Philip Morris International Inc

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. In order to ask a question, please press the star key followed by the number one on your telephone. 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 Rowley, 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 ICOS are to our ICOS 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-to-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 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 Babot, 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 locations where local conditions 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 ICOS 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 rate of high cost user acquisition and brand retention. With volumes of heated tobacco units growing 24% in Q2 2020 compared to the prior year, ROPs 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 terms 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 margins have been strong, in both the second quarter and first half. This reflects the increasing mix of ROPs in our business and their improving profitability. Productivity savings in manufacturing across ROPs and combustible, SG&A savings from the private to digital, the elimination or postponement of certain lower priority projects, and the operating leverage of higher ROP volumes all contributed. Indeed, it is no coincidence that the three regions where ROPs have a strong presence are driving this margin performance. We reached a truly historic milestone for ICOS, our mission and our future growth prospect on July 7th with the FDA's authorization of ICOS as a modified risk tobacco product. ICOS 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 cigarettes 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 users of tobacco products and persons who do not currently use tobacco products. A critical enabler for the future growth of RRPs is the implementation of differentiated regulatory frameworks 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 ICOS 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 youth prevention provides an important example of how government and public health organizations 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 had 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&E 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 deleted EPS growth, all on the like-for-like X currency basis. I focus now on our second quarter performance. The effect of confinement on mobility impacted daily consumption patterns 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 11th. 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 deleted EPS of $1.25 was notably better than the upper end of our previous guidance range. including a lower currency impact of 6 cents. 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, high-cost user acquisition grew substantially in the same months, with markets such as Russia back to pre-COVID rates and overall high-cost 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 latter factors accounted for approximately 10 cents of the better EPS performance. Before we come to guidance, I will outline some of the dynamic for the second half of the year. We expect a gradual underlying improvement in the combustible business coupled with continued robust growth for ICOs. The pandemic continues to present an uncertain operating environment with the potential for tightened restriction in localized areas. While not included in our guidance assumptions, they 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 restrictions is also unclear. This said, we observe relative stability in terms of pandemic restrictions 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 terms 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 a significant widespread increase in down trading with such dynamic currently concentrated in markets where 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 high-cost 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 a high level of search engagement in markets where stores have reopened. Despite the exceptional headwinds of 2020, we expect to grow our full-year adjusted diluted EPS between plus 2 and plus 5% on a 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 31 cents. This forecast assumes a total industry decline of 7% to 9%, excluding the US 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. But due to these two factors, our overall net revenue may see a modest decline. The forecast also reflects 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 market 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 market, with commensurate greater industry recovery towards the end of the year, and the compound effect of increased sequential high-cost user acquisition. In the third quarter, we expect the reversal of certain one-time benefits from the first half, with an EPS impact of approximately 10 cents, and the net revenue impact of around 1%. The continuation of headwinds in duty-free and Indonesia, the timing of 2020 pricing in certain market, 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 costs 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 continue 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 were weak, the sequential recovery seen in June and the beginning of July is more encouraging. Our combined June in-market sales volume were 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 reflects 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 ICOS means 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 flattered in Q2 2020 by weaker combustible volume, we expect this proportion to grow over time as our positive momentum on R&Ps continues. R&P 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 R&P 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 high-cost 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 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 ICOS were essentially offset by positive impact elsewhere and in markets where ICOS 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's cigarette market saw an accumulation of headwinds in the second quarter. A pronounced impact from pandemic-related restrictions on daily consumption added to the effect of tax-driven pricing and retail disruption. Industry volumes declined by 22%, excluding trade inventory movements, 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 effects, this has contributed to the underperformance of our premium skewed portfolio despite better sequential performance from AMILD. 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 a strong growth of the tax advantage below tier one segment. which in conjunction with the tax-driven pricing and pandemic situation of 2020 has led to increased downtrading. 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 segment now at approximately 25% of the market, This represents a serious threat to government excise revenue, and the correction of volume-based tax tiers becomes 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 signs 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 the 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 segment, such as the GSamsu 12s launched in March and Marlboro Filter Black 16s launched this month. With enforcement of the minimum retail price now underway, the main outstanding structural issue is the volume tier tax system, which clearly advantages growth of the super low segment. In the static 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 ROP performance. We estimate that there were 15.4 million total IQOS users as of June 30th, 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 ICOS 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 ICOS, with a balance in various stages of conversion. We observe early indication that the propensity of smokers to switch to ROPs 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 ICOS will contribute over time to better understanding of the heated tobacco category and the benefit of switching to ICOS compared to continued smoking. The overall share performance of IQOS HTUs continue 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 high-cost 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 UK, where HTU volumes increased more than five-fold over the prior year quarter and Spain. National off-tech shares surpassed 1% in both of these latter market despite limited distribution. Second quarter share of it 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 points 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 shares for key EU markets and global key cities, which serve as a useful indicator for national share growth potential. ICOS continued its strong performance in Russia with its share up by 3.2 to reach 5.9%. On a sequential basis versus the first quarter of 2020, Its 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 a track and trace system. A more reliable indicator is the 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 heat sticks and heats. ICOS users grew to an estimated total of 5.8 million, of which an estimated 4.3 million have stopped smoking and switched to ICOS. On an adjusted total tobacco view, including cigarillos and adjusted for trade inventory movement, The share for our HTU brands increased by two 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 a second-quarter total tobacco share of over 25%. In addition to strong ERRP growth in existing markets, the geographical expansion of ICOS continues. Despite pandemic-related restrictions, 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 Vive in the EVPOR category and of licensed KTNG products in select markets. To conclude on today's presentation, Our growth prospects remain strong. The continued momentum of ICOS through the unprecedented circumstances of the COVID pandemic demonstrate the structural growth characteristic of RRPs and we are on track to reach our 2021 target of 90 to 100 billion shipments of heated tobacco units. RRPs now make up almost a quarter 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 ICOS is a further testament to the integrity of the product and brand proposition and underline 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 downtrading 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 is in 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 cost. We remain on track to deliver our target of over $1 billion in efficiency by 2021. through both manufacturing productivity and SG&E saving. 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 dividends 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. Again, in order to ask a question or make a comment, please press the star key followed by 1 on your touch-tone phone. Our first question comes from one of Chris Grohe of Stiefel.

Hi, good morning. And nice to hear from you, Emmanuel. Good morning. I'd like to commend you for giving guidance for the year. I know there's uncertainty, but we certainly appreciate your outlook and even amidst the uncertainties in the market today. So thank you for that. I had a question, if I could, first of all, on ICO's performance. Obviously, it was very strong in the quarter. I'd like to understand how you approached your ICO's 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 that product line as we move into the second half of the year?

Yeah, sure, Chris. Well, you know, of course, ICOs remain our top priority and we are, you know, focusing our efforts and investment behind ICOs. So even in this challenging environment, we kept investing behind ICOs. Of course, we had to take into account the evolution of the environment and there was a a number of investments that had to be postponed because they were no longer making sense, so it was not possible to just do them. There was 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 products that we were working on that we had to delay. So they were clearly versus initial plan some reduction in the investment, but we absolutely stay committed to keep increasing investment behind ICOS. 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 what I would call the fixed part of the investment, the structure that we have to invest behind our RRPs and ICOs, we are growing volume. So we amortize this investment over a larger volume and sales. So we decrease the per-sig cost, if you want, and we increase profitability through that. And there is also a variable part on the investment in terms of consumer acquisition or retention. And here, I would say, through the crisis, we are, of course, already working on that. But we certainly 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 these variable cost per user, which is also very good news for the future of high-cost and high-cost profitability.

Thank you for that. And I just want to follow the question, if I could, in relation to pricing, which is a little stronger than I expected in the quarter, which is great. I'm just curious, you talked about maybe delaying some pricing decisions. Are those just a delay? Have you had a pullback on pricing decisions? As you've seen some downtrending in some markets, I'm just curious how you approach the pricing dynamic there.

Yeah, well, of course, you know, 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, you know, the trade is is disrupted, where there is some very challenging evolution in some places because of the lockdown, we have to revisit a 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 is passed, we will continue to implement. But clearly, in this environment, there are things 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 Lano Grovdjian of Barclays.

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

Yeah, thanks for the question. So you're absolutely right. As you all know, the mental ban came into force on the 20th of May. And really, you know, 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 underexposure to the the category, so that is probably a positive evolution for us in terms of evolution of the market. I would not say that the ICOS evolution is obviously impacted by that. I cannot exclude that it has been helping a little bit, but I would say ICOS in the EU behaved well through the quarter, once again underlying the strength of ICOS in the EU through this second quarter. And I would expect probably Q3 to bring more answer on the impact of the mental ban, both on ICOS 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. Now, I appreciate you're not commenting on 2021. But if we were to assume that that's the case in 2021 as well, then Q220 will create a very favorable comp because you had national lockdowns in Q220 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, you know, 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 that 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 2021 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 US 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 are traveling to other airports. So EU, I would say, area is important. But our exposure is much, much broader than that, and therefore it cannot be summarized to a European exposure, if you want.

Sure, but what I was curious is that, is it like 50% of your business 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 too high a percentage if I was to characterize it.

Okay, brilliant.

Thanks a lot. Thank you.

Our next question comes from one 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 You know, what percent of your new users are coming from digital at this point?

Thanks, Bonnie, for the question. Of course, you know, we can share what we can share both, by the way, for confidentiality reasons 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 centered around personal contact through shops, through coaches, and engaging into explaining to smokers the benefit of switching to ICOs. It had started, we did not discover that with the COVID crisis, but of course, in front of markets that were closed, lockdown and people confined at home, we had to accelerate the plan on digital engagement and to develop all the tools through all the digital contact and people were of course at home using a lot of 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 acquired and fully managed customers 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, you know, I think that this H1 2020 will remain a landmark for our ICOS business for a number of reasons. The MRTP decision is one. The improvement on profitability on the ROP business is another one. But certainly the acceleration of our digital model on acquisition and on retention for our ICOS business 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 and 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 strategies to accelerate the conversion?

Well, I would not go as far as to say that, you know, 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 to 100 billion stick next year. And this is going to come from the continuation of a very strong acquisition of new ICOS users. No doubt that the digital play is going to help us achieving that goal. And as I said, it's going to do that at a cheaper cost, which is definitely good news.

Oh, that's great. And then one final question from me. I just wanted to touch on, you know, the MRTP that you received. And I just want to, you know, hear from you maybe next steps in terms of if there are some to get to the next level of reduced risk approval. Just wanted to understand that from you. 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, starts 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 central question, you know, 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 dialogue 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 is 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 dialogue with them. Now on what it means globally. Well, first of all, it's quite important. We hope it's going to stop the discussion on whether, you know, ICOs and heat-not-burn technology is a better product or not than combustible cigarettes. I think that, you know, it's a 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 for 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're going to be able to I would say, share with other regulators, and we are hopeful that, of course, people will look at this decision and will draw a conclusion on that. Let's be clear, we already have this type of decision with several regulators 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 countries communicating on that reduced exposure of our high-cost products. 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 one of Robert Rampton of UBS.

Hello. Three questions from me. The first is on Indonesia. Can you help me understand where the Indonesia market should be from a revenue perspective if price enforcement takes place? Should revenue per stick reach 2019 levels but from a lower volume base, or is that market just going to deliver 20%? Has that revenue from that market just been based down 20% till the lower price tier issue is resolved? 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 dimensions 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 had not been increasing price at the end of 2019. So that was creating difficulty and we were saying that this difficulty would last until the minimum retail selling price is implemented. Then, you know, the COVID crisis started and, you know, 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, you know, 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, you know, as there was some pressure from on purchasing power. And there has been also, you know, in the version of the market, some evolution towards 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 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 percent versus the tier one 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, consumers have been looking for cheaper alternatives. And this market was supposed to stay at a very low level because this was supposed to only be granted to a 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 the 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 develop our brands and we launch offer in the most dynamic part of the market. And, you know, I've been referring to G. Samsung and Marlboro on which we are launching extension in a dynamic part of the market. We expect globally, you know, as the COVID crisis pass and we know that, you know, next year people, economists are expecting... a strong rebound of the Indonesian economy. So we expect globally also the pressure on downtrading 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, you know, second-tier trend a 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 a reform to limit the benefit or change the structure of the excise duty depending on the various categories. Well, at the end of the day, to create a level playing field and for all players to be playing on a kind of equal basis. And we are certainly hoping that it's going to impact, it's going to arrive as soon as possible. If everything that I've just been describing happens, 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, you know, 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 is on downtrading. I know you flagged Indonesia and that you don't expect downtrading going forward, but can you flag which markets you have seen downtrading?

What we flagged is that downtrading may have accelerated in a few countries where it was probably already visible before the crisis. So we talk about Turkey, we talk about, you know, 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, you know, nobody knows what's going to be the impact of the economic crisis that everybody is forecasting. We've been there before, so that would 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 will see, and we will adapt to the situation. Great. Thank you very much.

That's it from me.

Thank you.

Our next question comes from one of Michael Lavery of Piper Sandler.

Thank you. Good morning. Can you update us on the HEATS launch in Japan? You called out, I think, a little bit of mixed 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, you know, is at the forefront of what, you know, you can expect in many countries as they get more mature, I would say, on the growth of Eat Not Burn and ICOs. I think it makes sense to have several offerings 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 shipment and in market sales in Japan in Q2 for it not burned globally. So as you can see, it's a market that continues to grow very nicely. And certainly, Eats has been a contributor to that. So the fact that we are playing with both Malboro and Eats enables us to really capture maximum opportunity in the market. And we see a very positive trend on Eats, which has captured close to 4% of the market. So you see that it's already a sizable part of our RP business in Japan. And that bodes very well for what we can do with the 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's no enforcement all year, or is there a built-in assumption that 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 ICOS launch, so it's sort of maybe hitting it before it hits momentum, but how do you navigate that and how does that look?

Yeah, 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 situations. So, of course, we hope it's not going to last too much because we're not seeing 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 the decision on the capacity to import ICOs. But as you know, it's not targeted to ICOs. So we're just unfortunately here. the prisoner 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 one of Adam Spielman of Citi.

Hello, thank you very much. I've got two questions for you. The first one is really about EPS guidance. In June, you forecasted EPS of below $1.10. It turned out that was wrong by about 20 cents for a quarter that ended in June. You're now giving guidance with a 15-cent 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's 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 20 cents because what we are saying is that we have, I would say, a big half of the 20 cents, as you said, that is coming from one 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 facts 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 8 cents, 8 to 9 cents that we deliver above the anticipation at the beginning of June. And I would say that the month of June has been very important because, in fact, we all realize that all the lockdown and the confinement, you know, last until beginning of June when things were, you know, gradually released in many, many geographies. And even if there was still a number of disruption, I think that, you know, when we look, for instance, at, like, people, you know, not all being back to work physically, I think that, you know, 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 20, but rather 10 cents. And, you know, 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, you know, implicit in that answer is there won't be a sort of, unexpected 10 cent movement at the end of December. And I suppose that's an interesting point. Does that mean to say that you're sort of basically, if it looks like it's going 10 cents above, you'll somehow control it? Or is it that, you know, there could be at the end of December, as there was at the end of June, a random 10 cents movement?

Well, Adam, of course, you know, I've 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 possibilities and pluses and minuses, 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, you know, if there are things that we haven't been anticipating in our various scenarios that happened, that, you know, can always happen, of course. And, you know, the last months are here to remind us that we're not able to anticipate everything. Well, we'll see. But for the time being, with, again, all the information that we have, the June announcement you know, 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 hard to answer the way I phrase it. So can I talk about something completely different, which is the growth of margins, particularly 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 fast towards digital. And I guess the question is, within RRPs, how should we think about margins? So obviously there's a whole mixed thing. That's not really the question. The question is, Do we think that you've got to a good level, and yes, it will grow from now, but perhaps more modestly than it did 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 start by... reminding what is the model of ICOs and ROPs. It starts with the consumable that are, as you know, enjoying today a higher value on a per-stick basis, which is absolutely intrinsic to this ROP business. And that's a business on which, as well, versus the CC, we are also improving the way we are producing, improving productivity, and therefore, you know, 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've described, and there is a possibility of, I would say, a positive evolution. Then you have the devices, okay, which, you know, we've seen is a, 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 sometimes 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 data. new customers. So that's the starting point. And then below that, of course, you have the whole machine to acquire, you know, to convert, you know, smokers to high cost, and then to retain. And on that machine as well, you know, we're going to improve things as we are growing the top line on ROPs. We are gaining in efficiency. We use more digital, we set 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 ROPs gradually in a meaningful manner as we continue to grow on ICOs and ROPs. That's certainly our objective.

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

Well, Adam, I won't comment on that, you know, 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 one of the of Callan.

Hi, good morning. Thank you. My first question is on Marlboro. You know, I appreciate the commentary around some modest down trading that you'd already been seeing. in markets like Turkey and Mexico. I'm just trying to square that comment. Those are good Marlboro markets. I'm just trying to square that commentary with the assertion that you believe the 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, you know, I think that you're right. You have the two drivers behind Marlboro, and that has been, you know, Q2 has been a difficult quarter for Marlboro, has been losing some share, both because of, you said it, downtrading, and it's a few markets where, you know, we can see that. But also, I think, to a large extent, in many markets, well, Marlboro has a big market share because of the social momentum that have almost entirely disappeared during Q2. And at the same time, by the way, you have markets 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 You know, 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 a country where we have seen downtrading during the period when, you know, the COVID crisis, you know, hopefully eased. When it comes to the down trading, is it really Malboro 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 economic situation has been difficult. And despite that, we've seen good evolution for Malboro. I think Malboro has been getting three 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 Malboro. 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 that will enable a good and fast rebound for the brand.

That's helpful. Thank you. And then my second question is on the ICOS development. And looking quickly at your number of users and juxtaposing that against your volumes, it seems like perhaps there's 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 per capita consumption? Or is there like a structural shift in terms of per capita consumption in new geographies in combustible cigarettes that would translate into heat sticks relative to existing ICOs geographies. Thank you.

Well, Viviane, 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 a few markets for ICOS. 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 one 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 have 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?

Yeah. Thank you for the question. So as a general rule, yes, we are passing on this tax evolution, whether on excise UT or VAT. That's a general rule. But maybe more important is a comment on what we can expect for the coming quarters in terms 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... you know, could be there to, you know, try to find a way to finance it. First of all, this type of decision, you know, are usually made in the fourth quarter of the year. So, you know, probably end of the Q3, beginning of Q4. So we'll know more at that 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 the money that you're going to receive. And therefore, it remains to be seen seeing what's going to be the decision in terms 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. Again, it's probably a different way to approach the crisis. I've 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? 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, first weeks of July, seeing a kind of gradual improvement of the market. The global lockdowns are over. It 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. 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 so, 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, you know, 1% in Q3, but we are going to continue to see in Q3 some year-on-year negative evolution because a lot of markets remain extremely disrupted. And, you know, 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 a trajectory by market, but certainly we would expect the mature economy, and that's probably what we've seen 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, you know, ballpark, our feeling. And then, you know, if we enter Q4, as we said, we continue to expect an improvement on net revenue for Q4 versus Q3. So sequentially, we're going to keep improving the net revenue number. But nevertheless, you know, Q4 could still be negative year on year. And so we really have to make the difference between the quarter-on-quarter trend, you know, the sequential trend, and then the year-on-year comparison.

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

Well, ICOS has been doing very well in Russia in Q2, you know, in this environment. So, of course, you know, I cannot say that there was no impact from the disruption, some lockdown in Russia, but we continue to grow share for ICOS 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're very pleased with the ICOs I'm not going to elaborate on what's going to be the trend in the next two quarters. We expect the ICOS market share to keep growing and that we're going to continue to perform well on ICOS. 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. Hope 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 ICOS and what was the main driver there? Thank you.

Well, yes, indeed, we've seen, you know, in June with the end of the lockdown in many countries, an improvement of the trend. I would say ICOS has been doing well, as we said, through the quarter. So, of course, you know, we've seen some acceleration in June, but the whole quarter has been good for ICOS. 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, you know, the market... that are impacted by lower tourism have been more penalized. And I talk about, you know, Southern Europe here, of course. The markets are typically see a lot of, you know, purchase being made abroad, you know, 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 the 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.