Philip Morris International : Script (PDF 67 KB)

Philip Morris International Inc.

2021 First-Quarter Conference Call

April 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 first-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.

Please also note that growth rates presented on an organic basis reflect currency-neutral underlying 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.

(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 strong performance in the first quarter of 2021, well ahead of expectations, reaching a 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 28% of our net revenues, compared to 21.7% in the prior year quarter. We continued converting adult smokers at a very good pace and reached an estimated total of 19.1 million users, of which 14.0 million have switched to IQOS and stopped smoking. HTU shipment volumes grew 30% compared to the prior year quarter, with record market shares in key IQOS geographies, 12 markets with double-digit national share, and a share of 7.6% overall in IQOS markets excluding the U.S.

Our operating margins were also significantly above the prior year quarter, and while somewhat flattered by timing factors, the bulk of this improvement reflects strong underlying performance. The resulting combination of strong organic net revenue and adjusted diluted EPS growth leads us to raise our outlook for the year.

From a product standpoint, we continued to broaden our smoke-free portfolio and saw encouraging progress from new device and consumable offerings across multiple markets. We expect to benefit from further innovation through the course of 2021.

(SLIDE 6.)

Turning to the headline numbers, our Q1 net revenues grew by 2.9% on an organic basis. This was an excellent performance in the context of an essentially pre-COVID prior year comparison; and incorporates better-than expected HTU IMS and shipment volumes, which drove 32% organic growth in RRP net revenues. We also saw some higher-than-expectedpull-forward of shipments, predominantly cigarettes, in the EU Region ahead of the Easter period, and in Russia ahead of the April 1 discount ban.

We saw strong organic growth of 6.9% in our net revenue per unit, driven by the increasing weight of IQOS in our sales mix and pricing on both combustibles and RRPs. Combustible tobacco pricing was 2.7% of prior year combustible net revenues, reflecting solid pricing in many markets, partially offset by Indonesia. Excluding Indonesia, combustible pricing was over 4%.

Our adjusted operating income margin increased by 590 basis points on an organic basis. This reflects the increasing weight and profitability of IQOS, the positive impact of pricing, productivity savings, including lower device costs; lower commercial spend due to the pandemic, a favorable comparison in

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Eastern Europe and certain other timing factors. Combined with a lower effective tax rate, our resulting adjusted diluted EPS of $1.57 represents 21.5% organic growth; a very strong performance. We estimate that timing factors in the quarter, such as the earlier shipments mentioned and cost phasing, had a positive impact of around 8 cents. Other one-time factors accounted for an estimated further 2 cent increase.

(SLIDE 7.)

This brings me to guidance for 2021. While the speed and shape of the global recovery from the pandemic remains uncertain, the strong business results and underlying momentum of the first quarter, notably from our IQOS business, lead us to raise our outlook. We continue to account for a range of outcomes in our outlook for organic growth in net revenues and EPS. This range assumes that even in the event of renewed or prolonged restrictions, we will not see a return to the depressed consumption levels of Q2, 2020. While we have not been affected thus far by the current global shortage of semiconductors, this guidance assumes a limited impact on the supply of electronic devices to consumers. This is a fluid situation which we are monitoring closely; and where any constraints may arise, we intend to manage our inventories accordingly, and prioritize device sales to adult smokers who are new to the category.

Regarding Duty Free, a rebound in global travel is likely to lag the improvement of in-country mobility. Our guidance continues to assume no meaningful recovery in Duty Free this year.

We now expect organic net revenue growth in the range of 5% to 7%, versus 4% to 7% communicated previously, and organic adjusted diluted EPS growth of 11% to 13%, or 15% to 17% in reported terms.

The strength of IQOS is the main driver for this revision. We now expect to deliver HTU shipment volumes of between 95 and 100 billion units, representing the upper half of our previously targeted range for 2021. Given the continued strong momentum across our markets, the need to maintain inventory durations; and preparation for the roll-out of IQOS ILUMA that uses different consumables, we expect our full year shipments to be slightly ahead of IMS volumes.

We also raise our assumption for organic adjusted OI margin expansion to around 200 basis points. This includes the expectation of greater investment in the second half as our innovation and commercial activities step up. As detailed in this morning's press release, our other main assumptions remain unchanged.

This projected organic EPS growth, including an estimated favorable currency impact of approximately 20 cents at prevailing rates, versus 25 cents assumed previously, translates into a raised adjusted diluted EPS range of $5.95 to $6.05.

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This guidance does not include any impact of share repurchases. However, we remain on track to resume repurchases in the second half of the year, subject to Board approval.

(SLIDE 8.)

Looking forward to the second quarter, we now expect adjusted diluted EPS of $1.50 to $1.55, reflecting strong top-line growth against a weak prior year comparison, continued margin improvement, and the partial reversal of certain Q1 timing benefits.

For the second half, assuming that many of our key markets will have largely emerged from COVID restrictions, we expect continued robust top-line growth. This includes the contribution of higher expected device shipments which will result in less gross margin expansion compared to the first half. New product launches, investments in distribution and the phasing of productivities will also play a role. We will also step-up our commercial investments in the future growth of RRPs through portfolio and geographic expansion, including product launches such as IQOS ILUMA. We anticipate around $300 to $400 million of incremental commercial investments compared to the first half and consequently expect our organic OI margin expansion to be lower in H2, but overall to deliver a strong expansion of around 200 basis points for the year.

(SLIDE 9.)

Before discussing our results in more depth, I want to highlight a few of the positive regulatory developments in the quarter. Recognition of the harm reduction potential of smoke-free products continues to gain traction. Examples so far this year include the reversal of a longstanding import ban on heated tobacco products in Uruguay, and the integration of the harm reduction principle in Lithuania's tobacco control agenda. We also note the recent report from an all-party parliamentary group of MPs in the UK calling for the WHO to return to the founding principle of the FCTC which includes harm reduction, rather than the current prohibitionist stance. In New Zealand, we are reviewing the content and details of the consultation paper published last week. The policy recognizes the role of innovative products in harm reduction, while at the same time ensuring strict controls to prevent youth access.

In the EU, we continue to be hopeful that the revision of the Tobacco Excise Directive will lead to greater harmonization in the approach to smoke-free products, taking into account the relevant good practices and experience gained by Member States in this area. Here and around the world we continue to support differentiated regulatory and fiscal frameworks based on the relative risk to health. While there will on occasion be actions or proposals that do not incorporate harm reduction objectives, we believe that facts and science will guide policy over time; and we continue to see positive changes in many geographies.

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(SLIDE 10.)

Turning back to our results, Q1 shipment volumes declined by 3.7% on a total PMI basis. This reflects continued strong growth from HTUs of 30% to reach

21.7 billion units -- driven by the EU Region, Japan, Russia, Ukraine and an encouraging start from recently launched markets in the Middle East. HTU shipments and IMS volumes were broadly in line for the quarter.

While pandemic-related restrictions persisted around the world, total industry volume declines of 0.7% were relatively benign, incorporating over 25% growth in the heated tobacco category where we continue to have a share of over 80%.

Though less severe than in Q4, 2020, our cigarette volume declines reflect specific share headwinds in certain markets, which I'll come back to. We expect better combustible share and volume trends in both the second quarter and second half of the year.

(SLIDE 11.)

The strong performance from IQOS led to heated tobacco units comprising 13.0% of our total shipment volume in Q1, as compared to 9.6% in the prior year quarter, 11% in the year of 2020, 8% in 2019 and 5% in 2018. We continue to expect this proportion to grow over time as the positive momentum on IQOS continues, providing a powerful driver of revenue and margin growth.

(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 28% of our total net revenues in the quarter, compared to 21.7% in Q1, 2020. IQOS devices accounted for approximately 6% of the $2.1 billion of RRP net revenues, reflecting longer replacement times for existing users due to improving battery lives and reliability; and lower device prices in certain markets as we are preparing for IQOS ILUMA.

(SLIDE 13.)

The 2.9% organic growth in Q1 net revenues on shipment volume declines of 3.7% reflects the twin engines driving our top line. First, is pricing on combustibles and, in certain markets, on HTUs net of the lower device pricing I just mentioned. Second, the increasing mix of HTUs in our business at higher net revenue per unit continues to deliver substantial growth; and, as explained at Investor Day, this is an increasingly powerful driver as our transformation accelerates.

(SLIDE 14.)

Let me now go into the drivers of our first quarter margin expansion, starting with gross margin, which expanded by 390 basis points on an organic basis.

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