菲利普莫里斯國際 (PM) 2014 Q3 法說會逐字稿

Good day and welcome to the Philip Morris International third-quarter 2014 earnings conference call. Today's call is scheduled to last about one 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 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 2014 third-quarter results. You may access the release on our website at www.PMI.com. During our call today, we will be talking about results for the third quarter of 2014 and comparing them to the same period in 2013, unless otherwise stated.

A glossary of terms, data tables showing adjustments to net revenues and OCI for currency and acquisitions, asset impairment exit and other costs, free cash flow calculations and adjustments to earnings per share or EPS, as well as reconciliations to US GAAP measures are at the end of today's webcast slides, which are posted on our website. Please note that Reduced-Risk Products, or RRPs, is the term we use to refer to products with the potential to reduce individual risk and population harm in comparison to smoking combustible cigarettes.

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, our Chief Financial Officer.

Thank you, Nick and welcome, ladies and gentlemen. Our volume and financial results in the third quarter came in slightly above our expectations. Our organic cigarette volume decreased by just 0.4% due to an improvement in industry volume trends and higher PMI marketshares in the EU and EEMA regions, which nearly offset the relatively modest volume declines in the Asia and Latin America and Canada regions.

Net revenues, excluding currency and acquisitions, increased by 4% while adjusted OCI was up by 4.3% on the same basis. This growth was driven by the EEMA and Latin America and Canada regions thanks in large part to higher pricing, most notably in Russia. It was partly offset by previously announced investments behind our brand and iQOS.

Adjusted diluted EPS, excluding currency, grew by 10.4% to $1.59, driven primarily by continued strong profit growth across the EEMA and Latin America and Canada regions. For the first nine months of the year, we achieved a growth in currency-neutral adjusted diluted EPS of 11.9%. Let me remind you, however, that we will face a much more challenging comparison in the fourth quarter. Ex-currency, adjusted diluted EPS grew by 19.4% in the fourth quarter of 2013 and the pattern of our expenses this year is weighted much more heavily to the remainder of the year.

In addition, we will be making significant investment in the fourth quarter behind the pilot launches of our iQOS platform and Marlboro HeatSticks in Nagoya, Japan and Milan in Italy. We will also make additional investment in the continuation of the rollout of Marlboro Red 2.0, as well as the absorption of underlying costs attributable to the optimization of our manufacturing footprint.

As announced in our earnings release this morning, we are revising our 2014 reported diluted EPS guidance to a range of $4.76 to $4.81 compared with $5.26 in 2013 due predominantly to the impact of unfavorable exchange rate movements. Since July, we have witnessed a sharp decline in the value of certain key currencies versus the US dollar, in particular the Indonesian rupiah and the Russian ruble. Accordingly, at prevailing exchange rates, our guidance now includes a full-year unfavorable currency impact of approximately $0.72 per share versus $0.61 in our previous guidance.

In addition, there was one additional cent in the third quarter in after-tax asset impairment and exit cost related to the termination of cigarette manufacturing in the Netherlands and it is anticipated that there will be a further $0.01 in the fourth quarter related to the closure of our factory in Australia.

Our underlying business performance is slightly better than our previous expectations. While consumer downtrading and heavy discounting in Australia have persisted, there has been an improvement in the EU region and Indonesia and continued strong profit momentum in the EEMA and Latin America and Canada regions. Excluding the impact of currency and after-tax impairment and exit costs totaling $0.27 related to previously disclosed footprint optimization initiatives, our adjusted diluted EPS are projected to increase by approximately 6.5% to 7.5% compared to the $5.40 achieved in 2013. Our revised guidance results in a narrowing of the growth range around its midpoint.

I will now discuss the recent developments in key regions and markets starting with the EU region. The third quarter confirmed the improving cigarette industry volume trend was a decline of 3.4% thereby bringing the year-to-date September decline rate also to 3.4%. This represents a significant moderation compared to the 7.9% decline in the same period last year. We attribute this improvement to a slight decline in illicit trade, a slowdown in the growth of e-vapor products in several markets and less outswitching to fine-cut product.

The improved trend in cigarette industry volume is visible across all six of the largest EU regional markets by volume with a particularly strong improvement in the worst affected market in Southern Europe. While we do expect to see some acceleration in the decline in the fourth quarter due to recent price increases notably in Germany, and the impact of a more challenging industry volume comparison versus the fourth quarter of 2013, we are now forecasting a full-year decline of approximately 4%.

Our marketshare performance in the EU region continues to be very strong with growth of 1.2 points in the third quarter to 39.7% and a 1 point year-to-date September to 39.8%. The growth has been broadly based with share gains this year in all six of the largest EU region markets by volume. Our share growth reflects the strength of our key international brands -- Marlboro, L&M and Chesterfield. These brands now represent the top three industry brands in the region.

In the third quarter, Marlboro gained 0.2 share points to reach 19.1%. The growth momentum being reinforced by the successful rollout of Marlboro Red 2.0. L&M's share was stable at 7% with a notable performance in Germany. Chesterfield continued its particularly strong performance, gaining 1.4 share points to reach a regional share of 5.8%. The share growth was driven by Italy where it was price repositioned in February this year, as well as by successful line extensions in Poland.

The combination of more modest cigarette industry volume declines and share gains has resulted in an improved PMI volume performance. Were it not for the issues related to the excise tax structure in Italy, this would have translated into ex-currency adjusted OCI growth in the EU region year-to-date September. In addition, our profits are being impacted by costs related to the ending of cigarette manufacturing in the Netherlands and to the buildup of our commercial infrastructure in the UK. We are cautiously optimistic that as of 2015 the EU region should contribute to PMI's profit growth provided that improved cigarette industry volume trends continue.

I will now discuss some of our key markets in the Asia region beginning with Japan. Year-to-date September, industry volume in Japan declined by 3.2%, which is in line with our forecast decline range of 3% to 3.5% for the full year. The third quarter provided further evidence of our success in stabilizing our marketshare. Excluding the impact of trade inventory movement, our marketshare has remained around 25.9% since the fourth quarter of 2013. The share stabilization has been driven primarily by Lark, which is performing well following the successful morphing of the Philip Morris brand in April, as well as the recent revamp of the Lark brand family.

Our share has also benefited from the rollout of the Be Marlboro marketing campaign and the August launch of Marlboro Clear Hybrid, a smooth tasting, regular-to-menthol capsule product, which achieved a 0.6% marketshare in September. Going forward, we believe that our pipeline of new innovative products should further reinforce our competitive position in Japan.

In the Philippines, third-quarter tax paid cigarette industry volume was down by 3.2%. However, as Mighty Corporation continues to significantly underdeclare it sales volume for excise tax purposes, the trends in the tax paid market remain distorted. We estimate that Mighty is paying excise taxes on less than half of its total sales. Market research data on adult smoking incidence and adult daily consumption show continued resilience.

The Bureau of Internal Revenue issued its expected regulation on tax stamps. This requires manufacturers to affix tax stamps on all locally manufactured packs of cigarettes. However, there are still significant technical issues with the production of the stamps resulting in a delay in implementation.

In Indonesia, cigarette industry volume trends are subject to quarterly fluctuations. This was evident in the third quarter when industry volume increased by an unexpectedly vigorous 4.9%, driven by growth in the machine-made Kretek segment. On a 12-month moving basis, industry volume is up by 2.8% and for the full year, we expect industry volume two grow by around 2%.

While our marketshare remained below the previous year's level, we continue to achieve positive sequential share momentum with 35.5% in the third quarter following shares of 34.6% and 34.9% in the first and second quarters respectively. This growth has been driven by our strong performance in the growing, lighter-tasting, machine-made Kretek segment behind Sampoerna A, U Mild and Dji Sam Soe Magnum Blue. We have also seen a recent stabilization in the share of our key hand-rolled Kretek brand Dji Sam Soe as competitive brands have crossed critical price points.

Let me now turn to Russia where our business performance continues to be strong. In August, we reached a marketshare of 27.4% and on a year-to-date August basis, our share increased by 0.9 points to 27%. This strong performance was driven by above premium Parliament, mid-priced L&M and low-priced Bond Street and Next.

2014 has been characterized by significant retail price increases driven in large part by the sizable excise tax increase that took place at the beginning of the year. Retail prices have increased by some 17% in the premium segment and they are 30% at the low end of the market. This has resulted in an estimated September year-to-date cigarette industry volume decline of 9.4% and we expect a decline of 9% to 10% for the full year. However, we have been able to boost margins through higher prices.

On September 20, the cabinet submitted draft amendment to the tax code, including proposed excise tax rates for the period of 2015 to 2017. This proposal was submitted to the Duma for further considerations and approval. The amendments are essentially in line with previous legislation and do not include features that we consider to be particularly disruptive. Should the amendment be signed into the law by the President [as foreseen] this November, the new excise tax rate will take effect in January 1, 2015.

While cigarette industry volume has declined significantly this year in Russia, it has remained essentially stable in the rest of the EEMA region. This stability is attributable to Turkey, the Middle East and North Africa. Our business is performing well. We grew our year-to-date September regional marketshare by 0.1 points to 25.1%. Combined with strong pricing, this led to an increase in original adjusted OCI, excluding currency and acquisitions, of 20.8% year-to-date September.

The business outlook remains very positive thanks to the strength of Marlboro and Parliament in many key markets. Marlboro has been one of the key drivers of our favorable global marketshare momentum. In the third quarter, the brand gained 0.3 share points in the Latin America and Canada region and 0.2 share points in the EU and EEMA regions. Its share was stable overall in the Asia region.

Parliament, our (inaudible) premium proposition, has been a contributor not only to share growth, but also to improved profits as its volume increased by 9.3% in the third quarter to 12.9 billion units. The brand gained share across a broad range of markets, including Japan, Kazakhstan, Russia, Saudi Arabia and Turkey.

Pricing remained a key driver of our adjusted OCI growth during the third quarter. Our pricing variance reached $491 million for the quarter and $1.4 billion for the first nine months of the year. This has been boosted by our new business structure in Egypt, partially offset by Italy. During the third quarter, we increased prices in a number of markets across the region, most notably in Argentina, Germany, Indonesia and Spain. We are on track to achieve again this year our historical average of approximately $1.8 billion in annual pricing variance.

Let me now take a moment to provide a brief update on our Reduced-Risk Product. As I speak, we are in the final stages of preparing for the pilot launches in Japan and Italy of our heat-not-burn iQOS product platform and Marlboro HeatSticks. These launches will be made without any reduced exposure or reduced risk claims. As already announced, the official launch of iQOS in Nagoya, Japan's fourth-largest city, will take place on November 4. IQOS kits and Marlboro HeatSticks will be available at over 1000 retail outlets in Nagoya, including the world's first iQOS flagship store located in the city center. The iQOS kit will have a recommended retail price of JPY6,980 or approximately $65 while Marlboro HeatStick in regular and menthol variants will retail at JPY460 per pack of 20 or approximately $4.29 at price parity with Marlboro cigarettes.

Our HeatSticks have been classified by the Ministry of Finance in Japan in a category that results in an effective excise tax rate that is lower than cigarettes. Our second pilot launch will take place in Milan in Italy later this year. For competitive reasons, we will not disclose any details at this time.

In September, our Board approved a 6.4% increase in our quarterly dividend to an annualized rate of $4 per share. As a result, this year, we will exceed our target dividend payout ratio of 65%, reflecting our strong confidence in our business fundamentals and future prospects. Our dividend yield last Friday was 4.7%.

During the third quarter, we spent $750 million to repurchase a further 8.9 million shares at an average price of $84.54 per share. We continue to target total spending of $4 billion on share repurchases during 2014. Since the spin through the end of September of this year, we have returned over $70 billion to our shareholders through dividends and share repurchases.

In conclusion, third-quarter and year-to-date results were slightly above our expectations. As mentioned, we will face a much more challenging comparison in the fourth quarter. We have revised our 2014 reported diluted EPS guidance due predominantly to the impact of unfavorable exchange rate movements. On a currency-neutral adjusted diluted basis, we have narrowed the growth range around the midpoint to approximately 6.5% to 7.5%. While consumer downtrading and heavy discounting have unfortunately persisted in Australia, we have been able to offset this through a better performance in the EU region and Indonesia while the EEMA and Latin America regions have continued to perform very strongly.

The iQOS pilot launches in Japan and Italy this quarter mark an important milestone for our Reduced-Risk Products portfolio. We are excited to bring this product to market and strongly believe that this could represent the first step in a positive paradigm shift for both PMI and the tobacco industry.

Looking ahead to 2015 and 2016, we remain confident that our business fundamentals are improving and confirm our goal of returning to currency-neutral net revenue and adjusted OCI annual growth within our mid to long-term annual target rate of 4% to 6% and 6% to 8% respectively after taking into account the anticipated investments behind the commercial expansion of our Reduced-Risk Products. On this basis, we target a currency-neutral adjusted diluted EPS annual growth rate of 8% to 10% for this period. Thank you. I will be now happy to answer your questions.

(Operator Instructions). Bonnie Herzog, Wells Fargo.

I guess I'm trying to understand a few moving parts. On one hand, your total shipment volume was better than expected and you took share, but, on the other hand, your operating margins were down 230 basis points. So I'd be curious to hear how much of the margin pressure you experienced in the quarter was from a negative mix shift in your portfolio versus the higher costs you've been experiencing. And then could you give us a sense of how downtrading pressures have been trending so far in Q4?

There is some mix pressure, obviously, coming mainly from Asia, from Australia, but I think it's more due to the increased investment as previously anticipated and announced in the second half of the year. So we would have increased the investment in Q3 and will have more of the investment going into Q4 for the reasons which I mentioned in my remarks. This is what stands behind the movements in operating margin.

Okay. And then I have few questions on Asia, specifically Japan. Are you seeing any shift in your portfolio mix due to the tax increase? And then could you quantify for us the negative impact of inventory movements or maybe give us a sense of how much this impacted your volume and profits in the country in the quarter?

Well, I mean we could see a better performance of Lark partially following the successful morphing from Philip Morris into Lark and also from marketing initiatives, which we put behind the brand. Lark, obviously, is also slightly more lower priced than the premium brands in the market. I think it's a little bit too early to say what the pricing moves -- unequaled pricing moves over 20 and 10 years have created in terms of a dynamic behind the brands, but, yes, I think Lark is doing slightly better than a Marlboro in this comparison.

When it comes to adjustments, which we are making in Japan, essentially, we're trying to adjust the inventories to reflect the total market outlook and still year on year -- I mean our lower share, as you might notice, we stabilized our share on a sequential basis, but versus last year, we are still down and this adjustment essentially represents this one. I think you have -- just to give you a number I think on inventory, we'll have about 0.5 billion units on inventory adjustment in Q3.

Okay, that's helpful. And then my last question is on the e-vapor slowdown in the EU that you mentioned. What are you seeing in terms of the key trends and pressures on this category and then does this give you even more confidence in your iQOS platform?

The trends essentially are the same trends which I talk about where we talk about at the Investors Day on the second quarter. The consumers are moving into (inaudible) system. I think we all know the reasons behind it. The first product launches in e-cigarettes category are not really satisfying the consumer, so the acceptance rates are falling down. That's about the trends. In most of the markets, essentially in all of the markets, we see the same. It's just a continuation of the trend.

Now does this give us more optimism behind iQOS? I think it was more than a year or two years ago when we said that the current technology behind the e-cigarette doesn't (inaudible) well. We think that iQOS is by far a much better satisfying product. We have confirmed it in our test before going to the test market. As you remember, the acceptance rate, i.e. consumers who fully switch from a conventional cigarette, combustible cigarettes to an iQOS proposition were really very high, they were reaching 30%. I think we were encouraged by this one, by this result and hence, we're going to this test market. So I don't think this change in the trends or continuation of this negative trend in e-cigarette gives us more confidence behind the iQOS. Frankly speaking, we had the confidence. We are at a very high level of confidence when it comes to iQOS.

And then maybe lessons learned on pricing too just in terms of the affordability of the e-vapor category relative to where you're pricing your iQOS and then the HeatSticks. You're pricing them you mentioned at parity I think with Marlboro I believe you mentioned.

Yes, this is how we've positioned the product in Japan. Although we are not disclosing the details for Milan, but you understand our philosophy. The product has a benefit and therefore, I think that product deserves to be sold at a premium price. So this is -- I think we stay to what we have said before, that the positioning based on how much effort we have put into developing that product, despite the fact that we're not claiming other benefits in Japan, but we're aware about also the science, which we have put in validating the benefits of this product. I think it all comes together and makes this product deserving being put at the premium price.

All right, thank you, Jacek.

Judy Hong, Goldman Sachs.

So first, just maybe on FX and obviously the currency market continues to be very volatile and if we just assume maybe prevailing rates, just trying to gauge the impact on 2015 really and I get to a number something like a negative $0.35 or so. So can you just confirm that that's in the ballpark of where you see the impact in 2015 at current rates, especially when you take into consideration the effect of hedged rates on the yen?

I wouldn't go into 2015 at this stage. You know that our practice was we always gave this -- we talk about the impact of the currency on our guide -- at the time when we give the guidance for the year. One thing, which I'm not presumably disclosing anything new, if you look what is happening in the currency market over the last 24 hours, 48 hours, a week, it's an extremely volatile market. So I think another presumable reason when it's better not to give any number or confirm any sort of range at this stage.

Just on the yen though, I think the last time you talked about the effective hedge at 98 for this year, has there been any change to that number as we think about the year-over-year impact?

Yes, there was a bit of an impact. There is a bit of the impact of the yen. The effective rate will be higher than 98. In the revised guidance for the currency at the spot rate, which we gave today when we revised the impact by additional negative $0.11, the yen actually just therefore contributed $0.01. Most of the impact, which we get, which we have in these additional $0.11, is coming from Russian ruble and the rupiah, the Indonesian rupiah. So the yen just stands at the additional $0.01 very much because a large portion of our cash flows revenue from Japan is already hedged.

Okay. And then just in terms of what you're seeing in the Russian market, just wondering if any of the recent volatility in the currency fluctuation is having any impact in terms of demand or the pricing, the competitive dynamics in that market. And your volume in the third quarter in Russia was up 0.8%. Marketshare, obviously, was up, but was there any benefit in terms of any year-over-year inventory movement that boosted your shipment number as well?

No, actually the shipment volume I think was down by 0.4%. The shipment volume was not up; marketshare was up. And this partially is why our shipment volume is better than overall market performance is partially coming from the strong performance of our brands. The share advancements, which we are realizing in Russia, at the tune of 1.4 share points, so that's significant. There is obviously some timing of the shipment to other distributors, but I think overall is the performance of both Parliament, which you know that's very positive if you take into consideration the magnitude of the pricing, which we have realized in the market, but also Bond Street. So it nicely -- I think the portfolio there is nicely complementary and that stands behind the better share -- the better shipment versus the total market.

And just any color on the recent trends given the recent volatility in that market?

Yes, sorry, I missed this one. Not really. I mean you see our outlook for the full year even taking into consideration the implemented and announced price increases in Russia. Still the market is going to decline in the range 9% to 10%. If you will just calculate what is the resulting price elasticity, I mean everyone would realize that Russia has been very normal for our category, for a tobacco category elasticity range. So we're not seeing at this stage any headwinds coming from currency, from inflation or other macros. Now this is the situation as of today. I will have to obviously watch and we do watch carefully how the situations may unfold into the next period.

But as I said, I think our comfort on Russia is also coming through the well-laddered portfolio of brands and I repeat myself starting with the premium, Parliament in the premium going for the value mid-price brands, low price brands. So I think on that one, I think we should be able to hedge any potential headwinds if they were to materialize.

Got it. Okay, thank you.

Matthew Grainger, Morgan Stanley.

Hi, good morning. So just two questions from me. First, I wanted to follow up on the price mix question, specifically for Europe. I had expected to see some sequential improvement in pricing realization within the region given Germany, Portugal, Spain, but that didn't seem to materialize during the quarter. But just more at the regional level, marketshare trends were very strong; clearly, that's positive, but just wondering if you're seeing incremental downtrading overall within your portfolio or shifts within Marlboro to some of the lower price variants that are weighing on overall pricing realization?

I mean the pricing -- yes, it was very low pricing. The variance coming from the EU this quarter is partially the timing when we took the price increase in Germany and obviously, there was a negative, which is in this number coming from Italy. Just to remind, we are in the (inaudible) absorption for the three quarters of the year, obviously including the third quarter. It's going to be about behind us around the mid of the fourth quarter and obviously there was Chesterfield, the repositioning.

If I would look in detail market by market in the EU region, I would see -- I can see the positive pricing variance coming essentially for most of the countries with the exception, as I mentioned, Italy. So Italy is an overall drag if you like on the pricing variance in the region. And obviously, downtrading -- I think again I would have to go to Italy. I mean Chesterfield, which is now recorded, the marketshare well above 10%. I mean there is a bit of decline of Marlboro to the tune of about a point. So yes, there is some downtrading, but this is also the reasons why we have lowered the beginning of the year the price of Chesterfield in order to stop total marketshare erosion on our side. And the brand responded very well, so I think that part of the exercise went very well.

Okay. So really the only thing that would change much sequentially in the fourth quarter would be the headwind from Italy becoming less severe?

On the pricing variance, yes.

Okay.

On the pricing variance, because on the OCI, as I mentioned in my remarks, one of the test markets, which we will be conducting is in Italy, in the European Union and the second, EU was on the forefront and is on the forefront of a rollout of Marlboro 2.0 architecture. Hence, in our remarks, I think I made this comment that despite the fact that the volumes and our shipment volume is performing very strongly, and it's great for this year and even greater for 2015. However, this year, our profitability will be impacted as we cannot convert it into the profitability growth due to Marlboro 2.0, iQOS and some underlying costs due to the shutting down the manufacturing, cigarette manufacturing at our factory in Holland.

Okay. That's helpful. Thanks. And secondly just on currency, specifically on hedging. Given the persistence and the magnitude of the currency headwinds, have you considered at all changing the internal philosophy toward how you manage FX risk, perhaps including more active hedging or if not that, maybe encouraging local country managers to more actively offset transactional FX through pricing or discretionary reductions in operating costs?

This would require a significant change to the risk profile, if you like, which we'd like to have. As I'm presumably known to the community, most of our -- most of the impact of the currency on our results comes from the translation. That's the range of 70%, 80% of the impact, which we have on the translations, not on the transactions. So our philosophy obviously has an impact on our reported results, but I don't think we should be moving closer into something, which would add an element of speculation as a volatility into our performance.

Okay. And just to confirm, historically, we've thought of your hedging practices as isolated within sort of euro/yen and perhaps dollar/yen. Are there any others that you are actively hedging just when we're thinking about the disconnects between our currency model and --?

There are some hedges, which we are doing on the leaf, associated with the leaf purchases in Turkey, but most of the hedges are around the yen and the balance sheet hedges on our positions on the euro.

Okay. All right, thank you again.

Chris Growe, Stifel.

Hi, good morning. I just had a question for you to start off on just understand in the third quarter, maybe the fourth quarter, the phasing of costs that may be coming through and if I could just list what I've been watching. It's obviously the Marlboro 2.0. Obviously there are some costs related to that. I think that cuts across all regions. Obviously the closure of (inaudible) soon, maybe a little bit of Australia. And then I guess also related to that, the Reduced-Risk Products and is that a heavier fourth-quarter spending versus a third quarter and do you have any color you can add around the phasing and maybe in general how much those costs are burdening profit right now?

Certainly, Chris. I will give you color. But I would start with the 2013 fourth quarter because if you would look at our performance in 2013, you realize that our phasing of the cost in the last year was much more skewed toward the first half of the year or the first three quarters of the year. So just an apples to apples, I had $200 million positive cost variance in the Q4 of 2013. So that's my entering or starting position going into Q4 of this year. This is now combined that the pattern of our spending or initiatives is much more skewed towards the second half and in particular to the Q4 of this year and this actually creates the swing on the cost Q4 on Q4 going into the range of 400, maybe 400 plus even in this comparison. So this is one element.

Now drivers of this additional -- of this investment in the second half or in the Q4 of this year is as I mentioned in the case of the EU before is iQOS launching in Milan. There is some preparation cost already falling into Q3, but most of that would hit my Q4 results. Marlboro 2.0 will be the remainder part of the market in the EU, which would roll out the Marlboro new architecture in the Q4 and there was this underlying cost associated or related to the closure of the -- associated with the closure of the factory.

To give you magnitude, the underlying costs, which we carried this year due to the overall restructuring both in Holland and in Australia, it's in the range of about -- will hit my Q4 results in a range of about $40 million. So now you start adding those numbers, you will see why we are saying that the Q4 results -- I mean it will not be as great as the Q3 or Q2 this year and this is reflected in our guidance.

Sure. That was actually very good color. Thank you for all that detail. If I could ask a second question, in relation to your guidance for the year, which you've now kind of narrowed the guidance range for EPS, do you have the same assumption for Australia built into that guidance? Has that gotten any better or any worse than what you thought even back from sort of the Investor Day back in June?

No, it didn't get any worse or didn't get any better. So as I said, unfortunately, the heavy discounting and the competition in the low part of the market, as it intensified at the beginning of the year, continues to be pretty intense. And I think maybe also to be more on a positive side, if one of the competitors makes an assumption that you're going to have a volume growth in that market by being very aggressive on the price, you will not break the strategy until you switch off the volume growth of a given brand. So I think what we're doing, part of our strategy, despite the fact that it is obviously costly financially, I think it actually may lead to bringing some logic to the behavior in the market.

So this is all in our guidance. I think versus the Q2, especially at the Investor Day, which I think prudence at that time has dictated that we had to recognize that there is this potential headwind coming from Australia. I think at that time we were waiting for the more confirmation of the positive trends coming from other geographies, which have very nicely materialized in the Q3. But as I said, I think it would be imprudent to bet on this development in Q2 and now we're in a very comfortable position to say that the lower end of the range of the guidance, which we gave at that time, is no longer something which we should be worried about, that we can comfortably deliver in the mid-point of the range and the drivers I think are well-known. The EU has spectacularly good improvement on the total market and our marketshare continues to do very well.

Indonesia is a very positive surprise. It's coming. We knew that the market might be stronger, but I think last quarter Q3 has confirmed that the market goes in the right direction and also the growth momentum -- you saw our adjusted OCI growth in EEMA and Latin America. I mean they are really coming very strongly. So this is very important for us, not only from a Q3 perspective, but I would say even more important for us from a 2015 and beyond perspective. The roadmap, which we have laid down for this year, we step-by-step made the progress and therefore we should return to the higher level of growth in 2015 and 2016.

Okay, well, that was very good. Thank you. And I agree. So thanks so much. We will speak to you soon.

James Bushnell, Exane BNP.

Hi, good morning. Thanks for taking my questions. I have two please. The first is on the tax situation in Italy. I just wondered if you could give us your latest thoughts as to what might be happening and when -- I think January 15, we were hopeful that something might change. Then my second question is on plain packaging in Europe. When the first country passes legislation, whoever that might be, do you think you could give us a roadmap about what would happen and would you be hopeful that a legal challenge to that could either delay or stop the implementation of plain packaging or is it just a case of having to take a country to court and then having to do that while they're going ahead with the measure? Thank you.

Okay, I start with Italy. The tax restructuring in Italy is following its normal legislative process. We expect or the objective is that this should happen still this year, so would be implemented as of January 1 next year. That's the objective, and we'll see how it works. But as I said, I mean the restructuring is being discussed and is following the normal Italian legislative process.

When it comes to plain packaging, the second question which arised, there's nothing really new which has happened recently because we were aware about Ireland; we were aware about UK. Yes, there was a statement from the Ministry of Health in France that she will propose the legislation, implementing -- calling for implementations of plain packaging. To date to our knowledge, this is not a government position and no legislative initiative has been made, at least to date, into this direction.

Now, litigation, which you have mentioned quite rightly. It's obviously in our tool book of actions which we can take in order to protect extremely valuable trademarks, which we have, but the also other element which we are exploring before we reach into litigation. But yes, there is litigation which clearly is something which we will not be shy to use if this is what would be required by us.

One thing which is important to know when we talk about the UK and Ireland, if I am not mistaken, there are nine countries today or member states in the EU which have raised the concerns to Ireland in particular. And I think there are two countries already, which have raised their concerns to the UK; vis-a-vis they announced or the indication of introducing the plain packaging in these countries. It is clear we demonstrate you or demonstrate us that a number of member states in the EU itself are pretty much concerned whether this is the right policy to be implemented both from the perspective of the principles of internal market and let's remember that the whole purpose of creating the EU and the legislative powers, which we're giving in the form of directives, were to support the development of internal market and frankly speaking, plain packaging is not necessarily something which goes into this direction.

So yes, I mean to summarize this, plain packaging is an element in our toolbox and we will not be shy to use that if this is what will be required.

Okay, thank you very much. If I could just follow up and sorry to bring up currency again, but I noticed that the gap between your FX effect on your sales line versus your OCI line is widening, which presumably reflects a bit more transactional hits. And I just wondered if you could comment, is that still mostly the yen or does the Russian ruble come in there as well?

No, mostly in our revised guidance, the largest impact was coming from the ruble, the rupiah. The yen was, as I said earlier, was $0.01. We obviously had a positive Swiss franc on the cost side, which more than offset the negative coming from the euro.

Sorry. I meant in terms of the transactional FX exposure that you've seen in Q3. Is it mostly from the yen or is there also an impact from the ruble where I believe your costs are presumably not in rubles whereas obviously your revenues are.

No, I think it was more from a ruble; I think it was more from a ruble on a transactional side.

Okay, great. Thank you very much for your help.

Erik Bloomquist, Berenberg.

Good morning. I was hoping you could discuss a little more detail about the tax treatment of the HeatSticks in Japan and then perhaps in Italy as well. I was wondering if you could give us some more perspective on the tax differential, what is it driven by, is it a lower rate, is it taxed by -- what the basis for that is and then the ability of that tax treatment to be extended into other countries in the various regions? Thanks.

The tax treatment in Japan results that the iQOS HeatSticks will pay a tax about 20% lower than the tax on cigarettes. It's classified in a different tax category for the reasons that this is not a cigarette, this is not combustible. So there was (inaudible) to the tax category and the Ministry of Finance have decided to classify this product there. It's also very much similar to what has happened with the competitive product in that market, (inaudible) from JT, which also is classified in this tax category. I can't tell you more about Italy about the tax classification, but, as we have said also during Investor Day, I think we have a pretty strong case that this product for various reasons should enjoy better taxation than a combustible conventional cigarette. Now how this thing will materialize, we'll have to see. But this is what our engagement in various markets, that's the direction which we're taking.

Okay. And then with respect to, again, another foreign exchange-related question, given that that has such a material impact on the balance sheet and the ability to buy back stock, I mean is this really implying that, in 2015, the amount of buyback available to Philip Morris will be much more at the low end of what you've suggested and does that therefore imply, given your confidence in hitting an 8% to 10% constant currency EPS target, that the operational component of next year perhaps looks a bit stronger?

We have said I think at Investor Day that we're looking at the range of $2 billion to $3 billion for next year, but there is obviously the final target, the final amount will depend on two factors. One is obviously the acquisitions and second is also importantly the development on exchange rate, which obviously with our limited headroom to further leverage the balance sheet in order to support the single A rating, I mean that's something which we have to and we are watching very carefully. When we give the target in February, the target will reflect developments, potential developments on both sides. So I don't want to go into -- commit to any number for next year. As I said, we will announce it in February.

Okay, thank you.

Vivien Azer, Cowen and Company.

In terms of South Korea and the potential for a proposed tax increase, can you speak to the likelihood of that actually passing?

Well, I think there is high likelihood that the tax increase will happen. What we don't know at this stage is the magnitude of that increase, whether it's going to be in the range of 1001, 1.5 or 2001, we'll have to see. So this is what I can tell you at this stage. Clearly, it is a very significant tax increase, but we also have to remember, if my memory is not wrong, that we are approaching the 10th anniversary of no tax increase in Korea. So I think we'll have to take this magnitude also from the perspective of when was the last time Korea have adjusted the tax rate.

That's fair. Thank you. And your key competitor in that market has not always priced I think the way that everyone would've hoped. Is there any reason to think that they would be more constructive on pricing around the tax increase?

Well, I wouldn't like to go into this speculation.

Fair enough.

Investors community knows that the past performance is not necessarily the best driver of the guidance for the future performance. So let's stay at this with this. I don't know. I can't tell you.

Okay, fair. In terms of platform 2, can you just confirm that it remains on track and roughly one year behind platform 1?

Yes, yes. Nothing changed there.

So would we expect a test in the coming six months?

No, we should expect the test in 2015, end of 2015.

Okay.

So we said that the platform 2 is about a year behind. As per plan, it's behind the platform 1.

So not even a consumer test? Because in Japan and Italy, even though you're going to city tests in the fourth quarter, didn't you go in to do some consumer testing that you spoke about at CAGNY in February?

Vivien, we're talking about the two levels of a consumer testing. One is the consumer testing in terms of (inaudible) test, which obviously will be done -- we will be doing first and then there is consumer testing in terms of launching into the selected city or close geography. So always we will go in the same -- we will repeat the same sequence as we have done or as we are doing so far with iQOS, i.e. platform 1.

Terrific.

The second part of the 2015.

Understood. My last question is on the FDA submission that you're working on jointly with Altria. Any progress or updates on that? Do you have a sense of when you might actually make a formal submission to the FDA on MRTP?

Well, I think it was a subject of us concluding the clinical studies and closing the entire scientific package, which is to support that submission. But the clinical studies as per plan, we will be completing them in the mid of next year, second quarter next year and then the whole preparation for the packet submissions can only really start afterwards.

Very clear. Thank you very much.

Michael Lavery, CLSA.

Just turning to Indonesia, you indicated that the guidance for the category for the year would be around a 2% growth rate, which implies around a 1% decline in the quarter for 4Q. I know that the comp gets about 2 points tougher, but that's around a 6 point deceleration. Is there anything you think that's looming that would drive that or is that just a conservative number? How are you thinking about the category dynamics there?

I think we're looking a little bit on the longer time span, not just the quarters. As I indicated in my remarks, on the 12-month moving basis, the market is in a 2.4% decline. I think the 2% sounds to us -- seems to us more realistic for the full year. Maybe it's going to come a little bit better. I have to admit that Q3 came better than we expected so that we recognize by changing a little bit -- changing the outlook for the full year. The market may come better because there's not much in headwinds, which I can see in the market. Actually quite opposite because, as long as nothing is dramatically changing in terms of drivers of the bit lower performance last year, fuel subsidies, removal of partial fuel subsidies, I think there were spikes in the food inflation. I think that these things are slowly coming behind us, so maybe the market can even do better, but let's see. I think 2% is about to be realistic, the realistic number as we see it at this stage.

Okay, that's helpful. And you had said that your July share was just over 35% and you came in a full quarter at 35.5%. Was that a sequential progression and so you would have finished the quarter maybe around 36% and could you give any sense of how that's continued into 4Q or for September?

There was a sequential growth of the share in Indonesia quarter on quarter and also within the month and this is very much driven by the fact that the Dji Sam Soe, our competitors, main competitors of Dji Sam Soe have crossed the critical price point of IDR12,000 per pack. And as we expected, the moment that Dji Sam Soe will compete with the brands without this obstacle, if you like, of the psychological price point, we should observe better performance and Dji Sam Soe is coming actually now flat on the third quarter and year on year. So we stabilized the brand. Obviously, our entry with extending the brand into machine-made Kretek both on full flavor and the lighter variants helped a lot, so this is very good. So yes, we're growing the share sequentially and I think we should expect this going through the year. Although I think for still on a full-year basis, we will be below our marketshare of the last year, but I think it's a very nice starting point, which we're building already now into 2015.

And what is the mix impact from that? Obviously, you've launched the low-end brands and that would seem to be a benefit. Certainly the hand-rolled Dji Sam Soe pressure would offset some of that. But if that's stabilizing, is your mix a positive benefit now or is that still pressured?

There is -- I don't think there's that much -- there is a bit of -- there is some mix pressure, but you have to remember that there is a different tax level also behind the different price points and the different category of the product. So the margin differential is not necessarily fully translated or can be fully translated just from the retail price perspective.

Okay, great. Thank you. And then just on iQOS, you have the unit price that you mentioned. Does that have any flexibility in terms of the launch period just for discounting or anything that obviously you want to get people to try this or get it in people's hands? Certainly it's a premium product; I understand that pricing approach, but what's the right way to think about adoption and how to make sure that's not a prohibitive cost for people to think about up front?

By the regulatory ramifications, which we have in Japan, we cannot have a discount on HeatStick, on the Marlboro HeatStick.

I'm sorry. I didn't mean the HeatStick; I mean the iQOS unit itself.

It's the introductory price and the whole offering, the introductory offering to the consumer, which will be going for the iQOS heating device, tobacco heating device.

So you do have room to put incentives on that?

Sorry?

You do have flexibility to how you price that in terms of just getting it adopted initially? Because I think you said it's the JPY6,980, that's the sort of list price I guess and you could work off of that to have an upfront discount or something?

Absolutely correct. You're reading like you would be in Nagoya.

Okay, great. Thank you. And then just one last question on lower oil prices. I know certainly in Indonesia last year we saw consumer sensitivity to inflation there. Obviously every country's different, but very broadly speaking with the big move in oil, do you feel like that's potentially a net consumer benefit enough to impact any volume outlook or obviously it's a recent move and it hasn't stuck for a long time necessarily, but is that potentially a positive in terms of how you just look ahead for the next three, six, nine, 12 months?

I think it is positive. I think we all would like to have oil lower, at lower prices, especially in Indonesia where the market -- consumers are more sensitive. Yes, I mean that's the right direction. Hence, as I said earlier, that it might be that the volumes in Indonesia will do a bit better than 2% for the full year. Let's see how this develops, but it's positive; you're absolutely right.

Okay, thank you very much.

[Owen Bennett], Nomura.

Good morning. Just one from me. I was just wondering the pricing benefit from the change in business structure in Egypt. I was wondering if you could quantify this and can we expect this to drop off into next year when it laps?

Well the benefit is coming from, in the past, sorry, in the year 2013, what we -- the way we operated our structure in Egypt was that we've been selling just the materials, the components, i.e. tobacco, the cut filler, etc., the manufacturing was taking place outside Philip Morris by the partners in Egypt. As of this year, we're fully owning the entire process. Hence, we recognize the full cost of manufacturing. So this is all materials, plus the conversions, etc. But also correspondingly, we're recognizing the full revenue, i.e., the price which we're charging to the first customers.

The impact of Egypt of this accounting or reporting reflecting this new structure is in the range at the top line of the revenue in the range of about $200 million. And this is obviously the business organic growth, which we are realizing this year, which is coming on the top of this. But this is how much Egypt is pushing or increasing our revenue, but you also remember you have an offset in a cost base. When it comes to OCI, the net benefit, which we realize due to that structure, is not really inflating the numbers between the two years. But there is organic growth in Egypt.

Okay, great. Thank you.

Adam Spielman, Citi.

Hello, thank you for taking the question. I hope I can ask a question about 2015 and 2016 because you mentioned this in your press release. In it you say that you reiterate that you hope to achieve 6% to 8% OCI growth constant currency, but you also mentioned the cost of the expansion of Reduced-Risk Products. And so the question is, in the context of your entire OCI, is the commercial cost, the cost of commercializing Reduced-Risk Products material? I assume it is and I assume that it's going to be 1 or 2 percentage points otherwise you wouldn't have been mentioning it in your press release. That's the question. Thank you.

Good afternoon. Yes, there is an increased cost of iQOS, which is already included in our overall target for the next year. Obviously when we come in February, we will give the proper detailed guidance for the year. But from the very beginning, we said that we're targeting 6% to 8% in -- 6% to 8% adjusted OCI growth ex-currency in 2015 and 2016. And this number includes the cost, also obviously in the later part of that period, the revenue coming from iQOS. So this is all included in there and there will be quite an increase, a substantial increase of our spending behind iQOS next year, but this is -- this number is included in our [current].

Okay, but just to confirm, it is a material amount that is included?

Yes, but I will not disclose --.

How material. I knew you wouldn't do that, but that's clear. Thank you very much. That's helpful.

Thank you.

I will now turn the call back over to Nick Rolli for any closing remarks.

Thank you very much. That concludes our call for today. If you do have any follow-up questions, you can contact the Investor Relations team. We're currently here in Switzerland. Thank you again and have a wonderful day.

This concludes today's conference call. You may now disconnect.