Philip Morris International Inc.

2021 Third-Quarter Conference Call

October 19, 2021

NICK ROLLI

(SLIDE 1.)

Welcome. Thank you for joining us. Earlier today, we issued a press release containing detailed information on our 2021 third-quarter results. You may access the release on www.pmi.com.

(SLIDE 2.)

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 IQOS are to our IQOS heat-not-burn products. All references to smoke-free products are to our RRPs.

Growth rates presented on an organic basis reflect currency-neutral underlying results. Following the acquisitions of Fertin Pharma, OtiTopic and Vectura Group, PMI added the "Other" category in the third quarter of 2021. Business operations for the Other category are evaluated separately from the geographical operating segments.

(SLIDE 3.)

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.

(SLIDE 4.)

Please also note the additional Forward-Looking and Cautionary Statements related to COVID-19.

It's now my pleasure to introduce Emmanuel Babeau, our Chief Financial Officer. Emmanuel.

1

EMMANUEL BABEAU

(SLIDE 5.)

Thank you, Nick, and welcome, ladies and gentlemen. I hope everyone listening to the call is safe and well.

Our business delivered another strong performance in the third quarter of 2021 - coming ahead of our expectations to achieve a record high quarterly adjusted diluted EPS of $1.58.

Most notable was the continued excellent growth of IQOS, driving 33% Q3 organic growth in RRP net revenues and 7.6% for total PMI. HTU shipment volumes grew 24% compared to the same quarter last year to reach 23.5 billion units, with broad-based growth for both our volumes and the category across key geographies. This was delivered despite ongoing tightness in device supplies due to the global semiconductor shortage, which impacts IQOS user growth rates.

In combustibles, further sequential share gains supported total PMI volume growth of 2.1% in Q3, and we continue to expect total cigarette and HTU volume growth for the year. We are firmly on track for a strong 2021 organic growth performance; with an expected currency tailwind providing additional growth in dollar terms.

We are also delighted to share outstanding initial results from IQOS ILUMA in Japan, and growing traction for IQOS VEEV in early launch markets.

In the quarter, we made three milestone acquisitions - as we build our business for the long term to include products that go beyond tobacco and nicotine. Our smoke-free transformation is now also reflected in our financing with the launch of an industry-first Business Transformation-Linked Financing Framework, and we continue to prioritize returns to shareholders through a 4.2% increase in the dividend, and ongoing share repurchases.

(SLIDE 6.)

Turning to the headline numbers, our Q3 net revenues grew by 7.6% on an organic basis, or 9.1% in dollar terms. This reflects the continued strength of IQOS, and the recovery of the combustible business in many markets.

We witnessed good organic growth of 5.4% in our net revenue per unit, driven by the increasing weight of IQOS in our sales mix and pricing on both HTUs and combustibles.

Our adjusted operating income margin decreased by 10 basis points on an organic basis. This reflects the expected initial higher unit costs of IQOS ILUMA and increased commercial spend partly related to its launch, offsetting the continued positive effect from the increasing weight and profitability of IQOS, pricing, and productivity savings. Our resulting adjusted diluted EPS of

2

$1.58 represents 8.5% organic growth, and 11.3% in dollar terms; a very good performance.

(SLIDE 7.)

Looking at year-to-date performance, our adjusted net revenues grew by almost 11% in dollar terms and by 7.3% organically. This reflects the consistent growth of IQOS - where progress throughout the pandemic has been impressive.

We delivered strong organic growth of nearly 6% in our net revenue per unit, again reflecting our shifting business mix and pricing, with pricing on combustibles at just over 3%, or around 5% excluding Indonesia.

Our year-to-date adjusted operating income margin increased by 280 basis points on an organic basis, an excellent performance driven by our top-line growth engines of IQOS and pricing combined with operating leverage and productivity savings. Our adjusted diluted EPS grew 15.8% organically and 20.4% in dollar terms; also a very strong result.

(SLIDE 8.)

This brings me to guidance for 2021. We are revising our organic growth outlook for net revenues to 6.5-7%, representing the upper half of the previous range, and reaffirming the strong outlook for organic OI margin expansion of around 200 basis points.

We also confirm our currency-neutral adjusted diluted EPS growth forecast at the upper end of our previous range, reflecting 13% to 14% growth, or 16% to 17% in dollar terms. This translates into an adjusted diluted EPS range of $6.01-6.06, including an estimated favorable currency impact of 17 cents at prevailing rates.

Following on from our most recent public comments, as the tightness in device supply persists, we now expect our HTU shipment volumes to be around 95 billion units - as we prioritize devices for user retention. Given the continued growth of HTUs and the need to maintain inventory durations, we continue to expect our full year shipments to be slightly ahead of IMS volumes.

This guidance does not include any material impact of share repurchases or acquisitions. Share repurchases through October 15 amount to around $170 million, after some limitations during Q3 from blackout restrictions.

In terms of other assumptions, we are assuming only a limited Q4 recovery in Duty Free following a modest improvement in Q3, with intercontinental and Asian travel still very subdued.

We continue to assume full year combustible pricing of 2-3%, with a softer expected Q4 reflecting continued pandemic-related challenges in certain

3

markets, notably in South & Southeast Asia, as well as tough comparisons in Germany and Australia.

Lastly, in 2021 we continue to expect around $11 billion of operating cash flow at prevailing exchange rates, subject to year-end working capital requirements. We also update our expectation for full-year capital expenditures to around $0.6 billion, reflecting latest launch plans and pandemic-related timing factors.

(SLIDE 9.)

Before discussing our results in more depth I am pleased to report some recent positive regulatory developments, further to those shared in previous quarters. For example, Switzerland adopted a new Federal Law on Tobacco Products and E-cigarettes, defining dedicated product categories and differentiated health warnings.

In New Zealand, the government has now published new regulations for smoke-free products which allow branded packaging to be re-introduced with a specific text health warning.

In Egypt earlier this year, smoke-free products were clearly differentiated from combustible cigarettes in both fiscal and regulatory treatment.

There is a growing body of scientific and real-world evidence of the substantial risk reduction potential of non-combusted alternatives compared with smoking. While fluctuations across different markets are to be expected, we continue to support regulatory and fiscal frameworks that recognize this critical harm reduction opportunity.

(SLIDE 10.)

Turning back to our quarterly results, Q3 total shipment volumes increased by 2.1%, and by 1.5% year-to-date. This reflects continued strong growth from HTUs of 24% -- driven by the EU Region, Japan, Russia, Ukraine and encouraging progress from recently launched markets in the Middle East. HTU shipments were around 1 billion units below IMS volumes for the third quarter, primarily reflecting timing around the August ILUMA launch and the October tax-driven price increase in Japan. We expect this dynamic to reverse in Q4.

The -0.4% decline in our Q3 cigarette volumes reflects the continued sequential recovery of total industry volumes and of our market share.

(SLIDE 11.)

Due to the impressive performance of IQOS, heated tobacco units comprised 13% of our total shipment volume year-to-date, as compared to 11% in full year 2020, 8% in 2019 and 5% in 2018.

4

(SLIDE 12.)

Our sales mix is changing rapidly, putting us on track to achieve our aim of becoming a majority smoke-free company by 2025. Smoke-free products made up almost 30% of our adjusted net revenues year-to-date, compared to 23% for the same period in 2020. IQOS devices accounted for over 6% of the $6.7 billion of RRP net revenues, with a step-up in Q3 reflecting the IQOS ILUMA launch; which outweighed the effect of supply constraints on other IQOS versions.

(SLIDE 13.)

The 7.3% organic growth in year-to-date net revenues on shipment volume growth of 1.5% reflects the twin engines driving our top line. The first is pricing on combustibles and, in certain markets, on HTUs. The second is the increasing mix of HTUs in our business at higher net revenue per unit which continues to deliver substantial growth; an increasingly powerful driver as our transformation accelerates.

(SLIDE 14.)

Let me now go into the drivers of our year-to-date margin expansion, starting with gross margin, which expanded by 240 basis points on an organic basis. While expansion was lower in Q3 as ILUMA devices were shipped to Japan for the launch, the multiple positive levers discussed in prior quarters continue. Our significant efforts on manufacturing and supply chain efficiencies are also bearing fruit, with around $450 million of gross productivity savings delivered.

This was accompanied by robust SG&A efficiencies, with our adjusted year- to-date marketing, administration and research costs 40 basis points lower as a percentage of adjusted net revenues, on an organic basis. This reflects the ongoing digitalization and simplification of our business processes, including our IQOS commercial engine, and more efficient ways of working, partly offset by increased commercial investments in Q3. With SG&A savings of more than $200 million, before inflation and reinvestment, this means we have generated over $650 million in overall gross efficiencies year to date. This is strong progress towards the combined target of $2 billion for 2021-23.

(SLIDE 15.)

Moving to market share, sequential gains for both our IQOS and combustible portfolios give us strong momentum going into Q4 and next year despite an approximate 0.3 points year-over-year drag in Q3 from market mix. Importantly, we expect further improvements in the fourth quarter for HTUs with record shares across key IQOS geographies.

(SLIDE 16.)

For combustibles, the improving total market volume backdrop includes notable recoveries in Indonesia, Turkey and Mexico; and close to stable Q3 industry volumes in the EU Region.

5

Attachments

  • Original document
  • Permalink

Disclaimer

Philip Morris International Inc. published this content on 19 October 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 19 October 2021 13:30:02 UTC.