Philip Morris International : Script (PDF 56 KB)

Philip Morris International Inc.

2022 Second-Quarter Conference Call

July 21, 2022

JAMES BUSHNELL

(SLIDE 1.)

Welcome. Thank you for joining us. Earlier today, we issued a press release containing detailed information on our 2022 second-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, 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 and disposals.

Consistent with last quarter, figures and comparisons presented on a pro forma basis entirely exclude PMI's operations in Russia and Ukraine.

As mentioned previously, starting in the second quarter of 2022, and on a comparative basis, PMI will exclude amortization and impairment of acquired intangibles from its adjusted results.

(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.

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

1

EMMANUEL BABEAU

(SLIDE 4.)

Thank you James and welcome everyone. Before I begin, I want to reiterate our focus on supporting our employees and their families affected by the war in Ukraine, and above all on the safety of our people. We continue to deploy pledged humanitarian support and additional benefits for our Ukrainian employees.

As previously announced, we intend to exit the Russian market in an orderly manner, as the complexities of continuing to operate in Russia increase, such as supply chain challenges and financial and banking sector restrictions. We continue to actively work on options for doing so, in the context of an increasingly complex and rapidly changing regulatory and operating environment, including the requirement to obtain certain governmental approvals for any transaction.

Turning to our business, we demonstrated strong underlying momentum in the second quarter of 2022 with another quarter of positive volumes supporting better-than-expected top and bottom-line growth.

Most impressive was the continued excellent IQOS performance and strong Q2 pro forma user growth of more than 1.1 million, demonstrating further sequential acceleration compared to Q1 as device limitations and COVID restrictions continue to ease. This reflects strong momentum in the EU Region, Japan and developing markets. Q2 RRP pro forma net revenues grew by 11% despite the adverse shipment timing impacts due to supply chain constraints highlighted last quarter, while HTU IMS volumes grew by 20%.

IQOS ILUMA delivered further impressive results in its first three markets of Japan, Switzerland, and Spain. The acceleration in category growth in these diverse geographies highlights the exciting future growth opportunity across the world, including in the latest launch market of Greece.

In combustibles, robust Q2 pro forma volume growth of 2.4% and organic net revenue growth of 4.2% were driven by Marlboro share gains, stronger pricing and the continued recovery of the market. Maintaining leadership of the cigarette category allows us to maximize the switching of adult smokers to smoke-free alternatives and accelerate our transformation into a predominantly smoke-free business by 2025.

We expect the strong underlying momentum of our business in H1 to continue, and we are raising our pro forma organic growth outlook for the year. We are now well on track to deliver two consecutive years of volume growth, confirming our status as a growth company in terms of volumes, organic net revenues and margins. Despite a substantial currency headwind in 2022, we expect to deliver full year adjusted diluted EPS of around $6.00, including Russia and Ukraine.

2

The proposed addition of Swedish Match would further boost our future financial profile. This is a value-creating offer for both sets of shareholders with a compelling strategic and cultural fit, providing an additional opportunity to accelerate our smoke-free future.

(SLIDE 5.)

Turning to the headline numbers, our Q2 volumes grew by 3.0% on a pro forma basis, and by 1.1% in total, including Russia and Ukraine. Pro forma net revenues grew organically by 6.2% and by 5.3% for total PMI, reflecting both the continued strong growth of IQOS and the ongoing recovery of the combustible business in many markets against a pandemic-affected comparison. As we anticipated and indicated previously, less unfavorable timing of cigarette shipments also played a role, notably due to replenishment of Duty Free inventories.

Our total organic net revenue per unit grew by 3.0% on a pro forma basis and by 4.1% in total, despite the expected delay of HTU shipments to Japan as we manage through global supply chain disruption. This incorporates combustible pricing of 3.5% on a pro forma basis, or almost 5% excluding Indonesia.

Our Q2 adjusted operating income margin declined organically by 190 basis points on a pro forma basis and by 150 basis points in total. As expected and communicated in our Q1 quarterly results, this reflects four main factors. First, investment to further expand and match the speed of growth in our smoke- free portfolio. This includes the initial higher cost of ILUMA devices and HTUs, and the transitory dilutive margin impact of higher device sales as we roll out ILUMA, and replenish distribution channels as device constraints ease to support re-acceleratingIQOS user growth. Second, the impact of supply chain disruption notably due to the war in Ukraine, including around $80 million in additional air freight expenses. Third, inflation of around 4% in our cost of goods driven by the global pandemic recovery and exacerbated by the war, notably for certain direct materials, wages, energy and transportation costs. And last, a challenging prior year margin comparison which included substantial COGS productivity savings.

Despite these atypical margin challenges, our robust top-line growth and ongoing cost efficiencies enabled us to deliver 5.6% growth in pro forma currency-neutral adjusted diluted EPS ahead of expectation to $1.32, and 3.8% growth for total PMI to $1.48 including Russia and Ukraine.

(SLIDE 6.)

Looking at the first-half of the year, our volumes grew by 4.0% on a pro forma basis and by 2.2% for total PMI. Pro forma organic net revenues grew by 8.1% and by 7.1% in total, also driven by strong IQOS performance and the recovery of the cigarette category.

We delivered organic net revenue per unit growth of 4.0% on a pro forma basis and 4.7% in total, again reflecting the positive impacts of growing HTU volumes and pricing.

3

Our H1 adjusted operating income margin contracted organically by 110 basis points on a pro forma basis and 90 basis points in total, driven by the factors mentioned previously. We expect better margin performance in H2, a topic I will revisit shortly.

Currency-neutral adjusted diluted EPS grew by 10.4% to $2.79 on a pro forma basis and 9.2% in total to $3.06; an excellent performance given the circumstances.

(SLIDE 7.)

Reflecting this strong momentum, we are raising our guidance for 2022. With strong IQOS growth and robust trends in combustibles, we foresee an acceleration in our currency-neutral growth expectations relative to our previous forecasts.

First, we now expect to grow our total pro forma shipment volumes by 1.5% to 2.5% for 2022, achieving another year of volume growth. For pro forma net revenues, we expect to deliver between 6% and 8% organic growth, as compared to the 4.5% to 6.5% announced previously, despite a greater than anticipated drag from hyperinflationary accounting in Turkey.

With a strong recovery in device volumes, the increasing contribution of ILUMA with initially higher unit costs, and ongoing global inflation, we are narrowing our forecast for pro forma adjusted organic OI margin expansion to between 0 and 50 basis points.

We are also raising our growth outlook for pro forma currency-neutral adjusted diluted EPS to between 10% and 12%. This reflects a range of $5.23 to $5.34, including an estimated unfavorable currency impact of 86 cents at prevailing rates, notably due to the Euro and Japanese Yen. We include a slide in the appendix with further detail on this estimated impact. For total PMI, which assumes a full year contribution from Russia and Ukraine, we expect adjusted diluted EPS of $5.90 to $6.05 reflecting similar dynamics to the pro forma basis and including an estimated 69 cents unfavorable currency impact.

Please note our 2022 forecast assumes no contribution from the proposed combination with Swedish Match, which is expected to close in the fourth quarter of this year subject to Swedish Match shareholder acceptance and the necessary regulatory approvals.

The outlook for IQOS growth is excellent and we now expect to deliver full- year pro forma HTU shipment volumes of 90 to 92 billion units, representing the upper half of our previous forecast range. With growth momentum very strong, the main constraint for not further raising our HTU volume target is our production capacity, notably for ILUMA HTUs due to their outstanding initial success and the cancellation of production in Russia, as we convert existing production lines for induction consumables. We continue to expect excellent HTU growth in the coming quarters with a progressive improvement in ILUMA

4

HTU capacity through the first half of 2023. We are prioritizing ILUMA launch markets accordingly with further launches planned in Q4 as communicated previously.

(SLIDE 8.)

A notable further update to our outlook is an increase in our operating cash flow forecast to around $10.5 billion, as compared to around $10 billion previously, despite notable currency headwinds. This includes our accelerated pro forma earnings growth forecast and an assumed full year contribution from Russia and Ukraine.

We delivered robust operating cash flow growth in H1 of 14%, and as shown through the challenges of recent years, the cash generation capacity of our business remains exceptional. While flattered somewhat in 2021 by favorable timing and one-off impacts, our revised full year forecast demonstrates underlying growth against this exceptional year after also accounting for higher inflation-driven working capital requirements and currency. This underlines our ability to maintain a strong balance sheet, pay down debt and invest in the growth of our business.

Our net debt of $23 billion at June 30, 2022 decreased compared to both June and December 2021 despite H1 capital expenditures of $0.5 billion and ongoing dividend payments. Our commitment to our progressive dividend policy is unwavering and we look forward to the additional cash flows the proposed combination with Swedish Match would bring.

We also continue to expect around $1 billion in full year capital expenditures.

(SLIDE 9.)

Moving to the pro forma outlook for the second half, we expect to deliver strong top-line growth, organic adjusted OI margin expansion and a further acceleration in bottom-line growth.

For Q3, we expect mid-single digit organic top-line growth driven by IQOS, with around 22 billion in pro forma HTU shipment volumes. While there is a tougher comparison for cigarettes, and a modest negative impact expected from shipment timing, we expect combustible volume trends to remain resilient by historical standards. Net revenue growth will also continue to be impacted in both Q3 and Q4 by the shift to hyperinflationary accounting in Turkey.

While the temporary cost headwinds seen in Q2 are expected to ease somewhat in the third quarter, we expect this to be broadly offset by a step-up in smoke-free commercial and R&D investments as compared to a device- constrained Q3, 2021. This results in an expected Q3 pro forma adjusted diluted EPS range of $1.23 to $1.28, including an estimated adverse currency impact of 24 cents at prevailing rates.

5