 4.9% sequentially. This helped drive growth of the overall heated tobacco category to second quarter total tobacco share of over 25%. In addition to strong RRP growth in existing markets, the geographical expansion of IQOS continues. Despite pandemic-related restriction, we leverage our digital capabilities to launch in four new markets; Austria, North Macedonia, Montenegro, and Saudi Arabia. This takes the total number of markets where IQOS is available for sale to 57. Importantly, we still plan to expand our portfolio of smoke-free offering in the second half of the year with the launches of IQOS VEEV in the e-vapor category and of licensed KT&G product in select markets. To conclude on the today's presentation, our growth prospects remain strong. The continued momentum of IQOS through the unprecedented circumstances of the COVID pandemic demonstrates the structural growth characteristic of RRPs and we are on track to reach our 2021 target of 90 billion to 100 billion shipments of heated tobacco units. RRPs now make up almost 25% of our net revenue and we expect this percentage to grow over time. With digital efficiency, operating leverage from scale effect, and productivity saving simultaneously driving up the profitability of RRPs, this is a very positive dynamic for our margin outlook. The historic milestone of modified risk tobacco product authorization for IQOS is a further testament to the integrity of the product and brand proposition and underlying the need for government to implement science-based regulation. In addition, after a difficult April and May, the industry recovery has now started, providing better visibility for the rest of the year. It is also now clear that the effect of the pandemic on the Duty Free business and the specific dynamic in Indonesia will persist for at least another quarter. These factors are reflected in our expectation of sequential improvement through the second half of 2020. We assume the global economic backdrop is likely to affect total cigarette volume and induce some down-trading in certain markets. This is a dynamic we have faced before in a variety of markets where we have demonstrated robust business performance. As a reminder, we expect the unprecedented declines in Q2 2020 to reverse next year easing comparison. We also remain committed to increasing our market share through the growth of RRPs and by maintaining our leadership position in combustible. This is supported by a continued sharp focus on costs. We remain on track to deliver our target of over $1 billion in efficiency by 2021 through both manufacturing productivity and SG&A savings. We have additional opportunities on top of this from changes in our post-pandemic way of working, including the acceleration of digital activities. Importantly, our balance sheet and financial position are strong and our commitment to the dividend remains unwavering. Last, when COVID-related headwinds abate, we expect to resume growth consistent with the currency-neutral compound annual growth rate in our 2019-2021 algorithm of at least 5% net revenue growth and at least 8% adjusted diluted EPS growth. Thank you. I am now 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 Chris Growe of Stifel.

Hi, good morning and nice to hear from you, Emmanuel.

Good morning.

I like to -- good morning, I like to commend you for giving guidance for the year. I know there's uncertainty, but we certainly appreciate your outlook even amidst the uncertainties in the market today. So, thank you for that. I had a question if I could first of all on the -- on IQOS performance. Obviously, it was very strong in the quarter. I'd like to understand how you approached your IQOS investment. Did you pull back on that in the second quarter? Obviously, some of the stores were closed, and did you restart that in June in the third quarter? Just to understand kind of the momentum behind that product line as we move into the second half of the year.

Yes. Sure, Chris. Well, of course, IQOS remains our our top priority and we are focusing our efforts and investments behind IQOS. So, even in this challenging environment, we kept investing behind IQOS. Of course, we had to take into account the evolution of the environment and there was a number of investments that had to be postponed because they were no longer making sense. So, it was not possible to adjust and do them. There were a number of things on the commercial model that we had to revisit, and notably, when they were involving face-to-face contact. There were launches of new product that we were working on that we had to delay. So, there were clearly versus initial plan some reduction in the investment, but we absolutely stayed committed to keep increasing investment behind IQOS. I would say for me, the good thing of this Q2 and the H1 as a whole is that we see that the investments are getting an increasing return as we are, first, on that, what I would call the fixed part of the investment, the structure that we have to invest behind our RRPs and IQOS, we are growing volume. So, we amortized this investment over a larger volume and sales. So, we decreased the first, fixed cost, if you want, and we increased profitability through that. And there is also a variable part on the investment in term of consumer acquisition or retention, and here I would say through the crisis, we are of course already working on that. Wecertainly have been accelerating the usage of digital customer experience and way to engage with them in a more efficient, more digital manner, and that is going to be more scalable, that is going to reduce this variable cost per user, which is also very good news for the future of IQOS and IQOS profitability.

Thank you for that, and I have just one follow-up question if I could. And in relation to pricing, which was a little stronger than I had expected in the quarter, which was great. I'm just curious, you talked about maybe delaying some pricing decisions. Are those just a delay? Have you had a pull back on pricing decisions as you've seen some down-trading in some markets? I'm just curious how that -- how you approach the pricing dynamic there?

Yes. Well, of course, we have to take into account the environment when it comes to price increase. It is clear that in markets that are severely disrupted, where the trade is disrupted, where there is some very challenging evolution in some places because of the lockdown, we have to revisit plan for increasing price. So, it is clear that we take that into account. It doesn't change the potential of price increase that we absolutely retain and that once the COVID has passed, we will continue to implement. But clearly, in this environment, we are seeing that we were planning in a normal environment that are neither, I would say, desirable nor doable in the current environment, and that could include some delay and I think we are flagging that for Q3, where there was last year a number of price increase; and this year, I think it could be more skewed towards Q4 when things are normalizing hopefully.

Okay. Thanks so much for your time.

Thank you.

Our next question comes from the line of Gaurav Jain of Barclays.

Good afternoon. Thanks a lot. I have three questions. Number one is that in EU, you are talking of an acceleration in June, particularly in IQOS, and we know that there was a menthol cigarette ban in May. So, was there any benefit that IQOS saw, because it is still available in flavors, especially you are highlighting Poland, which is a big menthol market? So, I was just curious on that.

Yes, thanks for the question. So, you're absolutely right. As you all know the menthol ban came into force on the 20th of May. And really, that means that it has played over the month of June. I think it's premature to say that we have benefited from that. As you know, we have an under-exposure to the category. So, that is probably a positive evolution for us in terms of evolution of the market. I would not say that the IQOS evolution is obviously impacted by that. I cannot exclude that it has been helping a little bit, but I would say IQOS in the EU behaved well through the quarter; once again underlines the strength of IQOS in the EU through this second quarter. And I would expect probably Q3 to bring more answer on the impact of the menthol ban both on IQOS possibly and on the impact on the rest of the CC category.

Sure. My second question is on your guidance, and your assumption is that there are no further national lockdowns during the remainder of 2020. I appreciate you are not commenting on 2021, but if we were to assume that that's the case in 2021 as well, then Q2 '20 will create a very favorable comp because you had national lockdowns in Q2 '20 and most likely there won't be. So, could there be a year in 2021 when volumes are flattish for you?

Well, if you allow me, I'm not going to enter now into the comment of 2021, we'll do that in due course. But I can like you come to the pure look at the fact that indeed we have a depressed Q2. We have a market Duty Free that is very severely impacted by the COVID-19 crisis, and if things were back to normal next year, that would globally mean a favorable basis of comparison. But at this stage, I will keep with this simple fact-based possibility, if this was a scenario being confirmed, and in due course, of course, we'll share with you what it could mean for our '21 outlook, but it's too early to comment.

Sure. Thank you. And my last question is on your travel retail business. Can you talk a bit more in detail as to what exactly it is? Because we know travel retail is not big in U.S. and you're not there in China. So it does seem that a lot of it is probably within EU travel. So, is that what we should focus on that what are the travel dynamics within EU to be able to forecast what's happening in your travel retail business?

Well, EU is certainly important, but I think we have a global exposure. You're right, we're not in the U.S., we're not in China, but it doesn't mean that we're not benefiting from U.S. and Chinese travelers when they're traveling to other airport. So, EU, I would say, area is important, but our exposure is much, much broader than that, and therefore, it cannot be summarized to European exposure if you want.

Sure. But what I was curious is that is it like 50% of your businesses is intra-EU travel or 30% or 40%, is there any way to quantify it?

No. Well, I don't think we give that split, but I can tell you that this would be 12% [ph], if I was to characterize it.

Okay, brilliant. Thanks a lot.

Thank you.

Our next question comes from the line of Bonnie Herzog of Goldman Sachs.

Thank you. Hello. I wanted to circle back on the new user acquisition and just hoping you could give us an update on the progress you've made on the digital front in terms of some of the virtual guided trials you mentioned and really how that's impacting consumer engagement? And then, I'd be curious to hear what percent of your new users are coming from digital at this point?

Thanks, Bonnie for the question. Of course, we can share what we can share both by the way for confidentiality reason because it's part of the recipe of the success and as we gather the information, clearly, we've been accelerating on engaging with our customers through digital. So the initial model, as you know, was first -- not only, but first center around personnel contact through shops, through coaches and engaging into explaining to smokers the benefit of switching to IQOS. Truth, it has started, we did not discover that with the COVID crisis. But, of course, in front of market that where lockdown and people confine at home, we had to accelerate the plan on digital engagement and to develop all the tools through all the digital contacts and people were, of course, at home using a lot Internet to develop full interaction and full capacity to contact first, explain, follow and, of course, using a totally remote experience for our consumer. So, I'm not able to give you and I'm not sure that we would like to share that because it's quite sensitive, but I can tell you that we see the percentage of IQOS and fully managed customer through digital, which is increasing very fast and becoming very important. And, of course, the beauty of that is that it is easily scalable at a cheaper cost, which was probably more difficult when it was a full human-related experience. And again, I think that this H1 2020 will remain a landmark for our IQOS business for a number of reason; the MRTP decision is one; the improvement on profitability on the RRP business is another one; but, certainly, the acceleration of our digital model on acquisition and on retention for our IQOS customer is another one.

That's really helpful color. And I think it's pretty impressive just thinking through how this has really accelerated your efforts potentially in just your learning. So, as I think about what you were able to do in the quarter and during this environment in terms of acquiring more new users than you originally expected, does it suggest that your quarterly new user rate, which has been about 1 million new users each quarter in the last several quarters, do you think that this could step up as the world starts to reopen? In other words, have you learned something new in terms of strategy to accelerate the conversion?

Well, I would not go as far as to say that we are now at that stage coming with a vision that is going to accelerate things. But it is, certainly, confirming that our ambition is absolutely legitimate. We are confirming the 90 billion to 100 billion stick next year, and this is going to come from the continuation of a very strong acquisition of new IQOS users. No doubt that this digital play is going to help us achieving that goal, and as I said is going to do that at a cheaper cost, which is definitely good news.

Now that's great. And then one final question from me, if I may. I just wanted to touch on the MRTP that you received and I just want to hear from you maybe next steps in terms of -- if there are chances to get to the next level of reduced risk approval. Just wanted to understand that from [indiscernible] and then timing, possibly. And then wanted to maybe better understand how you might use what the FDA granted in terms of altering or modifying your marketing plans going forward? How you might try and include that? Thank you.

Thanks, Bonnie. Well, as you all can imagine, this MRTP authorization is a fantastic news and I would say both for us and for the consumers because I think it's coming as a game changer, as I know I use the word landmark. It, of course, start by validating all the scientific evidence that we have put together, and it's going to be an important element in -- and that's I think the sense of your question, how do you use this MRTP. Maybe starting with your question on the next level, of course, the FDA has left the door open to continue the dialog with them on precisely the next level. We intend to do that in the coming months. And I would say the question is whether the reduced risk authorization for marketing can come through a modified claim or through providing additional study or maybe a combination of both. That's what we intend to discuss with the FDA in the coming months and, of course, we are impatient to have this dialog with them. Now on what it means globally. Well, first of all, but it's quite important, we hope it's going to start the discussion on whether IQOS and heat-not-burn technology is a better product than combustible cigarette. I think that it's very, very important confirmation. And it really should put the focus on how we make this better alternative for the smoker as fast as possible, I would say, and in the broadest possible geographies and that's really what it means. So we think that as the FDA is recognized as a very highly regarded regulator, as they are coming from me with the right approach, where they are both dealing with review of reducing arms on tobacco-product and at the same time, the continued restriction on tobacco usage, we think that this is the right approach that we are going to be able to, I would say, share with other regulator and we are hopeful that, of course, people will look at this decision and will draw conclusion on that. Let's be clear, we already have this type of decision with several regulatory in the world. So we think it's just going to amplify that. And we are beyond the U.S., where now we have the authorization to market as a reduce exposure. We are already in other country communicating on that reduce exposure of our IQOS product. So it's going in the right direction to, I think, really define what should be the right priorities, and hopefully, it's going to accelerate things globally.

Thank you very much.

Thank you.

Our next question comes from the line of Robert Rampton of UBS.

Hello, three questions from me. The first is on Indonesia, can you help me understand where the Indonesian market should be from a revenue perspective? If price enforcement takes place, should revenue perspective reach 2019 levels, but from a lower volume base, or is that market just going to deliver 20%? Has that revenue from that market has been rebased down 20% till the lower price tier ratio with these results [ph]? Thanks.

Hi, Robert. If I understand well your question, you're asking what we should think about Indonesia beyond the COVID crisis and what we should understand. So, let's be clear, you have really two dimension that we need to explain on the situation in Indonesia. Well, the first one, of course, is everything related to the COVID crisis. To start with, remember that we started the year before the COVID crisis flagging the fact that Indonesia would be difficult in 2020. There was a double, I would say excise duty increase at the beginning of the year. We have been leading the price positioning in the market for quite a while in Indonesia and we have not been increasing price at the end of 2019. So, that's what's creating difficulty and we were saying that this difficulty would last until the minimum retail selling price is implemented. Then the COVID crisis started, and obviously, that has been creating a total disruption of the market. We have seen what we have seen in other new economy with impact on the consumption driven by daily wage worker, reducing their daily average consumption. I mean, is it 20%, 30%? Difficult to define. But that has been impacting, and as we flagged, it has been probably more impactful in urban areas than in the countryside. We have seen some down-trading as there were some pressure on purchasing power and there has been also in the regions of market some evolution to well certain category where we have a lower representation again in line with down-trading. On top of that there was this second-tier system on the excise duty due to or corresponding to low volume or supposed to be low volume company that are benefiting from a much lower excise duty and which can generate a price differential of 40% to 50% versus the Tier 1 system. So it's very substantial. We talk about a market where this cigarette of the second tier system can enjoy a significantly lower price. And, of course, at the time of down-trading consumer has been looking for cheaper alternative, and this market was supposed to stay at a very low level because this was supposed to only be granted to very small level of production. There has been some abuse on the way this has been played, and this second tier category has reached in Q2 25% of the market, which as you can imagine on something which was based on reduced volume was not at all the intention, and that has further disrupted the market. Now when we see these various headwinds that we have been facing, what can we expect? Well, first of all, regarding the minimum retail selling price implementation, it has now started. It's going to be implemented through Q3, but we don't expect really to impact in Q3, and therefore, we can expect to see the benefit of that in Q4. So that's going to be a first element that is going to improve the situation. Second, we are, of course, being active in trying to make sure that we developed our brands and we launched offer in the most dynamic part of the market, and I've been referring to Dji Sam Soe and Marlboro on which we are launching extension in dynamic part of the market. We expect globally as the COVID crisis pass and we know that next year people, economists are expecting a strong rebound of the Indonesian economy, so we expect globally also the pressure on down-trading to reduce as the economy is improving; the daily consumption to also improve, so that should help the trend. And last element that, of course, we don't control is this second tier category where we will need and we think is going to happen because otherwise, it's going to massively decrease the income of the country, but there is a need for reform to limit the benefit or change the structure of the excise duty depending on the values category. Well, at the end of the day to create level playing field and for all players to be playing on the kind of equal basis and we are certainly hoping that it's going to impact -- is going to arrive as soon as possible. If everything that I've just been described -- describing happen, well, there is no reason why we cannot rebound in Indonesia and be back to our market share that we experienced in the past years. Our brands are extremely strong. We have an incredible commercial machine in the country, and all that are, of course, the strengths on which we will build our rebound in the coming quarters.

Great, thank you. Thank you very much.

Thank you.

Sorry, my next question -- my next question is on down-trading, and I know you flagged Indonesia and that you don't expect down-trading going forward, but are there any more -- can you flag which markets you have seen down-trading? Is it mostly EM [ph]?

Yes. What we flagged is that down-trading may have accelerated in a few countries where it was probably already visible before the crisis started, so we talk about Turkey, we could talk about Mexico. These are typically in addition with Indonesia. These are the markets where we have seen I would say increased pressure on purchasing power triggering down-trading. Now for the future, of course, nobody knows what's going to be the impact of the economic crisis that everybody is forecasting. We've been there before, so that will not be the first time that we are managing a very tough environment and we have shown in the past that we have an absolute capacity to manage this kind of environment with the agility, with the headroom and with the levers to manage this kind of environment. So we would see and we will adapt to the situation.

Great. Thank you very much. That's it for me.

Thank you.

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

Thank you. Good morning. Can you update on the HEETS launch in Japan? And just you called out I think a little bit of mix pressure that surely would have come from that, and we saw the share gains, but maybe give us a sense of how it's tracking relative to your expectations and what sort of margin impact that has on your business there?

Sure, Michael. So, probably, Japan is at the forefront of what you can expect in many countries as it get more mature, I would say, on the growth of the heat-not-burn and IQOS. I think it makes sense to have several offering for the customers. And in Japan, I think, probably, my first comment will be on the fact that the market did perform well. Clearly, in H1 and in Q2, we have been growing double-digit our shipments and end-market sales in Japan in Q2 for heat-not-burn globally. So as you can see, it's a market that continue to grow very nicely, and certainly, HEETS has been a contributor to that. So the fact that we are playing with both Marlboro and HEETS enable us to really capture maximum opportunity in the market. And we see a very, very positive trend on HEETS, which has captured close to 4% of the market. So you see that it's already a sizable part of our RRP business in Japan, and that bodes very well for what we can do with two brands in the country.

Okay, great. Thanks. Could you also just clarify, in Indonesia, you gave color that in your guidance thinking you don't expect enforcement of minimum prices at least until September? As far as 4Q goes, what's your base case thinking? Is your thinking reflected in guidance that there is no enforcement all year, or is there built-in some assumption that does improve?

No. What is taken in the guidance is essentially that we should have a large part of the benefit in Q4. So, we're not expecting anything in Q3, but we think a large part of the benefit of having minimum retail selling price should be seen in Q4.

Okay, great. And just one last one. On Mexico, where the government has banned the import of heated tobacco devices, can you just give us a sense? You had just been getting underway there with your IQOS launch. So it's sort of maybe hitting it before hits momentum, but how you navigate that and how does that look?

Yes. So -- you're absolutely right Michael. So the good news is that we had the right level of inventory before this ban happened. So we are not facing out of stock situation. So, of course, we hope it is not going to last too much because we are not saying that we have some devices or inventory for several years, but for the time being, it's not an issue. We are hopeful that Mexico is going to look at the FDA decision and that will influence their decision on [indiscernible]. But it's -- as you know, it's not targeted to IQOS. So we're just unfortunately here the [indiscernible] of a broader decision, if I may say. Hopefully, they will come back on that one rapidly and that will allow us to resume the export to Mexico of devices.

Okay, great. Thank you very much.

Thank you.

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

Hi, thank you very much. I've got three questions for you. The first one is really about EPS guidance. In June, you forecasted, sorry -- in June, you forecasted EPS at below $1.10, it turned out that was wrong by about $0.20 for the quarter that ended in June. You're now giving guidance with a $0.15 range. And I just wonder why you think that range is appropriate given your inability to forecast even a month ahead accurately. So, that's the first question. It is about the range, I mean, of why...

Yes. No, I understand, Adam. Thank you for the question. Well, let's face the reality of number, it's not $0.20 because what we are saying is that we have, I would say, a big half of the $0.20, as you said, that is coming from one-off factor that's going to be compensated in Q3. So it's not as if we had missed the landing, it's just that the number of fact that we could not anticipate at the beginning of June happened at the end of June and that helped the landing of Q2. Now, you're right, there is approximately $0.08 to $0.09 that we deliver above the anticipation at the beginning of June and I would say, that's -- I mean, the month of June has been very important, because in fact, we all realize that all the lockdown and the confinement last until beginning of June when things were gradually released in many, many geographies, and even if there was still a number of disruption, I think that when we look, for instance, like people not all being back to work physically, I think that we don't know when all that is going to be back to normal. So, let's assume that June was probably giving us a pretty good visibility on what we could expect for the coming months. And that's really on the basis of that that we have come to this capacity to come with this vision and guidance for the full year. So again, June has been important, the learning of June has been important and the miss has not been $0.20 but rather $0.10, and of course, the first weeks of July, as we've been saying, is confirming this kind of understanding of the environment in which we are for the time being.

Okay. Well, fine. Okay. And implicit in that answer is there won't be a sort of unexpected $0.10 movement by the end of December. And I suppose that's an interesting point. Does that mean to say that you also basically if it looks like it's going $0.10 above, you'll somehow control it, or is it that there could be at the end of December, as there was at the end of June around $0.10 movement?

Well, and I'm of course you know I've broken my crystal ball, so I'm not able to tell you whether this kind of thing could happen. I think we're coming with a carefully considered range for the landing with a number of scenarios behind it and I think that's encapsulating several possibility and pluses and minus, as always, when you build a guidance, and we think that this is at that stage. With all the information that we have, the right guidance and the right vision for the landing, and I'm not able to say more. If there are things that we haven't been anticipating in our various scenarios that happen, that can always happen, of course, and the last months are here to remind us that we are not able to anticipate everything, well, we'll see. But for the time being, with again all the information that we have, the June till mid-July vision, we think that this is the right guidance for the end of the year.

Okay, well, thank you very much. And it's a question that's really tough to answer than I phrase it. Can I talk about something completely different, which is the growth of margin, specifically in the RRP portfolio. So, you said in this quarter, you've been really pleased, partly because RRPs are a higher percentage of the whole business, but also within that, RRP margins have gone up, partly because you sort of moved so -- surfaced towards digital. And I guess the question is, within RRPs, how should we think about margins? So obviously, there is a whole mix thing, that's not really the question. The question is, do we think that you got to good level and yes, it will grow from now but perhaps more modestly than it does in Q2, or do you think each quarter we can see really impressive gains in RRP margins, I don't know, for the next sort of two or three years? It's a slightly long-term question, it's not a 2020 question.

No, it is, Adam and it's a very fair question. Let me be start by reminding what is the model of IQOS and RRPs. It starts with the consumable that are, as you know, enjoying today higher value on the per stick basis, okay, which is absolutely intrinsic to this RRP business and that's a business on which as well versus CC, we are also improving the way we are producing, improving productivity, and therefore, when you look at the gross margin on the HTUs, there is some positive -- so we're starting from, of course, this favorable situation that I described and there is a possibility of, I would say, a positive evolution. Then, you have the devices, okay, which we've seen is a small percentage of the total, but it's a material one. And on this one, I think, we've been clear on the fact that the margin by type of device can be different, but we can accept to sometime not make money or in some condition even lose some money, because at the end of the day, it's part of the investment that we make to acquire new customers. So that's the starting point. And then below that, of course, you have the old machine to acquire in order to convert smokers to IQOS and then to retain. And on that machine as well, we're going to improve things as we are growing the top line on RRPs. We are gaining in efficiency, we use more digital, we said it, and we are, I would say, polishing the machine, increasing at the same time the strength of the engine, but also, I would say, reducing the cost of the engine. So, that's going to keep playing positively. So, I don't know whether I should take impressive and I don't know what you put behind impressive, but you should certainly expect us to keep growing the margin on the RRPs gradually in a meaningful manner as we continue to grow on IQOS and RRPs. That's certainly our objective.

Okay. Let me try and be a little bit more precise about impressive. You clearly not going to tell me or what the margin is precisely, but it's also clear the margin has grown very dramatically in '20 -- in the first half of 2020 versus last year. And so, I suppose the question is really should we expect something like a similar uplift again in 2021 on -- just on the RRP business, or is it going to be much more modest than the uplift was in 2020?

Adam, I won't comment on that, whether it's going to be above, below. What I can tell you is that we believe that we have some significant headroom to keep improving margin, but I won't comment further.

Okay, that's fine. Thank you very much.

Okay, thank you.

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

Hi, good morning. Thank you. My first question is on Marlboro. I appreciate the commentary around some modest down-trading that you had already been seeing in markets like Turkey and Mexico. I'm just trying to square that comment -- and those are good Marlboro markets, I'm just trying to square that commentary with the assertion that you believe that Marlboro market share will recover given its outsized exposure to social occasions. So, just wondering how much of the margin pressure do you think is really, excuse me, the market share pressure is coming from down-trading in select markets that have a high degree of exposure to Marlboro versus the social occasions? Thanks.

Well, I think that, you're right that you have the two drivers behind Marlboro and that has been -- Q2 has been a difficult quarter for Marlboro, has been losing some share both because of, you said it down-trading, and it's few markets where we can see that, but also I think to a large extent in many markets where Marlboro has a big market share because of the social movement that have almost entirely disappeared during Q2. And at the same time, by the way, you have market such as the Philippines, where Marlboro has been growing nicely as well. So, it's a mixed picture, I would say. It's not one direction and it's a bit more complex than that. But we are certainly confident that Marlboro is going to be able to rebound nicely first with everything around the social consumption, and we are going to certainly see some rebound as well even in countries, where we have seen down-trading during the period when the COVID crisis hopefully ease. When it comes to the down-trading, is it really Marlboro downward or more mid to low? So, I think even the real impact of, and I was talking about Philippines, which has been a market where the conversation has been difficult and despite that we've seen good evolution for Marlboro. I think Marlboro has been getting 3 points of market share in the quarter. So, it's quite good. So, I would say, when we talk about down-trading, I'm not sure that this has been the main impact on Marlboro, but rather again, down-trading is rather mid-pricing going to lower pricing, and the biggest impact on Marlboro we see is this absence of social moment where Marlboro is an important brand. So, we hope that will enable a good and fast rebound for the brand.

That's helpful. Thank you. And then my second question is on the IQOS development and looking quickly at your number of users and juxtaposing that against your volumes, it seems like perhaps there is a little bit of degradation in terms of average volumes per user. Is that a function of just new countries coming online and you need consumers to ramp their perhaps consumption or is there like a structural shift in terms of per capita consumption in new geographies in combustible cigarettes that would translate into HeatSticks relative to existing IQOS geographies? Thank you.

Well, Vivien, I'm not sure that we have any information that would clearly point to that. We know that Q2 has been impacted globally in the tobacco market by a lot of disruption that has been potentially influencing the daily consumption and that maybe in some markets, it can have an impact on few markets for IQOS, but frankly, we have no data and nothing pointing to that based on all the data that we have on Q2.

Understood. Thank you very much.

Thank you.

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

I just wanted to ask how you are thinking about the puts and takes of the current excise tax environment. There has been a number of developments during the quarter, including the Saudi Arabia VAT increase and Germany VAT reduction. So, what is the impact of these tax changes? And are you passing them through to consumers? And I guess looking forward, what is your outlook for excise taxes as a result of the economic environment and what did you see in the past following prior economic downturns?

Yes, thank you for the question. So, as a general rule, yes, we are passing on this tax evolution whether on excise duty or VAT, that's a general rule. But maybe more important is the comment on what we can expect for the coming quarters in term of evolution of the tax environment. Well, it is true and that's certainly the sense behind your question that many countries are going to face higher deficit -- budget deficit because of the crisis and the temptation could be there to try to find way to finance it. First of all, this type of decision is usually made in the fourth quarter of the year. So, probably end of the Q3, beginning of Q4. So we know more at the time. But I have the feeling that versus maybe what happened in 2008-2009, here, the environment is quite different and many governments are rather trying not to depress the consumption and you know that when you increase price, at the end of the day, you're not too sure about the net impact you're going to get on your -- on the money that you're going to receive. And therefore, it remains to be seen what's going to be the decision in term of tax increase of all nature. I think it's not clear. Well, if it was the case, as I said, we've seen that in the past in 2008/2009 as -- again, there is probably a different way to approach the crisis, as seen a lot of excise duty increase in many countries and I think we've shown our capacity to, of course, weather this kind of environment, and I would say, overcome this kind of headwind and we have no doubt that if it was the case, we would do that again. But, and I reiterate my but, it could be quite different this time and that is at least what we are hearing from a number of politicians and governments.

Thank you. And then I was wondering if you could provide more color on the trends that you saw exiting the second quarter. You highlighted that there was a particular recovery in Europe. And can you comment on what trends you're seeing across other regions? And then, I guess more broadly, how are you thinking about the volume trends across markets in your 7% to 9% industry volume forecast for this year? I guess what are the differences between emerging and developed markets and the drivers behind that forecast?

Well, sure. I should probably be back to what we've been sharing about our expectation for Q3. So, we are, as we said in June and first weeks of July, seeing a kind of gradual improvement of the market, the global lockdown are over. We -- doesn't mean that we are back to normal, but as I said, we start to see the market operating maybe in a more consistent manner and with a bit less disruption. So, that is a trend that we've been flagging on June, but -- so that is why we are saying that we expect for Q3, net revenue that will be in sequential improvement versus Q2. So, that's exactly what is behind our vision for the rest of the year. It doesn't mean that we're going to be back on the growth year-on-year, and also, of course, in addition to that, we have some negative impact coming from H1 that's going to play on the top line and we said about 1% in Q3, but we are going to continue to see in Q3 some year-on-year negative evolution because lot of market remain extremely disrupted, and of course, I've been talking about Duty Free, Indonesia, but many other markets are going to be disrupted because of the COVID crisis, because of the restriction, because of potentially some impact on the economy. So, all that is going to play and impact us. I'm not going to enter into trajectory by market, but certainly we would expect the mature economy and that's probably what we've seen in -- at the end of the quarter to show some good resilience in this environment and maybe less disruption versus a new economy. That would be in the ballpark our feeling. And then, if we enter Q4, as we said, we continue to expect an improvement on net revenue for Q4 versus Q2 -- Q3, so sequentially, we're going to keep improving the net revenue number, but nevertheless, Q4 could still be negative year-on-year. And so, we really have to make the difference between the quarter-on-quarter trend, the sequential trend and then the year-on-year comparison.

Thank you. And just my last question. Russia has been an important market for IQOS growth. Can you comment on what you're anticipating from the economic environment and its impact on IQOS adoption in Russia? And what has been the performance for your super premium HeatSticks launch? Thank you.

Well, IQOS has been doing very well in Russia in Q2 in this environment. So it's, of course, I cannot say that there was no impact from the disruption, some lockdown in Russia, but we continue to grow share for IQOS and we are pleased with the evolution of our RRP in this market. Altogether, the Russian market has probably been impacted but in a minor way by the evolution. So, when you look at the volume, it was down, it was not with a strong acceleration in the underlying decline in volume that we have seen in Q2. So, that's a market that has resisted pretty well through this COVID crisis, and again, we are very pleased with the IQOS development. I'm not going to elaborate on what is going to be the trend in the next two quarters. We expect the IQOS market share to keep growing and that we're going to continue to perform well on IQOS. The good news is that we also maintain market share in CC at the same time. So, that was a nice achievement.

Thank you.

Thank you.

Our final question will come from the line of Owen Bennett of Jefferies.

Good afternoon and hope you all well. I'll keep this very quick. So, I just wanted to come back to the sequential industry volume improvement in the EU in June. I was just wondering is it possible to break that out between cigarettes and IQOS and what was the main driver there? Thank you.

Well, yes, indeed we have seen in June, with the end of the lockdown in many countries, an improvement of the trend. I would say IQOS has been doing well, as we said, through the quarter. So, of course, we've seen some acceleration in June, but the whole quarter has been good for IQOS, and clearly, we have seen some acceleration in the CC business, which has been quite impacted by the lockdown in some geographies and we've seen some improvement in June. All markets are not being equal, and notably, the markets that are impacted by lower tourism have been more penalized and I talk about Southern Europe here. Of course, the markets typically see a lot of purchase being made abroad and a lot of cross-border activity with the border being closed. I mean, they've been globally doing better through the quarter. So, this is a kind of trend that we have seen in Europe.

Okay, very helpful. Thanks very much.

Thank you.

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

Thank you very much for joining us today. That concludes our call. If you have any follow-up questions, please contact the Investor Relations team. Thank you again. Stay well and have a great day. Thank you.

Thank you all. Talk to you soon. Thanks. Bye.

And thank you, ladies and gentlemen, this does conclude today's conference call. You may now disconnect.