菲利普莫里斯國際 (PM) 2015 Q3 法說會逐字稿

Good day and welcome to the Philip Morris International third-quarter 2015 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 Communication.

Please go ahead, sir.

Welcome and thank you for joining us.

Earlier today we issued a press release containing detailed information on our 2015 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 2015 and comparing them to the same period in 2014 unless otherwise stated.

A glossary of terms, adjustments and other calculations as well as reconciliations to US GAAP measures are at the end of today's webcast slides which are posted on our website.

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 my pleasure to introduce Jacek Olczak, our Chief Financial Officer.

Thank you Nick and welcome ladies and gentlemen.

Our strong performance in the first half of the year continued in the third quarter.

Organic cigarette volume declined by a modest 1.5% reflecting global cigarette industry volume, primarily in the Asia region partly offset by market share gains mainly in the EEMA region and Latin America and Canada region.

The cigarette volumes of Marlboro and L&M, our two largest brands, increased by 2.1% and 9.3% respectively in the quarter.

On a September year-to-date basis, our organic cigarette volume declined by 0.6% or by approximately 1.1% excluding estimated inventory movement.

For 2015 we continue to forecast an organic cigarette volume decline in the range of 1% to 1.5%.

Net revenues and adjusted OCI in the quarter grew by 5.9% and 9.3% respectively excluding currency.

This growth was driven by strong pricing across all regions partly offset by the impact of lower volume mainly in the Asia region.

Adjusted diluted EPS excluding currency grew by 15.8% to $1.61.

Our strong currency neutral results in the third quarter helped drive September year-to-date adjusted diluted EPS growth of 15.8% to $4.62 on the same basis.

As previously disclosed, our fourth-quarter results will be impacted by incremental investments to support the expansion of iQOS including accelerated spending behind planned launches in 2015 and 2016 and to further reinforce the favorable momentum of our cigarette brand portfolio.

As announced in our earnings release this morning, we are revising and narrowing our 2015 reported diluted EPS guidance to a range of $4.35 to $4.40 at prevailing exchange rates to reflect a slightly more unfavorable currency impact largely offset by an improved business outlook driven mainly by the EU and EEMA regions.

At prevailing exchange rate our guidance now includes a full-year unfavorable currency impact of approximately $1.22 per share versus $1.15 in our previous guidance.

Excluding currency our 2015 guidance represents a growth rate of 11% to 12% compared to adjusted diluted EPS of $5.02 in 2014.

This growth rate is above 9% to 11% range that we provided in July.

The evolution of the impact of exchange rates on our 2015 reported diluted EPS guidance is presented on this slide.

While exchange rates have been volatile throughout the year the net negative impact on our guidance has been relatively stable with the slight increase in our latest guidance driven mainly by a weakening of the Russian ruble versus the US dollar.

Strong the pricing remains the key driver of our financial performance.

In the third quarter we recorded a variance of $522 million reflecting higher pricing across all four regions.

We increased the retail prices during the quarter in key markets such as Argentina, Indonesia and Russia.

September year-to-date pricing variance of $1.6 billion puts us on track to achieve full-year pricing above our historical annual average of approximately $1.8 billion.

Our results in the third quarter were underpinned by continued market share gains.

International market share excluding China and the US increased by 0.3 points to 29.2% with strong growth in the EEMA and Latin America and Canada regions.

Marlboro was a key driver of this market share growth increasing by 0.4 points to 9.9%.

The brand grew share in all of our regions as it continues to benefit from the rollout of Architecture 2.0 which is now available in 84 markets worldwide.

Importantly our share in the top 30 OCI markets grew by 0.5 points to 37.8% with share up or essentially flat in 18 of these markets.

I will now provide an update on selected geographies beginning with the EU region.

Excluding trade inventory movements estimated cigarette industry volume declined by 0.1% in the third quarter following declines of 2.7% and 2.3% in the first and second quarters respectively.

We attribute the strong third-quarter performance mainly to improving economic conditions and consumer sentiment and now forecast full-year 2015 decline of around 2%.

Our cigarette markets in the EU region declined slightly in the third quarter due mainly to Italy.

September year-to-date our cigarette share increased by 0.1 point to 39.9%.

Cigarette share in the quarter was supported by the growth of our two largest brands in the region.

Share for Marlboro increased by 0.2 points to 19.3% driven by strong performances in France and Spain while share of L&M increased by 0.1 point to 7.1%.

The combination of our strong pricing, the more favorable cigarette industry volume trends and our stable overall cigarette market share resulted in third-quarter and September year-to-date adjusted OCI growth of 7.4% and 8.1% respectively excluding currency and acquisitions.

Turning now to Russia in our EEMA region, estimated cigarette industry volume declined by 4.6% in the third quarter.

Given the resilience of the September year-to-date cigarette industry volume trends we are revising our full-year 2015 forecast to a decline of around 7%.

Our market share performance in Russia remains strong.

August quarter-to-date share increased by 1.3 points to 28.7% driven by low price Bond Street and super-low Next.

Both brands continue to benefit from wider distribution particularly in the eastern part of the country.

Higher pricing drove double-digit OCI growth excluding currency in the third quarter.

In our August we announced the further retail selling price increase of RUB5 per pack across the majority of our portfolio which will be increasingly reflected at retail as the fourth quarter progresses.

Estimated cigarette industry volume in Turkey grew by 11.8% in the third quarter fueling September year-to-date growth of 9.6%.

We attribute the strong growth to a significant reduction in illicit trade which is estimated to be at its lowest level in the past six years.

Our August quarter-to-date market share increased by 1 point to 44.1%.

This marks the first year-over-year quarterly increase since the third quarter of 2013 and was driven by L&M, Marlboro and Parliament.

Favorable volume/mix and pricing drove double-digit OCI growth excluding currency in the third quarter.

Moving to Asia region while our market share in Indonesia was flat in the third quarter it increased by 0.4 points to 35.2% September year-to-date.

We are pleased by the strength of Sampoerna A which has continued its growth trend despite its main variant having crossed the critical IDR15,000 per pack price point.

Dji Sam Soe also continues to gain share thanks mainly to its machine-made Magnum variant.

Estimated cigarette industry volume declined by 1.1% in September year-to-date period.

We attribute the decline primarily to a softening in the economic environment and now expect flat full-year cigarette industry volume in 2015.

However, we continue to expect an increase of 1% to 3% annually over the mid- to long-term driven by growth in the adult population and rising income levels.

Last week Sampoerna announced the approval by shareholders of its plan for a rights issue at an exercise price of IDR77,000 per share.

The transactions will be one of the largest stock offerings in the past year across the whole of Southeast Asia and showcases the strength of our business in Indonesia.

The total net proceeds to Sampoerna from the rights issue will amount to approximately $1.4 billion.

After completion of the transaction 7.5% of Sampoerna issued in outstanding shares will be publicly in compliance with the Indonesian stock exchanges minimum public shareholding requirement that takes effect on January 30, 2016.

Clearly this injection of cash will enhance our financial flexibility and we will determine how best to use it in the long term interest of our shareholders while keeping a very watchful eye on currency movement.

In the near-term the proceeds will be used by Sampoerna for working capital purposes.

As you know beginning in 2015 excise payment terms in Indonesia have been shortened for the last two months of the year which will obviously put pressure on our year-end working capital.

In Japan estimated cigarette industry volume declined by 1.5% in the third quarter resulting in a decrease of 2.2% for the September year-to-date period.

For 2015 we continue to forecast a full-year decline in the range of 2.5% to 3%.

Our share in the quarter was down by 0.6 points to 25.3% due mainly to the strength and timing of competitors' offerings in the new differentiated menthol taste segment.

We are committed to improving our share in this important market and are further investing behind our pipeline of innovations.

The underlying business fundamentals in the Philippines continue to improve though market share trends based on the total tax paid cigarette market remains distorted due to higher estimated tax declarations by our principal local competitor.

Based on Nielsen retail audit data which we believe provides additional insight into our performance in the current environment our August quarter-to-date market share increased by 1.4 points to 73.7% driven by Marlboro and our leading low price brand Fortune.

This positive share performance was driven by two main factors.

First, reduced price gaps since the beginning of the year following price increases for super-low price brands at the bottom of the market have led to adult smoker uptrading to Marlboro across all three pillars and Fortune.

And second we have strengthened our portfolio through a range of investments in brand initiatives including new launches and innovative line extensions.

This is evidenced by the strong performance of Marlboro's capsule and highly mentholated variant as well as the success of our Fortune capsule variant which we launched in July this year.

Favorable volume/mix driven by a 17.8% increase in Marlboro shipment volume resulted in improved profitability in the third quarter.

The excise tax driven cigarette industry volume decline in Korea continues to moderate sequentially resulting in a decline of approximately 17% September year-to-date excluding estimated inventory movement and we now expect a similar decline for the full year.

Our market share in Korea increased by 1.8 points in the third quarter to 20.4% driven by the strong performance of Marlboro.

Shifting to our Reduced-Risk Products portfolio I will now provide a brief update on our commercialization and clinical assessment of iQOS.

During the third quarter there were a number of important commercial developments.

We launched iQOS in Switzerland in August with an initial focus on five major cities and began the national expansion of iQOS in Japan in September.

We also progressed with our expansion plan for Italy which includes additional city launches commencing later this quarter as well as planned city launches in other markets in late 2015 and early 2016 for which we have accelerated investment spending this year.

Let me remind you that to date iQOS has been launched with the convenience claims of no ash and less smell.

As we build our scientific evidence package which I will touch on now we expect to be able to broaden our claim.

Clinical trials are a cornerstone of our robust evidence package to substantiate reduced exposure and reduced risk claim.

We are conducting four types of clinical studies: pharmacokinetic studies, one-week reduced exposure studies in the clinic, three-month reduced exposure ambulatory studies and the long-term exposure response study.

We have completed all of these except for the long-term study.

I will now share with you a selection of the results from our three-month reduced exposure study in Japan.

In the study we measured biomarkers of exposure to harmful and potentially harmful compounds referred to as HPHCs in adult smokers who switch to iQOS, adult smokers who quit for the duration of the study and adult smokers who continued to smoke combustible cigarettes.

The biomarkers were measured in each group over five days in the clinic and then for 85 days outside the clinic, allowing us to assess changes in biomarkers of exposure in a close to real-world setting.

We then compared the reductions in exposure biomarkers of the group that switched to iQOS with the group that quit.

This slide shows the Japan study results for four key biomarkers of exposure.

The data showed that compared to adult smokers who continued smoking, shown in red, the reductions in exposure biomarkers for adult smokers who switched to iQOS, shown in blue, approached those for the adult smokers who quit for the duration of the study, which is shown in green.

In this study we measured a total of 15 biomarkers of exposure to 15 HBACs.

As illustrated by the chart the average reductions in biomarkers of exposure for adult smokers who switch to iQOS, shown in blue, reached over 95% of the reduction observed in those who ceased smoking during the study period, shown in green.

We expect to finalize the study reports by year-end and will seek to publish the data in peer-reviewed scientific journals in 2016.

Recognizing how important it will be that iQOS is accepted by adult smokers in the same three-month study in Japan we measured the level of product satisfaction of participants who switched to iQOS.

As shown here after an initial decline in product satisfaction the score rapidly increased and reach levels similar to those for combustible cigarettes.

In summary, our scientific assessment of the risk profile of iQOS is well advanced.

And we are on course with our plan to demonstrate that iQOS is not only a reduced exposure product but also a Reduced-Risk Product.

Turning now to our free cash flow we generated $5.4 billion in the first nine months of the year.

This is only moderately below our free cash flow for the same period in 2014 despite an adverse currency impact of $1.8 billion.

Our resilient cash flow performance was supported by the prudent management of working capital and capital expenditures.

For 2015 we continue to forecast free cash flow broadly in line with the last-year level despite a significant currency headwind.

In September our Board approved an increase in our quarterly dividend to an annualized rate of $4.08 per share reflecting the strong confidence in our business fundamentals and future prospects.

This marks the eighth consecutive dividend increase since the spinoff in March of 2008 representing a total increase of approximately 122% or compound annual growth of 12%.

As of last Friday's market close our dividend yield of 4.9% was significantly above that of our proxy peer group, our tobacco peer companies and 10-year U.S. Treasury notes.

In conclusion we delivered strong currency neutral results in the third quarter, reflecting improved cigarette industry volume trends and robust business fundamentals.

Our superior brand portfolio supported by a superb commercial organization is driving strong pricing and further market share gain.

We continue to progress with the commercialization and clinical assessment of iQOS.

Our resilient 2015 free cash flow has been supported by our prudent management of working capital and capital expenditures.

Finally, on a currency neutral basis our 2015 EPS guidance reflects the growth rate of 11% to 12% versus 2014 adjusted diluted EPS of $5.02.

This impressive growth comes notwithstanding the significant incremental investments that we are making in the fourth quarter to support the expansion of iQOS and to reinforce the favorable momentum of our cigarette brand portfolio.

Thank you.

And I will be now happy to answer your questions.

(Operator Instructions) Vivien Azer, Cowen.

Hi, good morning.

As we look to the fourth quarter considering the very strong year-to-date results that we've seen, the implied guidance for the fourth quarter clearly reflecting the incremental investment spending, Jacek, that you just called out, can you help dimensionalize the size of those investments if possible?

As well can you address any trade inventory timing issues that might weigh on the fourth quarter?

I think that most of the performance in the Q4, the fourth quarter, will be driven by our accelerated spending, key investments behind iQOS and combustible cigarettes.

I think as we look at this today it essentially should translate that we will be slightly below the fourth quarter of last year, maybe at parity to the fourth quarter of last year.

So yes there will be quite an investment step-up as I said mainly behind iQOS and the combustible business.

Okay, fair enough.

Thank you.

As we look at the EU and the increasingly more favorable volume dynamics that we're seeing, I know you guys called out reductions in illicit as well as reduced uptake in e-vapor.

But can you comment on the evolution of price elasticities in that market?

Because the volume trajectory looks particularly impressive given the pricing that we're seeing in the region.

The volume trajectory is impressive and there's also the reasons why as you remember we're revising the outlook for the total industry volume in the EU.

I think it is the second or third time actually I think this year and is also led us to increase our overall EPS guidance for this year.

Elasticities are turning over some period into more attractive territory if I could call it like this that for us always in our elasticity in the range of minus 0.3 to minus 0.5 this is what we think is a sort of underlying elasticity for the tobacco category.

And we observe it essentially in most of the countries including the south in Europe, has a very strong performance coming from Spain, Italy.

Obviously Italy we have our own challenge with Marlboro crossing EUR5 price point.

But overall I think that the industry is pretty strong and our volumes obviously are pretty strong as well.

I think that many of the positives for the EU but also from the overall better volume trends to some extent depends on the geography supported by more attractive elasticities or the reduction in illicit trade should continue to 2016.

So the way we look at this and I know that everyone is now puzzled with the Q4 performance but actually our focus is already on 2016 and how much of this very positive momentum for the industry but very much for us will continue into 2016.

Terrific.

That's helpful.

Thank you.

Matthew Grainger, Morgan Stanley.

Hi, good morning everyone.

First on Indonesia, we've seen continued deceleration in shipments and consumption this year which seems more linked to the economic environment than pricing but it's hard to separate out how all of these factors may be impacting margins and OCI for the Asian region.

So when you take into account all these various factors, pricing, weaker consumption, some of the investments you've made in selling infrastructure, are you comfortable with how to profitability and margins of the Indonesian business have been progressing year-to-date?

Yes, I'm very comfortable.

What we have in Indonesia it was more in the I think an event of the third quarter where we've been also adjusting capacity and it's resulted in some extra cost which we had to incur.

But overall I'm not that much worried of the shorter trend of the industry volume.

If you look at the smoking incidence in Indonesia it's relatively flat.

As you remember Indonesia is the market when you have a relatively high incidence of stick sales, individual stick sales.

And obviously this allows the consumers to adjust a little bit faster if there is softening on the macro side.

I think we are observing a slight decline in the daily consumption.

But as I said in my remarks I think if you look at the overall positive demographics of Indonesia and the growing income level, etc., I'm still confident that 1% to 3% growth outlook for the total industry in the longer term is absolutely attainable.

Pricing is very strong.

We still obviously don't know how the target discussions in Indonesia will unfold for the next year.

I think on a positive note is that things that the government is recognizing that there is the issue with the inflated tax base due to the change in the payment terms for this year, so we're comparing on a collection side from a government perspective 14 months to 12 months.

Let's remain hopeful that the rates announced for the next year will take this into consideration, at least to some extent but we will have to see.

But in terms of bottom-line growth of Indonesia I am very confident.

We have the right infrastructure, brand portfolio is very strong.

Share for the year looks -- the market share developments look very attractive.

And I think Indonesia is the market in which we obviously have high expectations of a high growth.

So I don't think it's anything which would worry me at this stage why this should change.

Okay.

And then just one clarification, just in terms of the bottom-line growth for Indonesia, and long-term expectations there, is that consistent with how the business is performing this year?

Are you seeing growth or is this better characterized as a year where you're reinvesting a bit back into the market?

Well, I mean we have been investing in Indonesia a lot this year behind the deployment of a commercial organization.

As you know, it's a large country where it's running.

There is a very large trade salesforce.

Our retail selling universe is one of the largest in the world.

So that obviously requires some appropriate investments if you want to continue to have the right support behind the brands.

We have the market in other parts of the world which are also on the emerging side, if you like, and volumes are actually a little bit developing worse, if I may say, versus Indonesia and we can drive double-digit bottom-line growth.

So I think you cannot ever extrapolate directly from one country to another, but I think Indonesia is in a good shape to deliver a very solid OCI growth, bottom-line growth, and remain one of the key contributors to Asian PMI.

Okay, thanks, Jacek.

And then just one question on the regulatory side.

I just wanted to get your thoughts on the draft version of the TPP agreement, which I know right now is under negotiation and on hold.

But assuming this is going to being negotiated and will go forward, what do you see as the practical impact of the tobacco carveout if it stays in?

And is there still a realistic potential for it to be negotiated out?

Well, first the TPP has no impact on pending cases, so it's mainly Australia case.

Look, we will have to see how TPP will be adopted or ratified by the signatories.

If I may say on my side just say it's unfortunately these negotiations have or during the negotiations people who are participating have traded away fairness and access to justice for all investors and instead they embrace the discriminations against the one single industry.

I'm not sure that people are worried that out of the five or six countries actually, more than six countries reported cases when there was a state investors dispute, only two cases relates to tobacco.

So I think the whole process went in a completely wrong direction.

But important for us is that it doesn't deteriorate our position vis-a-vis defending very much the trademarks around the plain packaging and does not impact any of our pending cases should the TPP be adopted.

Okay great.

Thanks Jacek.

Judy Hong, Goldman Sachs.

Thank you, good morning.

So just in thinking about 2016 I know it's a little bit too early but Jacek you talked about how you're focused on continuing to growth in 2016.

So as we look at this year obviously 11% to 12% ex-currency growth above your near- to medium-term targets that you laid out at your Investor Day in 2014.

So given the momentum you have in the EU, you're lapping the incremental spending behind the iQOS, any reason to think that that kind of above-average or above near- to medium-term growth in 2016 can't continue at this point?

Look, Judy, I mean the truth is that outlook for the tobacco market has improved this year, for us in particular in terms of volume, tax pricing and overall profit growth.

So many of the positives which we have observed this year which we have witnessed this year in our opinion should continue in 2016.

I think it's a bit premature at this stage to talk about the specific items for 2016.

Our target of 8% to 10% on the EPS I think it seems attainable but we need more information to come up with the formal guidance for next year.

I think in February we will be in a good position to talk about it.

But yes the trend from the EU, the Russia all the way still repeated Russia remains on our watch list.

The headline macros are not extremely positive although on the tobacco market side on the cigarette market side it seems that the consumer is so far navigating pretty strongly.

You will have to also understand that this year we're very pleased and we're very happy with the performance of this year.

But not necessarily we have the most challenging performance if you like as years before.

Correspondingly we will have to see how the 2016 will compare to 2015.

So I remain very optimistic.

We've been I have to admit surprised ourselves by the strong performance of the EU region.

I am very glad that it comes from the number of markets, the improved total market but also strong pricing in the marketshare trends.

EEMA is very strong, Latin America is very strong, Asia we know that we have a couple of issues, mainly Japan which I have to admit is a disappointing and below our expectations with regard to marketshare.

But overall we look very optimistically into 2016.

Okay and then just one quick follow-up on FX.

So I think I have it in my notes I think earlier in the year you're hedged about, I can't remember, 60% on the yen and the effective hedge rate was 110 or around that level.

Can you just update on how much you're hedged on the yen at this point and what the effective rate is?

We at the beginning of the year we usually give the hedge coverage ratio for the current year.

So in February when we are giving the currency, the guidance we said that we've been hedged at 60%.

Obviously there were a few moments during the year when the yen strengthened at least for a short period of time so we took advantage of that.

You remember our policy is to look ahead 12 to 18 months, so it's fair to assume that we already have hedged some of our cash flow from Japan going into 2016.

We will disclose this number when we will give the guidance in February next year.

When it comes to effective rate just to help a little bit there to estimate the currency impact in Q3 our effective rate of yen to the dollar for us was JPY111, slightly above JPY111 which compares to about JPY98 in Q3 of the past year.

So you could see for the hedging strategy we are about JPY10, JPY9 to JPY10 below the current spot rate of the year.

Got it.

Okay, that's helpful.

Thank you.

James Bushnell, Exane.

Hi, good morning or good afternoon in Switzerland.

I have two questions please.

The first one is just around pricing in Europe.

You had pricing around 5% which was a little bit softer than the first two quarters of the year.

I just wondered if there was anything specific you would call out there or if that's strictly a mathematical effect.

Sorry, I'll let you answer the first question.

No, this is mainly I guess due to the timing of implementation, you might have it never will have a perfect type of timing alignment.

So some of the pricing which we're taking in 2014 presumably lapped earlier in 2015 depends on the country, etc.

It's nothing specific, nothing which is I think pricing in Europe this year so far and the full-year is going to be very strong and much stronger than we had in the past year.

Okay.

Thank you.

Then just to drill in a bit more on Italy, you've obviously had good pricing this year.

I wondered if you could comment on what the outlook might be for the tax policy in 2016?

And now that Marlboro is clearly above that round price point which has hurt you on a share basis are you comfortable that moving it up further will not have a similar effect?

How are you thinking about the share loss of Marlboro in Italy?

Well it's not anything which comes by surprise.

Usually when we cross the important from psychological perspective around price point Marlboro usually is the first brand in a market to do this.

It's not really as I said surprised that Marlboro has a bit of a headwind at that time.

I think I'm happy that the prices went up in Italy.

There was a small reductions in the price gap.

That's very helpful.

You cross the price point later on consumer is a bit less sensitive with the next price increases.

So I think it's good that Marlboro is behind the price point, let's put it that way.

Okay.

And is there any view from the Italian government in terms of what might happen to taxes next year?

No, we will have to see.

Usually this discussions are taking place literally almost around the year-end or beginning of the year.

So for Italy we'll have to see how they want to approach it.

They made the very good move as you remember at the beginning of this year.

Let's hope that they will continue with this direction in 2016.

Okay, thank you very much.

Chris Growe, Stifel.

Hi, good morning.

Or good afternoon to you.

Thank you.

I have two questions for you if I could.

The first would be that if your volume performance again this quarter was better than what I expected and you've had some improvements in the EU and Russia in particular, a little softer in Indonesia in terms of your outlook there.

So as you look at your overall line performance being stronger than certainly I thought for the quarter, I think you're still looking for a 1% to 1.5% decline in volume for the year.

If we just push more towards the lower end of that range or I just wanted to get some color around some of the big markets that have improved and how that's helping your overall volume performance?

Look, I would still confirm it will be somewhere in the range of 1% to 1.5%.

I don't think we're in a position now to speculate will it be closer to 1%.

As you know in Q4 it's always the quarter when you have some distortions coming from the fact that end of the year or beginning of the year there are tax increases, price changes, etc.

So I think that forecast or the outlook for 1% to 1.5% is pretty realistic.

The EU has a good volumes.

It's no question about it.

Russia we're rolling out the RUB5 per packet price increase, so some of this price is already will roll through the market.

We'll see how that's going to impact the overall industry and our shipment volume.

That's from we have a sequential good performance in Korea, Philippines has a good performance overall, we'll see how we close.

But it looks good.

And as I said before I think some of the positive industry trends and this is not just a quarter-on-quarter but longer-term I think they should continue going -- they should continue to happen in 2016.

And that just one other question for you which is around the Asia division overall and we talked last quarter on the call about the Asia division approaching your midterm guidance range for profitability this quarter and I think year-to-date you're up around 4%.

I guess so related to that should we expect a stronger fourth quarter in that Asia region and then related to that should we see any inventory adjustments occurring in Japan in this fourth quarter?

That's been kind of an up-and-down pattern for those this year.

No, we're taking inventory adjustments are related to the lower than expected market share.

So obviously we don't want to hang there with the high inventories and try to have something which reflects that is a shortened forecast.

So it depends how we perform in Q4, I mean there might be some inventory movement.

We're also comparing the Q4 to the distorted Q4 last year when we had been shutting down the factory in Holland in Europe which ships most of the product to Japan, used to be shipped from this factory.

So we're building some inventory to be a safer side.

You go to the overall performance of the Asia region, Asia is a recipient of increased investment this year behind iQOS and also behind the combustible cigarettes.

As we are investing obviously Japan is in a full-fledged rollout to about 60% of the total market we started in September.

We have not deployed all tools behind iQOS in the market.

We will be gearing up to opening more iQOS flagship stores.

This obviously is going to have a cost impact.

There was an increased investment behind the cigarette category in Philippines behind a very strong momentum and the narrowing of the price gaps.

We have continued investment in Indonesia, so Asia will not have a spectacular performance this year.

Better than last year but it will not have a spectacular performance this year.

Okay.

Thank you for your time.

Bonnie Herzog, Wells Fargo.

Good morning.

I have a question on iQOS in Italy and the draft tobacco products directive.

Are you broadly happy with the directive?

And is it written such that you will be able to ultimately make reduced risk claims on iQOS?

And could you update us on any new product and/or technology innovation behind iQOS and when you might be ready to roll something out?

I think we are pleased with the development of the tobacco product directive.

So far it's being transposed into the Italian legislation.

I think critical for us is and therefore we announce publicly today the results of our 90 days or three-months exposure study because one of the key elements of us discussing with regulatory bodies on the claims and we're going to make about the product that's very positive.

We are now at the stage when we are fine-tuning or finalizing the claims, testing them with the consumer so we will not have -- so we will achieve the proper understanding.

But I think we have a pretty solid evidence at this stage to progress and support the iQOS rollout with reduced at least exposure claims at this stage.

In terms of the new innovations, yes, there is a pipeline of new developments behind iQOS.

For obvious reasons, Bonnie, I won't talk at this stage.

But yes we have I believe a pretty strong innovation which will come into the market still this year and to the new markets, to the large global markets next year when they will see further enhanced improved versions of iQOS both in terms of a heat stick and a variety of the blend taste directions which we can offer as well as the iQOS as a device in terms of touch, feel, more user-friendly electronics and so on.

So as you remember Nagoya was launched in the pretty industrial I could say type of iQOS device.

What we're rolling out already is the new version, much more modern, much more I believe appealing to smokers, to adult smokers and I think we'll be deploying more of these innovations as we speak.

Okay, thanks.

Then I just have sort of a big picture question as you think about your business overall, can you identify for us markets where you're seeing the biggest improvements on downtrading pressures easing or moderating just in summary?

Well, I think EU overall is holds very well actually, improved very well.

To the extent that mix essentially issue for us does not exist in the EU market.

That's very good.

You have in the EEMA region you will have a strong performance with uptrading in the big parts of North Africa.

Turkey holds very well despite the fact that total industry volume is up and obviously some of the illicit trade recovery usually initially fuels the bottom part of the market.

But if I look at Parliament and the Marlboro share performance despite the strong market it's very solid.

You have obviously a big uptrade in Philippines as a result of the closure of [the cut] and what is very important to us is that it's not the one variant of Marlboro which takes the benefit of this uptrading, it's across all variants of Marlboro we see the uptrade.

So that's important.

But as we said we'll have to see how the pricing further unfolds in the Philippines but so far this year exactly as we initially planned despite the fact that as you remember we had a couple of difficult years in Philippines.

But the recovery is on a good track.

All right.

Thank you.

Bill Marshall, Barclays.

Bill Marshall Karen

Hi, good morning.

Building off of that question actually I wanted to talk about illicit trade.

Because it feels like you mentioned it quite a bit in the press release today, mostly on the positive side particularly in the EU and EEMA, a little bit more negative it sounded like in Asia with some increases in illicit trade.

Has this become more of a cyclical factor for you guys and again going back to the last question indicative of uptrading and downtrading?

Or is it something that some governments are starting to take an even harder line and you're seeing some improvement there?

No just to clarify I think the only markets which we have growing illicit trade at this stage is Australia.

Maybe something in Pakistan but this I will just leave alone.

You have generally we cannot serve a better illicit or lower illicit trade levels in the EU in a number of markets, not just the one in particular, and that's important, that's good and I think this is strongly supporting the total industry recovery or better trends.

We have the Philippines alone with the higher declarations coming from Mighty, that clearly is the recovery of the tax not paid volumes and Turkey has extremely strong recovery.

I think usually I think at its highest level if I recall Turkey was about 20% of the illicit trade penetration and I think recently it shrank to about 11%.

So that's really the lowest over the long period of time incidence of illicit trade in Turkey.

If you take it net-net that's about 10 points of a straight recovery and you see year-to-date market in Turkey is about 10%.

There is underlying growth, secular growth in Turkey but still 10% only can be explained by the recovery of illicit trade.

So we see it and a number of geographies.

Now we have invested also a lot of effort, manpower effort behind engaging with the government, engaging with the key stakeholders, being the customs law enforcement, etc., international organizations.

I think it's a finally I mean start bringing bearing fruit and I think that many of these positive developments of illicit trade should in my opinion continue at least in the near future.

Great, thank you.

And then just a point of clarification, when we talk about this spending particularly behind iQOS, did you push any of that spending from the third quarter into the fourth quarter?

And if so could you quantify any of that spending for us and what this could mean as we look forward to that push into 2016 at all or is this kind of you're on track for the plan as you saw it earlier in the year?

I think we have more of the push from 2016 and 2015 as we revised our plans and we will rollout iQOS to more geographies than we have initially planned at the beginning of the year.

You might have some distortions or timing effects between Q3, Q4 because clearly once we accelerated our plans for deployment first you need to have a plans develop and are solid, then you come spending.

So you know usually spending follows a little bit after the plans are discussed, approved and then released to the market ready to go.

But I think it's more of 2016 going into 2015 in terms of iQOS overall acceleration than just the Q3 to Q4.

And if I remember we have been indicating that in the back half of the year we will have we expect the higher spending on iQOS and through also as we observed during the first three quarters of the year much stronger momentum behind the cigarette business we have also stepped up some investment behind that part of our portfolio.

Perfect, thank you very much.

Michael Lavery, CLSA.

Good morning, good afternoon.

I just wanted to follow-up on Vivien's question first and clarify, make sure I caught what you said.

You said that it might be -- we were talking about 4Q you were talking about parity to last year's 4Q or maybe slightly below.

Was that on an EPS basis?

Yes, this was on an EPS basis.

Thanks for helping me to clarify.

I said we can be slightly below to last year maybe in terms of parity but this is on an EPS ex-currency to be formally drive.

Well so then if you -- if my math is right you've got $3.61 for the nine months to date this year.

It looks like that would mean a $0.74 to $0.79 fourth quarter for your full-year guidance.

Does that reconcile with slightly below last year?

It feels like that's quite a bit below even with currency included.

Well, I mean I think your math is about right.

You take the guidance, it depends on which point of new guidance you're going to base your calculation.

You take out what we had in Q4 and that's about the resulting number.

Okay.

Then just wanted maybe to dig into that a little bit more and get some color on the spending.

You've got year-to-date an average quarterly organic growth rate of around 6.5% and organic EBIT growth around 11% average.

Last year's 4Q organic EBIT growth was down 12%, so it's your easiest comparison and you have a lot of momentum this year.

How much could you possibly spend?

It looks like you might need $300 million to $400 million of incremental investments to get to the kind of numbers you're talking about.

Do you even have the ability to spend that much in an effective way in one quarter?

We are a very large organization and we have (multiple speakers) quite sizable brands Marlboro and L&M, etc., and iQOS itself.

I think your $400 million is on the high side but I think it will be obviously substantial if you do the comps.

When you do the comps you have to just notice one thing, the growth on the OCI level last year versus growth on the EPS level they were slightly different, we had a few items below the OCI level.

But I would still stay with my math on the EPS in Q4 on an ex-currency basis we could be below what we had last year.

Okay, that's very helpful.

Thanks.

Then just touching base back on Indonesia you're saying that you think the category volumes probably are going to be about flat this year.

But with the last two quarters down over 4% it looks like that would need to be a 3% gain in 4Q or about a 7 point improvement.

Obviously there's some macro pressure there that's helping the inflation side because inflation is moderating, but is there any particular catalyst for why the category might accelerate that rapidly for 4Q that maybe we're missing?

Well this is a cigarette industry estimate on a quarterly basis and I said in one of the previous calls I wouldn't pay that much attention to how the estimate is being done and what the numbers are on a quarterly basis.

I think for the full-year I think it seems that Indonesia based on our outlook Indonesia will turn to be flattish or flat versus last year.

You might have some movement between the quarters.

It's not really that consumption level, it's the industry shipments volume.

So we will have to look into the timing of the price changes in the market and what's second last quarter versus third through the fourth quarter of last year and what we expect will happen in the fourth quarter of this year.

I think for this year you have a softening of the volumes in Indonesia.

I mean flat is a low soft of a performance.

But as I said in my remarks nothing really comes in Indonesia which would trouble us in our view then in the longer term the market has the potential to grow over 1% to 3% range.

And we will (technical difficulty) critical for us is to know what are the tax rates for the next year and then we can have a better estimate of how Indonesian markets will perform -- will perform.

The good thing is that the pricing is very strong.

I think a lot of investment which we have made behind the commercial organization as well as the capacity restructuring between the handmade and handrolled and machine-made cigarettes is down (technical difficulty) performance next year.

Okay, that's very helpful.

Then just on Australia you've mentioned the strong pricing there and the gains in Bond Street and some other positives.

Just on a total view that certainly was a big issue last year.

It seems like it's at a minimum not getting the same attention because it's improved a good bit.

Can you just put that total, your total business there in context and how you see maybe the rest of the year or beyond in terms of the outlook for that?

I don't think we're done with Australia yet.

The truth is that this year Australia is by far less of a drag for Asia and the total PMI performance it was last year.

But we can observe this year that the deep discount segment somehow moderated or muted its growth compared to how fast the segment was growing through essentially all quarters of last year.

We are much more present in the segment with Bond Street.

I mean it had a significant share advancement.

We still observe quite a level of discounting in the market.

In other markets the total market size is a bit distorted because just after the tax change, tax price change we will have to see.

I think we did and the forthcoming tax changes we should hopefully see some moderation of the heavy discounting that's very much at the bottom of the market but we'll have to see.

The trends are slightly better but I wouldn't call that Australia is behind.

Okay, that's very helpful.

Thank you.

Philip Gorham, Morningstar.

Hi everyone.

Thanks for taking the call.

Jacek, you're building a compelling case behind iQOS.

My question is how would you characterize your confidence at this stage that it's heat-not-burn that will be the category that emerges with the highest acceptance rate among consumers?

Then what's the implication of that on other categories?

Does it still makes sense to spend behind platforms three and four for example?

Thanks.

I will maybe start with the second part of your question.

I think it makes sense to continue our investment in terms of a product development and its assessment, scientific assessment behind the other platforms.

Because we think that there is a market for both truly a fully electronic cigarette as well as the products which are based on a tobacco heat-not-burn.

Heat-not-burn today offers consumers what we observe in the market a level of satisfaction which is very comparable to the combustible cigarette.

Knowing that the evidence which we have presented also today makes us confident that this is a product which significantly reduces the risk profile of a consumers versus continuing smoking combustible cigarette.

I think we will be in a position to demonstrate based again on our status and the whole portfolio of evidence that the product is reducing significantly the risk of smoking versus the traditional combustible product.

Acceptance is a very important component also in the view of our strategy of not only demonstrating that we can reduce the harm to individual but we can reduce the harm to the population.

Because you might have a great product which is accepted which is of a reduced -- has a reduced risk profile but is not accepted by consumers and frankly speaking you have not addressed the problem, the issue.

So yes we remain very confident that the current product which we have iQOS has a big potential but we also think that consumers, not all consumers will like to stay within a tobacco-based product.

And they may for a variety of reasons they may elect to go into the straight non-tobacco-based but nicotine-based electronic cigarette as we have observed initial high interest in many markets including UK and some others in Europe or the US.

So yes we will continue investing behind all four platforms as we believe there is room and a potential for each of these platforms going forward.

Okay great.

Thanks Jacek.

Adam Spielman, Citi.

Hello, thank you for asking for taking my question.

On the Reduced-Risk Products, can you tell me who will give you permission to make the claims either reduced exposure or reduced risk claims?

Is that national authorities in every country?

Would it require EU central permission from Brussels for EU countries?

Thank you.

Well in the case of the United States that's clearly the FDA.

In the case of the EU the way the European Tobacco Product Directive is being transformed it is being delegated to the individual member states who will have to have, well the first will have to better work sort of a process individual member states wants to have in their territory to allow for the claims, etc.

But it's very specific or every different country by country and market by market.

There are some markets today where we can go and make claims already as we state today.

And just follow-up that, within the markets that you're also currently talking about which I guess is the European markets particularly Italy, Switzerland which is obviously non-EU and Japan.

Where are your countries where you have the best dialogue and you think you've got the best chance of making a health claim or a reduced risk reduced exposure claim?

I think in our countries we have good engagement.

Critical is that need to support these discussions and engagement with evidence and therefore it was very critical for us that we progressing as per plan in the conducting the study, as we announced today the 90-day study which was important but not the only one piece of evidence which we are bringing to the table.

Officially the more evidence you have at the table the more constructive discussions you have.

But I think we are on a good path in each of these countries despite the fact that they have some differences in the regulatory regimes.

Okay, thank you very much.

Thomas Russo, Russo & Gardner.

Hi, my congratulations on wonderful numbers.

Keep up the good work.

I was curious, I may have missed the comments on the Trans-Pacific Partners forward revising legislation and wondered what comments you may have made or what you might make on that and again congratulations.

Tom, thank you very much for the congratulations.

On the TPP I made two comments.

One is that TPP has no impact on the pending cases which we have.

So most importantly the case which we had in Australia will not be impacted by the TPP.

Going forward we will have to see how TPP is going to be finally adopted so by the individual signatories of this treaty.

As I hear in the US in particular but also in some other place is not necessarily that it is going to receive the warmest reception for obvious reasons which I mentioned.

Because the negotiations could single out one industry and if you look at the statistics of all the investor states disputes so far there were more than 600 disputes between the investors and the states and only two of the disputes relate to tobacco.

So it's difficult to find the logic while one industry is being carved out.

So it's all about the letter of law equal treatment, equal access to justice and some of the negotiators have violated or forgot about that principle.

It's a sad story.

But as I said at this stage I don't think it impacts any of our abilities to defend our position with regards to protecting our trademark.

Thank you.

So you will challenge it because it's prejudicial and arbitrary and you don't think it compromises a cause of action regarding Australia?

That correct.

Thank you.

Thank you.

This concludes the question-and-answer session of today's conference.

I will now turn the floor back over to management for any closing remarks.

Thank you very much.

This ends the call.

If you have any follow-up calls the investor relations team is in Switzerland and we'd be happy to take your call.

Thank you very much.

Have a great day.

Thank you.

This concludes today's conference.

You may now disconnect.