Philip Morris International Inc

Philip Morris International first quarter and 2021 earnings conference call. Today's call is scheduled to last about one hour and could be marked 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 the question and answer from the investment community. I would now like to 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 2022 first quarter 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 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 adjusted results, excluding acquisitions. Figures and comparisons presented on a pro forma basis entirely exclude PMI's operations in Russia and Ukraine. In the third quarter of 2021, we acquired Fertin Pharma, Vektora Group, and Otatopic. On March 31st, 2022, we launched a new wellness and healthcare business, Vectora Fertin Pharma, which consolidates these entities. The operating results of this new business are reported in the other category. Business operations of our wellness and healthcare business are managed and evaluated separately from the geographical segments. Today's remarks contain forward-looking statements and projections of future results. I direct your attention to the forward-looking and cautionary statements disclosure in today's presentation and press release for a review of the various factors that could cause actual results to differ materially from projections or forward-looking statements. It's now my pleasure to introduce Jacek Golczyk, Chief Executive Officer, and Emmanuel Babau, Chief Financial Officer. Over to you, Jacek.

Thank you, Nick, and welcome everyone. I hope you are all safe and well. Recent months have been extremely challenging for many of us given the tragic events related to the war in Ukraine. I would like to express our sadness and solidarity for the people of Ukraine. Our primary concern is for our employees and their families and we have been doing everything we can to support them with three priorities. First, evacuating our colleagues. We have evacuated over 1,000 colleagues and family members from the country and supported more than 2,700 others to move from conflict zones to locations away from the heaviest fighting. we are delivering critical aid to people that cannot live or who decided to remain in Ukraine. And third, we are providing accommodation, immediate assistance and a path forward to those who left the country. In addition, we have already contributed around $10 million in funds and donated essential items across the country directly to humanitarian organization and through our own employee-led initiative projects with heart. This includes providing medicine, food, clothes and a variety of other items to our colleagues and to the broader population, the purchase of 25 ambulances and the setup of a mobile hospital. Based on our current visibility, we estimate an additional cost of around $25 million for additional support to employees this year. Our colleagues in neighboring countries continue to provide vital support to all people arriving from Ukraine to seek refuge. Our heartfelt gratitude goes to everyone involved in this generous effort to help at such a difficult time. In terms of the impact on our business operations, production at our Ukraine manufacturing facility in Kharkiv remains suspended. While business activities in eastern Ukraine have been mostly heavily impacted, we have seen some resumptions in areas where conditions allow, as we seek to maximize product availability and service to consumers using existing inventories on hand. We are also now planning to import products from other manufacturing locations, although this may involve higher costs. We continue to pay salaries to all our Ukrainian employees and to provide substantial in-kind support to them and their families. As communicated in our March 24 press release, PMI's board of directors and senior executive team are working on options to exit the Russian market in an orderly manner in the context of a complex and rapidly changing regulatory and operating environment. This is no easy task in view of recently introduced complex legislation, but we are committed to seeking a viable path to exit the market while supporting our employees in Russia for this period. It is also clear that we cannot continue business as usual in light of regulatory and supply chain disruption, which has already impacted the Russian business in the Q1. We have taken concrete steps to scale back our operations such as the cancellation of all new investments and product launches, including IQOS Illuma and IQOS V. We are delisting 25% of our cigarette products, including Marlboro and Parliamentary SKUs. We have also cancelled the $150 million investment in capacity to ultimately manufacture more than 20 billion Terra sticks for IQOS Illuma in our Russian factories. Clearly, the impact of the conflict has also created disruption in global supply chains and exacerbated inflationary pressures in certain materials and services. However, the Q1 performance and outlook for our business, excluding Russia and Ukraine, remains strong. On a reported basis, our outlook conservatively assumes no further contribution from Russia or Ukraine from April 1st. To provide a consistent view, given the uncertainty and volatility of these two markets, we will now also provide adjusted results and guidance on a pro forma basis, excluding Russia and Ukraine from both the prior and full current year. I will now hand over to Emmanuel to cover this in more detail.

Thank you, Jacek. We delivered a very strong performance in Q1 with a double-digit organic net revenue and currency neutral adjusted diluted EPS growth on a pro-forma basis, excluding Russia and Ukraine from both the current and prior year quarter. Overall currency neutral results were also ahead of our expectations. Our ICOS business delivered an excellent quarter, continuing the reacceleration seen last quarter as device supply constraints continued to ease. Our ICOS user base grew by more than 1 million, excluding Russia and Ukraine, marking a very strong performance. RP pro forma net revenues grew by plus 23%, with pro forma smoke-free net revenue over 30% of the total company. Importantly, pro forma HTU shipment volumes grew plus 18% compared to the prior year quarter. This reflects excellent progress in the EU region, continued growth in Japan, as well as over plus 50% growth in low and middle income markets. PMI HTUs are now the second largest nicotine brand in markets where IQOS is present, as our efforts on innovation, portfolio and geographic expansion drive consumer trials and adoption. The impressive start for IQOS Iluma continues in Japan and Switzerland, with very encouraging initial take-up in our latest launch market of Spain. The initial success in these three very different markets reaffirms our confidence in Illuma as an exciting future growth driver for our company. Meanwhile, our combustible business performed robustly, exceeding our objective of stable category share and delivering positive volume and organic net revenue growth. In addition to supporting strong financial performance, this also enhances our ability to maximize the switching of other smokers to smoke-free alternatives. Overall, our business is off to a strong start, and while currency is unfavorable in 2022, we expect to deliver another year of robust organic top and bottom line growth. Coming now to the headline numbers, our Q1 net revenue grew organically by plus 9% in total and plus 10% on a pro forma basis. This reflects total volume growth driven by the underlying strength of ICOs, the ongoing recovery of the combustible business in many markets against pandemic-affected comparison, and some positive timing impacts, including inventory movements. Our total organic net revenue per unit grew plus 5.3% and by plus 4.9% on the pro forma basis, driven by the increasing proportion of high-cost HTUs in our sales mix, higher device volumes and pricing. Combustible pricing was above expectations at plus 2.9% pro forma or around plus 6% excluding Indonesia. Our total Q1 adjusted operating income margin declined organically by 30 basis points and by 40 basis points excluding Russia and Ukraine. This reflects a lower gross margin compared to a tough prior year comparison where productivity was higher mostly due to timing factors. As flagged in our full year earnings, Q1 margins were impacted by higher device sales for increasing IQOS user acquisition, channel replenishment and IQOS Illuma. I've mentioned previously the unit cost and weight of Illuma consumables and device cost is initially higher as we ramp up production with improvement expected from next year. Inflation in certain elements of our supply chain, including energy, wages and direct materials, and an increase in the use of air freight, was also exacerbated by the impact of the war in Ukraine. Despite these temporary margin challenges, we saw positive effects of the increasing size of ICOs, pricing and cost efficiency combined with our strong net revenue growth. This enabled us to deliver adjusted deleted EPS of $1.56 including unfavorable currency of 23 cents representing plus 14% currency neutral growth. This was comfortably ahead of our currency neutral expectation even accounting for timing benefit of around 6 cents. Excluding Russia and Ukraine, our proforma adjusted deleted EPS of $1.46 grew by plus 16%. Turning now to our 2022 outlook. As Jacek mentioned, given the lack of visibility on Russia and Ukraine, we are now providing an adjusted outlook on the pro forma basis, excluding these two markets for the entire year. With our underlying business re-accelerating, our growth fundamentals remain strong. Importantly, we expect to deliver organic net revenue growth of plus 4.5% to plus 6.5% compared to 2021 pro forma adjusted net revenue of $29.2 billion. This is above our previous forecast trajectory for total PMI, despite an approximate half point drop from the shift to hyperinflationary accounting in Turkey. This range incorporates the risk of supply chain disruption for certain materials, a somewhat slower Terra production capacity build-up due to the production cancellation in Russia, part of which was designated for export, the remaining uncertainty on full device availability, and the pace of the ongoing pandemic recovery. We expect our pro forma adjusted operating income margin to be organically 0 to plus 100 basis points higher for the full year. As mentioned at full year result, we expect a lower gross margin as we invest in new innovation and incur temporarily higher unit and transportation costs for the fast growth of Philouma. Since then, we have observed increased inflation in raw material and energy prices, and additional supply chain costs due to war-related disruption, including a temporary increase in air freight for both HTU and select cigarette products. Higher expected device sales from the tremendous uptake of Icosiluma and easing of device supply constraints also have an initial dilutive margin impact. Despite this added headwind and a further expected COGS increase of around $300 million compared to our initial expectation, we remain confident that we will achieve organic pro forma margin expansion as our strong revenue growth, favorable product mix and cost saving initiative deliver sustainable accretion. We forecast pro-forma currency neutral adjusted diluted EPS growth of plus 9 to plus 11%, also above our prior total PMI full year guidance. This translates into a pro-forma adjusted diluted EPS range of $5.35 to $5.46, including an estimated unfavorable currency impact of around 63 cents at prevailing rates. This compared to our previous 2022 adjusted deleted EPS guidance of $6.12 to $6.30 provided in February with the difference primarily reflecting the exclusion of Russia and Ukraine and an incremental unfavorable currency impact. The underlying ACoS growth outlook remains excellent. On the pro forma basis, we expect to deliver between 88 and 92 billion HTU shipment volumes, representing plus 20 to plus 25% growth over the pro forma prior year of 73.5 billion units. This excludes the nearly 5 billion unit ship in Russia and Ukraine in Q1. And while we conservatively assume no further such contribution from April 1st, this implies a total outlook of 93 to 97 billion units for the year. We continue to expect pro forma FCU shipment to be modestly ahead of IMS for the year after lagging behind in the second quarter, as I will 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 HTUs, excluding Russia, Ukraine, US and China, to decline by up to minus 1%. Given our leadership in smoke-free products, the structural growth of the category and its growing proportion in our business, as well as stabilizing share in combustibles, we expect to gain share. We therefore target positive total PMI pro-pharma shipment volume within a range of flat to plus 1%. We assume fuel-year combustible pro-pharma pricing of around plus 3%, now including the adverse impact from hyperinflationary accounting in Turkey. The pricing environment is improving, including in Indonesia, although challenges remain due to ongoing pandemic-related impact and disposable income pressures. Our other assumptions include around $10 billion in operating cash flow and an effective tax rate of 21% to 22%. We continue to expect full year capital expenditure of around $1 billion. Despite the impact of the war in Ukraine, our balance sheet remains strong and we remain steadfastly committed to returning cash to shareholders through dividend and opportunistic share repurchases. With regard to the phasing of Profamba performance this year, we expect a robust H1 overall with margin expansion and adjusted deleted EPS growth weighted to the second half. In large part, this reflects the re-acceleration of ICOs as device supply constraints ease, with a sharp recovery in device volume as we replenish channel inventory for user acquisition and we supply the accelerated Illuma replacement cycle in Japan. In addition, our average device price is lower than the prior year, reflecting stepped-up commercial activity to drive acquisition, including the broadening of our device portfolio with Lille and IllumaOne. While our devices continue to be priced at a meaningful premium to annually discounted competitive offering, we have already seen encouraging signs in stabilizing our high category share. Moreover, As we adjust our supply chain flows to prevailing global disruption in various material and logistics services, combined with the effect of the war in Ukraine, there may be a risk of short out-of-stock situation on certain cigarette SKUs in select markets, and we are making adjustments to some products to reflect the availability of specific materials. The reorganization of supply chain flows will contribute to the later timing of shipment to certain markets. We notably expect Q2 to be impacted by a number of temporary or specific factors, including the reversal of certain Q1 timing benefits. Organic pro forma net revenue growth is expected to be low single digit with other notable factors including the delayed timing of HTU and cigarette shipment to Japan with an approximate two point drag on growth and a further impact from the shift to hyperinflationary accounting in Turkey where the Q2 exchange rate comparison is accentuated. We expect total PMI pro forma HTU shipment of around 20 billion in Q2, partly reflecting around 3 billion less HTU shipment to Japan than originally planned. This compared to 18.7 billion pro forma in Q2 2021. We expect these 3 billion units to move to H2, generating a further growth acceleration in the third and fourth quarters. For Q2 pro forma operating margin, the disproportionate impact of the catch-up in device shipment will be accompanied by a corresponding step-up in commercial investment as we support the re-acceleration of high-cost user acquisition over the coming quarters. In tandem with the negative mixed impact of lower shipments to Japan, the highest expected quarterly increase in air freight costs of over $80 million and other supply chain adjustment costs, we expect margins to contract further before a significant recovery in the second half. These dynamics are reflected in our expectation of H1 pro forma adjusted diluted EPS of $2.65 to $2.70, including an unfavorable currency impact of $0.36. This represents currency neutral growth of 5% to 7% compared to $2.86 in the prior year. In combination with our strong first quarter, H1 pro forma top line performance is expected to deliver organic growth of 5 to 7% overall. In H2, the powerful drivers of pricing, scale and efficiency and the receding of temporary cost headwind should outweigh inflationary pressures to deliver strong top line growth, organic margin expansion and an acceleration in bottom line growth. Our strong 2022 outlook places us firmly on track to deliver our 2021-2023 CAGR targets on a pro-farmer basis of more than 5% in organic net revenue growth and more than 9% in currency neutral adjusted EPS growth. We remain on track to deliver around $2 billion in growth cost savings by 2023, which is especially important given global inflationary pressures. Importantly, our ambition to become a majority smoke-free business by net revenue in 2025 remains intact. We remain confident in the rapid pace of our transformation. Turning back to our Q1 results, total shipment volumes increased by plus 3.5% on the total PMI basis and by plus 4.9% pro forma. This reflects continued strong broad-based pro-pharma growth of plus 18.4% as user acquisition re-accelerates from the Q3 2021 supply driven slowdown and an increase of plus 3.2% in pro-pharmacy guide volume reflecting the continued recovery of the total industry and of our category share. The transformation of our business towards smoke-free product continues at a rapid pace. ETH tobacco unit comprise almost 13% of our total pro forma shipment volume in the first quarter as compared to 11.6% in full year 2021. Our sales mix is also evolving rapidly to become a majority smoke-free company. Smoke-free net revenue made up over 30% of our proforma total in Q1, compared to 27.9% for full year 2021. ICO devices accounted for approximately 6% of the $2.1 billion of Q1 RP proforma net revenue, reflecting higher year-over-year device volume as supply constraint ease and Illuma performed strongly. We delivered organic growth of plus 10% in Q1 pro forma net revenue and shipment volume growth of plus 4.9%. This growth reflects the twin engines driving our top line. The first is pricing, led by combustible. The second is the increasing mix of radio-thread products in our business at higher net revenue per unit. which continue to deliver substantial growth, an increasingly powerful driver as our transformation accelerates. Let's now turn to the driver of our Q1 proforma OI margin which declined by 40 basis points. Our proforma growth margin decreased organically by 250 basis points, reflecting the factors I mentioned earlier. Conversely, our pro forma adjusted marketing, administration and research costs were 210 basis points better organically due to the positive operating leverage of high growth growth and successful cost efficiency programs. We generated around $180 million in gross cost savings in the first quarter, with around $80 million in cost productivity and $100 million from SG&A. This makes over $1 billion since the start of 2021, already over halfway towards our target of around $2 billion for 2021-23. This allows us to reinvest in top-line growth and mitigate inflationary pressures while continuing to deliver solid margin progression. We continue to accelerate investment in our commercial programs, digital engine and R&D, as well as a number of growth opportunities across category and geography. As reflected in our full year guidance, we expect our operating margin progression to improve over the course of the year as temporary headwinds and tough comparisons ease. Our combustible portfolio performed well in Q1 with robust proforma growth in volume and organic net revenues. This notably reflects a further recovery in Indonesia and the Philippines, supporting an expectation of organic net revenue growth and broadly stable volume in our South and Southeast Asia region this year. Increased travel also supported volume growth in Spain and duty-free. Our share of the combustible category continued to recover with a plus 0.4 point pro forma gain in Q1 on a year-over-year basis. This includes gain in Japan, Turkey and duty-free as our portfolio initiatives bear fruit and social consumption resume with mass borrow share plus 0.3 points higher. While the category is declining over time, our leadership in combustibles helps to maximize switching to smoke-free products and we continue to target a stable category share over time despite the impact of high-cost cannibalization. In terms of our overall market share now, ongoing gains for our high-cost portfolio create continued positive momentum. We delivered pro forma share growth in Q1 as expected, including gains in Italy, duty-free, Egypt, Germany, and Poland. PMI HTUs are now the second largest nicotine brand in the market where they are present with a 7.5% share excluding Russia and Ukraine. This includes the number one position in six markets. Moving now to the high cost performance. We estimate there were approximately 17.9 million ICOS users as of March 31st, excluding Russia and Ukraine, which had an estimated 4.8 million users at December 31st, 2021. This reflects pro-pharma growth of more than 1 million users, a phenomenal performance by historic standards. This was driven by the resumption of consumer programs in many markets, as device supply constraints receded, capitalizing on the strong underlying demand for the brand, as also evident in the very impressive start of Icosiluma. We estimate that 71% of total Icos users outside Russia and Ukraine, or 12.7 million adult smokers, have switched to Icos and stopped smoking, with a balance in various stages of conversion. We were also very encouraged by the FDA's recent MRTP order for ICO3, with a full range of authorized ICOs products now classified as modified risk tobacco products. In the EU region, first quarter HTU share reached 7.6% of total cigarette and HTU industry volume, representing a first quarter share gain of 2 points. including a small benefit from the timing of inventory movement. Adjusted IMS volume also continues to exhibit robust sequential growth, and we expect this to continue in the second quarter, noting that the usual seasonality of the compatible market, combined with the reversal of Q1 inventory movement, is expected to result in a lower sequential share in Q2. This very good performance includes strong user and volume growth across the region, with especially notable contributions from Italy and Poland. I also want to again highlight Hungary and Lithuania, where our Q1 national HTU share exceeded 25%. To give some further color on our progress in the EU region, this slide shows the selection of the latest key city of tech shares. While Vilnius continues to lead the way, approaching 40% share, Budapest, Rome and Athens are also well into the mid to high 20s. Elsewhere, we are especially pleased by Vienna, more than doubling to 5%. The strong traction in London at over 6% share and a further acceleration in Zurich with the introduction of Illuma. In Japan, The adjusted share for our HTU brands increased by plus 1.9 points to record 22.7% in Q1. This performance reflects the strength of our portfolio and the launch of high-cost Illuma, which is also driving notable gains in Tokyo and other key cities. We expect strong off-tech trends to continue in Q2, reaching around 24% market share despite seasonality effect. Conversely, as I touched on earlier, supply chain constraints will likely result in Q2 HTU cheapness below the prior year. With HTU inventory consequently reduced in the second quarter, we expect the replenishment in H2 to deliver substantial recovery. Notwithstanding such quarterly volatility, with substantial commercial activity plan and excellent underlying momentum, we expect strong double-digit HTU shipment volume growth in Japan this year. In addition to strong progress in developed countries, we see very promising high-cost growth in low- and middle-income markets. The share of our HTU brands in the 28 such markets launched by December 31st 2021, excluding Russia and Ukraine, grew by plus 0.8 points compared to the prior year to reach 2.7%. Given the large size of this market, the premium positioning of the existing IQOS portfolio and the relatively early stage of commercialization, this represents excellent progress. As mentioned last quarter, we also intend to bring a new complementary range of heat-not-burn devices and HTUs tailored to emerging markets towards the end of this year. A prime example of this is Egypt, where Ostec exit share in Cairo is approaching 5% within 8 months of launch as compared to total Q1 share of 4.3%. other notable successes including the recently launched market of morocco as well as lebanon jordan the dominican republic and the philippines despite pandemic restrictions in manila moving now to icosil luma we are delighted to report the further outstanding success since its launch with self-performance and consumer reactions still exceeding our expectation In Japan, the uptake of Illuma devices and consumables among both existing ICOS users and legal edge smokers has been rapid, with more than 30% of the large user base uptrading since the August 2021 launch, and over 20% of sales remain to legal edge smokers new to ICOS. Moreover, the enhanced and consistently high quality user experience, the better reliability and no need for cleaning has led to significant observed increases in conversion rates, retention rates and net promoter score. This bodes well for volumes with premium price Terra Consumable, the fastest growing launch in the smoke-free category, reaching an off-tech share of 12% within six months of national launch, overtaking Marlboro Heat Stick and Heat's combined to become the number one smoke-free brand. We now have all three high-cost Illuma devices in the market following the launch of Illuma One, which provides multiple consecutive use at a more affordable price point. We are also introducing a new HTU brand called Sentia for use with Illuma in select prefectures at the mainland price point comparable to Eats. Results in Switzerland have again been even more remarkable with significant sales to new users and Terrier making up almost two-thirds of HTU sales after only five months of commercialization. Our HTU share growth has accelerated from less than 6% in Q3 to 9% this quarter with notable success in the German-speaking majority of the country. Our newest Luma launch was in Spain last month. While very early days, the signs are also very positive, with devices to new users increasing plus 50% compared to the prior run rate, 10% of existing users upgraded within the first month, and Terria exiting March at over one quarter of total HTU off-tech. These results across three markets with different consumer characteristics and level of R&P maturity are clearly very encouraging for the wider rollout of Illuma around the world. While device supply constraints are easing, the timing of HTU availability for new Illuma markets has been somewhat slow. delayed given the rapid uptake in the initial market and the resulting need for greater supply for each new market than was originally anticipated. In addition, the cancellation of our investment in the production of stereo H2Us in our Russian facility has a short-term impact. As a result, further market launches are now mostly expected towards the end of H2. With Illuma, IQOS 3 Duo and LIL, we now have three heat-not-burn technologies under the IQOS umbrella to serve different consumer needs and segment the market. We have an exciting pipeline of innovations on devices and consumables at different price tiers. In EVAPOR, IQOS V's promising results in the first group of markets continue. Veev is a premium proposition with an average price premium to competitive device of 20% to 30%, making these results especially encouraging as we pursue a differentiated and profitable category leadership position over time. We see further success in Italy, reaching almost 20% off their share of closed system posts, with rapid progress also visible in Croatia within eight months of launch. In the Czech Republic, after some temporary supply disruption at the start of the quarter, which affected Q1 share, rapid growth has resumed. VIVE was present in seven markets at March 31st, and we plan to add more this year, with timing subject to device availability. Separately, our relaunched commercialization of nicotine pouches under the Shiro brand in the Nordic is progressing well, with positive consumer feedback. Moving to sustainability and our ESG priorities, I'm happy to share two important developments published in our 2022 proxy statement. Firstly, our board of directors updated our company statement of purpose, expanding it beyond smoke-free to better reflect the role of wellness and health care in our corporate strategy and transformation. Second, the introduction of a bespoke sustainability index explicitly links our ESG performance to 30% of long-term compensation. Further details will be shared in our integrated report on May 17th and further dedicated disclosures. Product health impacts remain one of our most critical ESG priorities, and the growing penetration of smoke-free products around the world is accelerating the end of cigarettes as legal-ed smokers switch to better alternatives. There is a growing body of scientific and real-world evidence of the substantial risk reduction potential of smoke-free products compared with smoking. While challenges in some markets are to be expected, we continue to support regulatory and fiscal framework that recognize the positive impact tobacco harm reduction policy can have on public health. A recent example of this is Italy, which has established distant excise tax category for heat not burn, evapour and nicotine bulge. Thank you and I will now turn it back to Jacek.

Thank you, Emmanuel. Despite the challenges in Russia and Ukraine, we have delivered an excellent start to the year with a strong recovery in IQOS user growth and exceptional initial results from the groundbreaking innovation of IQOS Illuma. As we covered recently at Cagney, we have a rich pipeline of further smoke-free innovations to expand and grow across new and existing categories and geographies. Our combustible business is now stabilizing category share despite the impact of ICOS cannibalization, which allows us to accelerate further switching of smokers to better alternatives. We also continue to invest for long-term growth through the development of innovative wellness and healthcare products, which seek to deliver a net positive impact on society. Our 2022 fundamentals are strong, with a pro forma expectation of 4.5% to 6.5% organic net revenue growth and 9% to 11% currency neutral adjusted diluted EPS growth. Despite the significant inflationary pressures and disruptions in the global supply chain affecting first half and the full year, we also expect our organic operating income margin to expand to up by 100 basis points. In addition, we have taken the conservative assumption in our reported guidance of no further contribution from Russia or Ukraine from April 1st. Overall, we are very confident in the near and mid-term growth outlook and remain committed to sustainably rewarding shareholders over time as we continue our transformation. Thank you and we are now happy to answer your questions.

Thank you. We will now conduct the question and answer portion of the conference. Again, in order to ask a question or make a comment, please press the star key followed by the 1 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 1 on your touchtone phone. Our first question comes from Chris Groh with Stifel. Your line is now open.

Hi, good morning. Good morning. Hi, Chris. Hi. I just wanted to ask if I could first, as I think about your ICOS guidance for the year and obviously reducing that for Russia and Ukraine, I just wanted to be sure, as you think about the new guidance, incorporate your expectations, excluding Russia and Ukraine, Is that the only adjustment you've made for volume in that estimate, the new $88 to $92 billion sticks? Is that just taking out your expectation for Russia and Ukraine for this year?

That's correct. We're just talking for the entire year the volumes from Russia and Ukraine. But then obviously, you know, for the Q1, we recognize what have been sold in above geographies, which is the $5 billion. Therefore, on a pro forma for the year excluding Russia and Ukraine, we're looking into 88 to 92. But if you add back the five, which we already solved during the first period, the first quarter, I mean, that effectively translates to 93, 97, which would assume or is assuming that there is no further sales of ICOs as of April 1 in neither Russia nor Ukraine.

Got it. Thank you. And then I just want to understand a little better about the second quarter. You've talked about higher device shipments in the quarter. I think that will be a stronger driver of revenue growth. At the same time, you have some timing differences, it sounds like, at least in Japan, where that will weigh on revenue overall. I think you're expecting more like a low single-digit increase in revenue. So I just want to understand, I guess, to the degree you can help in terms of the magnitude of those two factors. It sounds like the Japan timing may be a larger factor on 2Q revenue. And then just understand also the availability of devices. Is it the second half when that's back to like a – I'll call it full availability of devices? And is that a function of not having devices committed to Russia and Ukraine as providing more availability for the rest of the world? I hope that's clear. Thanks.

Yeah, okay. So the first quarter shipments of the devices, on the one hand, yes, you're absolutely right, because it contributes to the better – to the growth of revenue – But remember that the devices are putting the pressure on the margins, right? So that's the story between the devices and the impact, on the one hand, on the revenue and the margins. The big impact which we expect to have in Q2 is on the supply of the shipments of the consumables, like the heat sticks and et cetera. And as a result, among other constraints on the supply chain, of stopping the investment in Russia, we need to resource that missing capacity to other locations and it will take us a while. And therefore, we expect that we will go lower with the inventories in Japan, mainly Japan, in order to ensure on the manufacturing side the proper resourcing. We will have, when we expect, quite the robust growth on IMS and the market share. And I think Emmanuel on the slide have indicated that we should think of, we're aiming at the 24, around 24% market share for the quarter in Japan. So it's nothing on the consumer level, on the off-day level. But we need to do these operations through the inventories in order to resume to the normal course of a shipment in the Q3 and Q4. And hence, this will drive the better performance or stronger performance in the second half than the first half, which will be what we estimate to be impacted by the Q2 difference in a shipment. Now, with regards to the devices, I mean, there is this continuous sale of the devices in the excluded geographies, right? So it's not that we... stop selling we stop recognizing this whole thing due to the visibility and you know the other factors uh what is happening in russia and ukraine but that you know in a reality we need to keep that at least the replacement devices right so it's not that you can take the volume out of russia and ukraine and uh and to you know redirect them to to other locations we do have actually getting a better and better but not perfect visibility with regards to the device supplies and remember you know we've been very cautious about this as of second half of last year and you know the moment when we had the better order fulfillment and also better visibility with regards to the future or the orders for this year we feel more confident about how we can realize the fully realize the opportunity of ICOS. So that looks okay. It's not perfect. I don't want to mislead anybody. It's not perfect, but it's better than, say, at the beginning of the year. And you saw it at the moment that we regained some full-fledged availability of devices, how ICOS could accelerate its growth with the user acquisition and the market share progressions in Q1. So We know that we have it, but everything hinges on the continuity and uninterrupted supplies of both devices and heat sticks.

And Chris, maybe just to complement, I think it's really important that everybody understand the evolution of the growth margin in Q1, Q2, and H1 versus H2. I'm sure you remember that last year the growth margin in H1 was extremely high. We were at 70%. The growth margin was lower and probably more normative in H2. So what we have seen in Q1 was, first of all, facing very high combs. I think we've been describing in the presentation the various driver for the 250 basis point reduction in the growth margin. What you can expect for Q2 is this element to continue, knowing that the The gross margin reference is 70% as well last year in Q2. And on top of it, we will have more device sales even than in Q1, which I think is good news because it shows the success of ICOS. We have increased air freight costs. for the reason that we mentioned and the tension on the supply chain, and that's going to have an impact on the margin. And last element, you have this mix, which is a temporary element, of course, like air freight, by the way, on the fact that the volume will be lower for Japan in Q2 with the recovery and the compensation in H2. And with that, you have the reason for increased pressure, gross margin pressure in Q2, but with the compensation that will come in H2.

It was great color. Thanks so much.

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

Hi, good morning. I have a question on the 2023 outlook and how you're thinking about your targets for next year, particularly on the HTU side. Should we assume a similar reduction to your heated tobacco targets as the guidance reduction for this year of about 20%? And given Russia's significant contribution to the overall ICOS business, How are you adjusting your strategy for achieving your target for 50% of revenue coming from smoke-free products by 2025? Thank you.

Well, thank you. We continue with the geographical and the portfolio expansion of ICOS in the existing and the new geographies. And obviously this, you know, we're confronted with all the supply chain constraints and availability of devices, et cetera. So, I mean, we all know this. You know, the good way of – one of the way, maybe, to look at the 23 targets – I believe you referred to the absolute volume target for ICOS – is that, okay, let's assume that we don't have – and the lowest assumptions you can make is that we will not realize any further sales as of April 1 in the – of Russia and in the Ukraine. And that's essentially the floor of that thing. Where do we land? think everyone will appreciate we need a little bit of a time to really have the full visibility what's how you know what we will do with our business and you know our intentions about the exiting the russia and also what's the whatever you might be the longer term outlook for ukraine etc there will be a band in absolute numbers it's no questions about it the way i look into this whole thing we may be in a situations that will deliver these targets but with about a 12-month delay. I mean, I am not in a position, my thinking is not change the target, just recognize that you maybe need a little bit of additional time to deliver on this target. All other parameters, the relative growth targets being the top line, bottom line, and the relative growth of the relative contribution, which is very important target for us of the non-combustible to combustible business, They remain as we have said before, and on that one I'm confident we should be in a position to deliver this one. But in absolute volume, yes, I mean, we might have a miss, but the way, again, sorry for repetition, I look at this, maybe I need 12 months more to deliver the same target for other geographies and organic growth in existing geographies.

And, Pamela, on your question on how do we get to more than 50% in 2025, I'm sure you've seen that in Q1 on the pro forma basis, excluding Russia and Ukraine, we're a bit below the full perimeter of the group, but not that much below. So we're at 30% versus... around 31%. So, yes, there is a bit more ground to cover to get to 50%. But given the dynamism that we see in our ICOS business and the opportunity we've been clearly showing in low- and middle-income countries, we think we can catch up and deliver this more than 50%.

Thanks. And then a question on new ICOS user acquisition. You saw a good recovery this quarter despite taking out the impact from Russia to over a million users. Do you expect to see a similar pace of new user acquisition over the course of the year? And how much of a role did Illuma play in that? Would there be any impact from the supply disruption on the Terria consumables? Did you hear my question?

Yes, I think your question was, sorry, because we can't have the sentence. Your question was, we can expect the same dynamics of the user acquisition, right, going forward?

Yes.

Okay. So, look, I mean, the million, above million acquisition this quarter, which already goes sequentially above, you know, close to the million acquisition, the Q4, I mean, that directly correlated to our availability of the to the availability of devices and a full portfolio of devices. As you know, we also play now the different price segment games. We have more expensive devices, mid-priced devices, lower-priced devices. So as long as we have availability of devices, I actually think that numbers should continue. you know, we should repeat the same sort of the rate, if not actually higher, because you could see from the conversion perspective and, you know, the light consumer liking measured by NPS and other parameters, what we're offering today really is, you know, meeting the consumer expectations. So, you know, there's also bridging somehow to the, you know, before questions, that once we see the visibility on the devices, right, in the next, you know, quarter or so, and all the dynamics which we can achieve outside the Russia and Ukraine, then we would be in a position to revise what actually we will deliver, you know, in a year from now in terms of the total ICOS value.

Thank you.

Thank you.

We will take our next question from Vivian Azar with Cowan. Your line is open.

Hi, good morning.

Hi, good morning, Vivian.

So I wanted to follow up on Japan. I'm just having a hard time reconciling two comments that you guys made. Number one, that there was negative device mix in the quarter, but that you had device growth from Illuma. Because last quarter I thought the launch of Illuma was mix accretive. In Japan, so am I misunderstanding something or did something change? Thanks.

I think that the device mix, we're talking that, you know, we're selling three, as of now, three versions of Icozuma. you have a premium need and the lower price. Lower price was just introduced now to the market, to the consumers. Obviously, in the shipments, we already had them in the Q1, right, because this is all recognized on the shipments. And second is that these devices, I mean, the Illuma 1, which is the lowest price device, goes at the attractive price in the market, higher than the competition, but attractive and lower than the price that we used to have on the one version of ICOS 3 before. Maybe here, Viviane, when you need to look into it.

Yeah, Viviane, if I may, Emmanuel speaking. It's a positive in the mix within the device because it's come at a higher price. But any growth in device is negative to the mix in terms of gross margin because it's coming with, of course, a much reduced gross margin versus the consumable. So the more device we sell, you have some impact on the revenue, which is positive, but it has a dilutive impact on the gross margin rate, to be very clear.

Understood. I think what I had failed to grasp was the pricing tier, so thank you both for that. For my second question, I was hoping to get some incremental color on Germany. You had meaningful share growth both on a year-over-year and a sequential basis. Is there anything to call out there from an activation standpoint? Because the results were very strong.

No, this again comes to where post-price, increased post-price change environment in Germany. That's the one thing. And second is, again, I mean, Germany starts benefiting from not restricted access to the devices. So this, again, follows the same story that if we have a continuous broad range of availability of the devices, we can go into the portfolio game and enhance the performance. And this is one additional comment I would make here, Vivian, is that Germany is still running on the IQOS 3.1 version, which is a blade version. And, you know, the reasons why we went, for example, to Switzerland with IQOS Illuma is to before opening the larger market, which obviously will take a lot of volume of the devices, how IQOS Illuma would perform in the similar sort of a geography. So I'm very pleased with the success so far of IQOS Illuma in Switzerland. There's especially the German-speaking part, because we could use this as the proxy for German, on further acceleration of the growth in German. Now, nothing is certain in life, but I think this is as far as we can read through the consumer reactions in Switzerland.

Understood.

Thank you very much. We will take our next question from Bonnie Herzog with Goldman Sachs. Your line is now open. All right.

Thank you.

Hi, everyone.

I have a few questions on Russia. I guess I was hoping you could share maybe just a few more details on your exit from the country and really what the mechanics of that are, I guess. You know, could you help us understand what's being manufactured in the market currently? And then, you know, what about the volume your manufacturing facility in St. Petersburg exports? You know, can you share with us roughly what percentage of the volume is exported and then where you plan to maybe shift that volume to and when? And I guess I'm just trying to think about all this.

in terms of any you know costs associated with that and then is that being reflected in your in your guidance judging by judging just by the number of details you mentioned in that question you will appreciate how complex the situation is in russia so one by one russia in terms of the So far, production and export allocation was not really that significant. We had a much more significant plan of expanding Russia as one of the key suppliers of new Icos Luma, and hence our decisions to immediately stop that investment as a result that we created a temporary hole for the rest of the market, partially for the for Russia launch of ILUMA, which we also canceled, but also that Russia was supposed to contribute to the supply of the ILUMA consumable statistics into other markets, including in Japan. So our first priority is how do we can resource that capacity there. Obviously, that capacity means that we have an equipment installed in Russia And we can't, we don't use this equipment today. What will happen to that equipment going forward? We're also working on a certain plan, but I would stop here. I will not go into more details. Now, the exit Russia in the orderly manner for us means that we need to reconcile the interest, first of all, of our shareholders. the employees in Russia and, you know, that the ever-evolving legislation in Russia puts the significant risk or constraint of our ability to act there. And this is all in the context of, you know, the very, you know, evolving regulatory environment, both of the international, you know, it's obviously the sanctions, but also the legislation in Russia. If we want to know, we have a significant presence in Russia, as we all know it. We in the market organically build the business over the last 30 years. This is 100% business of PMI International. We don't have any partners contributing to the whole business. We obviously are connected with the local supply chains and wholesale and distribution components, but PMI Zora and Philip Morris Sales and Distribution is 100% Philip Morris business We have some shareholding in addition to this with a key distributor in the market. It's together along with our major tobacco companies. And to unwind in an orderly manner all the strings which we have in Russia is a complex endeavor, but we are committed to do so. Hence, you know, our guidance and the decisions to look at the PMI as the the rest of the business, which is doing absolutely great, despite all of the headwinds which we have and so on, rather than polluted with something which we have limited visibility and ability to act accordingly. So I know that my answer has not gave you more clarity, but that is the best which we can say at this moment. I mean, we're working on exit, but it's presumably one of the most complicated transactions in the history of the group, which we're having from the bottom.

Yes, I can only imagine. I appreciate the color. And just to be clear, just in terms of the exit, do you have a target date, the full exit of the market that you can share?

Well, I mean, we'd rather not delay beyond what is necessary as long as we satisfy the, you know, the older teams, the groups, if you like. And again, I repeat it, I mean, our, you know, we have a responsibility to shareholders, but we also have a responsibility to employees in Russia. And overall, you know... broad group of stakeholders with the various expectations. And you try to resolve that equation to the satisfaction of everyone as becoming a complex exercise. But, you know, we're working relentlessly on how to move forward. I mean, I would appreciate that if this was any other size of a business and presence in the market, things could have looked differently. But this was a very big business for us.

And honestly, that kind of brings me to my second question. You know, as I think about your new pro forma HTU volume guidance of, you know, 88 to 92 billion units for this year, which is, you know, assuming 22% growth at the midpoint. I guess I'd like to understand the key drivers of that since the growth outlook is now, I guess, above your previous guidance. But Russia really, I thought, was such an important driver of that and for your future. So I just kind of want to understand what gives you the confidence, especially also on top of the uncertainty related to the semiconductor chip shortage situation.

Yes, thank you. So, obviously, we need to make some of making some, you know, assumptions on the supply chain, as I said earlier. You know, we don't live today in a perfect visibility for all the remaining quarters of this year, but I think we have enough of the confidence to come up with this pro forma to estimate of this pro forma guidance. Look, you see the continuous trajectory of ICO's growth in essentially all geographies, including the geographies that historically were a bit tougher for us, where we had the progress, but they were not really going at the group level of the growth. And now we see that, you know, Japan with Iluma and a few other locations with Iluma already having a massive acceleration of the growth. We know what we have in our plans for this and, you know, the year after with Iluma. We also know that the ICOS 3.1, 3.2, which is, you know, the currency, the mostly sold device, also continues to be very attractive. And this is continuously despite the fact that we, you know, offering our portfolio both of the devices and the consumables at a significant premium to any other market, you know, propositions. I think, you know, we're getting this confidence that, you know, ICOS can continue to grow, and we're looking forward also to the moment when it will, you know, accelerate its growth. Will ICOS in the near term, excluding Russia and Ukraine, so that the rest of the geographies compensate the lack of Russia and Ukraine? I think over a longer period of time, we won't notice. Within a shorter period of time, it might be challenging, okay? So we're not making any promises at this stage. Okay.

Okay, thank you.

Thank you.

Okay, we'll take our next question from Garvan Bain, Jane with Barclays. Your line is open.

So I have a couple of questions.

Number one is, you know, we can't hear you. Could you repeat the question, please?

Sure. Is this better?

Yes, it's better. Yes, thank you.

Sorry about that. So my first question is, you know, your guidance on industry volume and your own volume, ex-Russia and Ukraine, so it seems to have become better. And if I look especially at your European volumes, they are quite strong. So, you know, we have this sort of the macro pressure on consumers and inflationary pressure, and, you know, Europe might be in recession, not in recession, you know, oil price impact. So, you know, my question is that why are you seeing stronger volumes? And is it that, you know, when cigarette prices historically used to be up four in Europe and wage growth was one, so cigarettes were becoming less affordable. And right now cigarette pricing is still four, while wage inflation is probably four or five. So cigarettes are actually becoming more affordable. And that's why you are seeing better volume trends.

Well, I think we should, I mean, we have the information of Q1 that are pointing to this evolution. It is true, Gaurav, that there are no uncertainty on what's going to be the growth of the global economy in the coming quarters. I suppose there is, you know, some trend in the market that are underlying trends, you know, in terms of demographics and behaviors. Let's face it, there is also still the continuation of rebound after the COVID pandemic. So last year was not a normal year. We are becoming much more normal. I'm not saying we're there yet. I'm including duty-free, we're not. But in other markets, we can hope that for the coming months to be more normal. And that's going to be a positive. I don't know what's going to be the impact of a potential slowdown of the economy. Is it, by the way, going to have an impact on volume or more on down trading, you know, and some countries in consumer going for cheaper offering? Today what we see, and we've been highlighting that, is Mago recovering market share. We see Chesterfield being very successful. And we see, of course, great success with all our high-cost brands. So that is what is driving for us. this outlook for growth in volume. And, of course, starting Q1 with a very nice growth, you know, even if we flag the fact that there was maybe some anticipation, but I think that the Q1 numbers are there. It shows the dynamism that we are seeing in our portfolio.

Sure. And, you know, coming to, you know, the EPS guidance and the dividends, so your dividend payout ratio will now be north of 90%. So how does that impact you know, how you're thinking about share repurchases. And, you know, we keep seeing these cycles with PM every three years. You know, you have massive adverse effects. And, you know, we go back 10 years. Euro used to be 150. Yen was 70. Then we had one cycle in 2014. Then 2017, now we have another cycle of effects. And, you know, clearly a lot of your costs are in Swiss franc and dollars. So is there something you can do so that the costs mismatch, the transaction effects mismatch is lesser? And, you know, we again get into the situation where dividend payout ratio is becoming very tight.

Well, Gaurav, so yes, of course, you know, on the basis of the guidance that we've been giving, we would have a payout ratio that would significantly increased versus 2021. I think we've shown in the past the capacity to grow in profit over time and reduce that. Our objective is to go down over time and we did not give any kind of precise precise then to go down to 75% is still there. I agree that given the adverse event that we are facing, it's going to take a bit more time to get there. Let's be clear, it's not so much, I mean, the currency is playing, but it's really the accumulation of currency and Russia leaving the perimeter of the group that is driving that situation. Now, on the forex, there is two elements. One is the pressure on margin, and we continue to work on trying to equalize better the currency in which we are invoicing and the currency in which we have our costs. We do that through the supply chain. There are some limitations because there are a number of things that you buy in dollars, but of course we do that through everything we buy. But there is one element that we cannot change, that we have limited invoicing in dollars. You know, when the dollar is going up versus most of the currency, that is an impact which is mechanical and on which there is not much we can do. So we can work, and I think we continue to work on the margin dimension. We cannot work on the fact that we have limited invoicing in dollar. Sure. Thanks a lot.

Thank you.

We'll take our next question from Owen Bennett with Jefferies. Your line is now open.

Owen, do you have a question?

It appears Mr. Bennett has dropped. We will go ahead and take our next question from Jarrett Bings with J.P. Morgan. Your line is open.

Hi, guys. I just wanted to ask about the – I just wanted to ask about the pricing environment. Given inflation in places like Europe, it's reaching levels not seen for a long time. Do you think there could be more of an opportunity to put through additional price increases, given you are seeing cost inflation as well on a global basis, especially post-Russia and Ukraine? Maybe we can see a bit more of a margin offset.

We're taking a price increase and a price variance. The opening of the year can be better than we initially thought. I will see what the remaining part of the year, especially the second half, will bring. When we look at the inflation, we also have to look at what is the inflation of the materials sold. Or is it like the cost of living and what is the inflation of the income, right? Because, you know, we haven't yet seen the inflation and the income level at the concept level. So we have to, you know, find the right spot and the right balance where do we get into this. But in most of the geographies, I mean, the pricing environment, as I would characterize it, is getting you know positive i mean emmanuel talk about the indonesia on the other hand we have a very strong rebound in the volumes in indonesia and you know hopefully also indonesia which used to be a quite a important or significant contributor to the to the pricing will you know hopefully towards the end of this year or you know definitely 23 will uh resume at its pricing contribution. You know, we had a price increase in Germany flowing through the market, the Philippines, you know, Turkey, okay, now Turkey goes to the hyperinflationary accounting, but we're trying to price it wisely, looking at the inflation, yes, the pressure, but as I said, the beginning of the year, we already started with a be the head of our own expectations pricing variant. So let's see how this continues through the year.

Got it. And maybe just to follow up on Southeast Asia, clearly it's a very, very strong start to the year in terms of volumes. What are your expectations there on the volume side for the rest of the year?

Well, there is this continuous, remember, this is the part of the world which is still not out of the woods with regards to COVID, unfortunately, right? So the situation is not really, doesn't get back to the pre-COVID times. I believe there is some underlying growth opportunities just by the fact that, you know, if they continue to recover from the COVID situation, we should start seeing the continuously better volume And as I said, I mean, we took the price increase in Philippines. We're taking some pricing, taking the pricing a little bit accelerated in Indonesia. But on the other hand, we're still in there. As you remember, Indonesia takes a couple of rounds of steps of a price increase to pass on the beginning of the excise increase. So we still need a bit of a time in order to go into the net margin improvement territory. But it's very much hinged potentially to keep it short on continuous recovery and also by surprises with regards of the COVID situation.

And as we said, we expect to grow nicely revenue in the region this year, which would be a very nice evolution.

Thanks, Chris.

Thank you.

Thank you. That was the last question, operator.

And there are no further questions on the line. I will turn the program back over to Nick Rowley for any additional or closing remarks.

I think you have to catch on closing remarks.

Okay, so thank you very much for your attention and the patience. A quarter was pretty complex and complicated for us, and since there are some technical problems, the earnings can also somehow adjust to the situations in a quarter. I have one on the comments once everyone, I hope, is still on the line. I would like to take this opportunity to thank Mr. Nigroli for his outstanding contribution to PMI and our former parent company over the past 35 years, and particularly the Vice President Investors Relations since the 2008 spin of Philly Borders International. As you all, I believe, will agree with me, he has been a critical contributor for the journey of our company. And I know that you, our investors and analysts, will join me in congratulating Nick and to wish him all the best for his very well-deserved retirement. At the same time, I would also like to congratulate James Bushnell, on his new role. I have a pleasure because I personally was hiring Mr. Bushnell some years ago to PMI in his new role as the successor to Nigroli, and I believe he will receive the same support and a warm welcome as Nigroli enjoyed from you for the last 35 years. So welcome, James, and thank you, Nick.

Thank you, Yacik. Thank you, Emmanuel. Congratulations, James. Thank you. Thank you all on the call because I know we've had some long relationships with many of you, and I value that relationship, and thank you very much. Thank you. That concludes the call, and again, we apologize for the technical difficulties on my last call, but we'll resolve everything and look forward to dealing with your follow-up questions. Thank you very much. Talk to you soon, guys. Thank you.

That does conclude today's program. Thank you for your participation. You may disconnect at any time.