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spk06: Good day and welcome to the Philip Morris International first quarter 2021 year-end 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 touchtone 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 Mr. Nick Rowley, Vice President of Investor Relations and Financial Communications. Please go ahead, sir.
spk05: Welcome, and thank you for joining us. Earlier today, we issued a press release containing detailed information on our 2021 first quarter results. You may access the release on www.pmi.com or the PMI IR 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 share data are at the end of today's webcast slides, which are posted to the website. Unless otherwise stated, all references to ICOS are to our ICOS heat-not-burn products. All references to smoke-free products are to our RRPs.
spk11: Diana, it's been a while. How are you? I know. I actually just finished meditating. Oh, that's great. How do you do it? Well, lately I've been using music as a form of meditation. It's been pulling me into a much more positive mindset.
spk10: Actually, there's a meditation that combines new technology and music. Are you interested? Yeah.
spk15: Mind Travel is an immersive musical journey that aspires to connect participants to this movement of meditation through music. I'm really trying to transport the audience.
spk13: Sony Hall is equipped with Sony's 360 reality audio. It encompasses 30 speakers that are strategically placed in the venue to give you sound from all sides of the room so you can not only hear the music, but feel it as well.
spk15: It occurred to me to create partnership with nature here in the heart of Times Square, where through this incredible 360 reality audio, I could bring nature to completely envelop us. Because if we can find that stillness here, then we can find it anywhere.
spk00: The beauty of the technology for 360 reality audio is it's truly going to transport you to the place that the creator wants to take you. And you get to experience that different world as a listener.
spk15: Music can so quickly, so effectively drop us back into what matters most. That one note clears away the stress, the anxiety, the meetings, the phone calls, so that for the hour that we're together, we can reflect.
spk13: I can hear birds coming from the distance off to the right, and there was this roaring thunder, and it was like above me.
spk00: You're entering another universe. It literally supports the fan coming in to create that mindfulness and transport themselves.
spk17: What this mind travel elemental moment was very relaxing and calming and kind of let me center myself in my thoughts.
spk13: Doing this experience with Murray really opens the doors for us to do a lot of other amazing experiences at this beautiful venue. And I can't wait to start thinking about what we're going to do next.
spk10: Well, where would you want to go? Well, I love it when sounds take you somewhere visual, like a film or a movie. I mean, for me, when listening to music, it takes me to a whole other place and time in my mind. I cannot wait for that.
spk05: Please also note that growth rates presented on an organic basis reflect currency neutral underlying results. 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 that 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.
spk14: Thank you, Nick, and welcome, ladies and gentlemen. I hope everyone listening to the call is safe and well. Our business delivered a strong performance in the first quarter of 2021, well ahead of expectations, reaching a record high quarterly adjusted diluted EPS of $1.57 despite the continued challenges of the global pandemic. Most impressive was the continued strong growth of IQOS, which made up 13% of our volumes and 28% of our net revenues compared to 21.7% in the prior year quarter. We continued converting adult smokers at a very good pace and reached an estimated total of 19.1 million users, of which 14 million have switched to IQOS and stopped smoking. HTU shipment volumes grew plus 30% compared to the prior year quarter, with record market shares in key high-cost geographies, 12 markets with double-digit national share, and a share of 7.6% overall in high-cost markets, excluding the US. Our operating margins were also significantly above the prior year quarter, and while somewhat flattered by timing factors, The bulk of this improvement reflect strong underlying performance. The resulting combination of strong organic net revenue and adjusted diluted EPS growth leads us to raise our outlook for the year. From a product standpoint, we continue to broaden our smoke-free portfolio and so encouraging progress from new device and consumable offerings across multiple markets. We expect to benefit from further innovation through the course of 2021.
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spk14: Turning to the headline numbers, our Q1 net revenues grew by plus 2.9% on an organic basis. This was an excellent performance in the context of an essentially pre-COVID prior year comparison. and incorporates better-than-expected HTU IMS and shipment volumes, which drove plus 32% organic growth in RRP net revenue. We also saw some higher-than-expected pull-forward of shipments, predominantly cigarettes, in the EU region ahead of the Easter period and in Russia ahead of the April 1st discount ban. We saw strong organic growth of plus 6.9% in our net revenue per unit, driven by the increasing weight of ICOs in our sales mix and pricing on both combustible and ROPs. Combustible tobacco pricing was plus 2.7% of prior combustible net revenues, reflecting solid pricing in many markets, partially offset by Indonesia. Excluding Indonesia, combustible pricing was over plus 4%. Our adjusted operating income margin increased by 580 basis points on an organic basis. This reflects the increasing weight and profitability of ICOs, the positive impact of pricing, productivity savings, including lower device cost, lower commercial spend due to the pandemic, a favorable comparison in Eastern Europe, and certain other timing factors. Combined with a lower effective tax rate, our resulting adjusted diluted EPS of $1.57 represents plus 21.5% organic growth, a very strong performance. We estimate that timing factors in the quarter, such as the earlier shipment mentioned and cost phasing, had a positive impact of around plus $0.08. Other one-time factors accounted for an estimated further plus $0.02 increase. This brings me now to guidance for 2021. While the speed and shape of the global recovery from the pandemic remains uncertain, the strong business results and underlying momentum of the first quarter, notably from our high-cost business, lead us to raise our outlook. We continue to account for a range of outcomes in our outlook for organic growth in net revenue and EPS. This range assumes that even in the event of renewed or prolonged restriction, we will not see a return to the depressed consumption level of Q2 2020. While we have not been affected thus far by the current global shortage of semiconductor, this guidance assumes a limited impact on the supply of electronic devices to consumers. This is a fluid situation which we are monitoring closely. And where any constraint may arise, we intend to manage our inventories accordingly and prioritize device sales to adult smokers who are new to the category. Regarding duty-free, a rebound in global travel is likely to lag the improvement of in-country mobility. Our guidance continues to assume no meaningful recovery in duty-free this year. We now expect organic net revenue growth in the range of plus 5% to plus 7% versus plus 4% to plus 7% communicated previously and organic adjusted deleted EPS growth of plus 11% to plus 13% or plus 15% to plus 17% in reported terms. The strength of ICOs is the main driver for this revision. We now expect to deliver HTU shipment volume of between 95 and 100 billion units, representing the upper half of our previously targeted range for 2021. Given the continued strong momentum across our market, the need to maintain inventory duration and preparation for the rollout of ICO Siluma that uses different consumables, we expect our full year shipment to be slightly ahead of our IMS volumes. We also raise our assumption for organic adjusted OI margin expansion to around plus 200 basis points. This includes the expectation of greater investment in the second half as our innovation and commercial activities step up. As detailed in this morning's press release, our other main assumptions remain unchanged. This projected organic EPS growth, including an estimated favorable currency impact of approximately plus 20 cents at prevailing rates versus plus 25 cents assumed previously, translate into a raised adjusted deleted EPS range of $595 to $605. This guidance does not include any impact of share repurchases. However, we remain on track to resume repurchases in the second half of the year, subject to board approval. Looking forward to the second quarter, we now expect adjusted diluted EPS of $1.50 to $1.55, reflecting strong top line growth against a week prior comparison, continued margin improvement, and the partial reversal of certain Q1 timing benefit. For the second half, assuming that many of our key markets will have largely emerged from COVID restriction, we expect continued robust top line growth. This includes the contribution of higher expected device shipment, which will result in less gross margin expansion compared to the first half. New product launches, investment in distribution, and the phasing of productivities will also play a role. We will also step up our commercial investment in the future growth of ARP through portfolio and geographic expansion, including product launches such as ICOS Illuma. We anticipate around plus $300 to plus $400 million of incremental commercial investment compared to the first half and consequently expect our organic OI margin expansion to be lower in H2, but overall to deliver a strong expansion of around plus 200 basis points for the year. Before discussing our results in more depth, I want to highlight a few of the positive regulatory developments in the quarter. Recognition of the harm reduction potential of smoke-free products continues to gain traction. Examples so far this year include the reversal of a long-standing import ban on heated tobacco products in Uruguay and the integration of the arm reduction principle in Lithuania's tobacco control agenda. We also note the recent report from an all-party parliamentary group of MPs in the UK calling for the WHO to return to the founding principle of the FCTC, which includes arms reduction rather than the current prohibitionist stance. In New Zealand, we are reviewing the content and detail of the consultation paper published last week. The policy recognizes the role of innovative product in arm reduction, while at the same time ensuring strict control to prevent youth access. In the EU, We continue to be hopeful that the revision of the Tobacco Excise Directive will lead to greater harmonization in the approach to smoke-free products, taking into account the relevant good practices and experience gained by Member States in this area. Here and around the world, we continue to support differentiated regulatory and fiscal frameworks based on the relative risk to health. While there will on occasion be actions or proposals that do not incorporate harm reduction objectives, we believe that fact and science will guide policy over time, and we continue to see positive changes in many geographies. Well, turning back now to our results, Q1 shipment volumes declined by 3.7% on the total PMI basis. This reflects continued strong growth from HTUs of plus 30% to reach 21.7 billion units, driven by the EU region, Japan, Russia, Ukraine, and an encouraging start from recently launched market in the Middle East. HTU shipment and IMS volumes were broadly in line for the quarter. While pandemic-related restrictions persisted around the world, total industry volume declined of 0.7%, were relatively benign, incorporating over plus 25% growth in the heated tobacco category, where we continue to have a share of over 80%. Though less severe than in Q4 2020, our cigarette volume declines reflect specific share headwind in certain markets, which I'll come back to. We expect better combustible share and volume trends in both the second quarter and second half of the year. The strong performance from ICOS led to heated tobacco units comprising 13% of our total shipment volume in Q1, as compared to 9.6% in the prior year quarter, 11% in the year of 2020, 8% in 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 growth. and margin growth. Our sales mix is changing rapidly, putting us on track to achieve our aim of becoming a majority smoke-free company by 2025. Smoke-free products made up 28% of our total net revenue in the quarter, compared to 21.7% in Q1 2020. High-cost devices accounted for approximately 6%, of the $2.1 billion of RRP net revenue, reflecting longer replacement time for existing users due to improving battery lives and reliability. And lower device price in certain markets as we are preparing for ICO Siluma.
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spk14: The plus 2.9% organic growth in Q1 net revenue on shipment volume decline of 3.7% reflect the twin engine driving our top line. First is pricing on combustible and in certain markets on HTU net of the lower device pricing I just mentioned. Second, the increasing mix of HTUs in our business at higher net revenue per unit continue to deliver substantial growth. And as explained at investor day, this is an increasingly powerful driver as our transformation accelerates. Let me now go into the driver of our first quarter margin expansion, starting with gross margin, which expands by 390 basis points on an organic basis. This is driven by multiple levers as shown in green on this slide. including the mixed effect of HTU within ICOS impact. In particular, our significant efforts on manufacturing and supply chain efficiency are bearing fruit, more than offsetting the effect of combustible volume declines. With around $150 million of gross productivity savings delivered in Q1. While somewhat front-loaded in the context of 2021, this represents a strong start on the journey towards our target of $1 billion over 2021-2023. As part of this savings, our gross profit increase was boosted by better absorption of manufacturing costs, given a high level of production in the quarter and lower device costs, with combined impact of around plus $60 million. Gross margin expansion was also accompanied by strong SG&A efficiencies, with our adjusted marketing, administration, and research costs 200 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 high-cost commercial engine and more efficient ways of working. We delivered around $60 million towards our 21-23 target of $1 billion in gross SG&A savings before inflation and reinvestment. The pandemic also impacted SG&A costs in the quarter through the latter timing of certain projects and reduced commercial and overhead costs due to ongoing restrictions. These latter factors accounted for around $100 million of the organic improvement. Focusing now on combustible, we continue to hold the leading international portfolio by market share and by brand strength, as covered at Invest Today. This gives us a formidable platform to accelerate the growth of ICOs via our commercial infrastructure, industry expertise and ability to communicate with adult smokers where permitted. It is therefore imperative to maintain our leadership through selective investment as we also drive returns through pricing and efficiency. Our cigarette share underperformance in Q1 can be attributed to the combination of several factors. This includes the COVID impact on social occasion where malboros over indexes, border closures and reduced travel, and instances of down trading and competition in the mid and low price segment in certain markets such as the Philippines and part of the EU region. This performance does not reflect our objective to maintain our share of cigarette net of cannibalization. We expect a strong sequential cigarette share recovery through the remainder of the year supported by portfolio initiative and the enduring strength of Marlboro, especially as pandemic restriction is. Accordingly, we target cigarette share to be about stable on the year-over-year basis for the next nine months, despite the impact of cannibalization. Share gains from HTUs will come on top of this. I will now turn to the South and Southeast Asia region. After a difficult 2020, notably in Indonesia, headwinds are now moderating. In Indonesia, volume trends are improving with WGD growth in enrolled Cretex, where we are the market leader supporting stable PMI share in the Tier 1 segment. Indeed, with industry volume recovering, we are targeting volume growth for our business here in 2021. Pricing remains the main headwind in Indonesia. New Excise Duty rates came into force on Feb 1st, and while all major players have taken some pricing, progress nonetheless remains slow. Despite the negative consequences for government revenue, there has not yet been a significant move to level the playing field between the Tier 1 and below Tier 1 segment, which continues to grow. We remain hopeful that the government will address this issue over time. The Philippines has performed well in recent years. For this quarter, further industry pricing in H2 2020, a slow economic recovery and pandemic-linked restriction gave rise to a double-digit market decline. Our share loss reflects downtrading from the mid to low price segment, with premium price malboros which make up over two-thirds of our volume growing share. Notwithstanding these challenges, we have plans to address the share decline and are targeting close to stable organic net revenue in 2021, despite the total market weakness. I'm also pleased to say that ICOS is off to an encouraging start in Metro Manila, with an exit share of almost 1% for EATS after full launch in Q3 2020. Overall, this region delivered strong growth pre-COVID. While it may not be a meaningful growth driver in 2021, we expect far less of a drag on group results compared to 2020. We target regional organic net revenue to be at least stable over the next nine months. Moving now to high-cost performance, we estimate there were 19.1 million high-cost users as of March 31st. This represents the addition of around 1.5 million adult users since December, building on the step up seen in the second half of 2020. Our accelerated pivot to digital and remote engagement during the pandemic, combined with strong momentum for the IQOS brand, is paying off. We further estimate that 73% of this total, or 14 million adult smokers, have switched to IQOS and stopped smoking, with the balance in various stages of conversion. Strong conversion rates notably reflect the increased prevalence of ICO3 Duo, which offers a superior user experience to previous device versions. As we mentioned at Investor Day, we seek to achieve even higher conversion rates over time with the introduction of innovations such as ICO Siluma. This user growth again reflects widespread momentum across all key ICOs geographies, including the EU region, Japan and Russia. It also reflects the enrichment of our offer and the segmentation of the category with new products and more price points, both above and below our initial HTU offering. In the EU region, first quarter share for Eats reached a record 5.7% of total cigarette and HTU industry volume. Adjusted for estimated trade inventory movement, this reflects 46% year-over-year IMS growth and around 10% sequential IMS growth accounting for fewer selling days in the period. I would also remind you of the sequential quarterly share dynamic which can be distorted by the seasonality of the combustible market in addition to pandemic-related fluctuations such as border closure and other social restrictions. With the region likely to reopen somewhat in Q2 and increase the total market, we expect further strong underlying HTU growth, but for sure to be broadly in line with Q1. This excellent performance includes strong growth in Italy, surpassing 10% share, with a 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 700,000 EU region high-cost users in the quarter to reach 5.9 million, a continuation of recent strong performance. We continue to see phenomenal progress in key cities across the EU region with a number of examples on this slide. HTU share in Rome is now approaching 20%, Warsaw and Lisbon reached 15%, Munich 8%, and London five percent while smaller cities the progress in vilnius at 36 share is also a global standout as covered at investor day key cities are a good indicator of national share growth potential and i would also refer you to the japanics where we show shares for key eu market and global key cities Strong performance continued in Russia with our HTU share up by 1.2 points to reach a record 7.7%. Adjusted for estimated trade inventory movement, this reflects plus 35% year-over-year IMS growth and around plus 8-10% sequentially once estimated consumer pantry loading effects are factored in. We continue to see sequential share growth for both our ETH and feed lineup with good traction for the regular heat and super premium heat creation variants. Moreover, LIL solid and feed consumable continue to supplement user acquisition. In both Russia and Ukraine, the majority of consumers purchasing a LIL device are smokers entering the smoke free category for the first time with high level of conversion in line with ICOS. both well for our ability to reach adult smokers in the medium and below price segment for whom purchasing power may be a barrier. Margins on mainstream price HTUs such as feet remain attractive compared to cigarettes sold at the same price. And while the volume of feet remains small compared to our total HTU volume in this market, given our large high cost user base, we expect LIL to grow further in 2021. With this success in Russia and Ukraine, we plan to offer a little solid in additional market later this year. In Japan, on a total tobacco basis, including sigari laws and adjusted for trade inventory movement, the share for our HTU brand increased by 3 points versus the prior year quarter and by 0.7 points sequentially to 20.8%. Both its and Marlboro HD grew market share following the October price increase, highlighting the strength of our price-tier portfolio. We expect to see further HTU volume growth in Japan over the remainder of the year, underpinned by ongoing user acquisition. For the second quarter in particular, we expect robust sequential IMS growth. We also expect a recovery in the total tobacco market, as the elasticity effect of the substantial October price increase fade, including on consumer pantry loading. As such, while year-over-year share growth is still likely to be strong, Q2 share may not reflect this underlying sequential growth performance and may be broadly stable versus Q1 on an adjusted basis, including CIGARI lows. In Q1, the overall heated tobacco category made up over 28% of the adjusted total Japanese tobacco market, with ICOS maintaining a high share of segment. ICOS HTUs also reached an off-tech share of 26.1% in Tokyo after surpassing the 25% milestone in December. In addition to a strong growth in existing market, the geographic expansion of our smoke-free product continues. This allows us to provide access to better alternatives to an even increasing amount of adult smokers. And as communicated at Invest Today, we aim to be in 100 markets by 2025. After launching in 12 new markets with IQOS in 2020, we added Aruba in the first quarter and launched our new eVapor product IQOS Vive in Finland, which takes the total number of markets where PMI smoke-free products are available for sale to 66 of which over half are outside the OECD. We are continuing to commercialize ICOS-V with Q1 launches in Italy and, as I just mentioned, Finland. This follows the initial launch market New Zealand and the Czech Republic in H2 2020. One of our key priorities is guarding against youth access for all our products and we are targeting for all our electronic smoke-free devices to be equipped with edge verification technology by 2023. We will be testing this technology with IQOS VIVE in select market this year. IQOS VIVE is a premium product providing a superior experience and as we explained previously, the commercial infrastructure of IQOS allows us to deploy efficiently and at scale through a bespoke route to market approach our other market major innovation for 2021 is the launch of icos iluma the next generation of icos as announced at investor day Building on the success of IQOS 3 Duo, we believe this simple and intuitive device will support easier switching and higher conversion for legal-edge smokers using smart core internal induction heating technology. We continue to plan for the launch of ILUMA in the second half of the year. As we roll out both IQOS VIVE and IQOS ILUMA, we carefully plan our manufacturing and supply chain activities to manage expected demand. and external factors such as the current tightness of global semiconductor supply that I mentioned previously. The ongoing success of FICO 3 Duo more than two years after launch demonstrate that significant innovation can have a lasting positive impact on growth and both our recently announced 2023 HTU Shipion Volume Target and the upward revision of our HTU Target for this year reflect this confidence. Our transformation is the bedrock for both business and sustainability performance. We do not have separate strategies. Phasing out cigarettes by replacing them with better alternatives such as ICOS drives our growth and addresses our biggest impact on society. Our unique commitment to phasing out cigarettes is underlined the new transformation targets announced at Invest Today which are aligned with the 27 business transformation metrics provided for stakeholders to measure and verify the pace and scale of our progress. This includes our ambition to become a majority smoke-free company by 2025, our aim to commercialize smoke-free products in 100 markets and to generate at least $1 billion in net revenue from beyond nicotine product as we move into adjacent business areas with a net positive impact on society. Our best-in-class performance on ESG allows us to further our leadership in sustainability. I am proud to see increasing external recognition, for example, on our efforts to develop a fully sustainable supply chain and our commitment to address gender inequality. Further, we recently updated our zero deforestation manifesto, strengthening our ambition undertaking to conserving forests across our entire value chain. We remain strongly committed to providing the highest level of disclosure on the key ESG and product impact areas of our company via integrated reporting, and we'll release our 2020 disclosure on May the 18th. We recognize that ESG analysis can provide valuable insight about factors with a significant potential impact on financial performance and thus better inform investment decision. To further maximize the value of investor engagement and aid understanding of the significant positive impact PMI's transformation can have on society, we plan to hold a sustainability webcast in early June, building on our recent investor day. Please do mark your calendars. To conclude, we've had a strong start to the year and look forward with confidence despite the continued uncertainty on the operating environment due to COVID. This is the same concluding slide I presented at Invest Today in February, as I believe our start to 2021 demonstrates all the key elements of our longer term trajectory. Through ICOS, we are building a business with multiple levers to deliver superior and sustainable growth over the coming year through improved volume dynamics, excellent top-line growth, strong margin expansion, and fast-growing earnings. Moreover, while every adult smoker who switches to ICOS is good for our business, it is also a clear positive for our impact on society and public health. We manage our transformation with care and responsibility for our stakeholders, guided by our sustainability materiality framework to maximize our positive impact across our T1 ESG and product areas. This is essential for the sustainability of our business and for delivering superior returns for shareholders over the long term. The increase in our organic growth outlook for 2021 is another step on this journey, also putting us nicely on track to achieve our 2023 financial and HTU shipment target. Thank you. I am now more than happy to answer your questions.
spk06: 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 touchtone 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 again by pressing star then the one on your touchtone phone. Our first question comes from Vivian Acer of Cowen.
spk09: Good morning. Good morning, Vivian. So given some of the headlines coming out of the U.S. yesterday, it might be helpful, please, for my first question, if you could just level set on ICOS's designation in your international markets in terms of the type of tobacco products from a tax perspective. Thanks.
spk14: So I guess, Yann, if I understand well, your question is how is our Eat Not Burn offer and product classified versus combustible cigarette in our non-U.S. geographies, correct?
spk09: That's correct. Yes, please. Right.
spk14: So I'm not sure that I'm going to be able to give, you know, one general answer because the classification can be different from one country to the other. I would say today probably the fact that the excise duty applied to our ICOS product is differentiated in the vast majority of the market show that the treatment is differentiated so the product is addressed already in a distinct manner on that particular element recognizing that it's a different product with a different feature than the combustible cigarette so we are of course going to see some situation that can be different from one market to the other we are certainly welcoming a regulation that will further clarify the fact that this is not a burn product are clearly different and a better alternative to combustible in the future. And as I think I mentioned, we see the regulation progressing nicely country after country to take that into account. I've been taking a few examples during my previous speech and we expect that to continue. So we expect more and more government regulated to further clarify distinction between Eat Not Burn and other reduced-risk products and combustible cigarettes, and come as well with different regulations. And as you know, we are calling for a differentiated approach on two items, certainly on the way we can communicate on these better alternatives and better products than the combustible cigarette, and also, of course, on taxation to make sure that we have an incentive to push the smokers to this better alternative for the health.
spk09: That's helpful. Thank you very much. And then my follow-up, if you could just provide your assessment of the risk of other countries potentially implementing a nicotine cap on combustible cigarettes. Thank you.
spk14: Well, I think that is something that, as you rightly say, Viviane, is not implemented anywhere today. And I think it's an idea that certainly would have to be investigated in all its dimension. I think that that could have a number of impact in terms of illicit trade, in terms of people smoking actually more combustible product to get to the same kind of nicotine dose, and of course, you know, therefore with negative impact. So I think at that stage, frankly, it's too early to say whether this is something that could have the right intent. In any case, that would have to be coupled with very strong awareness availability of better alternatives and certainly starting with Eat Not Burn if we were to work and that should be perceived as an incentive for people to quit smoking or to switch to this better alternative and certainly Eat Not Burn being the first one that could be perceived as a nice and satisfying alternative for smokers wanting to go for for better products. So I think that the idea you know is and it's not new because I think the FDA had put the idea on the table already in 2017. I don't think that much work has been done so far on all the potential consequences. We believe that a lot of work would have to be done on the impact and a lot of scientific evidence would have to be gathered and study on that. In any case for us that would have to be coupled with a very strong awareness, availability, and present that as an alternative for people who don't want to quit, but want to keep consuming nicotine.
spk09: Understood. Thank you very much.
spk14: You're welcome.
spk06: Our next question comes from one of Owen Bennett of Jefferies.
spk16: Good afternoon, Emmanuel. Hope all well. How are you? Good, thank you. And I just wanted to focus on the incremental commercial spending, the second part. Could you maybe give some more specifics around what this will be behind? Will it largely be focused on the rollout of Veev and Illuma? And then linked to this, I was just wondering how many markets realistically are you targeting for Veev and Illuma to be in by the back end of the year? Thank you.
spk14: Yeah, sure, Alan. So on the commercial spending side, Of course, here it's expecting, we believe realistically, that in many markets the situation on COVID will gradually improve. So everybody believes that in many markets with the vaccination and positive evolution starting in the summer, we're going to see a switch to a gradual improvement. As you know, during a significant period of time, because of COVID, we've been somewhat limited, restricted in commercial action, I would say across the portfolio, but of course, starting on our ICOs business. So as we see the market opening up, it will, in a general manner, be time to be back on communication, on making our ICOs product known. Build awareness, again, around ICOs is absolutely critical. key in building our ICOs business and obviously that will trigger more commercial and marketing activity. On top of that, you're absolutely right, that will be a period of very important launch with Illuma and Vive, although Vive has been started to be launched, we expect a number of market in the second part of the year. We'll see exactly what is the final number, we want to make sure that we do that you know, well with the right focus. On Illuma, you can expect key market to be first, you know, on the priority list for launch. So I'm not going to disclose at that stage the names, but you certainly expect key market for us on ICOS to be coming very first on the list. And of course, that will require specific investment to make sure that smokers or, you know, other already RRP user understand what is the benefit of Illuma, why it is an even greater product than Icos 3 Duo and generating more conversion, more loyalty to our product so that we require nice investment in the second part of the year. So that is really what is behind the 300 to 400 million that we are mentioning here.
spk16: Thanks very much. Very helpful.
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spk08: I, um... I wanted to ask maybe a follow-up. Hi. A follow-up on Illuma. Just trying to understand as you roll this out, you know, what's the expectation of how incremental this can be? I mean, I guess I'm wondering from your expectations internally, are you expecting to see a lot of, you know, current or dedicated ICOS users upgrade to this device? Or are you expecting for a lot of new users coming into this? to ICOS. And then, you know, since you're introducing the, this broad range of consumables with Illuma, you know, how, you know, should we assume that there is some level of incremental cost view related to that and therefore a margin drag or not necessarily just trying to think about how accretive this could be for you?
spk14: Yeah, sure. Bonnie, happy to, um, to, to answer on these two, uh, two points. So on the impact of Illuma, we broadly expect Illuma to be positive. Well, first of all, of course, on acquiring new smokers, you know, and converting new smokers, because they're going to find a more intuitive, you know, easier to use product. And we may convince with Illuma smokers that we did not manage to convince so far. So that's the first element. Second, of course, you know, we're going to also have a number of ICOS user or other, you know, eat not burn tobacco product user switching to Illuma because it's really a superior product with a lot of benefit for the consumer. And last, we believe that in terms of loyalty and people fully adopting the eat not burn practices and not moving back to cigarettes, the fact that it's a better product is also going to play a very nice role. So we expect to have people abandoning and switching back to cigarettes to be nicely lower once again because it's much easier to use, it's an overall better experience. And we think it's going to be really having a nice impact on that one. So as you can see, we expect several drivers behind this Illuma innovation to further boost our performance on high costs globally. Regarding consumable and globally as a launch, I would say you should expect, like always when you launch a new product, you are coming with a product that is not fully optimized in terms of manufacturing productivity. It's a new product. At the beginning, the volume are low. You've made some investment. It takes some time to be fully optimized. So there will be, beyond the cost of launching the product for marketing and commercial reason, there will be some impact at the gross margin level at the beginning because it's a new product and there will be a ramp up on the profitability of this new product and on the consumable margin on this new product. And that is, of course, taken into account in our guidance.
spk08: Okay, that's very helpful. Thank you. And then I wanted to circle back to, you know, some of the news that came out yesterday regarding a potential cap on nicotine levels on cigarettes in the US. So I guess my question is, you know, wondering if there's anything you can do to accelerate the rollout of icos in the US, you know, since I imagine, if a nicotine cap would ever be implemented, you know, as I see it, icos would have a distinct advantage. So I'd love it if you could touch on that. And then maybe your latest thoughts on potentially entering the U.S. market with Veve, you know, wondering if that might now become more of a possibility. And if so, you know, will you or have you submitted a PMTA? Thanks.
spk14: So just on the second one, on VIVE, it is certainly our intention at a certain point in time to submit a PMTA. We have not done it yet. And I don't have the timeline yet when we do that. But yeah, it is certainly our intention to do that at a certain point in time. Now, on growing the ICOS business, of course, we will work with our partner Altria there. Remember, you know, we are not commercializing ICOS in the US. We have licensed the ICOS commercialization to Altria. Let's not overreact to what is even not the news. I think it's a press article yesterday and therefore we should not run too fast to conclusion or believe that the world is going to change overnight. I think it's just a press article. But now we are convinced that the FDA has one clear objective, which is to promote a policy for harm reduction that will go through innovation and based on scientific evidence. and they want to supervise that. The MRTP that we received on ICOS 2.4, you know, signaled that they see ICOS as a positive contribution, and according to their own word, you know, that it's appropriate to promote public health. So that means that we have with ICOS a role to play, that we believe that this vision of the FDA is something that we can accompany and that we can foster and help to develop with our innovation and with ICOS. And of course, we'll make sure that with Altria, we try to maximize what we can do there.
spk08: All right. Thank you again.
spk14: Thank you.
spk06: Our next question comes from one of Adam Spielman of Citi.
spk03: Hi, good afternoon. I have two questions. The first one is on ICOS market share. Now, in the past couple of years, we've seen very good growth in 4Q versus 3Q and 1Q versus 4Q. And then market share has stalled. And you can see that, for example, in slide 19 and slide 21, that 2Q and 3Q There's been no growth in Japan or in, or little growth in the EU and in Russia. And I guess the question is, should we expect the same sort of pattern in 2021? In other words, great growth in 4Q, you've just delivered great growth in Q1, but then the market share will be pretty stable for the next couple of quarters in your key markets.
spk14: Hi, Adam. Well, I think, you know, Certainly the element, but I'm sure you have that in mind, that you need to take into account is, first of all, that there is an underlying seasonality in many markets that is impacting the volume on CC and therefore, you know, the denominator being impacted. That is, even if ICOs continue to grow and globally HITNOTBAND continue to grow very nicely, that is impacting the overall market share. And in addition to that, the COVID impact on border closure impact, you know, impact on illicit and some market that was not tracked, you know, that emerged and that was, you know, mainly CC business, of course, there again changing the denominator has been impacting the market share. So it's going to be a mix, we believe, in 2021 still with impact from the COVID of this normal seasonality plus the specific impact linked to the COVID. Now, we target a progressive growth overall, but it's true that on certain markets, we may have, after a very strong acceleration in one quarter, for all this reason, the following quarter, that could be with a lower growth and even stable. Of course, year on year, it's still a very strong growth, but you appreciate that. It's sequentially that the market share is potentially not growing at the same pace. It doesn't mean of course that the volume even sequentially are not growing either. You can have volume growing as well with the market share stable. So I think market share has to be taken with a pinch of salt and should be appreciated over a longer period of time to be meaningful in what they say.
spk03: Thank you very much. Yes, that's helpful. And my second question is around your quarterly EPS guidance. And really the question is whether you're worried that people are beginning to disregard it and sort of consensus is just sort of, well, not consensus, but the way the market thinks about you is no longer under your control. Now, let me try and explain that question a bit more. In the past two or three years, every time you've given guidance on a quarter, you've beaten it massively. I, frankly, no longer take much notice of it, or at least if you give a guidance for a certain amount of EPS, I think it's probably going to come in 10% or 12% more. And it's done it again this quarter, and yet the shares are fundamentally flat. Now, there might be other reasons for that, but it looks to me as if the market is sort of disregarding your EPS guidance on the quarter. And to me, that seems quite a dangerous situation for me. And so I was wondering if you think that's right, if you're worried about it, why you didn't actually, if you thought you were going to beat when you shipped more at the end of the course and you didn't tell the market, and how you think this dynamic is going to play out going forward?
spk14: Yes, Adam, so taking your challenge on guidance and what we deliver, I would identify two sources for two reasons, two drivers for beating, you know, often the guidance. The first one, and I think it's a good one, is the fact that we are, you know, often surprised by the strength of the ICO's business. So we expect something and it's coming even stronger, which is the case in this Q1 for some of the beats. So, you know, we are trying to make a fair assessment of what we can expect. And then when things are coming better, we take that as good news. But it's true. We've been too cautious in the way we've been forecasting. The other one, which I hope everybody understands, is that in today's environment, it's more difficult to anticipate, predict things, because you have a lot of volatility. And we've been, it's true, surprised. by seeing that we did not necessarily anticipate it well. And that can be spending that we thought we would do even in March and that we eventually did not do in terms of investment, and we are going to do that later in the year, or some movement in market that we are not well anticipated again. with the COVID impact creating a lot of nervousness, volatility, and frankly, somewhat a roller coaster in some of the attitude of the trade and even, you know, pantry loading from customers. So that would be really the two driver explaining why we've been, you know, beating on a few occasion our guidance. And when we know early in the quarter that we're going to beat, I mean, we share with that, When it really happened at the end of the quarter, I think we believe that it's, you know, it become clear at the stage where we say we're going to, we see that, you know, very close to the communication if you want. Now, on your challenge of, or your question, does it mean that the market is no longer, you know, following you? Well, I don't think this is the case. I think everybody understand the specificity of this COVID situation and accept that there can be volatility and things that we don't anticipate well. And then, you know, on the strength of ICOS, I think everybody can have a view on what we can deliver. I think we are today revising upward the guidance on the number of each tick for the year to 95 to 100 billion. I think, you know, based on the Q1, that's really sharing with all investors, shareholders, analysts, the best possible assumption that we can make and really reflecting our vision at that stage.
spk03: Okay, thank you. It was a tough question.
spk14: Thank you. Thank you.
spk06: Our next question comes from one of Michael Lavery of Piper Sandler.
spk19: Good morning. Thank you. Hi, Michael. I just wanted to come back to your comment about pricing on heat sticks and how you've begun to differentiate a little bit more there. And if I heard you right, you said you're now doing both above and below the original price points you'd had. Obviously, in Japan, we saw with the heat launch a lower price point introduced. But can you give a little more color on how you're doing above where you have been price point? And is there additional brand you have or a second or third one and just how that's positioned and if it's not too, too early, what you're seeing so far with that?
spk14: Sure, Michael, happy to do that. What is happening on our high-cost business and on the consumable is typically what you would expect in a market, consumer good market, where things start to mature a little bit. And I'm using this word with a lot of cautiousness, of course, because it's a very young market still. But in a few markets, like Japan, for instance, in a few other markets where we are now double-digit market share, it's maturing a little bit. So typically, the consumer, the customer will expect based on its purchasing power, its purchasing power based on his personal lifestyle and what he wants to enjoy or what he wants to say about his life or her life around him. We want to have different, I would say, positioning on what he's consuming. When you go for innovation, what we did with the eat consumable, you have one single reference at the beginning and then rapidly you see the need for segmenting the market. There is a category of the consumer that will be very keen to have an even superior experience. So to get to an even better consumable and ready to pay more for that. So to have a higher expense. So that's what we have with whether the Marlboro each tick in Japan or each creation in Russia, you keep the premium below the hyper premium if you want. And then at a certain point in time, there is also a need for a medium and probably later in the future for a medium minimum positioning because other consumer will be keen to have an inferior overall experience, but still great rewarding versus what they used to have with the same category of combustible and, of course, at a lower price point. So I think we're just doing the right commercial marketing job to make sure that we give satisfaction to all the expectation of our customers. It happens gradually. It's not relevant yet in every country. But as more and more countries are becoming a bit mature, that will become increasingly relevant in more and more markets in the future.
spk19: Okay, that's really helpful, Kohler. And on your sort of, quote, mature Japan market where you grew three or four share points year over year, I just want to make sure I understand some of the dynamics there. You give the adjusted share, which, of course, excludes some trade moves, but also cigarillos. and then the other share. The gap between those has widened a little bit over the five quarters you show. It's like 1.3, 1.5, 6, 9, and then 2.6. Unfortunately, we don't have great visibility on cigarillos. Is it just growth in that segment that's the key driver there, or is there also a little bit of an inventory build we should have in mind as we think about modeling 2Q and beyond?
spk14: No Michael, there is no concern of inventory bill whatsoever. Certainly the level of CIGARI law, remember that is a specific category, the tax advantage will fully disappear. next October, but that's still until now a very dynamic category in Japan. So what we are, as I said, seeing in Japan has been following the October excise duty increase and price increase. A very, very nice reaction from our ICOS business altogether, both Marlboro and Steak and Eats. We've been gaining very nicely market share at the end of the year 2020 in Q4. It continued in Q1, and therefore we are disclosing very positive and genuine market share growth during the last two quarters, and we're very happy with it.
spk19: Okay, great. Thanks so much.
spk14: Thank you.
spk06: Our next question comes from one of Chris Grohe of Stifel.
spk18: Hi, good morning. Hi, Chris. Questions were asked. I have just two quick ones for you. I was just curious in relation to ICO. You've had really strong development of market share in Russia and the EU. Those were also markets where you continued to build your availability of the product. Do you have a rough approximation of how widely available IQOS is, say, in the EU and Russia? Is there still more distribution potential in those markets to get it in front of more consumers?
spk14: Well, clearly, we said it in Russia, we have not the full coverage of the country yet. In the EU, we have a number of countries where we are in the big cities, but not yet with an important full coverage, I would say, with a lot of capillarity. I think Jacek, at the time of the investor day, highlighted the market share that we have in key cities and signaled that if we look backwards, the market share a few years upstream in big cities are a good indication of where you can get the whole market a few years down the road. So I think that that's a pretty good indicator of the fact that We manage, of course, to get even higher market share in key cities and the overall country. And the fact that we have done that in key cities means that we are very likely, if we continue to do a good job, to reach the same kind of market share globally for the country. But, of course, it's not the end of the road because, at the same time, we kept increasing share in the big cities. So it's an ongoing improvement, if you want. But that's, I think, the way you should be looking at things.
spk18: Okay, that's helpful. Thank you. And just one other question in relation to combustibles and an area where you've had a little bit of share pressure again this quarter, and there's some reasons for that. But I just was curious, when I think about commercial investments in the second half of the year, I always think of that in relation to ICOS and reduced-risk products. Do you need to apply more money, more attention, whatever the right word is,
spk14: towards combustible cigarettes to try to shore up some of that market share decline i know some of this is being generated by the success of icos but just curious how you're looking at that and is there any kind of change in the competitive dynamic you're seeing in in combustibles i mean we're certainly seeing uh competition quite active uh on on combustible because for many of them you know they have only little presence in rp so they are trying to uh to protect and build their business there and especially sometimes they are under pressure because of the of the growth in the heat-not-burn category. Chris, we are just reminding everybody that maintaining our leadership in CC is an absolute priority. We need this leadership in order to make sure that we keep the link with the smoker that we want to convert, in order to keep the impact with the trade to bring our RRP offering to customers, and of course, you know, for the financial resources that it provides in order to invest behind ERP. So you should expect us to continue to invest on CC to maintain this market share. It is clear that although it's not going to be the majority, but there will be some investment in the second half on the CC business as we defend our business. And as we see some of the markets where we've been some time hit hard by the COVID and we talk about the social consumption, you know, that has been eating Marlboro. Well, as we think the world is back to more social life in the second half, that would probably be a time to be back on making sure that we maintain and further strengthen the leadership on Marlboro as an example.
spk18: Okay. That's very helpful. Thank you for that caller.
spk14: Thank you.
spk06: Our next question comes from one of Pamela Kaufman of Morgan Stanley.
spk07: So I just wanted to come back to understanding your guidance and the cadence for this year. Given the strength in the first quarter and the outlook for Q2, your guidance for EPS implies a moderation from about mid-20% growth in the first half to high single-digit growth in the second half. And obviously you pointed to added incremental investments. But are there any other factors impacting the second half outlook? Because even when adjusting for the added incremental spend, it implies a notable moderation in growth. So just trying to understand what's contributing to that and how conservative it might be.
spk14: I'm happy to take that one. So I'm sure we've highlighted the fact that the Q1 margin has been helped Of course, by some deferral of investment on SG&E, and we signal the fact that we'll be much more active in H2 and the 300 to 400 million extra investment versus the first half. But we also signal that the performance on gross margin is absolutely impressive in Q1, and we're going to deliver a very strong performance on gross margin rate improvements through the year. But we flag the fact that Q1 has been boost as well by non-recurring element on manufacturing productivity. And therefore, we think that as it's not going to be reproduced, we're going to have here a moderation. We also are going to face, and that was Bonnie's question previously, some impact coming from the launch of Illuma and the consumable of Illuma, where there will be some pressure on growth margin because of the launch and the time for the ramp up on manufacturing productivity. And we will have also a number of investment that will be in the growth margin on distribution in the second half. So if you combine the fact that Yuan was exceptional for a few reasons, And the fact that there is both at the gross margin level in Q2 some element that will be impacting negatively plus increased investment that is driving the outlook for the margin in the second half. Although, as I said, you know, we're going to keep with a very nice margin improvement, but I'm sure you've noted that already.
spk07: Thank you. Also, I just wanted to ask about IQOS Veeb learnings and performance in your initial launch market. I understand you're leveraging your existing IQOS platform to commercialize Veeb. So how are you steering consumers across the various products?
spk14: Yeah. So at that stage, Pamela, it's very early stage, few market, very preliminary. We have very good feedback from customers reflecting the fact that it's a superior experience versus most traditional vaping experience. So we are collecting the data. We are reviewing the first information coming from these markets, and when we have a bit more element to share, we'll do that. I would say, for the time being, on the limited number of markets and with very small volume, we are happy with the qualitative feedback that we are getting from these markets.
spk07: Great. Thank you.
spk06: And ladies and gentlemen, we have time for one more question. Our final question will come from the line of Gaurav Jain of Barclays.
spk04: All right. Thank you. Good morning. Hi, Gaurav. Coming back to the questions which have been asked on, you know, repeated earnings beat and earnings coming ahead of guidance, how does this impact your thought process around the magnitude and timing of share repurchases?
spk14: I don't think that this is having a meaningful impact, Gaurav. I think we've signaled previously that we are absolutely on track, provided, of course, that we receive board approval to start share buyback in the second half of the year, as announced at the time of the investor day. I'm not sure that At that stage, you know, we are building a strategy based on that. As I said, you know, I'm hopeful that with the COVID, Edwin, abating, we're going to be better forecaster in the future for our quarterly guidance. So I don't take that as a kind of element that would be here to stay.
spk04: Sure. Thank you. And my second question is, you know, And maybe I'm incorrect in what I'm saying, but as I understand, a pack of ICOS has about six grams of tobacco, while a pack of cigarettes has 16 grams of tobacco. So does it imply that a pack of ICOS has lower nicotine versus a pack of cigarettes, which could therefore be something which helps you in this debate around nicotine caps?
spk14: No, Gaurav, not necessarily. It doesn't impact on some time in some country, not everywhere, on the excise duty because excise duty is on the weight of tobacco in several countries in the world. But the weight of tobacco is not directly going to guide the nicotine content that you're going to inhale through high-cost consumption versus combustible consumption.
spk04: Okay, brilliant. Well, thanks a lot.
spk14: Thank you. Thank you very much.
spk06: That was our final question. I'd like to turn the floor back over to management for any additional or closing remarks.
spk05: Well, thank you very much for joining us. That concludes our call today. Sorry, Emmanuel, unless you had a comment.
spk14: No, no. I want just to thank everybody for attending the call today, and we look forward to talk to you soon. Thank you.
spk05: If you have any follow-up questions, please contact the investor relations team. Thank you again, and have a great day. Bye-bye. Bye, everybody.
spk06: Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect.
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