Philip Morris International Inc

Good day and welcome to the Philip Morris International fourth quarter 2021 year and 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 be also invited to ask questions at the conclusion of questions from the investment community. I will now turn the call over to Mr. Nick Rowley, Vice President of Investor Relations and Financial Communications. Please go ahead, sir.

Welcome, and thank you for joining us. Earlier today, we issued a press release containing detailed information on our 2021 fourth quarter and full year results. You may access the release on www.pmi.com. A glossary of terms, including the definition for reduced risk products, or RRPs, as well as adjustments, other calculations and reconciliations to the most directly comparable U.S. GAAP measures and additional heated tobacco unit market share data are at the end of today's webcast slides, which are posted on our website. Unless otherwise stated, all references to ICOS are to our ICOS Heat Not Burn products, and all references to smoke-free products are to our RRPs. Growth rates presented on an organic basis reflect currency-neutral underlying results. Following the acquisitions of Fertin Pharma, Ototopic, and Vectora Group, PMI added the other category in the third quarter of 2021. Business operations for the other category are evaluated separately from the geographical operating segments. Today's remarks contain forward-looking statements and projections of future results. I direct your attention to the forward-looking and cautionary statements disclosure in today's presentation and press release for a review of the various factors that could cause actual results to differ materially from projections for forward-looking statements. Please also note the additional forward-looking and cautionary statements related to COVID-19. It's now my pleasure to introduce Jacek Olczyk, our Chief Executive Officer, and Emmanuel Babau, our Chief Financial Officer. Over to you, Jacek.

Thank you, Nick, and welcome, everyone. I hope you all safe and well. Our business delivered an excellent performance in 2021, reaching record net revenues, adjusted diluted EPS and cash flow, with growth in overall volumes, high single-digit organic net revenue growth, and strong double-digit adjusted EPS growth. This illustrates the sustainable nature of our growth based on new products and innovation as demonstrated by continued strength of ICOS, which delivered 31% full-year organic growth in RRP net revenues. Smoke-free products surpassed 30% of total net revenues in Q4 as we progress towards our ambition of becoming a predominantly smoke-free company by 2025. We are especially pleased by the reacceleration of our business in Q4 to deliver a better than expected result. This reacceleration was visible in organic net revenues, ICOS user growth, heated tobacco unit market shares across developed and emerging markets, innovation in devices and consumables, and commercial investment and combustible market share. ICOS user growth recovered in Q4 to reach an estimated 21.2 million total users, despite ongoing tightness in device supplies in the second half of the year. Full-year heated tobacco unit shipment volumes grew 25% to reach 95 billion units, with broad-based growth for both our volumes and the category across key geographies, with an especially positive rebound in the EU. The growth outlook for ICOS remains very positive, with outstanding initial results from ICOS Iluma in Japan and Switzerland, the only two launches so far, and growing traction for ICOS-V in early launch markets. In combustibles, we essentially reach our goal of stable category share in the fourth quarter despite the impact of ICOS cannibalization. During the year, we laid the foundations for our long-term growth ambitions beyond nicotine in wellness and healthcare, including the milestone acquisition of Fertil and Vectura, which provide essential capabilities for future product development. And last, bolstered by strong operating cash flow, we continued to prioritize returns to shareholders for a 4.2% increase in dividend and ongoing share repurchases. Turning to the headline numbers, our fully adjusted net revenues grew organically by 7.6% or 10.3% in dollar terms, including positive currency. This reflects the continued underlying strength of ICOs and the ongoing recovery of the combustible business in many markets compared to the pandemic-affected per year. Our net revenue per unit grew 5.3% organically, driven by the increasing proportion of ICOs in our sales mix and pricing. Combustible pricing was in line with our expectations at 2.7%, or around 4% excluding Indonesia. Our adjusted operating income margin increased by 200 basis points on an organic basis in line with our expectations with continued positive effects from the increasing size and profitability of ICOS pricing and productivity savings. Through first half expansion, although strong health expansions was tempered in the second half by the expected initial higher unit cost of Icosiluma, geographic and category expansion investment, and the Q4 resumption of consumer programs in a number of markets. Our resulting adjusted diluted EPS of $6.08 represents 17.6% growth in dollar terms and 15.3% currency-neutral growth. This is well above our prior guidance. As ICO's user growth, the launch of Illuma in total industry volumes exceeded our expectations. And finally, we generated operating cash flow of $12 billion, reflecting excellent underlying cash conversion in addition to strong Q4 business results and certain timing factors. Looking at our Q4 performance, net revenues grew by 8.4% organically. This reflects the sequential improvement in IQOS user acquisition, the initial success of Illuma in Japan, and strong overall volumes, including a further recovery in combustibles. We delivered a robust organic net revenue per unit growth of 4.1%, again reflecting our shifting business mix. We achieved this despite softer pricing on combustibles of 1.4%, due to the factors flagged previously of continued pandemic-related challenges in certain markets, as well as comparison effects in Germany and Australia. Our Q4 adjusted operating income margin declined by 10 basis points on an organic basis, primarily due to the same factors mentioned for the second half, as accelerating business performance opened more opportunities for investment in future growth. Despite that, our currency-neutral adjusted diluted EPS again grew strongly by 11.9%, also reflecting a lower interest cost and effective tax rate. Turning now to 2022 guidance. After the temporary slowdown in ICOS user growth in the second half of 2021, the device supply situation is gradually improving. While the situation remains fluid, we now expect a more limited impact, allowing us to gradually return to prior rates of user progression over the coming quarters. With the remarkable success of Illuma in its first market, a number of other innovations planned, and promising growth for ICOS in low- and middle-income markets, Our 2022 growth fundamentals are strong and we look forward to an exciting year. We note that the slower user growth in the second half of 2021, particularly in the third quarter, will have an estimated carryover effect on our growth this year of around 4 to 5 billion heated tobacco units. This is reflected in our 2022 expectations of 113 to 118 billion HDU shipments volume. Given this continued growth, we expect our full year HDU shipments to again be ahead of IMS volumes. We expect to deliver between a 4 and a 6% organic net revenue growth keeping us well on track to deliver our 2021-2023 compound annual growth rate target of more than 5%. This range prudently incorporates the continuing uncertainty on full device availability and the pace of the ongoing pandemic recovery. For duty-free, we assume no meaningful pickup in Asian travel, but a continued gradual recovery in other geographies. We expect our adjusted operating income margin to expand between a 50 and 150 basis points as the positive effects of our product transformation continue, despite the expectation of a moderately lower gross margin. This is essentially attributable to temporary Illuma-related factors, such as the higher initial weight and cost of Terea consumables and the cost of devices, which we expect to decrease over the 18 to 24 months post-launch, as we have experienced with previous major innovations. We also account for higher logistic costs, where the tremendous uptake of Illuma in Japan has led to increased use of air freight, investments to grow capacity across our smoke-free platforms, and inflation in certain supply chain elements. Operating income margin expansion and continued reinvestment in attractive smoke-free growth opportunities and in wellness and healthcare R&D will again be supported by our ongoing efficiency programs. We remain on track to deliver around $2 billion in gross savings by 2023. Accordingly, we forecast currency-neutral adjusted diluted EPS growth of 8% to 11%. This translates into an adjusted diluted EPS range of $6.12 to $6.30, including an estimated unfavorable currency impact of around 45 cents at prevailing rates. This is primarily due to translation effects, and this currency impact reflects notably the depreciation of the Euro, Japanese Yen, and Turkish Lila versus the dollar. This guidance includes the impact of $785 million of share repurchases made in 2021, which were somewhat restricted by blackout periods. It does not reflect the impact of repurchases in 2022, as we continue to take an opportunistic approach within our target of between $5 to $7 billion over three years. Our guidance also reflects the impact of acquired businesses, which we expect to generate underlying operating income in line with our business plan, but with an operating loss of around $150 million, or approximately 1% of adjusted value to DPS, which we'll come back to explain later. As outlined in today's release, there are a number of other assumptions underpinning our outlook. We expect the total industry volume of cigarettes and heated tobacco units, excluding the U.S. and China, to decline between a minus one and minus two percent. Given our leadership in smoke-free products, the structural growth of the category and its growing proportion in our business, we expect to ensure a target broadly stable total PMI shipment volume within a range of minus 1 to plus 1%. We assume fully air combustible pricing of three to four percent with a softer first half and a stronger second half of the year and this is clearly above 2021 levels. The pricing environment is improving but still challenging certain markets with ongoing pandemic related impacts. Our balance sheet is strong. We delivered excellent operating cash flow of $12 billion in 2021, reflecting robust underlying cash conversion in addition to favorable timing and one of the impacts of around half a billion dollars. With further strong organic profit growth expected in 2022, we expect to generate around $11 billion of operating cash flow subject to year-end working capital requirements and after accounting for the reversal of timing benefits and using prevailing exchange rates. As a result, we raise our 2021 to 2023 operating cash flow target communicated at the February 2021 Investor Day at then prevailing rates from around $35 billion to the range of $36 to $37 billion. We also expect full-year capital expenditures of around $1 billion, reflecting increased capacity investments behind our smoke-free platforms, including Iluma, and enhancing our digital commercial engine in addition to certain projects which were delayed due to the pandemic. Lastly, looking specifically to the first quarter of 2022, we expect adjusted diluted EPS of $1.50 to $1.55, including $0.15 of unfavorable currency at prevailing rates. We expect robust organic top-line growth and operating margins comparisons, which reflect both the very strong prior year quarter, which benefited from a high level of productivity savings and relatively low levels of investment, and the Q1 of 2022 dynamics of increased device sales, commercial investments, Illuma-related costs, and increases in some inputs, such as freight. Let me now hand over to Emmanuel, who will give you more details about our performance in 2021.