Philip Morris International Inc

Hi, your program is about to begin. If you should need any audio assistance during your call, please press star zero. Good day and welcome to the Philip Morris International First Quarter 2023 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 star followed by the number one on your touch-tone phone. Media representatives on this call will also be invited to ask questions at the conclusion of the questions from the investment community. I will now turn the call over to Mr. James Bushnell, Vice President of Investor Relations and Financial Communications. Please go ahead, sir.

James Bushnell, Vice President of Investor Relations and Financial Communications Welcome. Thank you for joining us. Earlier today, we issued a press release containing detailed information on our 2023 first quarter results. You may access the release on PMI.com. A glossary of terms, including the definition for smoke-free products, as well as adjustments, other calculations, and reconciliations to the most directly comparable U.S. gap measures for non-gap financial measures cited in this presentation, and additional net revenue data, are available in the exhibit to the Form 8K published this morning and on our Investor Relations website. Growth rates presented on an organic basis reflect currency-neutral adjusted results, excluding acquisitions and disposals. As such, figures and comparisons presented on an organic basis exclude Swedish match up until November 11th, 2023. 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 is now my pleasure to introduce Emmanuel Barbot, Chief Financial Officer. Over to you, Emmanuel.

Thank you, James, and welcome, everyone. I am pleased to report that Q1 performance exceeded our expectations with strong underlying momentum from ICOS, ZIN, and our combustible business. As mentioned at our full year earnings in February, we expected this quarter to be the weakest of the year due to a confluence of transitory factors impacting our top and bottom line. In this context, our business delivered robust results, and we look forward with confidence to the remainder of the year. Smoke-free net revenues made up almost 35% of total PMI, despite the impact of adverse timing factors on HTU shipments, with an increasing number of markets crossing the 50% threshold. ICOS continues to deliver strong share and user growth across its geographies, both with the Blade version and Illuma. Well launched, Illuma's excellent traction with both existing ICOS users and legal edge smokers is boosting growth, demonstrating the dynamism and importance of our ongoing innovation. Illuma's progress is especially notable in the first launch market of Japan, where share growth has accelerated in recent quarters. In combustibles, accelerated pricing across a range of markets helped to deliver robust organic net revenue growth. Swedish Match delivered impressive results with a standout performance from Zins plus 47% U.S. shipments volume growth compared to the first quarter of 2022. Following an encouraging start to the year, we are well set up to deliver strong performance in 2023, including excellent top and bottom line growth for the remainder of the year. Turning to the headline numbers, our Q1 organic net revenues saw robust growth of plus 3.2% against a very strong prior year quarter with organic growth of plus 9%. This reflects the continued strength of ICOS at a step up in pricing, but was partially offset by expected HTU inventory movements, which I will come back to. This organic figure does not include the excellent plus 14% ex-currency top-line growth of Swedish match led by ZIN. Our total reported currency neutral net revenue grew by plus 9.6%, with combined pro forma adjusted net revenue increasing by around plus 4%, also excluding currency. Our total organic net revenue per unit grew by plus 4.4%, with strong combustible pricing of plus 7.4%, partially offset by HTU dynamic in Japan and Germany, which I will come back to momentarily. We delivered Q1 adjusted diluted earning per share of $1.38, well above our previous expectation. reflect a strong underlying delivery from our existing operation, excellent Swedish match performance, and favorable phasing on interest costs. Compared to a record high prior year quarter, and with a number of one-off or accentuated margin headwinds from inflation, supply chain inefficiency, and timing factors as flagged previously, our adjusted diluted EPS contracted by minus 4.4%. Let me now walk through the mechanics of our Q1 net revenues. We delivered overall adjusted net revenue growth of plus 4.6% on an organic shipment volume decline of minus 1.1%. While not included in this number, SwedishMap's smoke-free volume grew by an excellent plus 10%, adding impressive accretion to our overall growth profile. Combustible and HTU pricing, excluding Germany and Japan HTUs, contributed plus 5.3 points of growth, including positive HTU pricing in a number of markets. This was partly offset by a negative 1.3 point HTU impact from Germany and Japan. The larger of the two was Germany, reflecting a full quarter of the 2022 excise tax increase for which we await a court ruling later this year. In Japan, the October 2022 excise tax increase and transition to Illuma were also a drag on our top line, and we expect some of this impact to phase out in the second half. While the increasing mix of HTUs in our business at higher net revenue per unit continues to positively impact our performance, Lower shipments in Europe this quarter due to wholesaler and distributor inventory movements limited the benefit. This was also the main driver for the difference between our smoke-free organic net revenue growth and HTU shipment volume growth. We expect this positive mix shift to accelerate as both smoke-free organic net revenue growth and HTU shipment growth align more closely with off-tech trends for the year as they also did in 2022. The positive mixed impact of HTUs, overall volume growth, and pricing are powerful drivers of our transformation and growth. As expected, the first quarter was impacted by peak margin headwinds at both the gross margin and adjusted operating income level. Our gross margin contracted by 0.6 percentage points due to the net impact of COGS inflation, pricing, volume, mix, and productivity savings. We expect the positive elements of pricing, productivities, and favorable HTU category mix to increasingly compensate and ultimately outweigh inflation as we progress through the year. Supply chain disruption and the accelerated transition of consumers and our business to Illuma accounted for a further 0.6 percentage point impact. We anticipate this item to abate as we progress with Illuma launches and gain efficiencies in our supply chain, including a return to SIF rate. In addition, Specific cost phasing and the geographic mix of inventory movement, notably for HTUs in Europe, impacted our gross margin by 1.8 percentage points in the quarter. Despite these exceptional Q1 dynamics, we continue to forecast the full year 2023 margin impact of our heat-not-burn business to be favorable as inventory movement and Illuma-related factors dissipate. Therefore, And as explained previously, we expect a progressive improvement in our gross profit and OI margin, notably weighted towards H2 as Edwin subsides and the underlying driver of our transformation accelerates. At around 26% of adjusted net revenues, our Q1 SG&A costs are at a similar ratio to the full year 2022. However, as expected, there was a notable increase compared to Q1 2022, given lower commercial spend at the beginning of last year, the inflationary environment, cost phasing, and front-loaded commercial investment. Our successful cost efficiency programs continue to deliver, enabling ongoing investment and helping to mitigate inflation, with $150 million of gross savings realized in Q1 2022. of which almost 50 million were from SG&A. Importantly, we expect a significant slowdown in SG&A growth to a level below the rate of net revenue growth for the remainder of the year, which will support OI margin improvements. This brings me to the outlook for 2023. Our robust Q1 performance supports visibility on strong full-year growths. We continue to expect plus 7 to plus 8.5% organic top line progression with a targeted acceleration in HTU shipment volume growth versus 2022. As detailed in this morning's press release, our other operating assumptions remain unchanged. And we remind you that our organic metrics do not include the contribution from Swedish match for the large majority of the year. Our updated full-year adjusted deleted EPS forecast of $6.10 to $6.22 includes an estimated unfavorable currency impact of $0.30. Positive estimated impact from the euro and a number of other currencies are outweighed mainly by the weakness of the Japanese yen, as well as a significant depreciation of the Russian ruble and the Egyptian pound. This range continues to reflect plus 7 to plus 9% currency neutral growth and does not include any contribution from a potential favorable excise tax ruling in Germany, which we would expect to add around 3 points to our adjusted diluted EPS related to 2023 tax payment. We continue to expect Swedish match to be low single-digit accretive to our 2023 adjusted deleted EPS after financing and for an increase of around $200 million in our non-acquisition-related interest costs, despite a relatively modest increment in Q1. As discussed at full-year earnings in February, this year's bottom-line results are expected to be notably H2-weighted. However, We expect our organic net revenue growth to already accelerate in the second quarter into the high single digit. We forecast second quarter HTU shipment volume of between 30 and 32 billion, with adjusted diluted EPS in the range of $1.42 to $1.47, including an estimated unfavorable currency impact of 13 cents. Looking ahead to the second half of the year, we expect close to double-digit organic top-line growth and a return to margin expansion. Looking now at our full-year forecast through a different lens, after the temporary headwinds in Q1, we expect very strong performance for the remainder of the year. Despite ongoing margin headwinds and investment, we expect organic top-line growth of plus 8% to plus 10%. improving margin with expansion in H2 and currency neutral adjusted diluted EPS growth of plus 10 to plus 13 percent. This reflects the strong underlying drivers of our transformation with high cost and ZIN driving volume at a higher net revenue per unit combined with stepped up pricing on combustibles. Turning back to our results, our HTU adjusted in-market sales volume grew by an estimated plus 16%, demonstrating continuous strong growth momentum. HTU shipment volume of 27.4 billion units were towards the higher end of our forecast range, with growth of plus 10.4%, which was well below actual off-tech trends as anticipated due to distributor and wholesaler inventory movement. As implied by our full year HTU shipment forecast, we expect the rate of shipment growth to accelerate for the rest of the year as shipments converge with consumer off-tech and to grow at a faster pace in 2023 than in 2022. Before detailing this inventory impact, it is important to note that in certain markets, such as Germany, IMS sales volumes are not measured at the point of distributor sales to the retail trade as the data is not available. In these cases, we instead use our shipment as the proxy. This means that shipment fluctuation can impact both IMS volume and reported market share and may not be representative of off-tech dynamic. Given the volatility seen over this quarter and from now on, where there is a significant difference between estimated off-tech performance and IMS data, we may choose to provide market share metrics based on adjusted IMS to better reflect off-tech, where adjustments reflect the total estimated impact of distributor and wholesaler inventory movement. As you may note in the appendix to today's earnings release, this is the case for Germany this quarter, where we also provide historical figures. Coming back now to Q1, HTU shipment volume in several European markets were below consumer of take. This is explained by the reversal of some inventory buildup at the end of Q4 2022 to meet the needs of Illuma launch, as mentioned at our full year result in February, and also to create some safety stock to mitigate the risk of production and distribution constraints due to energy shortages. As anticipated, we were able to adjust this safety stock in Q1 as the risk receded. We also decreased the level of high-cost blade HTU inventory in several markets to reduce the risk of obsolete stock given the rapid transition to Illuma. Notably impacted markets include Italy and Germany, where underlying market share and off-tech trends remain strong. Italian Q1 in-market sales volume grew by plus 21% compared to the prior year, with market share increasing from 15.4% in Q4 to 17.4% in Q1. In Germany, adjusted Q1 IMS volumes increased over 30% from the prior year, with adjusted market share up from 4.7% in Q4 to 5.3% in Q1. Now, turning back to the overall picture, while total Q1 cigarette and HTU shipment volume declined by minus 1.1%, our total IMS volumes were essentially stable and grew, excluding total estimated inventory movement. Our cigarette shipment declined by minus 3.1%, with resilient trends in many markets. The decline includes a notable impact from a high prior year comparison in Japan and the introduction of an abrupt excise tax increase in Pakistan, resulting in an increase in illicit trade and an industry contraction of over 30%. Volumes also declined in the Philippines following industry pricing, with consumer purchasing power facing ongoing pressure. we continue to target stable to positive combined cigarette and HTU shipment volume for the year, following growth in 2021 and 2022. This notably does not include the excellent growth prospect of oral nicotine, for which shipment volume grew by plus 10% in Q1. Most importantly, the exciting growth combination of ICOs and ZIN presents an unrivaled platform for growth over the coming years. Focusing now on combustible, our portfolio delivered robust Q1 organic net revenue growth of plus 3%. This reflects strong pricing of plus 7.4%, with a step-up across many markets, including Germany, Indonesia, and the Philippines. With over 80% of planned 2023 combustible pricing implemented or announced, we have good visibility on the full-year delivery, although some of the positive Q1 variants reflect earlier pricing compared to 2022. We now forecast a full-year variance of plus 6% to plus 7%. Our cigarette category share declined by 0.3 percentage points in Q1, which was essentially all attributable to geographic mix as the total industry declined in large volume markets such as the Philippines and Pakistan. The impact of share movements within markets was neutral, with gains including Egypt, Poland, and Turkey offset by decline in markets such as Ukraine, the Philippines, and Iraq. Importantly, we continue to target a stable category share in 2023 and over time, despite the impact of high-cost cannibalization. Moving now to our small tree product, we estimate there were 25.8 million high-cost users as of March 31st. This represents growth of close to 1 million adult users since December, with notable progress in Japan and Europe, in addition to a broad range of other geographies. iQOS ILLUMA has been a positive catalyst for volume and share growth across a broad range of launch markets, both supporting our strong position in the HNB category with a super user experience and fostering further category growth. For existing iQOS users, ILLUMA drives an accelerated upgrade cycle. This enhances retention and full conversion for the future, with a temporary margin impact from concentrated device sales. Indeed, we are now approaching an estimated 10 million Illuma users, with Illuma taking over 85% of HTU volume in the first launch market of Japan, Switzerland, and Spain. Illuma is also enabling better acquisition and conversion of legal edge brokers with market share acceleration visible in both earlier and more recently launched markets such as Italy and Korea. Since the introduction in these two markets in Q4, we are seeing encouraging trends in initial launch area and expect this to be increasingly visible at the national level over time as it is in Japan and Greece after a seasonal inflection in the latter. Our main focus in Q1 was on ensuring the success of Illuma in the 16 markets launched by the end of 2022, which cover over half of our ICOS business by volumes. In addition, we launched Illuma on a limited basis in Indonesia in February via our ICOS Club Member Program. This high-cost club was introduced in 2019 and now has over 100,000 estimated users across 10 cities, with a notable boost from the launch of Illuma. We expect to progressively launch Illuma in more markets this year. With Illuma accelerating high-cost growth, we are launched. PMI HTUs continue to strengthen their position as the second largest nicotine brand in markets where IQOS is present, with a record high share of 9% in Q1. Impressively, as of Q1, PMI HTUs are now the number one nicotine brand in 10 markets, with the addition of Italy and Greece during the quarter. Focusing now on Europe, which under our new regional structure include additional markets such as Ukraine. Our first quarter HTU share increased by plus 1.7 points to reach 9.2% of total cigarette and HTU industry volume, adjusted for estimated wholesaler and distributor inventory movement, such as those I mentioned earlier in Germany and Italy. On the same adjusted basis, IMS volumes continue to grow sequentially and reach a record high of 11.1 billion units on the four-quarter moving average. This reflects strong progress across the region. We expect our Europe HTU volume to grow strongly in the remainder of the year, while as in the past, our quarterly HTU share of market can be impacted by seasonality of cigarette consumption during Q2 and Q3. To give some further color on our standing progress in the region, slide 16 shows a selection of the latest key cities of tech shares. The success of ICOs continue across a diverse range of geographies from Western, Southern, Central, and Eastern Europe, including markets with and without Illuma. Notable standouts include Budapest, with over 35% of tech shares, as well as Rome and Athens, reaching the I20s. To my earlier comments, we are very pleased with performance in Germany, where off-stakes share in Munich surpassed 10% for the first time. We are also encouraged by recent positive regulatory development in Greece, where the Ministry of Health approved a differentiated health claim for heated tobacco products. Greece is the first country outside of the United States that permitted health-related statements following a robust scientific assessment. In Japan, the heat-not-burn category now represents over 35% of total tobacco with high-cost driving category growth. The acceleration seen in recent quarters continued in Q1. Adjusted total tobacco share for our HTU brand increased by plus 3.4 points to 26.2%, with off-tech shares surpassing 32% in Tokyo and 30% in Sendai. Adjusted IMS volume again grew sequentially, reaching a record high of 9 billion units on the four-quarter moving average. Strong performance in Japan further highlighted the importance of continuous innovation and a broad consumable portfolio. Our premium price Terria HTUs and mainstream price Sentia HTUs continued to grow through Q1, strengthening their position as the two largest heat-not-burn brands. We are delighted with the progress in Japan, and as we look forward to further robust volume growth in the coming quarters, we would also like to remind you of the seasonality impact on quarterly share metrics. In addition to strong high-cost gains in developed countries, we continue to see very promising growth in low- and middle-income markets, which are now approaching 30% of our total HTU volume. This slide highlights a selection of Q1 key city off-tech shares across markets in Eastern Europe, the Middle East, Asia, and Latin America. Notable successes include Bulgaria, with Sofia off-tech share of over 16%, and Egypt, where off-tech share in Cairo reached 7.5%. We also continue to see robust off-tech volume growth across these important future markets. Now, moving on to Swedish Match Business, which delivered an excellent Q1 performance with currency-neutral net revenue growth of plus 14%, and smoke-free product comprising 77% of total net revenues. Most impressive was the continued outstanding performance of Zin in the US, with plus 47% volume growth to 73 million cans. While volume growth benefited from inventory movement, including restocking in California following the December flavor ban, underlying growth in volumes was very strong, estimated well above plus 30%. We are also pleased with the Q1 performance in other U.S. smoke-free categories, including Moist Snuff, which gained plus 0.8 percentage point category share and delivered shipment volume growth of plus 3%. The smoke-free category in Scandinavia continued to grow, driven by nicotine pouches, albeit at a slower rate following January snus excise tax increase in Sweden and Norway, with this stocking accentuating the volume decline for Swedish match premium skewed snus portfolio. In cigars, the business delivered positive pricing and robust shipment volume growth of plus 4% in a declining category driven by the strong development of natural leaf varieties. Finally, I would like to congratulate Swedish matched employees for continuing to deliver excellent results as we thoughtfully integrate our activities. The integration is progressing very well and we look forward to sharing more on our combined growth plan later this year. Now, let's examine Zin's recent U.S. performance in more detail. Superb progress continues with a record increase in 12-month rolling shipment volume of 23 million cans, which equates to plus 40% growth. Category volume share remains essentially stable despite continued heavy competitive discounting from less premium offerings. Importantly, Retail value share for Zin also remains strong at 75.6%, highlighting its premium positioning and superior brand equity. There are two key engines driving the U.S. growth of Zin as covered at Cagney. First is a progressive increase in distribution with a number of stores plus 13% higher than Q1 2022 at around 140,000. There remains ample opportunity to further increase this over time. Second, our velocity of the number of cans sold per store, per week. These velocities continue to grow sequentially, and by an impressive plus 21% compared to prior year, as the brand continues to resonate with adult nicotine users. Now, let me update you on our exciting plans to further accelerate our smoke-free journey. As previously mentioned, the full global rollout of ICO Siluma is a major priority. We are on track to make substantial progress this year as HTU manufacturing constraints continue to ease. We continue to work on our ICOS US commercialization plan for launch in Q2 2024, in line with the principal outline at the recent CAGNI conference. With the benefit of the expertise and commercial tools from launching ICOS successfully in over 70 international markets, and a US market with a clear regulatory framework and the ability to communicate with adult smokers, we remain very positive about the opportunity. Importantly, we believe we can make the necessary investment in the US business, generating additional top-line performance while continuing to deliver strong bottom-line growth for PMI during the investment period. In addition to our premium offerings, we are continuing to focus on bonds, our latest heat-not-burn innovation that is especially relevant for low- and middle-income consumers. Pilot launches in the Philippines and Colombia are progressing well, and we intend to continue taking the learnings from this market before deploying on a wider scale. Another key mid-term opportunity from the Swedish match combination is the international expansion of nicotine pouches, notably within the world-leading brand. At Cagney, I mentioned we are targeting up to 10 launchers or relaunchers this year as we look to develop the category with adult smokers who value the convenience, specific use occasion, taste, and satisfaction. We expect these to commence in a few markets this summer, including both developed and emerging countries. While staying clearly focused on the heat-not-burn and nicotine pouch category, which present the largest and most accretive growth opportunities, we are adjusting our VIVE eVapor portfolio approach. We intend to focus on commercializing in select markets and prioritizing profitability given the known category challenges. VIVE 1 is a new pod-based system providing an enhanced user experience with fully outsourced manufacturing of devices and consumable to optimize costs. VIVE-1 will replace the current VIVE product, and as a result, we no longer intend to file a PMTA for the former technology. Instead, we will focus our near-term FDA engagement on ICOS and ZIN. We will come back on future eVapor FDA authorizations in due course. For this possible, the fastest growing eVapor segment, we are rebranding Veeba to Veev now. All of our eVapor products will now be under the single recognizable brand Veev for a seamless consumer experience. We will introduce a new Veev One platform in Canada later this month, and we'll apply an agile and disciplined approach for further Veev rollout later this year. Moving to sustainability, I want to first draw your attention to our 2022 integrated report published earlier this month, which outlines the progress we are making towards achieving our purpose and smoke-free future. The report provides a comprehensive run-through of all our most material sustainability topics. This includes those in focus for investors, such as post-consumer waste, use access prevention, decarbonization, and our resource allocation towards advancing our small free transformation. In conjunction with the integrated report, we also published an updated ESG KPI protocol, providing even more robust criteria on how we define success and measure ESG performance. It focuses on the KPIs included in our sustainability index, which, as outlined in our 2023 proxy statement, continue to represent 30% of our long-term performance-based equity executive compensation. I am also proud to announce that we released our first TCFD report yesterday, which updates and compiles our previous disclosure on how we are implementing the recommendation of the Task Force on Climate-Related Financial Disclosures in one document. will be an important topic for many companies as reporting regulations evolve. Lastly, we are also pleased that following CDP's AAA recognition, PMI was again included in CDP's Supplier Engagement Leaderboard, contributing towards achieving our Scope 3 ambitions. To conclude today's presentation, we are on track for a strong performance in 2023, despite margined wins. Our underlying growth fundamentals remain strong, and we expect these headwinds to progressively ease through the year. Indeed, we delivered higher-than-expected Q1 results, which put us on track for the third consecutive year of high single-digit organic net revenue growth. Continued excellent IQOS and ZIN performance further enhances our position as a global smoke-free champion, with leadership position in the largest category of heat not burn and the fastest-growing category of oral nicotine. We are taking action through pricing in combustible and our cost-saving initiative to recover cost inflation as we progress rapidly toward our ambition to become a majority smoke-free business. Finally, we remain a highly cash-generative business with an unwavering commitment to our progressive dividend policy We look forward to further rewarding our shareholders as our transformation delivers sustainable growth. Thank you, and we are now extremely happy to answer your questions.