Good day, and welcome to the Philip Morris International Second Quarter 2021 Earnings Call. Today's call is scheduled to last about 1 hour, including remarks by Philip Morris International Management, and the question-and-answer session. [ Operator instructions]. Media representatives on the call will be also be invited to ask questions at [Indiscernible] questions from the investment community. Now I'll 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 2021 second quarter results. You may access the release on www.pmi.com. 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 share data, are at the end of today's webcast slides, which are also posted on our website. Unless otherwise stated, all references to IQOS are to our IQOS heat-not-burn products. All references to smoke-free products are to our RRPs. Growth rates presented on an organic basis reflect currency-neutral underlying results. Adjusted net revenues exclude the impact of the Saudi Arabia customs assessments as described in today's press release. Please note that due to UK Takeover Code requirements, we do not intend to provide further information on this call regarding our offer to acquire Vectura Group PLC, that has not already been disclosed in the Rule 2.7 announcement on July 9, 2021. A copy of the Rule 2.7 offer announcement is available on www.pmi.com. 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 is safe and well. Our business delivered a very strong performance in the second quarter of 2021, coming slightly ahead of our expectations to match Q1's record high quarterly adjusted diluted EPS of $1.57 despite the continued challenges of the global pandemic. Most impressive was the continued strong growth of IQOS, which made up 13% of our volumes and nearly 30% of our adjusted net revenues compared to 24% in the prior-year quarter. HTU shipment volumes grew plus 30% and plus 12% compared to the same quarter last year and the previous quarter sequentially to reach 24.4 billion units with strong growth across key geographies. We also continued converting adult smokers at a good pace surpassing an estimated 20 million users, of which almost 15 million have switched to IQOS and stopped smoking. Combustible net revenues grew by plus 4% in Q2 on an organic basis, reflecting a partial volume rebound against a weak prior year quarter and solid pricing partly offset by market mix. Our adjusted operating income margin expanded significantly in both the second quarter and first half overall, and while we expect commercial investments to step up in the second-half, this puts us firmly on track for a strong 2021 performance organically with an expected currency tailwind providing additional growth in dollar terms. Importantly, this outlook also allowed us last month to confirm our share buyback program, where we target $5 billion to $7 billion over 3 years. We are also delighted to announce that IQOS ILUMA, the next-generation of IQOS, will be launched in Japan next month. As we covered at Investor Day in February, this represents a major step in category innovation as we seek to accelerate our journey toward…

Thank you. We will now conduct the question-and-answer portion of the conference. [Operator instructions]. In the interest of fairness and time, we ask that participants keep it to a maximum of two questions each. Our first question comes from the line of Chris Growe with Stifel. Please go ahead.

Hi. Good morning.

Hi, Chris.

Hi, and nice quarter there. I do want to ask you two questions if I could, please. I want to start first with, you have IQOS ILUMA launching soon in Japan, and I assume you'll go into more markets. I think in this quarter you had shipments above consumption. Would you expect that still to be the case? I know you've mentioned building inventories. Would that still likely happen in the second half of the year or we've already built inventories sufficiently to handle that launch?

Thank you, Chris. No, I think there was an element of preparation for the launch in this Q2. For the rest of the year, at that stage, we expect IMS and shipment to be more aligned, so we don't expect to have further material differences at that stage emerging in H2.

Okay. And just a question on the combustible business, and I know you gave some good detail on that. I guess my question would be that you did have a softer market share overall in combustibles. I think you mentioned you expect your share to stabilize there over time. I just want to get a sense if you thought that you could stabilize your combustible market share this year? And I think related to that, just to maybe give a little more color around the pricing environment and how competitive it is right now in combustibles, I think there may be factor that's contributed to less pricing for your business in that area.

Sure, Chris. On this objective to stabilize our market share in the CC segment or CC category, that's a clear objective that we have. Of course, it's a year-on-year stabilization that we want to reach. We are stabilizing sequentially quarter-on-quarter, and it's good to see that the Q2 market share is showing this kind of improvement versus Q1. We are not there yet in terms of stabilization year-on-year. That's an objective that we have gradually for the coming quarters. We'll see when we are able to reach it, but that's clearly something that we want to pursue. On the pricing environment, as you have seen we started nicely the year. Q2 was still quite good. I would cite in Indonesia, we are reporting a price impact of about 5%, so clearly positive. H2 is more difficult as we've been flagging it in terms of basis of comparison. There was a VAT decrease in Germany. There is a different pattern in excise duty increase in Australia, so that is going to play. And we are also going to monitor what is the situation as hopefully we are exiting the COVID crisis, which exactly what is the timing and how is the exit, but we know that many economies would still stay quite impacted by that. So, we’ll be of course monitoring the capacity of our customers to follow price increases and that will be certainly driving our decision when it comes to price increases. So, I would say we're going to monitor the situation. We're going to see what is happening. There would be certainly a question on evolution of inflation here and there as well that we're going to take into account. So, a lot of unknown at this stage, but we'll take that into account to monitor and decide on price increase. Nevertheless, we have been flagging the fact that after a 3% increase in H1, we do confirm the overall bracket of 2% to 3% for the full year, which means that we expect notably and partially because of tougher comps in H2, an H2 that could be less favorable in terms of price increase than H1.

Thank you for all the perspectives.

Thank you.

Our next question comes from Michael Lavery from Piper Sandler. Piper Sandler. Co.

Thank you. Good morning.

Hi, Michael.

I just wanted to ask a couple of questions on Indonesia. One, it follows on some of the pricing discussions, I guess. You called it out, obviously, as an offset to some of the favorable pricing. Can you just help us understand a little bit better the dynamics there and what to expect looking ahead?

Sure. So remember Indonesia was a very tough market last year, really hit hard by the pandemic. It doesn't mean, unfortunately, that the country has exited the crisis. And until recently, there has been new announcements of lockdown and restrictions. It's probably the impact was so strong last year that we're comparing to probably favorable basis of comparison, but the situation is certainly not back to normal there. Nevertheless, what we are seeing is certainly an improvement of the situation, again, based on probably favorable comparison. We are doing well ourselves when it comes to the premium market, what we call the Tier 1 with more excise duty, and we are gaining share there, and that explains that we are able to grow our volume this year. But we are also, unfortunately, at the same time seeing the Tier 2 category, the one enjoying lower taxes, that is still gaining ground and probably getting close to 30% market share. It used to be, at the end of last year, around 25%, 26%. So, that is playing the other way around, and hopefully this is going to be corrected with evolution [ph] on the excise duty policy put in place by the government. But, of course, we don't have any news on that and we don't know if and when it's going to happen. That is a situation that we are facing. And in Indonesia, there is clearly improvement versus last year. It doesn't mean that the environment, when it comes to possibility of price increase, is becoming favorable, but at least it's no longer the kind of very negatively oriented market that it used to be for us last year.

And just to confirm then on your pricing, are you saying that you're not getting any increases or have you actually lowered prices?

We are impacted by the increase in duty, so we are increasing price, but it's still having a negative impact, and that's why there is a difference between what we are reporting in terms of price impact with Indonesia and without Indonesia. So, overall it's still having a bit of a negative impact.

I got it. So, your increases aren't fully offsetting the duty increase?

That's correct.

And then just on IQOS in Indonesia, I know you haven't called out a launch there, and the Internet can be a funny creature [ph]. But we find about a dozen stores in Jakarta that all look quite proper and have really official sounding language. Are those resellers of products they are getting somewhere else or do you have a sort of a quiet launch there? Can you just give us a status of how IQOS sits in Indonesia today?

So, there is no official launch of an IQOS club where we may gather some user. As you know, Indonesia is first and foremost a kretek market. And while we certainly have the objective to develop a specific heat-not-burn device for kretek, we haven't been launching it yet. So, we do that, of course, addressing only part of the population, the one with the purchasing power that can afford the current devices, and also a small group of people that are non-kretek, if you want, smoker but that's a very small fraction of the consumer. So, that could be the element that you are referring to, but there is no offficial global launch, if you want, at that stage.

Okay. Thanks very much.

Thank you.

Our next question comes from Gaurav Jain from Barclays. Please go ahead.

Hi. Good morning.

Hi, Gaurav.

Hi. A couple of questions from me. One is on the guidance that you had at Investor Day, you know greater than 9% EPS growth over 2021 to 2023, and you are clearly coming quite ahead of that this year at almost 13%. So how should we interpret it is what I'm trying to understand that there is a slowdown in the next 2 years because you have these tax gap closures in Germany which will impact the high cost realization in that market next year and potentially in some other European markets or could be that [multiple speakers] independent --?

Well, thank you for the question, Gaurav. I think you're going too far. We've been sharing this three-year guidance and objective at the time of the Investor Day, more than 9%. We are off to a strong start because we are targeting indeed for the first year 12% to 14%, it's clearly above the 9%, so I think we're compliant for the time being with the overall beyond 9%, and that means that we are certainly on good track to deliver the more than 9%, but I don't see a contradiction between the more than 9% and what you said the new good news, which is the strong start in 2021.

Sure. And there is more of these tax gap closures in Europe, how would that impact your potential to achieve this EPS growth guidance?

I mean, of course, you can make whatever scenario, and it's difficult to react to the most extreme scenario. But I think we are taking into account and we have always said that, that there could be some reduction, gradual reduction, to the gap between CC, and even on other product when it comes to excise duties. That is absolutely factored in our guidance. We have the capacity to increase price. We've been repeating the fact that IQOS and the consumable that are coming with IQOS is a premium product, that is already a superior expense for the customer. And that is commanding a premium in terms of price positioning as well. Today, thanks to the lower excise duty, very often you're going to have consumable at a cheaper price than the premium combustible product like Marlboro. That is something that, of course, could be changed and we could increase price. And at the same time, we continue to see more and more governments and regulators saying that there should be a difference between combustible and heat-not-burn because heat-not-burns are better product, and that should be used, certain ly, as an incentive to a smoker switching to heat-not-burn category and to move to better product for them. We certainly believe that there will be some decrease in some country, but it's not going to be necessarily the case everywhere. We could also envisage increase in the gap. We haven't seen that recently in the EU, but we've been seeing that being installed in other country. And on the long term, we continue to believe that there will be still some nice difference between the two that is fully justified by the fact that these are better products. [Indiscernible] to say that we are ready to cover for certainly possible reduction in the gap. We think that some of that is going to happen anyway for sure, Germany being one example. And at the same time, we believe that there will be growing, I would say, consensus on the fact that there should be a clear differentiation between combustible and heat-not-burn product.

Sure. Thank you. If I can ask a quick one on Japan. We have this [Indiscernible] right gap closure, the?task? gap closures in October, and that will throw up a lot of volumes up in the market which will be moving, and you're launching IQOS ILUMA. There is a potential to launch a lower priced IQOS variant, maybe reposition IQOS 3 DUO at a lower price point to capture these volumes from the cigarette low category which will probably move.

Certainly, Gaurav, with IQOS ILUMA, we are going to enrich the premium category for [Indiscernible] product. And as we keep saying, that's going to be a real, I would say, major change for customers, and it's going to represent for them clearly a big, big progress, killing the remaining pinpoints. And therefore, of course we focus on that for the time being. We believe the potential is huge as we've been highlighting. Now, depending on how the market is evolving, certainly we'll see what is the interest of launching new devices with a different positioning. The ultimate goal, as we also said in several instances, is certainly, in any case, to have a full coverage of the spectrum of the market, from the most premium positioning to certainly more value for money designed to cost simple product that are of course delivering an experience that is not at the level of the prime experience, but that is value for money and good enough experience for other type, I would say, of customers So Japan will make no exception in our willingness to cover once again, the full market from premium to medium and even low price positioning.

Thanks a lot.

Thank you.

Our next question comes from Bonnie Herzog, from Goldman Sachs. Please go ahead.

Thank you. Hi, Emmanuel.

:

I wanted -- Hi, I wanted to circle back just on guidance. I just have a couple of questions. I -- thinking about this, Ukraine your EPS guidance for the full year, as you expect, industry volumes are improving, but it still does?imply? a decent step-down of growth in the second half despite lapping a relatively easier comp. Now, you did call out a few things, you called out incremental cost associated with the rollout of ILUMA and maybe some gross margin pressures as you expect to sell more devices in the second half. So I just want to make sure I understand all of the puts and takes, or any incremental pressures you're Operating in the second half, half. And then I just wanted to also clarify as it relates to I buybacks. You did mention your guidance doesn't include a material impact from any share buybacks, but just wanted to verify. Does this mean you're not going to be buying back as aggressively, in the second half of this year you're just just including buybacks at all:ot including buybacks at all in the guidance? I just wanted to make sure I understood that.

Sure, Bonnie. Very clear. Maybe starting with the buyback to make it clear. No, no, we're not making any kind of guidance on what's going to be the buyback or assumption. As we said, we want to be really, super flexible. And frankly, all scenario for the magnitude of the buyback in H2 can be envisaged. But precisely because we want to keep flexibility, we don't want to put any kind of assumption on the amount of buyback for H2. That's really the way you should understand it. Now on the H2 margin versus H1, because I guess that's really your question. I think you started to summarize well the reason for the different margin evolution profile, but I'm happy to go through all the element. Certainly, what's going to be common between H1 and H2 is strong dynamism in top line with continued favorable evolution, of course, on our IQOS business. We are still facing on the CC business, also, some relatively easy comp last year, so that should have an impact on theour on of our CC business. We continue to have the nice mix impact driven by the IQOS growth on our revenue first week, so that is going to stay. And of course, that's the reason why we are raising the guidance on the revenue organic growth to 6 to 7. It's our confidence on the continuation of strong dynamism on revenue growth in H2. Then on other element that could be different, there is, as I said it answering a previous question on price, we see H2 possibly being more challenging than the 3% price increase on the CC business that we delivered in H1, so that's clearly one element. Another one is the level of productivity. You have seen the number 300 million. In…

Okay, that was really helpful and I appreciate all that. Obviously, there's a lot of puts and takes, but broadly, given the raised guidance, you've feel pretty darn good about the momentum and just the improvements in industry volumes. That's encouraging. If I may, I wanted to ask a second question just on the competitive environment, especially as I think about what Japan Tobacco is doing by launching their new Ploom X. And it sounds like they plan to launch it at a pretty steep discount to drive trial. Now, this coincides with the launch of ILUMA in Japan. I just wanted to understand your strategy in terms of positioning ILUMA especially as it relates to price. Maybe overall, how concerned are you with stepped-up competition and how confident are you that you're going to be able to maintain share and ultimately continue to take share? Thanks.

Yes. Bonnie, Certainly, that's of course a very good question. I happy to elaborate on it. First and foremost, and that's probably the most important in my answer, we are really happy to see competition really taking now the bih tategueyas a big priority. And showing, I think increase commitment engagement beyond the category. We think that the shared vision on the fact that we need jointly to phase out cigarette and develop better product for smokers is a way, certainly, to accelerate the journey to end smoke the world. To see competition realizing that this is a great category, this is answering smokers need and expectation, putting more innovation, more investment there in the category, that's just great. And I think we can start seeing in some geography where competition increase investment, we can see the overall growth of the market accelerating. And of course, as we take a lion's share of that, that is very good news. Having said that, obviously, what is important for the smoker is the capacity to find with it heat-not-burn tech nology and proposal. Something that is mimicking, to the closest way possible, the experience versus combustible cigarette. And that's where our technology, our capacity to innovate, is making a big difference. And that's where probably some of the competition is struggling a little bit, and that is the reason why some of them believe that they have to discount their product to get some traction. So what does it generate? At the end of the day, it generates the fact that you may have a trial because the device is coming almost for free, the consumable is cheaper. But then if it's not satisfactory, if it doesn't provide the same pleasure, the same benefit as what you have with an IQOS experience and we love further more with IQOS ILUMA, then whether you switch back to IQOS, or you may just be back to combustible cigarette because as you're feeling that that's not satisfactory versus what you really enjoy. And therefore, it's not whether playing the role of converting smokers to heat-not-burn, and you create lot -- lower average consumption device and lower loyalty. So we continued to be a firm believer that at the end of the day, just the right technology, the right experience will convert the majority of the smokers to switch to better product and to heat-not-burn category. And we believe that this is exactly what we are offering with IQOS. And that make us confident on our capacity to retain big market share. It doesn't mean that we're not going to propose also, simpler device, always with our capacity to innovate. Targeting, as I said, different purchasing power, different expectation. But certainly we will continue to lead the way when it comes to a premium product delivering a superior experience.

Alright, very helpful again, thank you so much for all of that.

Thank you, Bonnie. Thank you.

Our next question is from Pamela Kaufman, from Morgan Stanley.

Hi. Good morning.

Hi, Pamela.

I was hoping that you could elaborate on your plans for increased investment in the second half in terms of what initiatives you will be spending behind, how much will be for ILUMA versus VEEV or the other reduced risk offerings. And then in terms of the level of spending, the $300 million to $400 million, is that primarily related to the launch in Japan? And should we think about annualizing this level of incremental investment for next year as you expand into additional markets?

Thank you, Pamela. I have to say, I fully understand your curiosity and that you want to know more about this extract in order to form an opinion. But I'm afraid I will have to disappoint you because, as you can imagine, that is super sensitive and we don't want to disclose the detail of that. Nevertheless, I'm certainly happy to say that we are putting investment in places that are going to move top-line, i.e. growing more volume, more conversion on a smoker switching to IQOS. Certainly, part of the amount is going to be behind the launch of IQOS ILUMA. But not only, there are also commercial activity. As we see, a number of markets returning to a certain normalcy. I will not say we are fully there, but certainly more reason to reaccelerate a number of marketing and commercial activity. And that's going to be important. We are also accelerating in term of innovation, and we are putting more money in life science and to build more presence in RRP category notably, so that's part of the accelaration. And we also signal it's going to be much more marginal, but that we may have to very selectively reinvest here and there on CC where it's possible. I would say it's going to be a small fraction of the extra investment, butt we have this objective of stabilizing our market share. So I think with that, Pamela, you have really what is behind the 300 million to 400 million. No, you don't need to necessarily annualize that, but let's be clear we're going to launch ILUMA in many more country next year in 2022. And And I'm not able to elaborate at that stage on what's going to be the plan in term of investment, but I would expect that, yeah, we'd certainly want to invest with a great return on this new offering and new technology. S that would have some impact on our investment next year. Remember, nevertheless, we have a very ambitious program to generate 1 billion efficiency on S G&A. We have ambition to be very dynamic on revenue. And therefore, our goal over a three-year period is to reduce nicely the SG&A on revenue ratio to create a driver for increased profitability. And of course, including all this investment that absolutely remained a big ambition that we have.

Thank you. That's very helpful. And my other question is, can you discuss the rationale behind the new management structure in the America s? I'm just curious how, if at all, it influences the Company's priorities in the region. Should we anticipate any changes to the way that IQOS ' U.S. rollout is conducted, or any changes in the Company's strategy towards the U.S. market, particularly given that Deepak Mishra 's background is in strategy and M&A?.

Well, thank you for highlighting the great talent of Deepak and we're all very pleased to see him taking his new responsibility. I think it just highlights, certainly, the potential that we see globally for Americas but notably, of course, for the U.S. We want to keep working in close interaction with Altria on IQOS. We flagged the fact that we could have, certainly, for IQOS VEEV some ambition. You will allow me not to elaborate more on that, but that certainly mean that we see the U.S. as actually a country where reduced risk product have a great potential and we want to participate in that potential.

Thank you.

You're welcome.

Our last question comes from Vivien Azer from Cowen. Please, go ahead.

Hi. Good morning. Thank you.

Hi Vivien.

Hi. My first question is on VEEV. I was wondering if you could expand and offer any preliminary insights. I know that it's still early days, but for the consumers that are engaging with that product, are they skewing towards legacy IQOS consumers, are they newer IQOS consumers, new consumers to the platform in general? Any other insights would be very helpful. Thank you.

Sure, Vivien. Indeed, we -- on VEEV, this is what I could call a soft launch for a number of reason. We want to learn the category. We are learning in many dimension including age verification, which we see as absolutely paramount. And the obvious initial move from us was to put VEEV as the nice complement for some of the already IQOS [Indiscernible] been user in the case of polyusage. And that was a natural move from people who were knowledgeable of IQOS already, the technology, the great experience the IQOS brand can provide. I think we are moving now to new dimension. We have beyond this initial move some great feedback coming from consumer that show that it's not only the elegance of the design, but the overall experience, the quality of the product that is comparing very well when we do test versus competitors. So time to certainly accelerate in our ambition that will come with more launches, of course, development of more flavors. So after this first step in the category, you should expect us to certainly increase ambition on vaping.

Perfect. Thank you. And my followup question is just on capital allocation. It's been a while since we've seen the Company be this acquisitive. In short order, do you feel comfortable that you've filled white space or knowledge gaps in your portfolio, or should we expect more bolt-on acquisitions going forward? Thank you.

My view would be, Vivien, that with the proposed acquisition of Fertin and Vectura, we would certainly really build a very strong platform on which for our 2 ambitions on inhale therapeutic and on self-care wellness, we would have indeed very strong platform, and notably from life science perspective. For the life science, that would be great. That's certainly the view that we have today on that topic.

Thank you.

Thank you.

This concludes the question-and-answer session. I will turn it back over to management for closing remarks.

Alright. Well, let me leave you with some key messages then. First, despite the slower recovery from pandemic in certain markets, we are happy to report a very robustful first half performance with a record high adjusted diluted EPS and raised 2021 guidance. Second, the impressive growth of IQOS continues. And we remain on track to deliver our target of 95 to 100 billion units for the year. Third, our Combustible Business is improving sequentially as the recovery from the pandemic infraction in many key markets. Lastly, we are building towards important milestone in our Beyond Nicotine strategic vision, as part of our business transformation. Thank you again for joining us and talk to you soon.

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