菲利普莫里斯國際 (PM) 2022 Q1 法說會逐字稿

Good day, and welcome to the Philip Morris International First Quarter and 2021 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 would now like to turn the call over to Mr. Nick Rolli, Private -- Vice President of 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 2022 first quarter results. You may access the release on www.pmi.com. 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. Figures and comparisons presented on a pro forma basis entirely exclude PMI's operations in Russia and Ukraine.

In the third quarter of 2021, we acquired Fertin Pharma, Vectura Group and OtiTopic. On March 31, 2022, we launched a new Wellness and Healthcare business, Vectura Fertin Pharma, which consolidates these entities. The operating results of this new business are reported in the Other category. Business operations of our Wellness and Healthcare business are managed and evaluated separately from the geographical segments.

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 Jacek Olczak, Chief Executive Officer; and Emmanuel Babeau, Chief Financial Officer. Over to you, Jacek.

Thank you, Nick, and welcome, everyone. I hope you are all safe and well. Recent months have been extremely challenging for many of us given the tragic events related to the war in Ukraine. I would like to express our sadness and solidarity for the people of Ukraine.

Our primary concern is for our employees and their families, and we have been doing everything we can to support them with 3 priorities. First, evacuating our colleagues. We have evacuated over 1,000 colleagues and family members from the country and supported more than 2,700 hours to move from conflict zones to locations away from the heaviest fighting. Second, we are delivering critical aids to people that cannot leave or who decided to remain in Ukraine. And third, we are providing accommodation, immediate assistance and a path forward to those who left the country.

In addition, we have already contributed around $10 million in funds and donated essential items across the country directly to humanitarian organization and through our own employee-led initiative, Projects with a Heart. This includes providing medicine, food, clothes and a variety of other items to our colleagues and to the broader population; the purchase of 25 ambulances and the setup of a mobile hospital. Based on our current visibility, we estimate an additional cost of around $25 million for additional support to employees this year.

Our colleagues in neighboring countries continue to provide vital support to all people arriving from Ukraine to seek refuge. Our heartfelt gratitude goes to everyone involved in this generous efforts to help at such a difficult time.

In terms of the impact on our business operations, the production at our Ukraine manufacturing facility in Kharkiv remains suspended. While business activities in Eastern Ukraine have been mostly heavily impacted, we have seen some resumptions in areas where conditions allow as we seek to maximize product availability and service to consumers using existing inventories on hand. We are also now planning to import products from other manufacturing location, although this may involve higher costs.

We continue to pay salaries to all our Ukrainian employees and to provide substantial in-kind support to them and their families. As communicated in our March 24 press release, PMI's Board of Directors and senior executive team are working on options to exit the Russian market in an orderly manner in the context of a complex and rapidly changing regulatory and operating environment. This is no easy task in view of recently introduced complex legislation, but we are committed to seeking a viable path to exit the market while supporting our employees in Russia for this period.

It is also clear that we cannot continue business as usual in light of regulatory and supply chain disruption, which has already impacted the Russian business in Q1. We have taken concrete steps to scale back our operations such as the cancellation of all new investments and product launches, including IQOS ILUMA and IQOS VEEV. We are delisting 25% of our cigarette products, including Marlboro and Parliament SKUs. We have also canceled $150 million investment in capacity to ultimately manufacture more than 20 billion TEREA sticks for IQOS ILUMA in our Russian factory.

Clearly, the impact of the conflict has also created disruption in global supply chains and exacerbated inflationary pressures in certain materials and services. However, the Q1 performance and outlook for our business, excluding Russia and Ukraine, remains strong. On a reported basis, our outlook conservatively assumes no further contribution from Russia or Ukraine from April 1. To provide a consistent view given the uncertainty and volatility of these 2 markets, we will now also provide adjusted results and guidance on a pro forma basis, excluding Russia and Ukraine from both the prior and full current year.

I will now hand over to Emmanuel to cover this in more detail.

Thank you, Jacek. We delivered a very strong performance in Q1 with a double-digit organic net revenue and currency-neutral adjusted diluted EPS growth on a pro forma basis, excluding Russia and Ukraine from both the current and prior year quarter. Overall currency-neutral results were also ahead of our expectations.

Our IQOS business delivered an excellent quarter, continuing the reacceleration seen last quarter as device supply constraints continue to ease. Our IQOS user base grew by more than 1 million excluding Russia and Ukraine, marking a very strong performance. RRP pro forma net revenues grew by plus 23%, with pro forma smoke-free net revenue over 30% of the total company. Importantly, pro forma HTU shipment volumes grew plus 18% compared to the prior year quarter. This reflects excellent progress in the EU region, continued growth in Japan as well as over plus 50% growth in low- and middle-income market.

PMI HTUs are now the second largest nicotine brand in markets where IQOS is present as our efforts on innovation, portfolio and geographic expansion drive consumer trial and adoption. The impressive start for IQOS ILUMA continues in Japan and Switzerland with very encouraging initial take-up in our latest launch market of Spain. The initial success in these 3 very different markets reaffirms our confidence in ILUMA as an exciting future growth driver for our company.

Meanwhile, our combustible business performed robustly, exceeding our objective of stable category share and delivering positive volume and organic net revenue growth. In addition to supporting strong financial performance, this also enhances our ability to maximize the switching of adult smokers to smoke-free alternatives. Overall, our business is off to a strong start. And while currency is unfavorable in 2022, we expect to deliver another year of robust organic top and bottom line growth.

Turning now to the headline numbers. Our Q1 net revenue grew organically by plus 9% in total and plus 10% on a pro forma basis. This reflects total volume growth driven by the underlying strength of IQOS, the ongoing recovery of the combustible business in many markets against pandemic-affected comparison and some positive timing impact, including inventory movements. Our total organic net revenue per unit grew plus 5.3% and by plus 4.9% on a pro forma basis, driven by the increasing proportion of IQOS HTUs in our sales mix, higher device volumes and pricing. Combustible pricing was above expectation at plus 2.9% pro forma or around plus 6% excluding Indonesia.

Our total Q1 adjusted operating income margin declined organically by 30 basis points and by 40 basis points, excluding Russia and Ukraine. This reflects a lower gross margin compared to a tough prior year comparison, where productivity was higher mostly due to timing factors. Flagged in our full year earnings, Q1 margins were impacted by higher device sales or increasing IQOS user acquisition, channel replenishment and IQOS ILUMA. As mentioned previously, the unit cost and weight of ILUMA consumable and device cost is initially higher as we ramp up production with improvement expected from next year. Inflation in certain elements of our supply chain, including energy, wages and direct materials and an increase in the use of air freight was also exacerbated by the impact of the war in Ukraine.

Despite these temporary margin challenges, we saw positive effects of the increasing size of IQOS, pricing and cost efficiency combined with our strong net revenue growth. This enabled us to deliver adjusted diluted EPS of $1.56, including unfavorable currency of $0.23, representing plus 14% currency-neutral growth. This was comfortably ahead of our currency-neutral expectations even accounting for timing benefit of around $0.06. Excluding Russia and Ukraine, our pro forma adjusted diluted EPS of $1.46 grew by plus 16%.

Turning now to our 2022 outlook. As Jacek mentioned, given the lack of visibility in Russia and Ukraine, we are now providing an adjusted outlook on a pro forma basis excluding these 2 markets for the entire year. With our underlying business reaccelerating, our growth fundamentals remain strong. Importantly, we expect to deliver organic net revenue growth of plus 4.5% to plus 6.5% compared to 2021 pro forma adjusted net revenue of $29.2 billion. This is both our previous forecast trajectory for total PMI, despite an approximate 0.5-point drag from the shift to hyperinflationary accounting in Turkey.

This range incorporates the risk of supply chain disruption for certain materials, a somewhat slower TEREA production capacity buildup due to the production cancellation in Russia, part of which was designated for export, the remaining uncertainty on full device availability and the pace of the ongoing pandemic recovery. We expect our pro forma adjusted operating income margin to be organically 0 to plus 100 basis points higher for the full year.

As mentioned at full year results, we expect a lower gross margin as we invest in new innovation and incurred temporarily higher unit and transportation costs for the fast growth of ILUMA. Since then, we have observed increased inflation in raw material and energy prices and additional supply chain costs due to war-related disruption including a temporary increase in air freight for both HTU and select cigarette products.

Higher expected device sales from the tremendous uptake of IQOS ILUMA and easing of device supplies constraint also have an initial dilutive margin impact. Despite this added headwind and the further expected COGS increase of around $300 million compared to our initial expectation, we remain confident that we will achieve organic pro forma margin expansion as our strong revenue growth, favorable product mix and cost saving initiatives deliver sustainable accretion. We forecast pro forma currency neutral-adjusted diluted EPS growth of plus 9% to plus 11%, also above our prior total PMI full year guidance. This translates into a pro forma adjusted diluted EPS range of $5.35 to $5.46, including an estimated unfavorable currency impact of around $0.63 at prevailing rates. This compared to our previous 2022 adjusted diluted EPS guidance of $6.12 to $6.30 provided in February, with the difference primarily reflecting the exclusion of Russia and Ukraine and an incremental unfavorable currency impact.

The underlying IQOS growth outlook remains excellent. On a pro forma basis, we expect to deliver between 88 billion and 92 billion HTU shipment volumes, representing plus 20% to plus 25% growth over the pro forma prior year of 73.5 billion units. This excludes the nearly 5 billion unit shipped in Russia and Ukraine in Q1. And while we conservatively assume no further such contribution from April 1, this imply a total outlook of 93 billion to 97 billion units for the year. We continue to expect pro forma HTU shipment to be modestly ahead of IMS for the year after lagging behind in the second quarter, as I will explain later.

As outlined in today's release, there are a number of other assumptions underpinning our outlook. We expect the total industry volume of cigarette and HTUs excluding Russia, Ukraine, U.S. and China, to decline by up to minus 1%. Given our leadership in smoke-free products, the structural growth of the category and its growing proportion in our business as well as stabilizing share in combustible, we expect to gain share. We therefore target positive total PMI pro forma shipment volume within the range of flat to plus 1%. We assume full year combustible pro forma pricing of around plus 3%, now including the adverse impact from hyperinflationary accounting in Turkey.

The pricing environment is improving, including in Indonesia, although challenges remain due to ongoing pandemic-related impact and disposable income pressures. Our other assumptions include around $10 billion in operating cash flow and an effective tax rate of 21% to 22%. We continue to expect full year capital expenditure of around $1 billion. Despite the impact of the war in Ukraine, our balance sheet remains strong and we remain steadfastly committed to returning cash to shareholders through dividend and opportunistic share repurchases.

With regard to the phasing of pro forma performance this year, we expect a robust H1 overall with margin expansion and adjusted diluted EPS growth weighted to the second half. In large part, this reflects the reacceleration of IQOS as device supply constraints ease, with a sharp recovery in device volume as we replenish channel inventory for user acquisition and we supply the accelerated ILUMA replacement cycle in Japan. In addition, our average device price is lower than the prior year, reflecting stepped-up commercial activity to drive acquisition, including the broadening of our device portfolio with LIL and ILUMA ONE.

While our devices continue to be priced at a meaningful premium to heavily discounted competitive offering, we have already seen encouraging signs in stabilizing our high category share. Moreover, as we adjust our supply chain flows to prevailing global disruption in various material and logistic services, combined with the effect of the war in Ukraine, there may be a risk of short out-of-stock situation on certain cigarette SKUs in select markets. And we are making adjustment to some product to reflect the availability of specific material. The reorganization of supply chain flows will contribute to the later timing of shipments to certain markets.

We notably expect Q2 to be impacted by a number of temporary or specific factors, including the reversal of certain Q1 timing benefit. Organic pro forma net revenue growth is expected to be low single digit with other notable factors, including the delayed timing of HTU and cigarette shipment to Japan with an approximate 2-point drag on growth and a further impact from the shift to hyperinflationary accounting in Turkey, where the Q2 exchange rate comparison is accentuated. We expect total PMI pro forma HTU shipment of around 20 billion in Q2, partly reflecting around 3 billion less HTU shipment to Japan than originally planned. This compared to 18.7 billion pro forma in Q2 2021. We expect this 3 billion unit to move to H2, generating a further growth acceleration in the third and fourth quarters.

For Q2 pro forma operating margin, the disproportionate impact of the catch-up in device shipment will be accompanied by a corresponding step-up in commercial investment as we support the reacceleration of IQOS user acquisition over the coming quarters. In tandem with the negative mix impact of lower shipments to Japan, the highest expected quarterly increase in air freight costs of over $80 million and other supply chain adjustment costs, we expect margins to contract further before a significant recovery in the second half.

These dynamics are reflected in our expectation of H1 pro forma adjusted diluted EPS of $2.65 to $2.70, including an unfavorable currency impact of $0.36 at prevailing rates. This represents currency-neutral growth of 5% to 7% compared to $2.86 in the prior year. In combination with our strong first quarter, H1 pro forma top line performance is expected to deliver organic growth of 5% to 7% overall.

In H2, the powerful drivers of pricing, scale and efficiencies and the receding of temporary cost headwinds should outweigh inflationary pressures to deliver strong top line growth, organic margin expansion and an acceleration in bottom line growth.

Our strong 2022 outlook places us firmly on track to deliver our 2021-2023 CAGR targets on a pro forma basis of more than 5% in organic net revenue growth and more than 9% in currently -- in currency-neutral adjusted EPS growth.

We remain on track to deliver around $2 billion in gross cost savings by 2023, which is especially important given global inflationary pressures. Importantly, our ambition to become a majority smoke-free business by net revenue in 2025 remains intact. We remain confident in the rapid pace of our transformation.

Turning back to our Q1 results. Total shipment volumes increased by plus 3.5% on a total PMI basis and by plus 4.9% pro forma. This reflects continued strong broad-based pro forma growth of plus 18.4% as user acquisition reaccelerate from the Q3 2021 supply-driven slowdown and an increase of plus 3.2% in pro forma cigarette volume, reflecting the continued recovery of the total industry and of our category share.

The transformation of our business towards smoke-free products continued at a rapid pace. Heated tobacco unit comprised almost 13% of our total pro forma shipment volume in the first quarter as compared to 11.6% in full year 2021. Our sales mix is also evolving rapidly to become a majority smoke-free company. Smoke-free net revenue made up over 30% of our pro forma total in Q1 compared to 27.9% for full year 2021.

IQOS devices accounted for approximately 6% of the $2.1 billion of Q1 RRP pro forma net revenue, reflecting higher year-over-year device volume as supply constraint ease and ILUMA performs strongly.

We delivered organic growth of plus 10% in Q1 pro forma net revenue on shipment volume growth of plus 4.9%. This growth reflects the twin engine driving our top line. The first is pricing led by combustible; the second is the increasing mix of reduced-risk products in our business at higher net revenue per unit, which continue to deliver substantial growth, an increasingly powerful driver as our transformation accelerates.

Let's now turn to the driver of our Q1 pro forma OI margin, which declined by 40 basis points. Our pro forma gross margin decreased organically by 250 basis points, reflecting the factors I mentioned earlier. Conversely, our pro forma adjusted marketing, administration and research costs were 210 basis points better organically due to the positive operating leverage of IQOS growth and successful cost efficiency programs.

We generated around $180 million in gross cost savings in the first quarter, with around $80 million in COGS productivities and $100 million from SG&A. This makes over $1 billion since the start of 2021, already over halfway towards our target of around $2 billion for '21-'23. This allows us to reinvest in top line growth and mitigate inflationary pressures while continuing to deliver solid margin progression.

We continue to accelerate investments in our commercial programs, digital engine and R&D as well as a number of growth opportunities across categories and geographies. As reflected in our full year guidance, we expect our operating margin progression to improve over the course of the year as temporary headwinds and tough comparisons ease.

Our combustible portfolio performed well in Q1 with robust pro forma growth in volume and organic net revenues. This notably reflects a further recovery in Indonesia and the Philippines, supporting an expectation of organic net revenue growth and broadly stable volume in our South and Southeast Asia region this year. Increased travel also supported volume growth in Spain and Duty Free.

Our share of the combustible category continued to recover with a plus 0.4-point pro forma gain in Q1 on a year-over-year basis. This includes gain in Japan, Turkey and Duty Free as our portfolio initiatives bear fruit and social consumption resumed with Marlboro share plus 0.3 points higher.

While the category is declining over time. Our leadership in combustibles helps to maximize switching to smoke-free product, and we continue to target a stable category share over time despite the impact of IQOS cannibalization.

In terms of our overall market share now, ongoing gains for our IQOS portfolio creates continued positive momentum. We delivered pro forma share growth in Q1 as expected, including gains in Italy, Duty Free, Egypt, Germany and Poland. PMI HTUs are now the second largest nicotine brand in the market where they are present with a 7.5% share, excluding Russia and Ukraine. This includes the #1 position in 6 markets.

Moving now to the IQOS performance. We estimate there were approximately 17.9 million IQOS users as of March 31, excluding Russia and Ukraine, which had an estimated 4.8 million users at December 31, 2021. This reflects pro forma growth of more than 1 million users, a phenomenal performance by historic standards. This was driven by the resumption of consumer program in many markets, as device supply constraints receded, capitalizing on the strong underlying demand for the brand, as also evident in the very impressive start of IQOS ILUMA.

We estimate that 71% of total IQOS users outside Russia and Ukraine, or 12.7 million adult smokers, have switched to IQOS and stopped smoking, with the balance in various stages of conversion.

We were also very encouraged by the FDA's recent MRTP order for IQOS 3, with the full range of authorized IQOS products now classified as modified risk tobacco product.

In the EU region, first quarter HTU share reached 7.6% of total cigarette and HTU industry volume, representing a first quarter share gain of 2 points, including a small benefit from the timing of inventory movement. Adjusted IMS volume also continue to exhibit robust sequential growth, and we expect this to continue in the second quarter, noting that the usual seasonality of the combustible market combined with the reversal of Q1 inventory movement, is expected to result in a lower sequential share in Q2. This very good performance include strong user and volume growth across the region, with especially notable contribution from Italy and Poland. I also want to again highlight Hungary and Lithuania where our Q1 national HTU share exceeded 25%.

To give some further color on our progress in the EU region, this slide shows a selection of the latest key city offtake shares. While Vilnius continue to lead the way, approaching 40% share, Budapest, Rome and Athens are also well into the mid- to high 20s. Elsewhere, we are especially pleased by Vienna more than doubling to 5%, the strong traction in London at over 6% share, and a further acceleration in Zurich with the introduction of ILUMA.

In Japan, the adjusted share for our HTU brands increased by plus 1.9 points to a record 22.7% in Q1. This performance reflects the strength of our portfolio and the launch of IQOS ILUMA, which is also driving notable gains in Tokyo and other key cities. We expect strong offtake trends to continue in Q2, reaching around 24% market share despite seasonality effect. Conversely, as I touched on earlier, supply chain constraints will likely result in Q2 HTU shipment below the prior year. With HTU inventory consequently reduced in the second quarter, we expect the replenishment in H2 to deliver a substantial recovery.

Notwithstanding such quarterly volatility with substantial commercial activity planned and excellent underlying momentum, we expect strong double-digit HTU shipment volume growth in Japan this year.

In addition to strong progress in developed countries, we see very promising IQOS growth in low-and middle-income market. The share of our HTU brands in the 28 such markets launched by December 31, 2021, excluding Russia and Ukraine, grew by plus 0.8 points compared to the prior year to reach 2.7%. Given the large size of this market, the premium positioning of the exiting IQOS portfolio and the relatively early stage of commercialization, this represents excellent progress. As mentioned last quarter, we also intend to bring a new complementary range of heat-not-burn devices and HTUs tailored to emerging markets towards the end of this year.

A prime example of this is Egypt, where offtake exit share in Cairo is approaching 5% within 8 months of launch as compared to total Q1 share of 4.3%. Other notable successes, including the recently launched market of Morocco as well as Lebanon, Jordan, the Dominican Republic and the Philippines, despite pandemic restriction in Manila.

Moving now to IQOS ILUMA. We are delighted to report the further outstanding success since its launch, with sales performance and consumer reactions still exceeding our expectation. In Japan, the uptake of ILUMA devices and consumables among both existing IQOS users and legal-age smoker has been rapid, with more than 30% of the large user base up-trading since the August 2021 launch, and over 20% of sales remain to legal-age smoker new to IQOS. Moreover, the enhanced and consistently high-quality user experience, better reliability and no need for cleaning has led to significant observed increases in conversion rates, retention rates and Net Promoter Score. This bodes well for volumes with premium-priced TEREA consumables, the fastest-growing launch in the smoke-free category, reaching an offtake share of 12% within 6 months of national launch, overtaking Marlboro HeatSticks and HEETS combined to become the #1 smoke-free brand.

We now have all 3 IQOS ILUMA devices in the market following the launch of ILUMA ONE, which provides multiple consecutive use at a more affordable price point. We are also introducing a new HTU brand called SENTIA for use with ILUMA in select prefectures at a mainline price point comparable to HEETS.

Results in Switzerland have again been even more remarkable with significant sales to new user and TEREA making up almost 2/3 of HTU sales after only 5 months of commercialization. Our HTU share growth has accelerated from less than 6% in Q3 to 9% this quarter, with notable success in the German-speaking majority of the country. Our newest ILUMA launch was in Spain last month. While very early days, the signs are also very positive with device sales to new user increasing plus 50% compared to the prior run rate, 10% of existing users upgraded within the first month and TEREA exiting March at over 1/4 of total HTU offtake.

These results across 3 markets with differing consumer characteristics and level of RRP maturity are clearly very encouraging for the wider rollout of ILUMA around the world. While device supply constraints are easing, the timing of HTU availability for new ILUMA market has been somewhat delayed given the rapid uptake in the initial market and the resulting need for greater supply for each new market than was originally anticipated. In addition, the cancellation of our investment in the production of TEREA HTUs in our Russian facility has a short-term impact. As a result, further market launches are now mostly expected towards the end of H2.

With ILUMA, IQOS 3 DUO and LIL, we now have 3 heat-not-burn technology under the IQOS umbrella to serve different consumer needs and segment the market. We have an exciting pipeline of innovation on devices and consumables at different price tier.

In e-vapor, IQOS VEEV's promising results in the first group of markets continue. VEEV is a premium proposition with an average price premium to competitive device of 20% to 30%, making these results especially encouraging as we pursue a differentiated and profitable category leadership position over time. We see further success in Italy, reaching almost 20% offtake share of closed-system pods, with rapid progress also visible in Croatia within 8 months of launch.

In the Czech Republic after some temporary supply disruption at the start of the quarter which affected Q1 share, rapid growth has resumed. VEEV was present in 7 markets at March 31, and we plan to add more this year with timing subject to device availability. Separately, our relaunched commercialization of nicotine pouches under the Shiro brand in the Nordics is progressing well with positive consumer feedback.

Moving to sustainability and our ESG priorities. I'm happy to share 2 important development published in our 2022 proxy statement. Firstly, our Board of Directors updated our company's statement of purpose, expanding it beyond smoke-free to better reflect the role of wellness and health care in our corporate strategy and transformation. Second, the introduction of a bespoke Sustainability Index explicitly links our ESG performance to 30% of long-term compensation. Further details will be shared in our Integrated Report on May 17 and further dedicated disclosures.

Product health impact remains one of our most critical ESG priorities, and the growing penetration of smoke-free products around the world is accelerating the end of cigarette as legal-age smokers switch to better alternative. There is a growing body of scientific and real-world evidence of the substantial risk reduction potential of smoke-free products compared with smoking. While challenges in some markets are to be expected, we continue to support regulatory and fiscal framework that recognize the positive impact tobacco harm reduction policies can have on public health. A recent example of this is Italy, which has established distinct excise tax category for heat-not-burn, e-vapor and nicotine pouches.

Thank you. And I will now turn it back to Jacek.

Thank you, Emmanuel. Despite the challenges in Russia and Ukraine, we have delivered an excellent start to the year with a strong recovery in IQOS user growth, an exceptional initial results from the groundbreaking innovation of IQOS ILUMA. As we covered recently at CAGNY, we have a rich pipeline of further smoke-free innovations to expand and grow across new and existing categories and geographies.

Our combustible business is now stabilizing category share despite the impact of IQOS cannibalization, which allows us to accelerate further switching of smokers to better alternatives.

We also continue to invest for long-term growth through the development of innovative wellness and health care products, which seeks to deliver a net positive impact on society. Our 2022 fundamentals are strong, with a pro forma expectation of 4.5% to 6.5% organic net revenue growth and 9% to 11% currency-neutral adjusted diluted EPS growth. Despite the significant inflationary pressures and disruptions in the global supply chain affecting first half and the full year, we also expect our organic operating income margin to expand to up by 100 basis points.

In addition, we have taken the conservative assumption in our reported guidance of no further contribution from Russia or Ukraine from April 1. Overall, we are very confident in the near- and midterm growth outlook and remain committed to sustainably rewarding shareholders over time as we continue our transformation.

Thank you. And we are now happy to answer your questions.

Operator, this is Nick Rolli. Can I just interrupt for one second? I understand we had some technical difficulties with the webcast, and I apologize for that. The full script and slides are posted on our website, so please access www.pmi.com. And we will correct the replay on the webcast following today's presentation. So you can go back to the website, and if you missed any of the audio sound, but you can get the script and slides on our website. Thank you. Go ahead, operator, with the questions.

(Operator Instructions)

Our first question comes from Chris Growe with Stifel.

I just wanted to ask if I could first. As I think about your IQOS guidance for the year and obviously reducing that for Russia and Ukraine. I just want to be sure, as you think about -- as those -- the new guidance incorporates your expectations, excluding Russia and Ukraine, is that the only adjustment you've made for volume and that estimate, the new 88 billion to 92 billion sticks? Is that just taking out your expectation for Russia and Ukraine for this year?

That's correct. We're just talking for the entire year, the volumes from Russia and Ukraine. But then obviously, for the Q1, we recognize what have been sold in above geographies, which is this 5 billion. Therefore, on a pro forma for the full year, excluding Russia and Ukraine, we're looking into 88 billion to 92 billion. But if you add back the 5 billion, which we already sold during the first period, the first quarter, I mean, the effect translates to 93 billion, 97 billion, which would assume or is assuming that there is no further sales of IQOS as of April 1 in neither Russia nor in Ukraine.

Got it. And then I just want to understand a little bit about the second quarter. You've talked about higher device shipments in the quarter. I think that will be a stronger driver of revenue growth. At the same time, you have some timing differences it sounds like at least in Japan, where that will weigh on revenue overall. I think you're expecting more like a low single-digit increase in revenue.

So I just want to understand, I guess, to a degree you can help in terms of the magnitude of those 2 factors. It sounds like the Japan timing may be a larger factor on 2Q revenue. And then just to understand also the availability of devices. Is it the second half when that's back to like a, I'll call it, full availability of devices? And is that a function of not having devices committed to Russia and Ukraine is providing more availability for the rest of the world? I hope that's clear.

Okay. So the first quarter shipments of the devices, on the one hand, yes, you're absolutely right, this contributes to the better rev, to the growth of revenue. But remember that the devices are putting a pressure on the margins, right? So that's the story between the devices and the impact on one hand on the revenue than the margins.

The big impact, which we expect to have in Q2 is on the supply of the shipments of the consumables, so the HeatSticks and TEREA. And as a result, among other constraints on the supply chain of stopping the investment in Russia, we need to resource that missing capacity to other locations, and it will take us a while. And therefore, we expect that we will go lower with the inventories in Japan, mainly Japan, in order to ensure on the manufacturing side, the proper resourcing we will have when we expect quite a robust growth on IMS and the market share.

And I think Emmanuel on the slide have indicated that we should think that we're aiming at the 24%, around 24% market share for the quarter in Japan. So it's nothing on the consumer level on the offtake level, but we need to do these operations through the inventories in order to resume to the normal course of shipments in the Q3 and Q4. And hence, this will drive the better performance, a stronger performance in the second half than the first half, which will be what we estimate to be impacted by the Q2 difference in a shipment.

Now with regards to the devices, I mean, we -- there is this continuous sale of the devices in the excluded geographies, right? So it's not that we stopped selling. We stopped recognizing this whole thing due to the visibility and other factors, what is happening in Russia and Ukraine. But in reality, we need to keep at least the replacement devices, right? So it's not that you can take the volume out of Russia and Ukraine and to redirect them to other locations.

We do have -- actually getting better and better, but not perfect visibility with regards to the device supplies. And do you remember, we've been very cautious about this as of second half of last year. And the moment when we had the better order fulfillment and also better visibility with regards to the future orders for this year, we feel more confident about how we can realize the -- fully realize the opportunity of IQOS. So that looks okay. It's not perfect, but I don't want to mislead anybody. It's not perfect, but it's better than, say, at the beginning of the year.

And you saw it at the moment that we regained some have almost full-fledged availability of devices, how IQOS could accelerate its growth for the user acquisition and the market share progressions in Q1. So we know that we have it, but everything hinges on a continuity and undisturbed, uninterrupted supplies of both devices and HeatSticks.

And Chris, maybe just to complement, I think it's really important that everybody understands the evolution of the gross margin in Q1, Q2 and H1 versus H2. I'm sure you remember that last year, the gross margin in H1 was extremely high. We were at 70%. The gross margin was lower and probably more normative in H2.

So what we have seen in Q1 was, first of all, facing very high comps. I think we've been describing in the presentation the various driver for the 250 basis point reduction in the gross margin. What you can expect for Q2 is this element to continue, knowing that the gross margin reference is 70% as well last year in Q2. And on top of it, we will have more device sales even than in Q1, which I think is good news because it shows the success of IQOS.

We have increased air freight costs for the reason that we mentioned and the tension on the supply chain, and that's going to have an impact on the margin. And last element, you have this mix which is a temporary element, of course, like air freight, by the way, on the fact that the volume will be lower for Japan in Q2 with the recovery and the compensation in H2. And with that, you have the reason for increased pressure, gross margin pressure in Q2, but with the compensation that will come in H2.

We will take our next question from Pamela Kaufman with Morgan Stanley.

I have a question on the 2023 outlook and how you're thinking about your targets for next year, particularly on the HTU side. Should we assume a similar reduction to your heated tobacco target as the guidance reduction for this year of about 20%? And given Russia's significant contribution to the overall IQOS business, how are you adjusting your strategy for achieving your target for 50% of revenue coming from smoke-free products by 2025?

We'll continue with the geographical and portfolio expansion of IQOS in the existing and the new geographies. And obviously, this we confronted with all the supply chain constraints and availability of devices, et cetera. So I mean we all know this.

The good way or one of the way maybe to look at the '23 targets, I believe you referred to the absolute volume target for IQOS is that, okay, let's assume that we don't have -- the lowest assumptions you can make is that we will not realize any further sales as of April 1 in the -- of Russia and in Ukraine. And that's essentially the floor of that thing.

Where do we land? I think everyone will appreciate, we need a little bit of time to really have the full visibility what is happening or what we will do with our business and you know our intentions about the exiting the Russia and also what's the -- or whatever might be the longer-term outlook for Ukraine, et cetera. There will be a bend in absolute numbers, there's no questions about it. The way I look into this whole thing, we may be in a situation that will deliver this target but with about a 12-month delay.

I mean, I am not in a position -- my thinking does not change the target. Just recognize that you may need a little bit of additional time to deliver on this target. All other parameters, the relative growth targets being the top line, bottom line and the relative growth of the -- or relative contribution, which is a very important target for us, of the noncombustible to combustible business, they remain as we have said before. And on that one, I'm confident we should be in a position to deliver this one.

But in absolute volume, yes. I mean we might have missed but the way again -- sorry for repetition, I look at this, maybe I need a 12 months more to deliver the same target for other geographies and organic growth in existing geographies.

And Pamela, on your question on how do we get to more than 50% in 2025, I'm sure you've seen that in Q1 on a pro forma basis, excluding Russia and Ukraine, we are a bit below the full perimeter of the group, but not that much below. So we're at 30% versus around 31%.

So yes, there is a bit more ground to cover to get to 50%. But given the dynamism that we see in our IQOS business and the opportunity we've been clearly showing in low- and middle-income country, we think we can catch up and deliver this more than 50%.

And then a question on new IQOS user acquisition. You saw a good recovery this quarter, just by taking out the impacts from Russia to 1 million user -- over 1 million users. Do you expect to see a similar pace of new user acquisition over the course of the year? And how much of a role did ILUMA play in that? Would there be any impact from the supply disruption on the TEREA consumables?

Yes. Did you hear my question?

Yes. I think your question was -- sorry, because we want to catch up the sentence. Your question was we can expect the same dynamics of the user acquisition, right, going forward?

Yes.

Okay. So look, I mean the 1 million, above 1 million acquisition this quarter, which already goes sequentially about close to the 1 million acquisition, the Q4, I mean, that's directly correlated to our availability of the device, to the availability of devices and a full portfolio of devices. As you know, we also play now the different price segments gains. We have a more expensive devices, mid-priced devices, lower-priced devices.

So as long as we have availability of devices, I actually think that number should -- we should repeat the same sort of the rate if not actually higher because you could see from the conversion perspective and the like, consumer liking measured by NPS and other parameters, what we're offering today really is meeting the consumer expectation.

So there's also bridging somehow to the -- before the question, that once we see the visibility on the devices, right, in the next quarter or so, and all the dynamics which we can achieve outside the Russia and Ukraine, then we would be in a position to revise what actually we will deliver in a year from now in terms of a total IQOS volume.

We will take our next question from Vivien Azer with Cowen.

So I wanted to follow up on Japan. I'm just having a hard time reconciling 2 comments that you guys made. Number one, that there was negative device mix in the quarter but that you had device growth from ILUMA, because last quarter, I thought the launch of ILUMA was mix accretive in Japan. So am I misunderstanding something or did something change?

I think that device mix, we're talking that we're signing up 3, as of now, 3 versions of IQOS ILUMA. You have a premium, mid and the lower price. Lower price was just introduced now to the market to the consumers. So obviously, in the shipments, we already had them in the Q1, right, because this is all recognized on the shipment.

And second is that these devices, I mean, the ILUMA ONE, which is the lowest price device, goes at attractive price in the market higher than the competitions, but attractive and lower than the price that we used to have on the one version of IQOS 3 before. So maybe here to Vivien what you need to look into.

Yes. Vivien, if I may, Emmanuel speaking. It's a positive in the mix within the device because it comes at a higher price. But any growth in device is negative to the mix in terms of gross margin because it's coming with, of course, a much reduced gross margin versus the consumables. So the more device we sell, you have some impact on the revenue which is positive, but it has a dilutive impact on the gross margin rate, to be very clear.

Understood. I think what I had failed to grasp was the pricing tier, so thank you both for that. For my second question, I was hoping to get some incremental color on Germany. You had meaningful share growth, both on a year-over-year and a sequential basis. Is there anything to call out there from an activation standpoint? Because the results were very strong.

No. This again comes to where cost price -- increased cost price change environment in Germany as the one thing. And second is, again, I mean, the Germany starts benefiting from not restricted access to the devices. So this again follows the same story that if we have a continuous broad range availability of the devices, we can go into the portfolio again and hence the performance. And this is one extra -- one additional comment I would make here, Vivien, is that Germany is still running on the IQOS 3.1 version, which is a blade version.

And the reasons why we went for example, to Switzerland, with IQOS ILUMA is before opening the larger market, which obviously will take a lot of volume of the device because IQOS ILUMA would be performing in the similar sort of geography. So I'm very pleased with the success so far of IQOS ILUMA in Switzerland, especially the German-speaking part, because I use this as the -- we could use this as the proxy for Germany on acceleration, of the further acceleration of the growth in Germany.

Now nothing is certain in life, but I think this is as far as we can read through the consumer reactions in Switzerland.

We will take our next question from Bonnie Herzog with Goldman Sachs.

I had a few questions on Russia. I guess I was hoping you could share maybe just a few more details on your exit from the country and really what the mechanics of that are. I guess could you help us understand what's being manufactured in the market currently? And then what about the volume your manufacturing facility in St. Petersburg exports? Can you share with us roughly what percentage of the volume is exported? And then where you plan to maybe shift that volume to and when? And I guess I'm just trying to think about all this in terms of any costs associated with that. And then is that being reflected in your guidance?

Bonnie, Jacek here. Judging by -- judging just by the number of details you mentioned in that question, you will appreciate how complex the situation is in Russia, so one by one. Russia in terms of the -- so far, production and export allocation was not really that significant. We had a much more significant plans of expanding Russia is that one of the key suppliers of new IQOS ILUMA, and hence, our decision is to immediately stop that investment as a result that we created a temporary hold for the rest of the market, partially for Russia launch of ILUMA, which we also canceled but also that Russia was supposed to contribute to the supply of the ILUMA, the consumables that are HeatSticks into other markets, including in Japan. So our first priority is how we can resource that capacity there.

Obviously, that capacity means that we have an equipment installed in Russia. And we can't -- we don't use this equipment today. What will happen to that equipment going forward, we're also working on a certain plan, but I would stop here. I will not go into more details.

Now to exit Russia in the orderly manner for us means that we need to reconcile the interest first of all of our shareholders, the employees in Russia. And you know that the ever-evolving legislation in Russia puts the significant risk or constraints of our ability to adhere. And this is only in the context of the very evolving regulatory environment, both on the international, it's obviously the sanctions, but also the legislations or legislation in Russia.

So if we want to, we have a significant presence in Russia, as we all know it. We're in the market, organically built the business over the last 30 years. This is 100% business of PMI International. We don't have any partners contributing to the core business. We obviously are connected with the local supply chains and wholesale and distribution components, but PM Izhora and Philip Morris sales and distribution is 100% Philip Morris business.

We have some shareholding in addition to this, we have a key distributor in the market, together along with our major tobacco company. And to unwind in orderly manner, all the strengths which we have in Russia is a complex endeavor. But we are committed to do so. Hence in our guidance and the decisions to look at the PMI as the rest of the business, which is doing absolutely great despite all of the headwinds which we have and so on rather than [pollute it] with something which would have limited visibility and ability to track them accordingly.

So I know that my answers have not -- gave you more clarity, but that is the best which we can say at this moment. I mean we're working on the exit, but it's presumably one of the most complication -- complicated transactions in front of the history of the group, which we're drawing from the board.

Yes, I can only imagine. I appreciate the color. And just to be clear, just in terms of the exit, do you have a target date, the full exit of the market that you can share?

Well, I mean, we are not delayed beyond what is necessary as long as we satisfied all the teams of the groups, if you like. And again, I repeat it, I mean, our -- we have a responsibility to shareholders, but we also have responsibility too in place in Russia. And overall group of stakeholders with the various expectations, okay? And you try to resolve that equation to the satisfaction of everyone, that's becoming a complex exercise. But we're working relentlessly of how to move forward. I mean I would appreciate that if there was any other size of the business and presence in the market, things could have looked differently. But this was a very big business for us.

And honestly, that kind of brings me to my second question. As I think about your new pro forma HTU volume guidance of 88 billion to 92 billion units for this year, which assuming 22% growth at the midpoint, I guess I'd like to understand the key drivers of that since the growth outlook is now I guess, above your previous guidance. But Russia really, I thought, was such an important driver of that and for your future.

So I just kind of want to understand what gives you the confidence, especially also on top of the uncertainty related to the semiconductor chip shortage situation.

Yes, thank you. So obviously, we need to make some -- we're making some assumptions on the supply chain. As I said earlier, we don't live today in a perfect visibility for all the remaining quarters of this year. But I think we have enough of the confidence to come up with this pro forma -- estimate of this pro forma guidance.

Now look, you see the continuous trajectory of IQOS growth in essentially all geographies, including the geographies that historically were a bit tougher for us, where yet we had the progress but they were not really going at the group level of the growth. And now we see that Japan, with that ILUMA and a few other locations with ILUMA already having a massive acceleration of the growth. We know that we have in our plans for this and the year after with ILUMA.

We also know that IQOS [3.1 3 DUO] which is currently the mostly sold device also continues to be very attractive. And this is continuously despite the fact that we offering our portfolio both of the devices and the consumables at a significant premium to any other market propositions. I think we're getting this confidence that IQOS continues to grow. And we're looking forward also to the moment when this will accelerate its growth. Will IQOS in the near term, excluding Russia and Ukraine, so the rest of the geographies compensate the lack of Russia and Ukraine? I think over a longer period of time, we once notice is in a shorter period of time, it might be challenging, okay? So we're not making any promises at this stage.

We'll take our next question from Gaurav Jain with Barclays.

So I have a couple of questions. Number one is (inaudible)...

Gaurav, we cannot really hear you.

We can't hear you. Could you repeat the question, please?

Sure. Is this better?

It's better, yes.

Yes, it's better, yes. Thank you.

Sorry about that. So my first question is your guidance on industry volume and your own volume, ex Russia and Ukraine. So it seems to have become better. And if I look especially at your European volumes, they are quite strong. So we have this sort of the macro pressure on consumers and inflationary pressure and Europe might be in recession, not in recession or oil price impact.

So my question is that why are you seeing stronger volumes? And is it that when cigarette prices historically used to be up 4 in Europe and wage growth was 1, so cigarettes were becoming less affordable. And right now, cigarette pricing is still 4, while wage inflation is probably 4 or 5, so cigarettes are actually becoming more affordable, and that's why you are seeing better volume trends.

Well, I think we should -- I mean we have the information of Q1 that are pointing to this evolution. It is true, Gaurav, that there are uncertainty on what's going to be the growth of the global economy in the coming quarters.

I suppose there is some trend in the market that are underlying trends in terms of demographics and behaviors. And let's face it, there is also still the continuation of rebound after the COVID. So last year was not a normal year. We are becoming much more normal. I'm not saying we're there yet, [technically in Duty Free], we're not. But in other markets, we can hope that for the coming months to be more normal, and that's going to be a positive.

So I don't know what's going to be the impact of a potential slowdown of the economy. Is it, by the way, going to have an impact on volume or more down trading and some countries in consumer going for cheaper offering. Today, what we see and we've been highlighting that with Marlboro recovering market share, we see Chesterfield being very successful. And we see, of course, great success with all our IQOS brand.

So that is what is driving for us this outlook for growth in volume. And of course, starting Q1 with a very nice growth, even if we flagged the fact that there was some -- maybe some anticipation. But I think that the Q1 numbers are there, it shows the dynamism that we are seeing in our portfolio.

Sure. And coming to the EPS guidance and the dividend. So your dividend payout ratio will now be north of 90%. So how does that impact how you're thinking about share repurchases?

And we keep seeing these cycles with PM every 3 years. You have massive adverse FX and we go back 10 years, euro used to be EUR 1.50, yen was JPY 70. Then we had 1 cycle in 2014 and 2017. Now we have another cycle of FX. And clearly, a lot of your costs are in Swiss francs and dollars. So is there something you can do so that the cost mismatch, the transaction FX mismatch is lesser? And we again get into the situation where dividend payout ratio is becoming very tight.

Well, Gaurav. So yes, of course, on the basis of the guidance that we've been giving, we would have a payout ratio that would significantly increase versus 2021. I think we've shown in the past the capacity to grow profit over time and reduce that. Our objective is to go down over time, and we did not give any kind of precise date to go down to 75% is still there.

I agree that given the adverse event that we are facing, it's going to take a bit more time to get there. That's the case, not so much -- I mean, the currency is playing, but it's really the accumulation of currency and Russia leaving the perimeter of the group that is driving that situation.

Now on the ForEx, there is 2 elements. One is the pressure on margin, and we continue to work on trying to equalize better the currency in which we are invoicing and the currency in which we have our cost. We do that with the supply chain. There are some limitations because there are a number of things that you buy in dollars. But of course, we do that through everything we buy.

But there is one element that we cannot change that we have limited invoicing in dollars. So when the dollar is going up versus most of the currency, that is an impact, which is mechanical and on which there is not much we can do. So we can work, and I think we continue to work on the margin dimension. We cannot work on the fact that we have limited invoicing in dollar.

We will take our next question from Owen Bennett with Jefferies. It appears Mr. Bennett has dropped. We will go ahead and take our next question from Jared Dinges with JPMorgan.

I just wanted to ask about the pricing environment, given inflation in places like Europe is -- it's reaching levels not seen for a long time.

Do you think there could be more of an opportunity to put through additional price increases given you are seeing cost inflation as well on a global basis, especially post-Russia and Ukraine, maybe we can see a bit more of a margin offset?

We're taking a price increase and a price variance. So the opening of the -- came in be better than we initially thought. We will see what the remaining part of the year and especially the second half will bring.

Now when we look at the inflation, I mean, we also have to look at what is the inflation of the material. So like the cost of living and what is the inflation of the income, right? Because we haven't yet seen the inflation on the income level at the concept level. So we have to find the right spot at the right balance where do we have introduced.

But in most of the geographies, I mean, at the pricing environment, I would characterize it is getting positive. I mean Emmanuel talked about the Indonesia. On the other hand, we have a very strong rebound in the volumes in Indonesia. And hopefully also Indonesia, which used to be quite important or significant contributor to the pricing will hopefully towards the end of this year or definitely '23 will resume its pricing contribution.

We had a price increase in Germany flowing through the market, as the Philippines or Turkey as now Turkey goes to the hyperinflationary accounting. But we're trying to price it widely, looking at the inflation yields, the pressure. But as I said at the beginning of the year, we already started be ahead of our own expectations, pricing variance. So let's see how does this continue through the year.

Got it. And maybe just to follow up on Southeast Asia. Clearly, it's a very, very strong start to the year in terms of volumes. What are your expectations there on the volume side for the rest of the year?

Well, there is this continuous -- remember, this is the part of the world which is still not out of the woods with regards to COVID unfortunately, right? So the situation is not really -- it didn't get back to the pre-COVID times. I believe there is some underlying growth opportunities just by the fact that if the continued recovery from the COVID situation, we should start seeing continuously better volume.

And as I said, I mean, we took a price increase in Philippines. We're taking some pricing or taking the pricing a little bit accelerated in Indonesia, but on the other hand, we're still in there. As you remember, Indonesia take a couple of rounds of steps of a price increase to pass on the beginning of the excise increase. So we still need a bit of a time in order to go into the net margin improvement territory.

But it's very much hinges essentially to keep the charge on continuous recovery and no further surprises with regards of the COVID situation.

And Jared, as we said, we expect to grow nicely revenue in the region this year, which would be a very nice evolution.

That was the last question. Operator?

And there are no further questions on the line. I will turn the program back over to Nick Rolli for any additional or closing remarks.

I think Jacek, you have some closing remarks.

Okay. So thank you, everyone, for your attention and the patience. The quarter was pretty complex and complicated for us, and since the -- due to some technical problems, the earnings call also somehow adjusted to the situations in a quarter.

I have one only comment for everyone I hope is still on the line. I would like to take this opportunity to thank Mr. Nick Rolli for his outstanding contribution to PMI and our former parent company over the past 35 years, in particular, as the Vice President, Investor Relations since the 2008 spin of Philip Morris International.

As you all, I believe will agree with me, he has been a critical contributor to the journey of our company. And I know that you, our investors and analysts will join me in congratulating Nick and to wish him all the best for his very well-deserved retirement. At the same time, I would also like to congratulate James Bushnell on his new role. I have the pleasure because I personally was hiring Mr. Bushnell some years ago to PMI in his new role as the successor to Nick Rolli, and I believe he will receive the same support and warm welcome as Nick Rolli enjoyed from you for the last 35 years. So welcome, James, and thank you, Nick.

Thank you, Jacek, Thank you, Emmanuel. Congratulations, James.

Thank you, Nick.

And thank you all on the call because I know we've had some long relationships with many of you, and I value that relationship. And that's it. So thank you very much.

Thank you, Nick.

That concludes the call. And again, we apologize for the technical difficulties on my last call, but we'll resolve everything and look forward to dealing with your follow-up questions. Thank you very much.

Talk to you soon, guys. Thank you.

This does conclude today's program. Thank you for your participation. You may disconnect at any time.