Philip Morris International : Script (PDF 66 KB)

Philip Morris International Inc.

2021 Second-Quarter Conference Call

July 20, 2021

NICK ROLLI

(SLIDE 1.)

Welcome. Thank you for joining us. Earlier today, we issued a press release containing detailed information on our 2021 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. All references to smoke-free products are to our RRPs.

Growth rates presented on an organic basis reflect currency-neutral underlying results. Adjusted net revenues exclude the impact of the Saudi Arabia customs assessments as described in today's press release.

Please note that due to U.K. Takeover Code requirements, we do not intend to provide further information on this call regarding our offer to acquire Vectura Group plc that has not already been disclosed in the Rule 2.7 announcement on July 9, 2021. A copy of the Rule 2.7 offer announcement is available on www.pmi.com.

(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.

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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 a very strong performance in the second quarter of 2021 - coming slightly ahead of our expectations to match Q1's record high quarterly adjusted diluted EPS of $1.57, despite the continued challenges of the global pandemic.

Most impressive was the continued strong growth of IQOS, which made up 13% of our volumes and nearly 30% of our adjusted net revenues, compared to 24% in the prior year quarter. HTU shipment volumes grew +30% and +12% compared to the same quarter last year and the previous quarter sequentially to reach 24.4 billion units, with strong growth across key geographies. We also continued converting adult smokers at a good pace surpassing an estimated 20 million users, of which almost 15 million have switched to IQOS and stopped smoking.

Combustible net revenues grew by +4% in Q2 on an organic basis, reflecting a partial volume rebound against a weak prior year quarter and solid pricing, partly offset by market mix.

Our adjusted operating income margins expanded significantly in both the second quarter and first half overall, and while we expect commercial investments to step up in the second half, this puts us firmly on track for a strong 2021 performance organically; with an expected currency tailwind providing additional growth in dollar terms. Importantly, this outlook also allowed us last month to confirm our share buyback program where we target $5 billion to $7 billion over 3 years.

We are also delighted to announce that IQOS ILUMA, the next generation of IQOS, will be launched in Japan next month. As we covered at Investor Day in February, this represents a major step in category innovation as we seek to accelerate our journey toward a smoke-free future.

With regard to long-term growth, we also took important steps to build our modern oral and beyond nicotine businesses in recent weeks through the proposed acquisitions of Fertin Pharma and Vectura, which I'll come back to later.

(SLIDE 6.)

Turning to the headline numbers, our Q2 adjusted net revenues grew by +11.6% on an organic basis, or around +18% in dollar terms. This reflects both the recovery of the combustible business in many markets compared to the heavily disrupted second quarter of 2020, including the need for higher inventory levels; and the continued strength of IQOS, with +35% organic growth in RRP net revenues. For combustibles, while certain geographies and

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channels remain significantly affected by the pandemic -- notably in South and Southeast Asia, South America, and global Duty Free - re-openings in much of the world have led to partial recovery in social occasions, and a sequential recovery in our market share.

We witnessed good organic growth of +5.1% in our net revenue per unit, driven by the increasing weight of IQOS in our sales mix and pricing on both combustibles and RRPs.

Our adjusted operating income margin increased by 270 basis points on an organic basis. This reflects the increasing weight and profitability of IQOS, higher combustible volumes, the positive impact of pricing, productivity savings, including lower device costs and lower commercial spend due to the pandemic. Our resulting adjusted diluted EPS of $1.57 represents +17.8% organic growth, and +21.7% in dollar terms; a very strong performance.

(SLIDE 7.)

Looking at the first half overall, our adjusted net revenues grew by almost +12% in dollar terms and by +7.1% organically. This was achieved despite a tougher Q1 comparison, and reflects the Q2 factors I just mentioned and the consistent growth of IQOS - where progress throughout the pandemic has been impressive, notably including the doubling of users in the EU Region since the end of 2019.

We delivered strong organic growth of nearly +6% in our net revenue per unit, again reflecting our shifting business mix and pricing.

Our H1 adjusted operating income margin increased by 440 basis points on an organic basis. While we plan to increase commercial investments in the second half, as we noted at Q1, this remains an excellent performance. Our H1 adjusted diluted EPS grew +19.6% organically and +25.6% in dollar terms; also a very strong result.

(SLIDE 8.)

This brings me to guidance for 2021. We now expect an even stronger organic performance for the year than previously, supported by improved total industry volumes for combustibles following the easing of pandemic restrictions.

For net revenues, we are revising our organic growth forecast to between +6% and +7%, representing the upper end of the previous range.

We continue to expect organic adjusted OI margin expansion of around +200 basis points, and we are raising our organic adjusted diluted EPS growth range to +12% to +14%, or +15% to +17% in dollar terms. We also continue to expect HTU shipment volumes of between 95 and 100 billion units. Given the strong momentum across our markets, the need to maintain inventory durations; and preparation for the roll-out of IQOS ILUMA which uses different

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consumables, we expect our full year HTU shipments to be slightly ahead of IMS volumes.

This projected organic EPS growth, including an estimated favorable currency impact of approximately 18 cents at prevailing rates, translates into an increased adjusted diluted EPS range of $5.97 to $6.07.

This guidance does not include any material impact of share repurchases or acquisitions. We recently received Board authorization for the launch of our 3 year share repurchase program, where we target $5 to $7 billion starting in the period following our Q2 earnings release. Please note this program is not affected by the proposed acquisitions of Fertin Pharma or Vectura.

(SLIDE 9.)

Turning now to some of the key H2 assumptions underpinning this guidance. We assume that many of our key markets will have largely emerged from COVID restrictions, supporting better industry volumes. Where significant pandemic-related challenges remain - notably Indonesia, the Philippines and certain markets in South America - we assume no significant further deterioration from the present situation.

We continue to assume no meaningful recovery in Duty Free this year, with intercontinental and Asian travel still subdued. A rebound in travel within customs areas such as the European Union has limited effect.

In addition, following combustible pricing of around +3% in the first half, we anticipate a somewhat softer second half progression. We continue to expect the full year variance to be +2-3%. This reflects continued pandemic-related challenges in certain markets, notably in South & Southeast Asia. H2 also faces tough pricing comparisons from the 2020 VAT reduction in Germany and new excise tax terms in Australia.

The global semi-conductor shortage continues to put constraints on device supplies, and while the overall impact remains manageable we have adjusted our device assortments to limit the effect on consumer availability. This dynamic is included in our guidance, and we continue to monitor the situation closely.

Despite these factors, we have multiple growth drivers in our business and we are confident in our ability to deliver continued robust top-line progress.

This revenue assumption includes higher expected device shipments and the launch of IQOS ILUMA, which will contribute to less gross margin expansion compared to the first half. As mentioned previously, we will also step-up our commercial investments in key areas including portfolio expansion and product launches such as IQOS ILUMA and IQOS VEEV, smoke-free category understanding and awareness campaigns and a number of commercial development projects. We anticipate around $300 to $400 million of incremental spending compared to the first half which will impact our H2 OI

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margin, but overall still expect to deliver a very robust expansion of around +200 basis points for the year.

For Q3 specifically, we expect EPS of $1.50 to $1.55.

Lastly, we continue to expect around $11 billion in 2021 operating cash flow at prevailing exchange rates and subject to year-end working capital requirements.

(SLIDE 10.)

Before discussing our results in more depth, I want to highlight some of the positive regulatory developments in the quarter. Recognition of the harm reduction potential of smoke-free products continues to gain traction. Examples in recent weeks include the passing of a broad differentiated regulatory framework for RRPs by the Philippines House of Representatives, and the institution of differentiated excise treatment for heated tobacco products in Pakistan. In Mexico, the ban on the import and export of Electronic Nicotine Delivery Systems no longer applies to heated tobacco devices, which will allow us to resume imports of IQOS devices.

While we are encouraged that the German government has recognized the important principle of differentiation between combustible cigarettes and smoke-free products on the basis of potential health impact, we view the announced excise tax changes on heated tobacco as misguided, providing less incentive for consumers to switch away from cigarettes to less harmful alternatives. We also note the differing views among the key political groups in the country ahead of the fall elections, and we are hopeful a new government could revisit the decision.

In the EU more generally, we remain optimistic that the revision of the Tobacco Excise Directive will lead to greater harmonization in the structural approach to non-combustible products, taking into account the relevant good practices and experience gained by Member States.

(SLIDE 11.)

Turning back to our quarterly results, Q2 total shipment volumes increased by +6.1%, and by +1.1% for H1. This reflects continued strong growth from HTUs of +30% to reach 24.4 billion units in Q2 -- driven by the EU Region, Japan, Russia, Ukraine and encouraging progress from recently launched markets in the Middle East. HTU shipments were around 1.4 billion units ahead of IMS volumes for the second quarter, reflecting the need to maintain inventory durations in this growing business, sea freight lead times, and the first shipments of ILUMA consumables.

The +3.2% growth in our Q2 cigarette volumes reflects the recovery of a number of key markets compared to a notably weak prior year quarter, when pandemic-related disruption was at its peak. While our cigarette share improved sequentially, we continue to face some specific market share headwinds in addition to market mix effects, which I will come back to.

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