菲利普莫里斯國際 (PM) 2021 Q1 法說會逐字稿

Good day and welcome to the Philip Morris International First Quarter 2021 Year-End Earnings Conference Call. Today's call is scheduled to last about 1 hour, including remarks by Philip Morris International management and the question-and-answer session. (Operator Instructions)

I will now turn the call over to Mr. Nick Rolli, Vice President, Investor Relations and Financial Communications. Please go ahead, sir.

Welcome, and 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 or the PMI IR app. 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 share data are at the end of today's webcast slides, which are posted to the 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.

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. 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?

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 million have switched to IQOS and stopped smoking. HTU shipment volumes grew plus 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 market, excluding the U.S.

Our operating margins were also significantly above the prior year quarter. And while somewhat flatted 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.

Turning to the headline numbers. Our Q1 net revenues grew by plus 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 plus 32% organic growth in RRP net revenue. We also saw some higher-than-expected pull-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 a strong organic growth of plus 6.9% in our net revenue per unit driven by the increasing weight of IQOS in our sales mix and pricing on both combustible and RRPs. Combustible tobacco pricing was plus 2.7% of prior year combustible net revenues, reflecting solid pricing in many markets, partially offset by Indonesia. Excluding Indonesia, combustible pricing was over plus 4%.

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

Combined with a lower effective tax rate, our resulting adjusted diluted EPS of $1.57 represent, plus 21.5% organic growth, a very strong performance. We estimate that timing factors in the quarter, such as the earlier shipment mentioned and cost phasing, had a positive impact of around plus $0.08. Other onetime factors accounted for an estimated further plus $0.02 increase.

This brings me now to guidance for 2021. While the speed and shape of the global recovery from the pandemic remains uncertain, the strong business result and underlying momentum of the first quarter, notably from our IQOS business, led us to raise our outlook. We continue to account for a range of outcomes in our outlook for organic growth in net revenue and EPS.

This range assumed that even in the event of renewed or prolonged restriction, we will not see a return to the depressed consumption level of Q2 2020. While we have not been affected thus far by the current global shortage of semiconductor, the guidance assumes a limited impact on the supply of electronic devices to consumer. This is a fluid situation, which we are monitoring closely. And where any constraint 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 continue to assume no meaningful recovery in Duty Free this year. We now expect organic net revenue growth in the range of plus 5% to plus 7% versus plus 4% to plus 7% communicated previously and organic adjusted diluted EPS growth of plus 11% to plus 13% or plus 15% to plus 17% in reported terms. The strength of IQOS is the main driver for this revision. We now expect to deliver HTU shipment volume of between 95 billion and 100 billion units, representing the upper half of our previously targeted range for 2021.

Given the continued strong momentum across our market, the need to maintain inventory duration and preparation for the rollout of IQOS ILUMA that uses different consumable, we expect our full year shipment to be slightly ahead of our IMS volumes. We also raised our assumption for organic adjusted OI margin expansion to around plus 200 basis point. 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 plus $0.20 at prevailing rates versus plus $0.25 assumed previously, translate into a raised adjusted diluted EPS range of $5.95 to $6.05. 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.

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 benefit. For the second half, assuming that many of our key market will have largely emerged from COVID restriction, we expect continued robust top line growth. This include the contribution of higher expected device shipment, 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 investment in the future growth of RRP through portfolio and geographic expansion, including product launches such as IQOS ILUMA. We anticipate around plus $300 million to plus $400 million of incremental commercial investment 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 plus 200 basis point for the year.

Before discussing our result in more depth, I want to highlight a few of the positive regulatory development in the quarter. Recognition of the harm-reduction potential of smoke-free product continues to gain traction.

Examples so far this year include the reversal of a long-standing import ban on heated tobacco product 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 U.K. calling for the WHO to return to the founding principle of the FCTC, which includes harm reduction rather than the current prohibition stance.

In New Zealand, we are reviewing the content and detail of the consultation paper published last week. The policy recognizes the role of innovative product in harm reduction while at the same time ensuring strict control 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 effort to smoke-free product, 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 framework 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 fact and science will guide policy over time, and we continue to see positive changes in many geographies.

Well, turning back now to our results. Q1 shipment volumes declined by 3.7% on a total PMI basis. This reflects continued strong growth from HTUs of plus 30% to reach 21.7 billion units driven by the EU Region, Japan, Russia, Ukraine and an encouraging start from recently launched market in the Middle East. HTU shipment and IMS volumes were broadly in line for the quarter.

While pandemic-related restriction persisted around the world, total industry volume decline of 0.7% were relatively benign, incorporating over plus 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 decline reflects specific share headwind in certain market, 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.

The strong performance from IQOS led to heated tobacco units comprising 13% 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.

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 product made up 28% of our total net revenue in the quarter compared to 21.7% in Q1 2020. IQOS devices accounted for approximately 6% of the $2.1 billion of RRP net revenue, reflecting longer replacement time for existing users due to improving battery lives and reliability and lower device price in certain market as we are preparing for IQOS ILUMA.

The plus 2.9% organic growth in Q1 net revenue and shipment volume decline of 3.7% reflect the twin engine driving our top line. First is pricing on combustible and, in certain market, on HTU net of the lower device pricing I just mentioned. Second, the increasing mix of HTUs in our business at higher net revenue per unit continue to deliver substantial growth. And as explained at Investor Day, this is an increasingly powerful driver as our transformation accelerates.

Let me now go into the driver of our first quarter margin expansion, starting with gross margin, which expanded by 390 basis points on an organic basis. This is driven by multiple levers, as shown in green on this slide, including the mix effect of HTU within IQOS impact. In particular, our significant efforts on manufacturing and supply chain efficiency are bearing fruits, more than offsetting the effect of combustible volume declines with around $150 million of gross productivity savings delivered in Q1. While somewhat front-loaded in the context of 2021, this represent a strong start on the journey towards our target of $1 billion over 2021-2023. As part of these savings, our gross profit increase was boosted by better absorption of manufacturing costs given the high level of production in the quarter and lower device costs with a combined impact of around plus $60 million.

Gross margin expansion was also accompanied by strong SG&A efficiencies with our adjusted marketing, administration and research costs 200 basis point lower as a percentage of net revenue on an organic basis. This reflect the ongoing digitalization and simplification of our business processes, including our IQOS commercial engine and more efficient ways of working. We delivered around $60 million towards our '21-'23 target of $1 billion in gross SG&A savings before inflation and reinvestment. The pandemic also impacted SG&A costs in the quarter through the latter timing of certain project and reduced commercial and overhead costs due to ongoing restriction. These latter factors accounted for around $100 million of the organic improvement.

Focusing now on combustible. We continue to hold the leading international portfolio by market share and by brand strength, as covered at Investor Day. This gives us a formidable platform to accelerate the growth of IQOS via our commercial infrastructure, industry expertise and ability to communicate with adult smokers, where permitted. It is, therefore, imperative to maintain our leadership through selective investment as we also drive returns through pricing and efficiency.

Our cigarette share underperformance in Q1 can be attributed to the combination of several factors. This include the COVID impact on social occasions where Marlboro overindexes; border closures and reduced travel; and instances of downtrading and competition in the mid- and low-price segment in certain markets, such as the Philippine and part of the EU Region.

This performance does not reflect our objective to maintain our share of cigarette, net of cannibalization. We expect a strong sequential cigarette share recovery through the remainder of the year, supported by portfolio initiative and the enduring strength of Marlboro, especially as pandemic restriction ease. Accordingly, we target cigarette share to be about stable on a year-over-year basis for the next 9 months despite the impact of cannibalization. Share gains from HTUs will come on top of this.

I will now turn to the South and Southeast Asia region. After a difficult 2020, notably in Indonesia, headwinds are now moderating. In Indonesia, volume trends are improving with double-digit growth in hand-rolled kreteks where we are the market leader supporting stable PMI share in the Tier 1 segment. Indeed, with industry volume recovering, we are targeting volume growth for our business here in 2021.

Pricing remain the main headwind in Indonesia. New excise duty rates came into force on Feb 1. And while all major players have taken some pricing, progress nonetheless remains low. Despite the negative consequences for government revenue, there has not yet been a significant move to level the playing field between the Tier 1 and below Tier 1 segment, which continues to grow. We remain hopeful that the government will address this issue over time.

The Philippines has performed well in recent years. For this quarter, further industry pricing in H2 2020, a slow economic recovery and pandemic-linked restriction gave rise to a double-digit market decline. Our share loss reflect downtrading from the mid- to low-price segment with premium-priced Marlboro, which make up over 2/3 of our volume growing share.

Notwithstanding these challenges, we have plans to address the share decline and are targeting close to stable organic net revenue in 2021 despite the total market weakness. I'm also pleased to say that IQOS is off to an encouraging start in Metro Manila with an exit share of almost 1% for HEETS after full launch in Q3 2020. Overall, this region delivered strong growth pre-COVID. While it may not be a meaningful growth driver in 2021, we expect far less of a drag on group results compared to 2020. We target regional organic net revenue to be at least stable over the next 9 months.

Moving now to IQOS performance. We estimate there were 19.1 million IQOS user as of March 31. This represents the addition of around 1.5 million adult users since December, building on the step-up seen in the second half of 2020. Our accelerated pivot to digital and remote engagement during the pandemic, combined with strong momentum for the IQOS brand, is paying off.

We further estimate that 73% of this total or 14 million adult smokers have switched to IQOS and stopped smoking, with the balance in various stages of conversion. Strong conversion rates notably reflect the increased prevalence of IQOS 3 DUO, which offers a superior user experience to previous device version. As we mentioned at Investor Day, we seek to achieve even higher conversion rate over time with the introduction of innovation such as IQOS ILUMA.

This user growth again reflects widespread momentum across all key IQOS geographies, including the EU Region, Japan and Russia. It also reflect the enrichment of our offer and the segmentation of the category with new product and more price points, both above and below our initial HTU offering.

In the EU Region, first quarter share for HEETS reached a record 5.7% of total cigarette and HTU industry volume. Adjusted for estimated trade inventory movement, this reflect 46% year-over-year IMS growth and around 10% sequential IMS growth accounting for fewer selling days in the period. I would also remind you of the sequential quarterly share dynamic, which can be distorted by the seasonality of the combustible market in addition to pandemic-related fluctuations, such as border closure and other social restriction.

With the region likely to reopen somewhat in Q2 and increase the total market, we expect further strong underlying HTU growth, but for sure to be broadly in line with Q1. This excellent performance includes strong growth in Italy, surpassing 10% share, with the large majority of user acquisition coming organically as the increasing awareness and prominence of the product build its own momentum.

Germany and Poland were also strong contributors. We added a further 700,000 EU Region IQOS user in the quarter to reach 5.9 million, a continuation of recent strong performance.

We continue to see phenomenal progress in key cities across the EU Region with a number of example on this slide. HTU share in Rome is now approaching 20%; Warsaw and Lisbon reached 15%; Munich, 8%; and London, 5%. While a smaller city, the progress in Vilnius at 36% share is also a global standout. As covered at Investor Day, key cities are a good indicator of national share growth potential. And I would also refer you to the appendix where we show shares for key EU market and global key cities.

Strong performance continued in Russia with our HTU share up by 1.2 points to reach a record 7.7%. Adjusted for estimated trade inventory movement, this reflect plus 35% year-over-year IMS growth and around plus 8%, 10% sequentially once estimated consumer pantry-loading effects are factored in.

We continue to see sequential share growth for both our HEETS and Fiit lineup with good traction for the regular HEETS and super-premium HEETS Creations variants. Moreover, lil SOLID and Fiit consumable continue to supplement user acquisition. In both Russia and Ukraine, the majority of consumer purchasing a lil device are smokers entering the smoke-free category for the first time, with high level of conversion in line with IQOS. This bodes well for our ability to reach adult smoker in the medium- and below-price segment for whom purchasing power may be a barrier.

Margins on mainstream-priced HTUs, such as Fiit, remain attractive compared to cigarettes sold at the same price. And while the volume of Fiit remains small compared to our total HTU volume in this market given our large IQOS user base, we expect lil to grow further in 2021. With this success in Russia and Ukraine, we plan to offer lil SOLID in additional market later this year.

In Japan, on a total tobacco basis, including cigarillos and adjusted for trade inventory movement, the share for our HTU brand increased by 3 points versus the prior year quarter and by 0.7 points sequentially to 20.8%. Both HEETS and Marlboro HeatSticks grew market share following the October price increase, highlighting the strength of our price-tiered portfolio.

We expect to see further HTU volume growth in Japan over the remainder of the year, underpinned by ongoing user acquisition. For the second quarter, in particular, we expect robust sequential IMS growth. We also expect a recovery in the total tobacco market as the elasticity effect of the substantial October price increase fade, including on consumer pantry loading. As such, while year-over-year share growth is still likely to be strong, Q2 share may not reflect this underlying sequential growth performance and maybe broadly stable versus Q1 on an adjusted basis, including cigarillos.

In Q1, the overall heated tobacco category made up over 28% of the adjusted total Japanese tobacco market, with IQOS maintaining a high share of segment. IQOS HTUs also reached an offtake share of 26.1% in Tokyo after surpassing the 25% milestone in December.

In addition to a strong growth in existing market, the geographic expansion of our smoke-free product continues. This allows us to provide access to better alternative to an even increasing amount of adult smoker. And as communicated at Investor Day, we aim to be in 100 market by 2025. After launching in 12 new market with IQOS in 2020, we added Aruba in the first quarter and launched our new e-vapor product, IQOS VEEV, in Finland, which takes the total number of market where PMI smoke-free products are available for sale to 66, of which over half are outside the OECD.

We are continuing to commercialize IQOS VEEV with Q1 launches in Italy and, as I just mentioned, Finland. This follows the initial launch market New Zealand and the Czech Republic in H2 2020.

One of our key priorities is guarding against youth access for all our product, and we are targeting for all our electronic smoke-free devices to be equipped with age verification technology by 2023. We will be testing this technology with IQOS VEEV in select market this year.

IQOS VEEV is a premium product providing a superior experience. And as we explained previously, the commercial infrastructure of IQOS allows us to deploy efficiently and at scale through a bespoke route-to-market approach.

Our other market major innovation for 2021 is the launch of IQOS ILUMA, the next generation of IQOS, as announced at Investor Day. Building on the success of IQOS 3 DUO, we believe this simple and intuitive device will support easier switching and higher conversion for legal-age smokers using Smartcore internal induction-heating technology. We continue to plan for the launch of ILUMA in the second half of the year.

As we roll out both IQOS VEEV and IQOS ILUMA, we carefully plan our manufacturing and supply chain activities to manage expected demand and external factors, such as the current tightness of global semiconductor supply that I mentioned previously. The ongoing success of IQOS 3 DUO more than 2 years after launch demonstrate that significant innovation can have a lasting positive impact on growth. And both our recently announced 2023 HTU shipping volume target and the upward revision of our HTU target for this year reflect this confidence.

Our transformation is the bedrock for both business and sustainability performance. We do not have separate strategies. Phasing out cigarettes by replacing them with better alternatives, such as IQOS, drives our growth and addresses our biggest impact on society.

Our unique commitment to phasing out cigarette is underlined by the new transformation target announced at Investor Day, which are aligned with the 27 business transformation metric provided for stakeholder to measure and verify the pace and scale of our progress. This includes our ambition to become a majority smoke-free company by 2025, our aim to commercialize smoke-free product in 100 market and to generate at least $1 billion in net revenue from beyond nicotine product as we move into adjacent business areas with a net positive impact on society.

Our best-in-class performance on ESG allows us to further our leadership in sustainability. I am proud to see increasing external recognition, for example, on our efforts to develop a fully sustainable supply chain and our commitment to address gender inequality. Further, we recently updated our zero deforestation manifesto, strengthening our ambition undertaking to conserving forests across our entire value chain.

We remain strongly committed to providing the highest level of disclosure on the key ESG and product impact areas of our company via integrated reporting, and we'll release our 2020 disclosure on May 18. We recognize that ESG analysis can provide valuable insight about factors with a significant potential impact on financial performance and, thus, better informed investment decision.

To further maximize the value of investor engagement and aid understanding of the significant positive impact PMI's transformation can have on society, we plan to hold a sustainability webcast in early June, building on our recent Investor Day. Please do mark your calendars.

To conclude, we've had a strong start to the year and look forward with confidence despite the continued uncertainty on the operating environment due to COVID. This is the same concluding slide I presented at Investor Day in February as I believe our start to 2021 demonstrates all the key elements of our longer-term trajectory. Through IQOS, we are building a business with multiple levers to deliver superior and sustainable growth over the coming years through improved volume dynamics, excellent top line growth, strong margin expansion and fast-growing earnings. Moreover, while every adult smoker who switches to IQOS is good for our business, it is also a clear positive for our impact on society and public health.

We manage our transformation with care and responsibility for our stakeholders, guided by our sustainability materiality framework to maximize our positive impact across our Tier 1 ESG and product areas. This is essential for the sustainability of our business and for delivering superior returns for shareholder over the long term. The increase in our organic growth outlook for 2021 is another step on this journey, also putting us nicely on track to achieve our 2023 financial and HTU shipment targets.

Thank you. I am now more than happy to answer your questions.

(Operator Instructions) Our first question comes from Vivien Azer of Cowen.

So given some of the headlines coming out of the U.S. yesterday, it might be helpful, please, for my first question, if you could just level set on IQOS' designation in your international markets in terms of the type of tobacco products from a tax perspective.

So I guess, Vivien, if I understand what your question is, how is our heat-not-burn offer and product classified versus combustible cigarette in our non-U.S. geographies, correct?

That's correct. Yes, please.

Right. So I'm not sure that I'm going to be able to give one general answer because the classification can be different from one country to the other. I would say, today, probably the fact that the excise duty applied to our IQOS product is differentiated in the vast majority of the market show that the treatment is differentiated. So the product is addressed already in a distinct manner on that particular element, recognizing that it's a different product with a different feature than the combustible cigarette.

So we are, of course, going to see some situation that can be different from one market to the other. We are certainly welcoming a regulation that will further clarify the fact that this heat-not-burn product are clearly different and a better alternative to combustible in the future. And as I think I mentioned, we see the regulation progressing nicely country after country. To take that into account, I've been taking a few example during my previous speech.

And we expect that to continue. So we expect more and more government regulator to further clarify distinction between heat-not-burn and other reduced-risk product and combustible cigarette and come as well with different regulation. And as you know, we are calling for a differentiated approach on 2 items certainly on the way we can communicate on this better alternative and better product than the combustible cigarette and also, of course, on taxation to make sure that we have an incentive to push the smokers to this better alternative for their health.

That's helpful. And then my follow-up, if you could just provide your assessment of the risk of other countries potentially implementing a nicotine cap on combustible cigarettes.

Well, I think that is something that, as you rightly said, again, is not implemented anywhere today. And I think it's an idea that certainly would have to be investigated in all its dimension. I think that, that could have a number of impact in term of illicit trade, in term of people smoking actually more combustible product to get to the same kind of nicotine dose and, of course, therefore, with negative impact.

So I think at that stage, frankly, it's too early to say whether this is something that could have the right intent. In any case, that would have to be coupled with very strong awareness, availability of better alternative and certainly starting with heat-not-burn if we were to work. And that should be perceived as an incentive for people to quit smoking or to switch to this better alternative and certainly, heat-not-burn being the first one, that could be perceived as a nice and satisfying alternative for smoker wanting to go for a better product.

So I think that the idea is -- and it's not new because I think the FDA had put the idea on the table already in 2017. I don't think that much work has been done so far on all the potential consequences. We believe that a lot of work would have to be done on the impact and a lot of scientific evidence would have to be gathered and study on that. And in any case, for us, that would have to be coupled with very strong awareness, availability and present that as an alternative for people who don't want to quit but want to keep consuming nicotine.

Our next question comes from the line of Owen Bennett of Jefferies.

I just wanted to focus on the incremental commercial spend in the second half. Could you maybe give some more specifics around what this will be behind? Will it largely be focused on the rollout of VEEV and ILUMA? And then linked to this, I was just wondering how many markets realistically are you targeting for VEEV and ILUMA to be in by the back end of the year?

Yes. Sure, Owen. So on the commercial spending, of course, here, it's expecting, we believe, realistically that in many market, the situation on COVID will gradually improve. So everybody believe that in many markets, with the vaccination and positive evolution starting in the summer, we're going to see through H2 a gradual improvement.

So as you know, during a significant period of time because of COVID, we've been somewhat limited, restricted in commercial action, I would say, across the portfolio, but of course, starting on our IQOS business. So as we see the market opening up, it will, in a general manner, be time to be back on communication, on making our IQOS product known. Build awareness again around IQOS is absolutely key in building our IQOS business. And obviously, that will trigger more commercial and marketing activity.

On top of that, you're absolutely right, that will be a period of very important launch with ILUMA and VEEV. Although VEEV has been started to be launched, we expect a number of market in the second part of the year. We'll see exactly what is the final number. We want to make sure that we do that well with the right focus.

On ILUMA, you can expect key market to be first on the priority list for launch. So I'm not going to disclose at that stage the names, but you certainly expect a key market for us on IQOS to be coming very first on the list. And of course, that will require specific investment to make sure that smokers or other already RRP user understand what is the benefit of ILUMA, why it is an even greater product than IQOS 3 DUO and generating more conversion, more loyalty to our product. So that will require nice investment in the second part of the year. So that is really what is behind the $300 million to $400 million that we are mentioning here.

Our next question comes from the line of Bonnie Herzog of Goldman Sachs.

I wanted to ask maybe a follow-up on ILUMA. Just trying to understand, as you roll this out, what's the expectation of how incremental this can be. I mean I guess I'm wondering from your expectations internally, are you expecting to see a lot of current or dedicated IQOS users upgrade to this device? Or are you expecting for a lot of new users coming into IQOS?

And then since you're introducing this broad range of consumables with ILUMA, how -- should we assume that there is some level of incremental cost view related to that and therefore, a margin drag or not necessarily? Just trying to think about how accretive this could be for you.

Yes. Sure, Bonnie. Happy to answer on these 2 points. So on the impact of ILUMA, we broadly expect ILUMA to be positive. Well, first of all, of course, on acquiring new smokers and converting new smokers because they're going to find a more intuitive, easier-to-use product. And we may convince with ILUMA a smoker that we did not manage to convince so far. So that's the first element.

Second, of course, we're going to also have a number of IQOS user or other heat-not-burn tobacco product user switching to ILUMA because it's really a severe product with a lot of benefit for the consumer.

And last, we believe that in term of loyalty and people fully adopting the heat-not-burn practices and not moving back to cigarettes, the fact that it's a better product is also going to play a very nice role. So we expect to have people abandoning and switching back to cigarette to be nicely lower once again because it's much easier to use, it's an overall better experience. And we think it's going to be really having a nice impact on that one.

So as you can see, we expect several driver behind this ILUMA innovation to further boost our performance on IQOS globally.

Regarding consumable and globally as a launch, I would say, you should expect, like always, when you launch a new product, you are coming with a product that is not fully optimized in term of manufacturing productivity. It's a new product. At the beginning, the volume are low. You've made some investment. It takes some time to be fully optimized.

So there will be -- beyond the cost of launching the product for marketing and commercial reason, there will be some impact at the gross margin level at the beginning because it's a new product and there will be a ramp-up on the profitability of this new product and on the consumable margin on this new product. And that is, of course, taken into account in our guidance.

Okay. That's very helpful. And then I wanted to circle back to some of the news that came out yesterday regarding a potential cap on nicotine levels on cigarettes in the U.S. So I guess my question is, wondering if there's anything you can do to accelerate the rollout of IQOS in the U.S. since I imagine, if a nicotine cap would ever be implemented, as I see it, IQOS would have a distinct advantage. So I'd love it if you could touch on that.

And then maybe your latest thoughts on potentially entering the U.S. market with VEEV. Wondering if that might now become more of a possibility? And if so, will you or have you submitted a PMTA?

So just on the second one, on VEEV, it is certainly our intention at a certain point in time to submit a PMTA. We have not done it yet. And I don't have the time line yet when we do that. But yes, it is certainly our intention to do that at a certain point in time.

Now on growing the IQOS business, of course, we will work with our partner, Altria, there. Remember, we are not commercializing IQOS in the U.S. We have licensed the IQOS commercialization to Altria. Let's not overreact to what is even not a news. I think it's a press article yesterday. And therefore, we should not run too fast to conclusion or believe that the world is going to change overnight. I think it's just a press article.

But now we are convinced that the FDA has one clear objective, which is to promote a policy for harm reduction that will go through innovation and based on scientific evidence. And they want to supervise that. The MRTP that we received on IQOS 2.4 signaled that they see IQOS as a positive contribution and, according to their own words, that it's appropriate to promote public health. So that means that we have with IQOS a role to play that we believe that this vision of the FDA is something that we can accompany and that we can foster and help to develop with our innovation and with IQOS. And of course, we'll make sure that with Altria, we try to maximize what we can do there.

Our next question comes from the line of Adam Spielman of Citi.

I have two questions. The first one is on IQOS market share. Now in the first couple of years, you've seen very good growth in 4Q versus 3Q and 1Q versus 4Q. And then market share has stalled, and you can see that, for example, on Slide 19 and Slide 21. But sort of 2Q and 3Q, there's been no growth in Japan or in -- or little growth in the EU and in Russia. And I guess the question is, should we expect the same sort of pattern in 2021? In other words, great growth in 4Q, you just delivered good growth in Q1, but then the market share will be pretty stable for the next couple of quarters in your key markets.

Adam, well, I think certainly the element, but I'm sure you have that in mind that you need to take into account is, first of all, that there is an underlying seasonality in many market that is impacting the volume on CC and therefore, the denominator being impacted, that is even if IQOS continue to grow and -- globally, heat-not-burn continue to grow very nicely, that is impacting the overall market share.

And in addition to that, the COVID impact on border closure impact, impact on illicit and some market that was not tracked that emerged and that was mainly CC business, of course, there, again, changing the denominator has been impacting the market share. So it's going to be a mix, we believe, in 2021, still with impact from the COVID of this normal seasonality plus the still specific impact linked to the COVID.

Now we target progressive growth overall. But it's true that on certain market, we may have after a very strong acceleration in 1 quarter. For all this reason, the following quarter, that could be with a lower growth and even stable with, of course, year-on-year, it's still very strong growth, but you appreciate that. It's sequentially that the market share is potentially not growing at the same pace.

It doesn't mean, of course, that the volume even sequentially are not growing either. You can have volume growing as well with the market share stable. So I think market share has to be taken with a pinch of salt and should be appreciated over a longer period of time to be meaningful in what they say.

That's very helpful. And my...

I hope that makes sense.

Yes. Yes. That's helpful. And my second question is around your quarterly EPS guidance. And really, the question is whether you're worried that people are beginning to disregard it and sort of consensus is just sort of -- well, not consensus, but the way the market thinks about you is no longer under your control.

Now let me try and explain that question a bit more. In the past 2 or 3 years, every time you've given guidance on a quarter, you've beaten it massively. I, frankly, no longer take much notice of it or at least if you give a guidance for a certain amount of EPS, I think it's probably going to come in 10% or 12% more. And it started again this quarter. And yet the shares are fundamentally flat. Now there might be other reasons for that. But it looks to me as if the market is sort of disregarding your EPS guidance on the quarter. And to me, that seems quite a dangerous situation for you. And so I was wondering if you think that's right. If you're worried about it, why you didn't actually -- if you thought you were going to beat when you shipped more at the end of the quarter, you didn't tell the market? And how you think this dynamic is going to play out going forward?

Yes, Adam. So taking your challenge on guidance and what we deliver, I would identify 2 sources for 2 reason, 2 driver for beating often the guidance. The first one, and I think it's a good one, is the fact that we are often surprised by the strength of the IQOS business. So we expect something and it's coming even stronger, which is the case in this Q1 for some of the beat. So we are trying to make a fair assessment of what we can expect. And then when things are coming better, we take that as good news. But it's true. We've been too cautious in the way we've been forecasting.

The other one, which I hope everybody understand, is that in today's environment, it's more difficult to anticipate, predict things because you have a lot of volatility. And we've been -- it's truly no surprise by seeing that we did not necessarily anticipate well. And that can be a spending that we thought we would do even in March and that we eventually did not do in term of investment and we are going to do that later in the year or some movement in market that we are not well anticipated, again, with the COVID impact creating a lot of nervousness, volatility and, frankly, somewhat a roller coaster in some of the attitude of the trade and even pantry loading from customers.

So that would be really the 2 driver explaining why we've been beating on a few occasion our guidance. And when we know early in the quarter that we're going to beat, I mean, we share with that, when it really happen at the end of the quarter, I think we believe that it become clear at a stage where we say we're going to -- we see that very close to the communication, if you want.

Now on your challenge of -- or your question, does it mean that the market is no longer following you, well, I don't think this is the case. I think everybody understand the specificity of this COVID situation and accept that there can be volatility in things that we don't anticipate well. And then on the strength of IQOS, I think everybody can have a view on what we can deliver. I think we are today revising upwards the guidance on the number of HeatSticks for the year to 95 billion to 100 billion. I think based on the Q1, that's really sharing with all investors, shareholder, analyst the best possible assumption that we can make and really reflecting our vision at that stage.

Our next question comes from the line of Michael Lavery of Piper Sandler.

Just wanted to come back to your comments about pricing on HeatSticks and how you've begun to differentiate a little bit more there. And if -- I assume if I heard you right, you said you're now doing both above and below the original price points you've had. Obviously, in Japan, we saw with the HEETS launch a lower price points introduced.

But can you give a little more color on how you're doing above where you have been price points? And is there additional -- a new brand you have or a second or a third one? And just how that's positioned and if it's not too, too early, what you're seeing so far with that?

Sure. Mike, happy to do that. What is happening on our IQOS business and on the consumable is typically what you would expect in a market -- consumer good market where things start to mature a little bit. And I'm using this word with a lot of cautiousness, of course, because it's a very young market still. But in a few market like Japan, for instance, a few other market where we are now double-digit market share, it's maturing a little bit.

So typically, the consumer, the customer will expect based on his purchasing power, his purchasing based on his personal lifestyle and what he wants to enjoy or what he want to say about his life or her life around him will want to have different, I would say, positioning on what he's consuming.

So when you go for innovation, what we did with the HEETS consumable, you have one single reference at the beginning. And then rapidly, you see the need for segmenting the market. There is a category of the consumer that will be very keen to have an even superior experience. So to get to an even better consumable and really to pay more for that, so to have higher expense.

So that's what we have with whether the Marlboro HeatSticks in Japan or HEETS Creation in Russia, you keep the premium below the hyper premium, if you want. And then at a certain point in time, there is also a need for a medium and probably, later in the future, for a medium minimum positioning because other consumer will be keen to have an inferior overall experience but still great, rewarding versus what they used to have with the same category of combustible and, of course, at a lower price point.

So I think we're just doing the right commercial marketing job to make sure that we give satisfaction to all the expectation of our customers. It happened gradually. It's not relevant yet in every country. But as more and more country are becoming a bit mature, that will become increasingly relevant in more and more market in the future.

Okay. That's really helpful color. And on your sort of "mature Japan market," where you grew 3 or 4 share points year-over-year. I just want to make sure I understand some of the dynamics there. You give the adjusted share, which, of course, excludes some trade moves, but also cigarillos and then the other share, the gap between those has widened a little bit. Over the 5 quarters you show, it's like 1.3, 1.5, 6, 9 and then 2.6. Unfortunately, we don't have great visibility on cigarillos. Is it just growth in that segment the key driver there? Or is there also a little bit of an inventory build we should have in mind as we think about modeling 2Q and beyond?

No. Michael, there is no concern of inventory build whatsoever. That's certainly the level of cigarillo. Remember, that is a specific category. The tax advantage will fully disappear next October, but that's still until now a very dynamic category in Japan.

So what we are, as I said, seeing in Japan has been following the October excise duty increase and price increase, a very, very nice reaction from our IQOS business altogether, both Marlboro HeatSticks and HEETS. We've been gaining very nicely market share at the end of the year 2020 in Q4. It continued in Q1. And therefore, we are disclosing very positive and genuine market share growth during the last 2 quarter, and we're very happy with it.

Our next question comes from the line of Chris Growe of Stifel.

Questions were asked. I have just two quick ones for you. I was just curious in relation to IQOS, you've had really strong development of market share in Russia and the EU. Those are also markets where you continue to build your availability of the product. Do you have a rough approximation of how widely available IQOS is, say, in the EU and Russia? Is there still more distribution potential in those markets to get it in front of more consumers?

Well, clearly, we said that in Russia, we have not a full coverage of the country yet. In the EU, we have a number of country where we are in the big cities, but not yet with an important full coverage, I would say, with a lot of capillarity.

I think Jacek, at the time of the Investor Day, highlighted the market share that we have in key cities and signaled that if we look backwards, the market share a few years upstream are -- in big city are a good indication of where you can get the whole market a few years down the road.

So I think that that's a pretty good indicator of the fact that we managed, of course, to get even higher market share in key cities than the overall country. And the fact that we have done that in key city mean that we are very likely if we continue to do a good job to reach the same kind of market share globally for the country. But of course, it's not the end of the road because at the same time, we'll keep increasing share in the big city. So it's an ongoing improvement, if you want. But that's I think the way you should be looking at things.

Okay. That's helpful. And just one other question in relation to combustibles and an area where you've had a little bit of share pressure again this quarter, and there's some reasons for that. But I just was curious, when I think about commercial investments in the second half of the year, I always think of that in relation to IQOS and reduced risk products. Do you need to apply more money, more attention, whatever the right word is, towards combustible cigarettes to try to shore up some of that market share decline? I know some of this is being generated by the success of IQOS. But just curious how you're looking at that. And is there any kind of change in the competitive dynamic you're seeing in combustibles?

I mean we're certainly seeing competition quite active on combustible because for many of them, they have only little presence in RRPs. So they are trying to protect and build their business there. And especially, sometimes they are under pressure because of the growth in the heat-not-burn category.

Chris, we are just reminding everybody that maintaining our leadership in CC is an absolute priority. We need this leadership in order to make sure that we keep the link with the smoker that we want to convert in order to keep the impact with the trade to bring our RRP offering to customers and, of course, for the financial resources that you provide in order to invest behind RRP.

So you should expect us to continue to invest on CC to maintain this market share. It is clear that although it's not going to be the majority, but there will be some investment in the second half on the CC business as we defend our business. And as we see some of the markets where we've been sometime hit hard by the COVID and we talk about the social consumption that has been hitting Marlboro, well, as we think the world is back to more social life in the second half, that would probably be a time to be back on making sure that we maintain and further strengthen the leadership on Marlboro, as an example.

Our next question comes from the line of Pamela Kaufman of Morgan Stanley.

So I just wanted to come back to understanding your guidance and the cadence for this year. Given the strength in the first quarter and the outlook for Q2, your guidance for EPS implies a moderation from about mid-20% growth in the first half to high single-digit growth in the second half. And obviously, you pointed to added incremental investments. But are there any other factors impacting the second half outlook? Because when -- even when adjusting for the added incremental spend, it implies a notable moderation in growth. So just trying to understand what [consistency is that] and how conservative it might be.

I'm happy to take that one. So I'm sure we've highlighted the fact that the Q1 margin has been helped, of course, by some deferral of investment on SG&A. And we signaled the fact that we'll be much more active in H2 and the $300 million to $400 million extra investment versus the first half. But we also signaled that gross margin has been -- I mean performance on gross margin is absolutely impressive in Q1, and we're going to deliver a very strong performance on gross margin rate improvements through the year.

But we flagged the fact that Q1 had been boost as well by nonrecurring element on manufacturing productivity. And therefore, we think that as it's not going to be reproduced, we're going to have here a moderation. We also are going to face, and that was Bonnie's question previously, some impact coming from the launch of ILUMA and the consumable of ILUMA where there will be some pressure on gross margin because of it is -- of the launch and the time for the ramp-up on manufacturing productivity. And we will have also a number of investment that will be in the gross margin on distribution in the second half.

So if you combine the fact that Q1 was exceptional for a few reason and the fact that there is both at the gross margin level in Q2 some element that will be impacting negatively plus increased investment, that is driving the outlook for the margin in the second half. Although, as I said, we're going to keep with a very nice margin improvement, but I'm sure you've noted that already.

Also, I just wanted to ask about IQOS VEEV learnings and performance in your initial launch markets. I understand you're leveraging your existing IQOS platform to commercialize these. So how are you steering consumers across the various products?

Yes. So at that stage, Pamela, it's very early stage, few market, very preliminary. We have very good feedback from customers reflecting the fact that it's a superior experience versus most or traditional vaping experience.

So we are collecting the data. We are reviewing the first information coming from these markets. And when we have a bit more element to share, we'll do that. I would say for the time being on the limited number of market and with very small volume, we are happy with the qualitative feedback that we are getting from these markets.

Our final question will come from the line of Gaurav Jain of Barclays.

Coming back to the questions which have been asked on repeated earnings beat and earnings coming ahead of guidance. How does this impact your thought process around the magnitude and timing of share repurchases?

I don't think that this is having a meaningful impact, Gaurav. I think we've signaled previously that we are absolutely on track provided, of course, that we receive Board approval to start share buyback in the second half of the year, as announced at the time of the Investor Day. I'm not sure that at that stage, we are building a strategy based on that. As I said, I'm hopeful that with the COVID headwind abating, we're going to be better forecaster in the future for our quarterly guidance. So I don't take that as a kind of element that would be here to stay.

Sure. And my second question is on -- and maybe I'm incorrect in what I'm saying, but as I understand, a pack of IQOS has about 6 grams of tobacco while a pack of cigarettes has 16 gram of tobacco. So does it imply that a pack of IQOS has lower nicotine versus a pack of cigarettes, which could therefore be something which helps you in this debate around nicotine caps?

No, Gaurav, not necessarily. It has an impact on some time in some country, not everywhere, on the excise duty because excise duty is on the weight of tobacco in several countries in the world. But the weight of tobacco is not directly going to guide the nicotine content that you're going to inhale through IQOS consumption or -- versus combustible consumption.

And that was our final question. I'd like to turn the floor back over to management for any additional or closing remarks.

Well, thank you very much for joining.

Thank you...

That concludes our call for today. Sorry, Emmanuel. Unless you had a comment...

No. No. I want just to thank everybody for attending the call today, and we look forward to talk to you soon.

Thank you. If you have any follow-up questions, please contact the Investor Relations team. Thank you again and have a great day.

Bye-bye. Bye, everybody.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect.