Philip Morris International Inc

and welcome to the Philip Morris International fourth quarter 2020 year-end earnings conference call. Today's policy table will ask about how to get out. Included from our request, both Morris International Management and question and answer sessions. If you want to ask a question, please press the star key followed by the mark to touch the phone at any time. 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 Stephen Necrolli, Vice President of Invest 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 fourth quarter and full year results. You may access the release on .pmi.com. A glossary of terms, including the definition for reduced risk products, or RRPs, as well as adjustments, other calculations and reconciliations to the most directly comparable US gap measures, and additional heated tobacco unit market data are at the end of today's webcast slides, which are also posted to the website. Unless otherwise stated, all references to ICHOS are to our ICHOS heat not burn products. Comparisons presented on a like for like basis reflect pro forma 2019 results, which have been adjusted for the deconsolidation of our Canadian subsidiary, Rothman's Benson and Hedges Inc. Effective March 22nd, 2019. Please also note that the growth rates presented on an organic basis reflect currency neutral underlying results and like for like comparisons were applicable. 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 full 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. In addition, please be aware that today's remarks and question and answer session will focus on the performance in 2020 and the outlook for 2021. We plan to address the outlook beyond 2021 at our virtual investor day next week on February 10th. Now my pleasure to introduce Emmanuel Babeau, our chief financial officer, Andre Collinsopoulos, our chief executive officer and Yatsen Golchek, our chief operating officer will join Emmanuel for the question and answer session. Emmanuel.

Thank you, Nick and welcome ladies and gentlemen. I hope everyone listening to the call is safe and well. Our business delivered a robust performance in 2020 despite the unprecedented challenges of the global pandemic. Most impressive was the continued strong growth of ICOs which made up over 10% of our volumes and almost one quarter of our net revenues for the year. The daily consumption of HTUs by ICOs user saw minimal impact from social restriction and despite significant constraint, we were able to continue acquiring new user in switching from cigarettes at a very good pace to reach a total of 17.6 million of which 12.7 million have switched to ICOs and stopped smoking. HTU shipment volumes grew 28% compared to the prior year with record market shares in key ICOs geographies in Q4. Moreover, 10 market exited 2020 with double digit national share in December. Our rate of user acquisition was again strong in Q4 propelled by the increasing sophistication of our digital commercial model and the positive word of mouth effect from this increasing prominence despite tighter restriction in a number of markets. The most significant pandemic related headwinds we faced were in the combustible business with the highest impact in duty-free and Southeast Asia where we also faced additional challenges in Indonesia due to the excise tax structure. The least impacted region was the EU. While the timing and duration of the recovery remain uncertain, we expect a rebound in industry volumes over the next one to two years as the pandemic recedes. Despite these challenges, our operating margins were again significantly ahead in the fourth quarter and the full year. This reflect the increasing weight and profitability of ICOs and the delivery of our three-year cost efficiency target one year ahead of schedule which also enables reinvestment in the business. This drove excellent EPS growth and cash generation where we also exceeded our prior targets. From a product standpoint, we broadened our smoke-free portfolio with a wider range of consumables such as heat, dimension and feed and the launch of ICOs VEVE in e-vapor and LIL in heat not burn. We also continue to make good progress around the world on the recognition of the positive impact of switching smokers to scientifically substantiated RRPs. The FDA's modified risk tobacco product authorization of a version of ICOs was a major milestone in this regard. This was also followed by the pre-market authorization of the ICOs-free device in December. Turning now to the headline numbers, our full year net revenue declined by .6% on an organic basis. This was an exceptionally resilient performance in the context of the pandemic. We estimate that duty-free, net of partial volume recapture in local markets and Indonesia alone were a mid single-digit drag on our top line growth. Despite these factors, we saw strong organic growth of .9% in our net revenue per unit, driven by the increasing weight of ICOs in our sales mix. Combustible tobacco pricing was plus 3.7%, reflecting solid pricing in many markets, partially offset by Edwin's in Indonesia. Excluding Indonesia, combustible pricing was around plus 6%. Despite the decline in organic net revenue and combustible volumes, our adjusted operating income margin increased by 240 basis points on an organic basis. This reflects the positive impact of ICOs on both our growth margin and the ratio of SGNA to net revenue, which I will come back to. The resulting 7% adjusted diluted organic EPS growth exceeds our previous guidance of around 6% and also reflect a strong end to the year in Japan. This brings me on to the fourth quarter, which had very similar dynamic to the full year. Organic net revenue declined by 3.5%. While a significant improvement from the decline of almost 10% in Q2, continued weakness in Indonesia and duty-free and a lower total market in the Philippines, including pricing with effect, more than offset a strong performance from ICOs. Our net revenue per unit again increased solidly by .2% due to the same factors as the full year. Our adjusted operating income margin expanded by 200 basis points to deliver plus .4% adjusted diluted EPS growth, all on an organic basis. Before we turn back to the full year, I will now expand on the strong underlying Q4 dynamic in little more detail. Our HTU shipment volumes continue to show strong growth and reach a record 21.7 billion units driven by the EU region, Japan and Russia. In Japan, the industry was weak as expected as consumer and trade deloading following the October tax-driven price increase led to a 13% decline in the total tobacco market, including cigarillos. We outperformed this trend significantly as a strong finish for ICOs, Oftec and Share gave rise to higher shipment for both in-quarter sellout and to provide appropriate inventory for a strong expected start to 2021. With social restriction starting to tighten toward the end of the quarter in a number of markets in response to a second wave of the pandemic, combustible volumes and revenue saw some impact from reduced mobility and social occasion, albeit to a significantly lesser degree than the second quarter. Nonetheless, the strength of the ICOs business enabled the EU, Eastern Europe and East Asia and Australia region to deliver mid single digit top line growth. Elsewhere, the continued challenges in Indonesia and duty-free against a tough comparison and a lower total market in the Philippines in the immediate aftermath of a price increase weighed on revenue growth. Despite the ongoing restriction in many markets in the first quarter of 2021 and a tough prior year comparison, we expect better top line performance which I'll come back to later. Let me now go into the drivers of our 2020 margin expansion, starting with growth margin, which expanded by 200 basis points on an organic basis. This is driven by multiple levers. First, our ongoing transformation is delivering an increasing mix of ICOs consumable in our business. Second is pricing on combustible. Third is our focus on overall manufacturing and supply chain productivity, which compensated for lower combustible volume exacerbated by impact of the pandemic in addition to inflation, investment and extraordinary COVID related costs in our supply chain. Growth margin expansion was augmented by our focus on SGNA efficiency with our adjusted marketing administration and research costs, 40 basis points lower as a percentage of net revenue on an organic basis. This reflects the ongoing digitalization and simplification of our business processes, including our ICOs commercial engine and more efficient ways of working. Clear focus on cost efficiency allows us to improve profitability while continuing to invest in the growth of ICOs. I am very pleased to report that we have already achieved our 2019-2021 target of over $1 billion in annualized growth saving in only two years with $1.1 billion delivered by the end of 2020. Over two thirds of the savings came from manufacturing and supply chain productivity and device costs where our focus on efficiency, quality and footprint more than offset inflation, supply chain investment, extraordinary COVID related costs and the effect of lower combustible volumes. The remainder came from commercial efficiency and GNA cost. Importantly, these savings do not include those resulting from the pandemic, such as reduced travel and the necessary shift of consumer to digital channels. Between higher manufacturing costs and SGNA saving such as these, we estimate a net efficiency of around $150 million due to COVID effect. We plan to elaborate further on our CUT initiative and the fueling of ICOs growth at next week's Invest Today. The strong uplift in our profitability and excellent earning growth allowed us to deliver nearly $10 billion in operating cash flow for the year well above our expectation of at least $9 billion. This represents .5% like for like excurrency growth and also reflects ongoing working capital initiative and impressive performance in a year with significant disruption to global supply chain. Our capital expenditures amounted to $0.6 billion below our historic run rate. Significant improvement in manufacturing performance have translated into lower ongoing requirements. However, we also benefited from the timing of certain investment and expect capex of around $0.8 billion in 2021. Aside from reinvesting in the business, the primary use of cash is on return to shareholders and we raise the quarterly dividend this year to an annualized rate of $4.80 per share. Capital allocation is another topic we will cover at Invest Today. I turn now to industry volumes which declined around 6% in 2020 excluding the US and China. This compares to the historic average of a two to 3% decline. We estimate the .4% difference is almost entirely attributable to the effect of the COVID pandemic on the combustible category. As is evident in our results, the smoke-free category has displayed remarkable resilience reflecting its convenience and suitability for different use occasions. As we have covered in prior quarters, lower daily consumption in combustible has been driven by two main factors. First, the reduction in usage occasion during confinement, especially in markets with a large amount of daily wage worker. And second, the reduced amount of social occasion due to closure of hospitality settings and restriction on social gatherings. Duty-free also remains depressed in line with global travel. We have seen a partial recovery in daily consumption since the most severe period of reduced mobility in Q2 and we expect a gradual improvement as the pandemic recedes. As we all know, there remain considerable uncertainty on the speed, shape and timing of exiting the pandemic. And at present, many countries are experiencing a serious resurgence in infections. However, based on our recent experience with renewed lockdown situation, we do not expect to see a repeat of the severe drop in consumption of Q2 2020. However, it is uncertain if any rebound will occur this year. So we assume the historic average decline of two to 3% to be the floor for industry trends in 2021. I'll come back to this when discussing guidance assumptions. Turning now to our volume performance. Weak combustible industry volumes were compounded by our exposure to Indonesia and duty-free and the over-indexing of our premium portfolio to social consumption occasions. It follows that as pandemic recedes, we should see a better dynamic in our market share. And I'll come to this point shortly. As expected, quarterly fluctuation in inventory level were even out over the year with no significant difference between our IMS and shipments. The clear highlight in our volume performance was the shipment of 76.1 billion HTUs in 2020. This was just above the upper end of our previously communicated 75 to 76 billion range and represent 28% growth over the prior year. HTU net revenues increased by plus 33% on an organic basis, partly reflecting positive mix. We remain well on track to deliver on our target of 90 to 100 billion units this year. And we will have more to say on the outlook beyond 2021 next week. This strong performance from ICOS means that each tobacco unit made up over 10% of our total shipment volume in 2020 and over 12% in the fourth quarter as compared to approximately 8% in the year of 2019 and 5% in 2018. We continue to expect this proportion to grow over time as the positive momentum on ICOS continues, providing a powerful driver of revenue and margin growth. Our sales mix is changing rapidly. Smoke-free product made up 26% of our total net revenue in the fourth quarter. ICOS devices accounted for approximately 7% of the $6.8 billion of RP net revenue for the full year, mainly due to a naturally lower ratio of new user to existing user, longer replacement cycle and geographic mix. In some geographies, we still sell a substantial amount of the lower price original ICOS 2.4 Plus device and we have now introduced Lil Solid in Eastern Europe. Focusing now on our total international market share, our volume share increased by 0.2 points before the impact of duty-free cigarettes in Indonesia. This was driven by higher share for heated tobacco units, which increased by 0.8 points to reach 3%, only partly offset by lower share for cigarettes. In key markets where ICOS has a meaningful presence, our share increased with very few exceptions. However, our total international market share was negatively impacted by duty-free and Indonesia. Marlboro remains by far the world's leading brand with .5% share of cigarettes in 2020. However, in many markets, it overindexes to social consumption occasion, which are naturally lower during COVID related restrictions. Indeed, we saw aggregate Marlboro share movement track pandemic development over the course of the year and expect its recovery to have a similar trend. In terms of value share, our share of total industry, net revenue, excluding the US and China, which is more closely related to financial performance, we estimate to be significantly above our volume share, given the premium positioning of Marlboro and ICOS. We expect our value share to grow strongly in 2021, driven by ICOS. I turn now to Indonesia. After a difficult 2020, we enter 2021 with a sequentially stable share trend, supported by our leadership of the end-roll CRETECH segment, which is growing again. New excise duty rates will come into force on February the 1st with a weighted average increase of around 13% for our portfolio over 2021. This is broadly in line with the average annual increase prior to 2020, and for PMI, is a lower average increase in the industry, given our over-indexing to end-roll CRETECHs, where excise rates are unchanged. Given this higher margin segment, which supports significant employment in Indonesia, is both lower price and less tax than machine-made product, we expect a tailwind for our market share and financial performance over the coming year. Despite the negative consequences for government revenue, there has not yet been a significant move to level the playing field between the tier one and below tier one segments. We remain hopeful that the government will address this issue over time. With respect to the minimum retail selling price, enforcement continue to progress slowly, given mobility constraints. However, we expect the impact on the market is now likely to be more limited. The large majority of the industry is now above minimum level, and with no change in the minimum price in 2021, the pass-on of new excise rate would move the remainder of the industry above compliant levels. We also saw a flattening in the growth of the below tier one segment in the fourth quarter, and a gradual improvement in our shipment volume. As in many other markets, daily consumption improves in Q2, but is still below pre-pandemic level and remain sensitive to social restriction. Indonesia was a material drag on our 2020 financial results. While there remain much work to be done on the excise structure and ongoing uncertainty with regard to the pandemic, for 2021, we expect a much less negative industry volume trend, a better market share outlook, and a much smaller impact on our overall performance. For the total international cigarette category, we assume a rebound over 2021, 2022 as a negative impact of COVID on daily consumption reverse. The fundamental of the category also remain intact, including price elasticity, which we estimate at around minus 0.4 on the global average basis. With regard to our combustible portfolio, investment levels remain adequate. However, incrementally more may be needed in the immediate aftermath of COVID. We will continue investing in the brand equity of Marlboro, which remain by far the world's leading brand. Given the economic environment, the management of price gaps and growing our share of the low price segment will also be a focus. Pricing in combustibles remain an important driver of performance. And while the carryover effect of COVID may impact our 2021 variants, the pricing power of our portfolio remains strong. Additionally, as HTU volumes grow, this pricing power increases due to the higher price productivity on Eats and our other HTU brands. I would also highlight that pricing is no longer the sole driver of our top line growth with the increasing weight of ICOs in our sales mix, generating significant growth in our average selling price. I move now to ICOs performance. We estimate that there were 17.6 million legal age ICOs users as of December the 31st. This represents the addition of around 1.2 million adult users since the end of the third quarter and over 4 million in 2020. We have notably seen user acquisition accelerate through the second half of the year, despite renewed pandemic linked restriction in the fourth quarter in a number of markets. Our accelerated pivot to digital and remote engagement combined with strong momentum for the ICOs brand is paying off. We further estimate that 72% of this total or 12.7 million adult smokers have switched to ICOs and stopped smoking with a balance in various stages of conversion. This again reflect widespread user growth momentum across all ICOs geographies, including the EU region, Japan and Russia. As our user base expand in markets such as Japan and Russia, we are increasingly enriching our offer and segmenting the category with new product and more price points. The addition of Lil Solid in Russia and Ukraine in the second half helped us to reach a broader range of legal age smokers in this market and bring them into the smoke-free category, though at this early stage, the number of user acquired through the purchase of a Lil device is immaterial in the context of our user base. As we have said previously, we plan to bring more exciting innovation from ICOs in the coming quarters, which we'll elaborate on further next week. In the EU region, fourth quarter share for each reached a record 5% of total cigarette and each TU industry volume. As shown on the slide, this reflect strong sequential and -over-year growth in IMS volumes. I draw your attention to the contrast between the consistent sequential growth in IMS and the progression in sequential quarterly share, which can be distorted by the seasonality of the combustible market, in addition to other fluctuation linked to the pandemic, such as border closure and other social restriction. It follows that 2021 and future years are also likely to see underlying share gain, accentuated in the winter months, with a converse dynamic in Q2 and Q4. This excellent performance reflect strong growth in Italy, exiting the year with 10% share, with the large majority of user acquisition coming organically as the increasing awareness and prominence of the product build its own momentum. Germany and Poland were also strong contributors. We added a further 0.6 million Icos user in the fourth quarter to reach 5.2 million, a continuation of recent strong performance. In addition, we saw further progress in Spain and in the UK, where both national and London Eats of Tech shares continue to grow, with the latter reaching almost 4% in the quarter. We show here select key cities, which demonstrate the strong traction of Icos and the excellent potential for national shares across the region. I also refer you to the appendix, where we show shares for key EU market and globally key cities. Strong performance continued in Russia, with our HTU share up by 2.2 points to reach a record .2% in Q4. As with the EU region, we highlight the effect of the seasonality in the combustible category on quarterly shares. The seasonal fluctuation in Russia can be significant, and we urge you to bear this in mind when reading our quarterly results in the future. A notable success in the latter part of the year was the expansion of our product portfolio with LIL Tholid and FIT consumables to cater to a broader range of adult smokers across the socioeconomic spectrum. In both Russia and Ukraine, the majority of consumers purchasing a LIL device are new users with the incrementality contributing to an acceleration in user acquisition with high level of conversion in line with Icos. The volume of FIT consumables sold is broadly commensurate with LIL device ownership, and at this early stage of commercialization, both are small in the context of the Icos business in this market. However, while we have successfully upgraded many legal age smokers in the medium price segment to Icos, this bodes well for our ability to reach consumers in certain markets in the medium and below price segment, for whom purchasing power may be a barrier to entering the category. The Icos brand also resonate strongly across the Eastern Europe region. Rapid growth and excellent market share are testament to our agile commercial model and the consumer appetite for smoke-free alternative, even in markets with lower purchasing power, and again, serve as very encouraging indicators for the continued progression of our national market share. In Japan, our total reported share for heated tobacco units reach .1% in the fourth quarter, supported by line extension for both Marlboro HeatStick and Eats, such as the recent launch of Marlboro Black Mental. On a more representative total tobacco basis, including cigarillos and adjusted for trade inventory movement, the share for our HCU brands increased by 2.9 points versus the prior year quarter, and by 1.2 points sequentially to 20%. Both Eats and Marlboro HeatStick grew market share following the October price increase, highlighting the strength of our price tiered portfolio. We are especially pleased by our Q4 off-tech share in Tokyo, which reached the milestone of 25% in December. Q4 2020 adjusted in-market sales volume for our HCU brands grew .6% sequentially, which we regard as a strong performance, given the pull forward of consumer off-tech into Q3 before the price increase. The overall heated tobacco category made up over 27% of the total tobacco market in Q4, with Icos maintaining its high share of segment. We are especially pleased by our Q4 off-tech share in Tokyo, which reached the milestone of 25% in December. A very similar picture is seen in QC across Japan, including Sendai. The Korean market has specific challenges around consumer misperception of the category. And while we continue working to address this issue, it's notable that Kuala Lumpur in Malaysia has already overtaken Seoul in market share terms, crossing double digit in the third quarter. In addition to strong growth in existing market, the geographic expansion of Icos continue. We leverage our digital capability to launch in three new markets, Estonia, Kuwait, and the Maldives. This takes the total number of markets where Icos is available for sale to 64, of which over half are outside the OECD. We continue the commercialization of Icos V, our new e-vapor product, with the first EU market launch in the Czech Republic in December. This follows lead market New Zealand in August 2020, and we will continue to enter new market over 2021, including Italy and Finland in the coming weeks. As we have said previously, the commercial infrastructure of Icos allows us to deploy efficiently and at scale. Both the VIV device and the consumable will be premium position. We also place great importance on efforts to guard against youth access for all our product. As we roll out Icos V, we will be testing age verification technology in select markets. Switching now to sustainability, I want to again emphasize that our corporate strategy and our sustainability strategy are deeply aligned. ESG issues are business issues that serve as input to our long-term strategy and sit at the core of our mission. Despite the unprecedented challenges of the global pandemic, we have not deviated from our vision of our efforts to be a more sustainable company, and we achieved a number of key milestone in 2020. By replacing cigarettes with less harmful alternative, we can significantly reduce the negative impact of our product have on the health of our consumer. That's why the core of our strategy focuses on addressing the impact of P product, the first and most critical pillar of our approach to sustainability. This is what differentiates our company and eyelet our unique value proposition as the final piece of our ESG plus P framework. Phasing out cigarettes remain our focus, and in 2020, we estimate a further 4.1 million legal age smoker enter the smoke-free category with Icos, with a total of 12.7 million now switched and stopped smoking. We also show here some recent notable achievement across ESG, which we'll come back to in more detail at Invest Today. While there remain much work to do, we believe our transparency and detailed approach to sustainability, materiality, and disclosure make PMI an excellent example of impact, which we are achieving through carefully embedding sustainability into business and understanding it as an opportunity for innovation and growth, including our pioneering role in tobacco and reduction. In other words, our transformation is a unique sustainability story, another topic we will return to next week. I will now turn to guidance for 2021, where we expect a significant recovery. The main unknown is the speed and shape of the global exit from the pandemic. While COVID was clearly disruptive to our performance in 2020, it is not yet over, and we must factor this uncertainty into our outlook for the coming year. With the rollout of vaccine just starting and lockdown measures currently in place across many markets, we do not assume any meaningful change in the first quarter, where we also face an unfavorable pre-COVID prior year comparison. Looking beyond this, there are clearly a range of outcome, and we are reflecting this by providing a range for our assumed organic growth in net revenue and EPS. These ranges assume that even in the event of prolonged restriction, we will not see a return to the depressed consumption level of Q2 2020, which is consistent with our observation of a less severe impact in the second wave. For duty-free, a rebound in global travel is likely to lag the improvement of in-country mobility. Our guidance assume no meaningful recovery in duty-free this year. Despite this assumption, we expect organic net revenue growth in the range of four to 7%, and organic adjusted deleted EPS growth of plus nine to plus 11%, or plus 14 to plus 16% in dollar terms. This tighter range for EPS reflect the likely higher level of growth investment in the event of a faster recovery, and thus our assumption is for at least 150 basis point of margin expansion in all scenario within the range. This reflect the ongoing positive mix effect of high cost in our business, and the accretion of cost efficiency net of continued growth investment. This projected organic EPS growth, including an estimated favorable currency impact of approximately 25 cents at prevailing rates, translate into an adjusted deleted EPS range of $5.90 to $6. This guidance does not assume share repurchases. This guidance also assumes the achievement of our three year HTU shipment volume target of 90 to 100 billion units. Coming to some of the other key assumptions underpinning this guidance, we expect a total industry volume progression of flat to minus 3%, depending on the speed and shape of recovery from the pandemic. We expect to outperform the industry trend, driven by the share gains of high cost, with the resulting PMI volume forecast of plus one to minus 2%. This also incorporates a manageable excise outlook, including a positive structural change in Turkey, and above average increase in Russia, and the increase in Indonesia, in line with historic averages. As I mentioned earlier, our combustible pricing power remains strong. However, given 2020 carryover effect, notably in Indonesia, and the immediate aftermath of the COVID crisis, we assume combustible pricing of two to 3% in 2021, or around plus 4% excluding Indonesia. As in 2020, the biggest driver for our top line growth is likely to be the higher weight of the high cost business, which has significantly higher average net revenue per unit. As laid out in this morning's press release, we assume that our full year effective tax rate will be around 22%, and assume that operating cash flow will grow strongly to around $11 billion, at prevailing exchange rate, and subject to working capital requirement. As I already mentioned, we assume capital expenditure of around $0.8 billion. Let me now spend a moment on the expectation for the first quarter. Our organic net revenue are likely to be around stable to slightly down as we lap a strong Q1 2020, which benefited from inventory buildup in March, as the pandemic began to spread in many markets, in addition to being a largely COVID free quarter. This incorporates continued strong year on year growth in the shipment and IMS volumes of HTUs. Due to normal seasonal patterns and the lower number of selling days in Q1, we expect this volume to be sequentially stable to slightly below Q4 2020. We also expect strong sequential HTU share gains on both an underlying and reported basis compared to Q4, noting the seasonal factors in the combustible market I already mentioned. We expect strong margin progression in Q1, primarily due to the positive mix effect of ICOs and the effect of the cost efficiency realized in 2020. We believe this would result in an organic adjusted deleted EPS growth of around 8%, which equates to around $1.40, including an estimated 9% favorable currency impact at prevailing rates. Looking beyond the first quarter, it will come as no surprise that the easier comparison in Q2 should enable higher than average year over year growth in volumes and net revenues. To conclude, our results were stronger than expected with plus 7% organic EPS growth delivered in the term of 2020. We are building a business through ICOs to deliver superior and sustainable growth over the coming years. Continued momentum of ICOs through the challenges of the pandemic demonstrate this structural growth characteristic. We are also committed to maintaining the strong leadership and competitiveness of our combustible business. We have a number of levers for growth in our top and bottom line. First, the powerful mix effect of ICOs. Second, pricing, which remains important for combustible and, where appropriate, for RPS. Additionally, efficiency in our manufacturing, supply chain and SG&A costs are further levered as we continue to hone our business model. Moreover, with the launch of the ICOs VIF and LIL product, we are broadening and stepping up our product offer and innovation in 2021. You can also expect us to bring further exciting innovation to our ICOs Eat Not Burn platform. As I mentioned, sustainability is at the heart of our smoke-free strategy, and we continue to work tirelessly to further our mission. Our organization demonstrated extraordinary resilience in 2020, coping and growing admirably through one of the most challenging period in recent history. At the same time, our business continue to transform, incorporating and leveraging new skills and capabilities. In short, we look forward with confidence and we will expand on this topic further at our Vistule Investor Day on February the 10th. We look forward to seeing you there. Thank you. Andre, Yatssek and I are now most than 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 one on your touch-tone phone. In the interest of fairness and time, we ask that participants keep to a maximum of two questions each. If time allows, follow-up questions may be taken. You may rejoin the queue by again pressing star, then one on your touch-tone phone. Our first question will come from the line of Bonnie Herzog with Goldman Sachs. Hi, everyone.

Hi, Bonnie. Hello, Bonnie. Hi,

and congratulations, Andre and Yatssek. I guess my first question today would be on margins and I guess, Emmanuel, I was hoping you could talk a little bit more about your expectations around margins, I guess, in terms of any favorable fixed cost absorption you expect as you amortize the investment behind ICOs over this increasingly larger accelerating volume base. And then as I'm thinking about that in the context of your variable costs going lower, as you touched upon thinking about the progress you've made with digital, so could you just talk about that and how big of an impact this could be or big of an opportunity this could be in the future? Thanks.

Sure, Bonnie, happy to do that. It's gonna be only a teaser versus what we're gonna see next week, so bear with us and we'll elaborate with much more detail, but I can certainly anticipate a few headlines on what we'll share next week. I think what is obvious in our number for 2020 is the fact that beyond the great performance of ICOs, we have also used efficiency on cost as a powerful lever to generate performance. That's really showing up very clearly in our numbers. So we are delivering in two years instead of three years the overall at least one billion savings. And what is good is that we are working on cost efficiency on several levels, and many of them, of course, are related to ICOs, but not exclusively to ICOs for some of them. If you look at the gross margin level, it's quite obvious that we are being very successful in generating manufacturing productivity, and that's a great driver for further margin improvement. And here we are working globally across the portfolio, I would say, on margin improvement, so it's not just on ICOs, even if probably on ICOs because that's a business that doesn't have the same maturity, we have more runway, if you want, to improve the productivity, and we are certainly extremely good in road in that respect. But we are also generating manufacturing productivity on CC. And then on our SG&A, I think you could identify two driver on cost efficiency. One, I would say, is probably something you're gonna find in many companies today, we are working to be a more efficient and agile company, so we work on being more digitized, we work on simplifying the way we work, we automate, we standardize, and that is allowing us not to be cost cutter, but just to take cost to be a better company and deliver overall higher performance. And then you have elements that are indeed connected with our commercial performance, and not only to ICOs, but certainly mainly to ICOs. And you have two elements. One is all the investment that we made in the past, and that is a great platform on ICOs, and I'm not saying that investment is over, we're gonna keep investing, but of course, we have now an investment that we amortize over a fast growing base, and we are not growing the level of investment at the speed of the growth of the ICOs business. And then there is this great work that we are doing, thanks to digital and thanks of course to all the learning that we are making on the ICOs business, where we very nicely reduce all the variable per user cost, but I will stop there because we will elaborate on that next week.

Okay, that was really helpful, I appreciate that. And then my second question is, all the progress you've made with ICOs and growing the base and it's so large, but as you look out, could you talk about further segmentation of markets with your different platforms or possibly different price points as you continue to convert more smokers? And you touched on that, my guess is you're gonna touch on that more next week, but just as I looked at your business, it implies that your user base is probably going to need to double in the next maybe three plus years, based on our analysis, for you to hit your aspirational target of that 250 billion units by 2025. So, love to hear any strategy there, insights, because I think about it, I assume more of the conversion is gonna come from other reduced risk technologies and how do you anticipate your mix evolving over time? Thanks.

Yeah, I'll give you the first shot. I still believe over the next three years, Bonnie, as I said many times, that heated tobacco technology will be the prevailing technology because it has a highest ability in terms of taste and satisfaction to convert people. Now, in terms of segmentation, I believe in most markets we will need one or two heat not burn technologies if I stay with this segment and probably two to three over time consumable price segments, so we can cover mostly the vast majority of the markets, there will be exclusions where you need to cover four price segments with probably two technologies. And we'll talk next week about the next step in technology for aerosolization in heat not burn, which will address many of the pain points consumers have today. Now, clearly, the heated tobacco product is one category, I think that's the fastest growth both in terms of revenue and bottom line and volume. The second is obviously e-vapor. We are entering this market because I believe there is consumers there that want to switch trade to this product, there is a lot of dual users and we see also dual users between heat not burn and e-vapor that obviously we would like to capture, I think we can also capture consumers for other e-vapor products. The key there is clearly to leverage the infrastructure and the brand name of Icos, I think the product is very good and that's the first reactions we get, but we need to build equity because that's a problem for the category as you know and also consumer loyalty because for the economics to be at best for e-vapor you don't only need to be premium positioned, but you also need to have loyal consumers because if you discount just products and you sell them and then a consumer has 10 different products from 10 different competitors and consumes half a cartridge of your product per week, it's very difficult to make turn and more importantly it's very difficult to maintain an infrastructure. Now we have the advantage of having a lot of infrastructure with Icos that we can leverage, the equity of Icos is undeniably the best in the RRP, so I think that's helpful, technology is good, we are premium so I think we can make in roads in this category and then obviously we were also going to expand in the pure nicotine products like nicotine pouches or the P3 over time, although I think this is more occasional use products than predominant use products, so that's a little bit and again sorry to cut this here, but we're going to elaborate this more in more extensively next week.

I expected that, so very helpful, thank you so much.

Thank you.

The next question will come from the line of Michael Levery with Piper Sandler.

Good morning, thank you. Just wanted to touch on Icos again and the Philippines you have a 20 basis points share which of course is small but it's very early there and if I understand it right, you launched there without any stores initially, you also touched on the call about some digital launches in Estonia and Kuwait and the Maldives and so just would love a little more sense of how some of those digital efforts work and certainly seems in the Philippines already to be pretty quickly effective, can you just bring to life a little bit of how you're going to market there?

Yeah, so yes we started this year in Philippines to be very precise in the Manila, not even a greater Manila and the product as expected actually responded pretty well. This was one of the first fully digital if I may, launched also driven by the fact that we had to change the strategy last moment due to the COVID and restrictions and the whole COVID impact and the product starts getting a good traction. I think we'll still stay for a while in Manila which is frankly speaking not the major secret because we're following the same path or the same strategy for the rollout in every geography, right? Especially if you go to the sizable geography like Philippines. But you know, product is well received. I think the taste characteristics, et cetera, fits very well. We also testing the different route to consumer models as you know, we entering the countries when you have a stick purchase, there is a lot of consumption on trade rather than just off trade so we need to come up with good solutions there. But yeah, I'm very positive on that part of Asia which is still unchartered for Icos.

Okay, thank you, that's helpful. And just a second one on buybacks, helpful clarity that there's no consideration on that in the guidance but with some currency tailwinds now and the balance sheet where it is, it certainly seems like that could be, could come into play. Can you give a sense of what you would need to have in place or see before you might trigger resumption of buybacks?

Look, if you bear with us until next week, we'll have a global review of our capital allocation strategy and we'll address all components at that stage.

Okay, that's no problem. If I could maybe swap that question then, could you give any sense of where you stand on two with tips, any update on that?

On? On tips on the platform too. I mean, we will be further conducting this time the market commercial test this year in 2021.

Okay, thank you very much.

Thank you. Thank you.

The next question will come from the line of Vivian of the Air with Cohen.

Hi, thank you, good afternoon. I wanted to also drill down on Icos. I was wondering if you could give us some color on what the mix looks like for the consumables from traditional tobacco flavors and some of the novel flavors that you have in the market.

Thanks. Well, that's Iciacek here. Hi Vivian. It varies market by market, okay? Obviously, as you know, we have flavors of menthol, we have some other flavors, but still Icos, frankly speaking, in most of the places is very much attractiveness is coming from a tobacco flavors. I mean, at the end of the day, most of the segments which we are targeting at this stage and we are operating at scale, I mean, most of the segments are the flavor, tobacco flavor type of a segment, right? So Icos really has a very winning proposition there also has a great propositions in a menthol and other flavors. So that varies by the country and you can't really, I think if I give you the international share of the flavors, it will be just misleading. The average doesn't accept that. Yeah, but

it follows typically if you have a predominant menthol market like Japan, the dominance of menthol, if you have predominantly, I mean, cigarette markets without menthol, then you have predominantly there. A bit sometimes over indexed in menthol in general because it has a bit more impact for people. So it's easier to switch to.

Understood, thank you for that. And my follow up also on Icos, please, in terms of the market share progression that you saw in Japan, either in the quarter or over the course of the year, can you contextualize the contributions from the Marlboro brand versus the Heath brand? Thank you.

The Marlboro brand is still the major contributor of the overall volumes and the growth. So we're very pleased that on the course of the last year, we continue growing Marlboro. Obviously Heath, which is priced a notch below the Marlboro, had to be the better dynamics than Marlboro, but above actually contributing to the growth. And it's very interesting, Vian, you're asking because this is the first market which we tried to do double, dual positioning of the consumables, Marlboro and the Heath in Japan. As you know very well, we also extended Heath in the couple of Eastern European geographies in Russia when first we brought the above premium propositions to Heath, the Heath creations. And Heath's creations contributes. So we like premium rights further to Heath in Russia. And the Heath's creations in Moscow constitute now about 10% of the overall Heath volume. So that's very good. And then we complemented on the notch below price segments by bringing the little feeds to proposition. So we now in Russia, we testing can Icos operate on the free essentially price segments on the devices. And the spread is pretty phenomenal because Icos devices will go from a $60 on the premium device and then we go down to the $20 on the little device. And then we have a coverage on the consumables spreading from 170 rubles per pack to 130. So it gives you the Heath how broadly we can go with Icos touching the segments above medium and below medium. And this is the spike as you know that we have a competition in Russia, but frankly speaking competition in terms of the devices is essentially close to zero. So it's a little bit of a very aggressive promotions, but we continue delivering the strong growth on Icos both in terms of a user acquisitions measured by the device sales and by the Heath further expansions on the Heath. And what is also good in a place is like in Russia, that we continue growing in the top cities which we started few years ago. So we have a continuous growth in the cities and the expansion doesn't need from that growth which we have in the Moscow, St. Petersburg and the other main cities.

Thank you so much for that caller, appreciate it. Thank you.

Thank you.

The

next question will come from the line of Barav. James, good morning please.

Yeah, hi, good morning. Thank you for taking my question. So on the organic margin improvement which you are guiding to for FY21 of 150 basis point, that is on top of 240 basis point improvement in FY20 and this benefits like reduction in travel expense, there was a cut in German VAT, et cetera. So what I'm trying to ask is that, is your underlying margin improvement closer to 200 basis point, not 150 basis point and that is clearly happening because of high cost. So is that how we should be thinking about the next few years as well?

So for the medium term, again, we'll elaborate next week on more outlook. For the year, Gaurav, I let you make your assumption. I think we are clear on the kind of one-off saving that we have seen because of the COVID. So you can factor that in your model. And then I think we're also clear on what are the driver for margin improvement. So it's about the positive impact of high cost in term of per stick revenue, in term of margin and then everything that is happening on cost efficiency. That is really what is driving, that has been driving the margin improvement in 2020 and that will continue in 2021 as you can imagine, beyond 2021 but we'll elaborate on that next week.

Sure, my second question is on the European Beating Cancer Plan which was released earlier this week and the talk of things like flavor ban, plain packaging, increasing taxes on heated tobacco to equal to cigarettes. So how do you think of that and how do you incorporate these sort of risks in your outlook?

Okay, first of all, this is a plan and there are many positive aspects also in this plan in my view. First of all, we don't talk about taxes. I mean, this is subject to directives. The Tobacco Excise Directive that governs the excise tax and the Tobacco Product Directive that is the regulation of the product. Okay, the first is the Tobacco Excise Directive today does not foresee reduced risk product category. So it has to be amended under all circumstances. Okay, and we're not talking about increases. It's creating a framework under which member states can tax. Our view is that absence of combustion, for example, is a key criteria on how to tax differently, cigarettes to other products. And then within that major cliff of change in toxicity and exposure, member states can have different tax rates for these products, but this product should not be by any means higher than any combustible category available. Okay, as a minimum criteria, but this has to happen. Nobody said that taxes will increase on heated tobacco products, frankly speaking at this stage or in a vapor product. Okay, so all this has to be defined and the discussions are going to start in the course of this year and continue in next year in any case. So that's for, and then the Tobacco Product Directive in serve, I hope that there will be a bit more regulatory clarity in there regarding RRPs because any vapor product, because just now we left it up to the member state to regulate, which frankly speaking is not harmonizing a directive one. And secondly, is a pain for all the industry participants because every country has a different regulation. And we always advocated serious regulation on these products provided that these is differentiated from cigarettes. Okay, now there are voices that say that this product should be the same thing as cigarettes, but at the end of the day, it was very clear also in the cancer plan that all in the Q and A is that only based on science and evidence, they will take decisions. So I wouldn't be particularly worried about this at this stage and I think the outcome may be positive actually because it's an opportunity to discuss all this. Now in the longer term, we discuss very often. I believe tax differentials will be maintained because it makes sense for public health. It makes sense for the consumers. And as we also explained, we have room even, to pass taxes if by any chance, differentials close somehow because ICOs also in order to pass past of the tax benefit to the consumers, it's mid price position essentially if you take the weighted average of the countries, number one and number two, its price productivity is much, much higher than cigarettes. So passing on a tax is triggering less price increase than passing on tax on cigarettes. So that's in a nutshell, the way we should look at it, but we have to assume that excise taxes will increase over time also for, you know, RRPs as governments need money and that will apply to heated tobacco products that already taxed substantially and potentially in some cases to vapor products in the future. But that's all baked in in the assumptions.

Sure, thank you. And if I can ask one last question, it's on your minority interest, which has been increasing at a higher rate than your EBIT and that's driven by Philippines. So is there an opportunity to reduce your minority interest considering your partner in Philippines, it trades on the exchanges at like some six times PE?

No, don't envisage this.

Sure, thank you.

Not in the period, I mean, if our partner wants to sell one day we can discuss, they're very happy with it. We are

very happy with our partnership in Philippines.

The next question will come from the line of Adam Soman with Citi. Hello.

Hi Adam. So first question, I think you said in your guidance, that you're expecting to take less pricing variants on combustible cigarettes than usual. Now, for years and years and years, it's been 6%. And I think you said it's something to do with COVID that you want to take less pricing. I'm really surprised by that. You also said the pricing model hasn't been broken. So I suppose the question is, if you take less pricing in combustibles this year, 2021, what would it take for you to have another low year in 2022? That was my first question.

Okay. First of all, we didn't say we will take less pricing. We will also, where is the pricing opportunity, we'll take price. And I think the model still works very well. Elasticity is the same, everything. We had to make some, in my view, reasonable conservative, you may say assumptions regarding what's going to happen in Indonesia and Russia because of the tax increase. And Indonesia has a never get it carry over from last year, which makes the comparisons year to year problematic. Plus in Germany, we had a VAT, I would say tax break, which we assume is not going to continue this year. So if you exclude all these elements, I think we're still back to a normal pricing in the other markets. So clearly in terms of, post COVID, I would say assumptions, we have to watch more carefully the price gaps. That's clear at the mid to low end of the market. But that doesn't mean that we're going to take any severe pricing decisions at this stage anywhere. I just, this is a watch out. If there is down trading, which is happening between the mid price typically and the low price segment. Also because we have absence of contraband and all these things. That's something to watch in certain markets, but overall I think we're in good shape. Also, both on Icos, on heat not burn products and combustible, the excise taxes are now in, so I'm not mistaken everywhere. So we have pretty good visibility of where we are. So I don't think it's super COVID related. What is COVID related in the guidance is the range we gave because, if you look at what happened last year, if we assume two to 3% underlying industry decline, even baking in Indonesia, we had a .7% industry decline. So we're missing consumption for mathematically 3.7 to 4.7. That's on average 100 billion for the industry. So we don't, that will rebound in my view one day, but once the restrictions finish. Now, we gave a guidance for this year of zero to minus three, which is at zero, you have some recovery. At minus three, you have super underlying negativity, maybe exaggerated, I don't know at this stage, but that's plus minus 20 billion units for us. So that's plus minus 2.5 revenue points. So that's where the volatility is. Okay. And if pricing comes better in Russia and Indonesia, that much the better. We may end up at the high end of the range.

Okay, well, I think that leads to my next question, which is to be blunt, I don't really understand the UPS guidance. And there are many aspects that I don't understand about it. There's just a board, you're saying in Q1, where your comp is insanely hard, you're gonna have flat organic sales, you're gonna have margin expansion, you're gonna have 8% like for like UPS growth. You then say, because the comp is really easy in Q2, you're gonna have a great quarter, you imply that. And yet the full year is only nine to 11. And it seems to me that if you can do so well in Q1, and you're gonna do well in Q2, then the nine to 11 is very conservative. And another way of asking the same question, every single time you've given guidance of any sort on UPS since 2018, you've beaten it. This quarter, you gave guidance, it wasn't a range, it was a point estimate. You said you were gonna do about $1.20 for the full quarter. And you said that in December, and yet you beat it very handsomely. Now that would suggest that the way you give guidance is systematically incredibly conservative. We either, you can't forecast, which I don't believe, or you're systematically incredibly conservative. That point, the fact you've always been conservative, with the fact you're so well in Q1 against a really tough comp, suggests to me that the guidance for the full year is also super conservative. Is that fair?

I wouldn't say conservative, but it's not bullish either. I mean, Adam, I understand what you are saying, but we're at the beginning of the year. Many things can happen regarding COVID, because it's not finished. So last year, as Emmanuel said, we had more than $150 million exceptional expenses because of COVID, okay? So you need to put some caution in the bottom line regarding unexpected costs. And if we have a rebound, I would call, not a very gradual recovery, we may need to invest a bit more money towards the end of the year to accelerate acquisition. You can physically do that. If we physically can't, then clearly the money will go to the bottom line. So at this stage, we gave this range, okay? Which by the way, if the dollar stays with disease, is not bad at all because it's 14 to 16%. And the revenue line would be eight to 11, which will be phenomenal, I would say. So I don't think this is conservative. It's just, I don't have a crystal ball to foresee everything that's happening in every month of this year, okay? We're still not in normal situation, that's all. So I understand, but... And I'm just... I'll explain.

Just in the sequence, please factor in that. I mean, as we say, we talk about a gradual recovery that we are expecting without being able to, of course, design exactly what's gonna be the trajectory. But that would mean certainly more investment in H2. Remember, we've been, of course, limited in commercial activity. As we say, H2 could be a better moment overall with a number of restrictions being eased. There will be also more investments queued toward the second part of the year. So you have to take that into account. And that explain as well why Q1 maybe is expected today better than one could have expected initially. But investment will need to happen in the year.

In any case, I would love to be conservative. And as the quarters unfold, we'll get more, okay? But I think I gave the parameters, the pricing, that still can come more favorable, that goes straight to the bottom line. You know, if we have it more combustible, that's fine. It goes to the bottom line, but we have to assume that. So as the quarters pass, we'll give you better... Okay, thank you. Thank you, Adam. Thank you,

Adam. The final question will come from the line of Robert Rampton with UBS.

What?

Hello? Hello?

Robert, your line is open.

I don't think I'm in the queue, actually. All right,

and we're showing no further audio questions.

Operator, can you put Robert Rampton in queue from UBS, please?

His line is open.

Robert, can you join? Okay, we'll get back to Robert after the call. Operator, if we can just go to the final remarks. Andre, I think you have some closing remarks.

Yeah, thank

you

all for joining. I think we had a rather complicated 2020, but the results came out much better than I would have thought when we were talking for the first time in March. I think we look at a very good recovery in relative terms in 2021. Icos continues to grow strongly. The momentum is excellent in my view, and we will see some rebound hopefully in cigarette volumes in the next one to two years. I would love to see positive total market, maybe in 2022. And we look forward to sharing with you more on the long-term growth and more on understanding the profitability of Icos in next week, actually. So have a very good day, and thank you for this next week.

Thank you very much. I just wanted to add that if you have any follow-up questions, you can contact the Investor Relations team and look on our website for the instructions on how to log on to the Investor Day event. It starts at 8.30 Eastern time on February 10th. You can register on our website. And again, thank you very much for joining the call. Have a nice day.

Bye.

Thank you.

This does conclude today's conference call. We thank you for your participation and ask that you please disconnect your line.