Please stand by. Your program is about to begin. [Operator Instructions] Good day and welcome to the Philip Morris International Third Quarter 2021 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 2021 third quarter results. You may access the release on www. pmi.com. A glossary of terms including the definition for reduced risk products for 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 posted on our website. Unless otherwise stated, all references to IQOS or to our IQOS Heat Up Burn products, all references to smoke-free products are to our RRPs. Growth rates presented on organic basis reflect currency-neutral underlying results. Following the acquisitions of Fertin Pharma, Otitopic, and Vectura Group, PMI added the other category in the third quarter of 2021. Business operations for the other category are evaluated separately from the geographical operating segments. 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 A - 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 another strong performance in the third quarter of 2021, coming ahead of our expectation to achieve a record [Indiscernible] quarterly adjusted diluted EPS of $1.58. Most notable was the continued excellent growth of IQOS driving +33% Q3 organic growth in RRP net revenue, and +7.6% for total PMI. HTU shipment volumes grew +24% compared to the same quarter last year to reach 23.5 billion units with broad-based growth for both our volume and the category across key geographies. This was delivered despite ongoing tightness in device supplies, due to the global semiconductor shortage, which impact IQOS user growth rates. In combustibles, further sequential share gains supported total PMI giving growth of 2.1% in Q3. And we continue to expect total cigarette and it's [Indiscernible] goals for the year. We are firmly on track for a strong 2021 organic growth performance with an expected currency tailwind providing additional growth in the [Indiscernible]. We are also delighted to share outstanding initial result for IQOS ILUMA in Japan, and growing traction for IQOS VEEV in early launch markets. In the quarter, we made three milestone acquisition as we build our business for the long term to include product that go beyond tobacco and nicotine. Our smoke-free transformation is now also reflected in our financing with the launch of an industry for business transformation link financing framework. And we continue to prioritize return to shareholder through 4.2% increase in the dividend and ongoing share repurchases. Turning to the headline numbers, our Q3 net revenue grew by +7.6% on an organic basis or +9.1% in dollar terms. This reflects the continued strength of IQOS and the recovery of the [Indiscernible] business in many…

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 please keep a maximum of two questions each. If time allows, follow-up questions may be taken. [Operator Instructions] And we will take our first question from Gaurav Jain with Barclays.

Hi, good morning. Thank you for taking my questions.

[Indiscernible]

[Indiscernible]. My first question is on the -- unit 2022 comments around growth rate being lower than the range you have given for 2021-2023 because of the issues around device supply. Now, if device supply is lower and your IQOS acquisition is lower, then doesn't it imply that your commercial investments are also lower and so it should be beneficial to your EPS, or is that a correct way -- incorrect way of thinking about things?

So thank you, Guarav, for the question. First of all, let me repeat that this is one scenario, the fact that the constraints are going to stay with us in H1 next year. This is not the only one, so you have more favorable scenario. And at that stage, frankly, it's a fast-moving, super-fluid situation. So we don't know, but I think it was really important to share the possibility that the pressure on availability that we are seeing in H2 2021, we're still going to see it in in H1 2022. So that's the scenario you are referring to and in this situation we would see after this six months second half of 2021, we'd see another six months period with reduced acquisition that is the underlying potential that we have seen in H1. In this situation, no doubt that, of course, the spending would be impacted by the fact that the number of launches or a number of commercial activities, that's happening, that's very clear. But at the same time, I think we've been very clearly saying it today, we are absolutely sure of the very strong potential of IQOS. And we think that this potential remained absolutely unchanged by what's going on. So there will be when the shortage ease, a very nice acceleration. On top of that, we will be coming at the same time with very exciting innovation. You know ILUMA, there is more in the pipe. So we're going to make sure even when there is some limitation on availability that we keep building awareness, we keep building the category, but also the IQOS franchise. So not all cost will go away because we're going to -- I mean, we are here to make a success. As you know, on the long time and not managing only 6 months. So yes, there would be in this scenario -- once again it's one scenario, among others. They would be reduction in investment. But as you can see in Q3, we continue to invest even when there is some limitation because we are building this long-term success that is extremely clear in the outlook that we have.

Thank you. And a follow-up question on your U.S. strategy. And there are number of almost like cross-currents going on that you're partnering with Altria for IQOS and they're now you have lost the lawsuit versus VAT. And there is a potential that you have to do domestic production of your devices. Then you are also planning to file a PMTA for IQOS VEEV later next year, so that could also be a potential new product than the U.S. market. And then you've also acquired Fertin, which also gives you to capability to potentially launch a modern oral product in the U.S. if you file for that PMTA as well. So how should we think about, in some parts you will be partnering with Altria, in some other parts you could potentially be competing with Altria. So how does it all fit together?

Thank you, Guarav, for the question. Let me clarify it again. We have commercial partnership with Altria and each of them tobacco products, so that's very clear. And we're going to see what is the final outcome of this ITC question. I will not rest with the final conclusion. We are at the time of the presidential review. We frankly think it's going to be a defining moment for the objective of the FDA of tobacco on reduction. I think the administration has a great opportunity here to flag how important this tobacco harm reduction policy is. And that would mean to protect IQOS, which is the only [Indiscernible] inhaled nicotine product that is today benefiting from [Indiscernible] in the U.S. So we are still hopeful that we're going to get a positive conclusion after the presidential ruling for us. In the case that it was not the final outcome, of course, we'll continue to work with Altria. The development would be a bit delayed. We'll find a solution to overcome the ITC decision. And we've been flagging the fact that it could go for local production. And, as I think I've been saying during my notes, we remain absolutely convinced of the very strong potential of IQOS in the U.S. So that's one thing. And then you have the other Altria category where indeed we have ambition and you've said it, we are going to file for a PMTA for VEEV. We could be considering launching modern oral product at a certain point in time as well. And on this one, all the options are open, so we don't have any commercial agreement today. And we will decide in due course how we want to launch and with which kind of set up or partnership. But no decision has been made at that stage.

Thanks a lot, Emmanuel.

Thank you, Guarav.

We will take our next question from Bonnie Herzog with, I apologize, Goldman Sachs. Your line is now active.

Thank you. Hi, Emmanuel.

Hello, Bonnie.

I had a couple of questions on IQOS ' performance during the quarter. First, is there any sense of how much stronger device sales could have been in the quarter without the supply constraints? In other words, curious to hear from you how strong orders might be for new invites -- devices, especially on ILUMA. And then maybe if you could share how big of a backlog there is. And then surrounding this issue, I just was curious to better understand what gives you the conviction that these issues are going to subside by the second half and just thinking about the risks. These shortages last longer. And then finally on his topic, are there any consent -- contingencies you guys might be working on, or any way for you to be less dependent on the semiconductor suppliers going forward?

Thank you Bonnie. So first question on the IQOS potential in term of sale of device during Q3 without the constraint. We are seeing that we've been missing several 100,000 of sale of devices. So it's obviously very, very material and we've been reporting the fact that outside Japan and really we have to look outside Japan because Japan with the launch of ILUMA was a specific situation. So outside Japan, devices have been growing by 7%, which is, of course, very, very significantly below the underlying growth of our markets. And we are growing still close to 25% even in Q3. So that I think give an idea of the kind of GAAP that we may have been facing during this quarter. We believe, as I said, that during Q4, as we now have a better, I would say, grip on things, we've been managing on the reassortment, reallotment. We have a better understanding of the kind of commercial actions that are giving the best possible return. We have a very clear view on how we're going to prioritize. So we believe that we are growing even still with the severe restriction on devices, I'm not able to say whether that would be exactly the same level, but let's take that as an assumption, the same level as Q3, we believe that in terms of user growth, we could do better than in Q3. And we mentioned a few 100 thousand better user growth acquisition. So altogether, that mean that if you believe that the [Indiscernible] underlying growth rate was between 4.5 to 5 million user a year that we're seeing in each one, we're going to miss anywhere between 1 to 1.5 million user growth in H2 altogether. And that is absolutely consistent. So that was something that…

Okay. Super helpful. If I may, I'd like to maybe squeeze in another quick question. Just during this period of slower IQOS device sales and new user acquisition, how should we think about your total volume growth? So is it safe to assume your combustible cig volume will be elevated during this period of slower IQOS device sales and essentially be strong enough to more than offset this? And then given this dynamic, how should we think about this mix impact on your margins in the next few quarters? Thanks.

Sorry, your line was not very good, but you were asking how we should expect the impact on user acquisition versus volumes, correct?

Sorry, if it didn't come through -- more so on the mix, Emmanuel, because I'm thinking during this period of slower IQOS device sales, combustible cig volume could be elevated.

Yeah.

[Indiscernible] thinking that mix dynamic can impact on margins.

Look, we continue to target very nice growth of IQOS and [Indiscernible] is a brilliant category altogether. And of course, as the EPS leader of this category, we see that continuing in the coming quarters. And as you know as well, that is coming with a very nice mix in terms of revenue per stick, and it's still very much visible in our Q3 numbers. And we also flagged the fact that that was positive in terms of gross margin rate for the consumable business, the IQOS business. So maybe if the growth is a bit weaker because of the situation, the positive mix will continue to evolve; has already, but at a lower pace. But that's going to continue to be nicely positive. And on top of that, of course, then there is a question of, okay, what are we going to spend in terms of SG&A in this kind of situation. So it's difficult to say that it's going to be necessarily as in a negative impact on the margin. We are talking about very powerful driver on our financial performance. And even once again, is the growth rate is going to decrease a bit, still going to be significantly higher than any evolution on [Indiscernible]. And it's going to still continue to deliver a positive impact on the mix.

All right. Thank you so much again.

Thank you, Bonnie.

And we will take our next question from Pamela Kaufman with Morgan Stanley. Your line is now open.

Hi, good morning. I have a follow-up question --

Good morning.

Good morning. I have a follow-up question about the outlook for next year and the scenarios that will drive the risks to be below your midterm target. It sounds like you're anticipating weaker 1H supply and an improvement in the second half. Would this scenario drive your results to fall below the side and 9% revenue and earnings growth target, or would supply conditions need to worsen relative to these assumptions?

Of course, we can play without limits with that very scenario. We have to admit that we've been seeing already in Q3 a weakening of user growth. And as we said, versus -- even if we expect in Q4 an improvement versus Q3, it will still be below the underlying trend. And then, you know, in the scenario that we are describing, we say if the shortages continue in H1 next year, that's when we're going to face this pressure on growth. So it's difficult for me to just comment one scenario. But [Indiscernible], that's the accumulation of what has been happening in H2 this year, 2021, and what could happen the beginning of next year, so H1 2022, that could drive a reduction in the potential growth rate next year. Which would be temporary once again, and when there is a rebound, the [Indiscernible] will come, but that would be the combination that would trigger something that could be below our average growth targets.

Thank you. That was helpful. My next question is on the ITC decision. Can you elaborate on your contingency plans for making IQOS available in the U.S. What would be the timing of manufacturing IQOS in the U.S. And just to clarify, does the ruling also pertain to ILUMA technology? In terms of bringing ILUMA to the U.S. market, is there an opportunity to bridge IQOS 's PMTA application for ILUMA to accelerate its entry into the U.S.?

So regarding the ITC contingency plan, if eventually the presidential review was not favorable, but I want to repeat before answering you that we are hopeful that this presidential review will have a positive outcome for us for the reason I mentioned previously. I cannot elaborate further, unfortunately, but that clearly -- it's part of what we described, the fact that we could have some local production as an element, but I won't elaborate further on how this could happen and how we would get there. On the ILUMA PMTA, a PMTA, frankly, we will need to have a discussion with the FDA on the process and all the process would be carried by the FDA. And at this stage, I'm not able to answer you. So we will certainly require -- ask for a PMTA on ILUMA at a certain point in time, but not in a position today to comment on timing.

Okay. Understood. Thank you.

Thank you Pam.

We'll take our next question from Vivien Azer with Cowen. Your line is now open.

Hi, thank you. Good morning.

Good morning, Vivien.

I apologize for belaboring the ITC issue, but I've got a question on that too. You've noted your track record of success in terms of defending against litigation internationally. Two questions, please. Number 1, are there current cases that are still pending internationally around IP litigation? If so, can you outline where those exist. And number 2, can you just clarify that the litigation that you've successfully defended addresses the exact same claims that were reviewed by the ITC? Thank you.

Well, there are a number of cases pending, I won't elaborate on that. Not all of them are public. And notably in Europe, I just want to repeat that so far in Europe, we've been on 11 cases, trial or at appeal, we've been successful. So I think it tells a lot about the strength of what we've been doing. And yes, some of the patents on which the ITC based their decision before proceeding for review but then that have been reviewed by a number of courts in Europe. And it to be the UK court. And they already have the [Indiscernible] and the UK court precisely has invalidated two family of patent that are at the original ITC decision. And the European Patent Office already evaluated one of this family of patent, so even fundamentally on the merit of the patent and the validity of the patent, we have been going through success in Europe.

That's helpful. Thank you. And then my follow-up question is on combustible cigarettes. The outlook is getting modestly, it's better; pricing, you've reiterated. If I recall correctly, as we kind of started the year, I think there was a point of caution around pricing with COVID uncertainty, etc, etc. What is your view of the consumer? I know it's a broad question; you operate in a lot of markets. But if you were a little bit conservative or cautious on pricing, when we started the year, what is your feeling about your ability to take pricing today? Thank you.

Well, you have to still give me the remaining weeks for the year before I can elaborate on next year. I think it's still quite unclear what's going to be the environment. One might think that inflation clearly accelerating in many countries, we'll maybe build a global environment that could be better than what we thought initially, but that's still early time. So I'm not able to comment at that stage, so I will keep a cautious stance, which was built, you probably remember on the aftermath of the COVID and the impact of many economy are being under shock. So we were seeing that that was probably not making a great landscape for price increase. But I have to admit that I don't know what's going to be the impact coming from what seems to be a general increase in inflation. And maybe that is going to create a more favorable situation, but bear with us, it's still a couple of months before we can have a clearer view on that one.

Understood. Thank you very much.

Thanks, Vivien.

And we will take our next question from Chris Growe with Stifel. Your line is now open.

Thank you. Good morning.

Hi Chris.

I had a question. Hi, Emmanuel. Thank you. I just had a quick follow-up on the supply shortage. Sorry to keep going there, but I did hear some effect on the 2.4 device. I know it's limiting ILUMA's launch in some markets. Is this chip shortage true for all your products, those 3.0 and duo. Just to be sure, are those also affected by the chip shortage?

Well, Chris, that would mean that we will need to enter into great detail of how we are prioritizing our portfolio, and I don't think I want to do that because, of course, that's quite strategic for us. What is very clear is that we have one, North Star, if you want, which is to first protect our existing IQOS user and to make sure that we make device available when they want to renew the device. And second, of course, we want to optimize any commercial action to make sure that we have the highest return on a new device that we are selling and that we avoid as much as possible selling device with a very low percentage of utilization afterwards by the consumer. And certainly for us, moving and taking the benefit of that to step up the blade technology and move IQOS 3 as a priority instead of IQOS 2.4+ was one of the moves that we have decided to make. And that explain why we have some more limitation on top of the fact that due to component issue there was also more pressure on 2.4, but obviously in these kind of moment s where a lot of things are on the table, you are managing constraint and long-term strategic vision as well. That's what we're doing.

Thank you for that color there. And just a separate question in relation to some of your beyond nicotine and tobacco acquisitions, Otitopic and Vectura, in particular respiratory drug companies. I just had a simple kind of high-level question. Do you need more pieces to fit that vision you have for respiratory drugs? And just to understand kind of what stage we're at in terms of your acquisitions, to understand if you need to do more here in the short-term, if this is a good base to which you can build this element of your beyond nicotine sales.

So globally, we think that we have put on beyond nicotine great platforms if you want, and notably in term of R&D. And I think there is a lot we're going to be able to do already with this acquisition. Now, does it mean that in the future, we could think of other [Indiscernible] acquisition that would bring additional capacity that we don't have here maybe, but I think for the time being, we're going to focus on making sure that we integrate this acquisition and we maximize the synergy. In the interview as I said, in terms of R&D, which were really two big objectives to combine strengths on R&D. And we optimize by putting -- know our all skills, talent together, we optimize what we can do already in therapeutic, but I could make the comment as well for 13 and self - care wellness.

And just to be clear, these acquisitions should not take you away from your separate goal of repurchasing you shares? That's kind of the main thing I was looking at just to understand future capital commitments through your [Indiscernible].

Nothing. No, absolutely. Nothing has changed on our buyback program. Absolutely.

That's great. Thank you so much. Have a good day.

Thank you.

And we will take our final question from Callum Elliott with Bernstein. Your line is now open.

Thanks for the question. I was just [Indiscernible] Emmanuel, could you talk please about the tax situation for IQOS in Germany, recognizing that the political landscape is still shrouded in some uncertainty. It does seem like the proposed tax changes would be a material headwind to price mix and profitability next year, so just hoping that you could frame the magnitude of this impact. And then maybe sort of slightly bigger picture, do you see an increased risk of contagion for this kind of big IQOS tax increase in other markets?

Well, on Germany what I can certainly you repeat is the fact that it's a mixed feelings about the German decision because on one side, we are very happy with such a prominent country as Germany, putting in allows the fact that this project are better and should be treated differently than cigarette, and I think it's really great that this tobacco harm reduction principle is recognized. At the same time, 20% differentials seem too low. Yes of course it will have impact as we are progressively impacted by it. And it's too early for me to give an idea of what's going to be the impact next year. But there will be some impact of course, [Indiscernible] it's not going to derail our fundamentally the trajectory on IQOS and profit growth. But we believe that 20% is not enough. So we are hopeful that at a certain point in time and it's too early to say, of course, the new coalition is yet form, even if things are getting clarified. But we know whether there is the possibility that starting from these 20% differential. There is a plan to grow it over time, and that could be a possibility. Now, in term of contagion, we don't see that today. We see, on the contrary, when we look at the latest country, they are now coming to a differentiated treatment when it comes to each of them versus CC, we see normally most of the cases significantly higher even, differential versus Germany. So more than 20%. If I take just one example, that's the case in Egypt for instance. So in the recent decision taken by authorities, they are clearly making a bigger difference, which I think to a large extent is much more in line with the reduction in exposure to toxicans. You have a 90 to 95% if you wanted to have a rule to determine what could be the difference. Well, maybe that should be the guideline. And I think we are happy to see a number of country, regulatory government moving to the differentiated treatment between CC and [Indiscernible] and taking a big difference on tax treatment.

Okay. Thank you.

Thank you.

We have no further questions at this time. I will turn the program back over to Nick Rolli for any additional or closing remarks.

Actually, I think Emmanuel has a few brief remarks.

Yes. Thank you, Nick. Just give me a moment to wrap up with some brief closing comments. First of all, 2021 is on track to be a great year for the growth of IQOS and the financial performance of our business. We see continuation of strong underlying fundamentals, demand, and momentum for the IQOS brand. And last, but certainly not least, despite near-term challenges with device supply, we remain on track for our 3-year growth targets supported by a rich innovation pipeline. So thank you very much for your time today and we look forward to talking to you soon.

Thank you very much, Emmanuel. That concludes the call. If you have any follow-up questions, you may contact the Investor Relations team. Thank you again. Have a nice day.

Thank you. Talk to you soon. Bye-bye.

This does conclude the Philip Morris International Q3, 2021 earnings call. You may disconnect at any time.