菲利普莫里斯國際 (PM) 2016 Q1 法說會逐字稿

Good day and welcome to the Philip Morris International first-quarter 2016 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 2016 first-quarter results.

You may access the release on our website at www.PMI.com or the PMI investor relations app.

During our call today we will be talking about results for the first quarter of 2016 and comparing them to the same period in 2015 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 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 is now my pleasure to introduce Jacek Olczak, our Chief Financial Officer.

Thank you, Nick, and welcome ladies and gentlemen.

As announced this morning we are raising our 2016 reported diluted earnings per share guidance by $0.15 to a range of $4.40 to $4.50 at the prevailing exchange rates.

The revision is driven solely by currency.

Our guidance, therefore, now includes $0.45 of unfavorable currency and continues to represent a growth rate excluding currency of approximately 10% to 12% compared to our adjusted diluted EPS of $4.42 in 2015.

We expect our currency neutral adjusted diluted EPS growth in 2016 to be skewed towards the second half of the year and the fourth quarter in particular.

The $0.15 moderation in the currency impact on our guidance reflects the depreciation of the US dollar against a number of our key currencies since we last provided guidance in mid-February.

As shown on this slide, the Indonesian rupiah, Japanese yen and Russian ruble were the principal drivers of the variance.

Let me now review our first-quarter results which as expected were heavily impacted by a difficult comparison versus our exceptionally strong first-quarter results in 2015 that mask otherwise solid performance.

Organic cigarette volume in the quarter declined by 1.4% due mainly to the Asia region, principally Indonesia, Pakistan and the Philippines, and partially offset by the EU and Latin American and Canada regions as well as the favorable estimated impact of the leap year.

As a reminder our organic cigarette volume grew by 1.4% in the first quarter of 2015.

Our cigarette volume benefited from the strong performance of our international brands with the top seven including premium priced Marlboro and above premium Parliament all growing.

For the full year, we continued to forecast a decline in our organic cigarette volume of 1% to 1.5%.

This compares favorably to our forecast of a cigarette industry volume decline excluding China and the US of 2% to 2.5%.

On a currency neutral basis, we recorded modest net revenue and adjusted diluted EPS growth in the quarter while adjusted OCI declined slightly.

As seen on this slide our financial results faced particularly difficult comparisons in the quarter.

The comparisons were challenging across all regions and even Asia following the first-quarter 2015 gain in Korea related to inventories built ahead of the January 2015 excise tax increase.

We recorded a pricing variance of $272 million in the first quarter driven by the EU, EEMA and Latin America and Canada regions.

Importantly, our pricing variance was slightly positive in the Asia region despite the unfavorable comparison related to the gain in Korea last year.

During the quarter we announced or implemented price increases in a number of markets, notably Argentina, Germany, Indonesia and Russia as well as others shown on this slide.

For the full year, we continue to anticipate the pricing variance of around 6% of our 2015 net revenues.

Our cigarette market shares excluding China and the US declined slightly in the first quarter due mainly to Asia region, notably Indonesia and Japan, partly offset by the EU and Latin America and Canada regions.

Marlboro's marketshare was stable on the same basis with strong growth in the Asia, EU and LAC regions offset by a decline in the EEMA region due largely to North Africa.

Let me now discuss our regional results beginning with the EU where first-quarter cigarette industry volume increased by 0.6%.

The strong industry performance continues to reflect the improving economies, notably in the Southern Europe, a decline in illicit trade, less out-switching to the fine cut category and a lower prevalence of e-vapor product.

We also attribute some of the growth to the estimated favorable impact of immigration in select geographies.

Our positive momentum continued in the quarter with regional cigarette share increasing by 0.6 points to 38.7%.

Marlboro, L&M and Chesterfield, the top three selling industry cigarette brands in the region, all grew share in the quarter, underscoring the broad strength of our portfolio.

We are progressing well with the commercialization of iQOS in the region.

In Switzerland iQOS is currently present in six key cities, representing approximately one-third of total cigarette industry volume.

During the last week of March we reached a HeatStick offtake share of 0.8% in the launch area, the highest level since the launch last August.

At 1.9% marketshare, HeatStick offtake share was even higher in the French-speaking part of the launch area where we have concentrated the majority of our support thus far.

In Italy HeatStick's offtake share has been stable at around 0.2% in the expansion area covering Bologna, Milan, Modena, Rome and Turin.

We recently entered the latest version of the iQOS device and are refocusing our marketing approach and touch points to increase the effectiveness of our engagement.

This includes the rollout of iQOS embassies which leverage the iQOS flagship store concept that we have successfully deployed in Japan.

Turning to the EEMA region, we face particularly difficult comparisons this year following currency neutral net revenue and adjusted OCI growth of 14.1% and 24.3% respectively in the first quarter of 2015.

We also face challenges in some of our key EEMA markets.

In Ukraine the overall economic and geopolitical uncertainty contributed to a very competitive pricing environment which began in late 2015 and is now starting to improve.

In Algeria sizable excise tax-driven retail price increases over the past year of approximately 21% on an industry weighted average basis put pressure on Marlboro share, though this was partly offset by the strong performance of L&M.

We expect better performance in this market as the year unfolds and remain confident in the outlook for the region this year.

In Russia, cigarette industry volume declined by 6% in the quarter, a resilient performance given the significant retail price increases over the past year of approximately 23% on an industry weighted average basis.

For the full year, we maintained our forecast for a cigarette industry volume decline of around 9%.

Our market share declined by 0.2 points to 27.8% in the February quarter-to-date period which we attribute mainly to price increases for some of our product that reach adult smokers sooner than competitors' price increases.

The downtrading in our portfolio from the medium to lower price segment was consistent with the broader industry trend.

Our strong pricing resulted in another quarter of solid double-digit currency neutral OCI growth and we are targeting similar growth for the full year on the same basis.

In Turkey cigarette industry volume grew by 11.7% in the first quarter as the industry continued to benefit from a significant reduction in illicit trade.

Our February quarter-to-date marketshare increased by 0.6 points to 43.9% driven by the continued strength of Marlboro which grew by 1.1 points to 10%.

Currency neutral OCI growth in the quarter was exceptional and benefited from our January price increases as well as higher cigarette volume driven by the growth in both industry volume and market share.

Moving to the Asian region, our financial results were similarly impacted by a difficult comparison due principally to the gain in Korea that I mentioned earlier.

Beyond this distortion, there were a number of positive developments in the quarter, notably Marlboro's original cigarette market share and volume increased by 0.5 points and 5.1% respectively.

In Australia the super-low price segment is showing signs of stabilization and March price increases for cigarette brands in the segment were above the excise tax pass-on.

Importantly, we grew our share in the quarter by 1.1 points to 36.4% driven by Bond Street and choice.

In the Philippines, price gaps were stable throughout the quarter and represented a significant narrowing compared to the first quarter of 2015.

The narrowed price gaps between Marlboro and lower-priced brands continue to support our strong overall share which increased by 1.4 points to 73.6%.

Let me now covers some specific Asia region markets in more detail.

In Indonesia, cigarette industry volume declined by 5.9% in the first quarter due mainly to the soft economy and the impact of industry weighted average price increases of around 11% in the quarter which exceeded the inflation rate of around 4%.

The decline also reflects the difficult comparison versus the first quarter of 2015 in which cigarette industry volume grew by 6%.

Our market share declined by 1.3 points to 34.1% due primarily to share loss in the machine-made kretek segment, reflecting the growth of competitors' plus 4 cigarette offers, value proposition with four extra cigarettes per pack.

The decline was partly offset by our favorable performance in the hand-rolled kretek segment where we solidified our leadership position and grew segment share.

We expect our share loss in the quarter to be a temporary phenomenon and we have a number of initiatives in place to restore growth, particularly in the machine-made kretek segment.

For the full year, we forecast a cigarette industry volume decline of 1% to 2% and are targeting double-digit currency neutral OCI growth.

In Japan, cigarette industry volume increased by 2.3% in the first quarter, driven by estimated retail trade inventory movement and adult smoker purchases ahead of price increases for select competitors' brands effective April 1. Excluding this favorable inventory movement we estimate that cigarette industry volume was essentially flat.

Our cigarette market share declined by 1.6 points due to inventory movements, competitors offerings in the differentiated menthol taste segment and cannibalization by HeatSticks.

We continue to invest behind the pipeline of innovations for our cigarette brand portfolio including the national rollout of Parliament Crystal Blast in March.

As you may be aware, last week we submitted an application to the Ministry of Finance for approval to increase the prices of nearly all Lark variants and some Parliament variants by [JPY7] per pack effective August 1 -- vary by JPY10 per pack effective August 1. This variance represents approximately 45% of our cigarette volume in Japan.

We are very excited by the performance of iQOS in Japan.

As seen on this chart, weekly HeatStick offtake share increased steadily through the end of the first quarter reaching 2.4% in the expansion area and 3.4% in Tokyo during the last week of March.

On a quarterly basis we recorded a HeatStick offtake share of 1.8% in the expansions area and estimated this equates to a first-quarter national market share of approximately 0.8%.

The positive HeatStick offtake share momentum is a clear indicator that iQOS is resonating with Japanese adult smokers.

Importantly, we are seeing a steady increase in the proportion of iQOS purchasers who have predominantly or fully converted to it reaching approximately 60% in February.

In addition, I am pleased to confirm that yesterday we commenced the full expansion of iQOS nationally.

Let me conclude my comments on regional performance with the Latin America and Canada region where our cigarette volume increased by 2.4% in the quarter driven principally by Mexico, partly offset by Argentina.

Regional market share increased by 1.1 points to 39.3%, reflecting growth in the majority of our key markets.

Marlboro had a very strong quarter with the share up by 1.2 points and volume growth of 8.5%.

Our strong net revenue and adjusted OCI growth rate excluding currency were driven mainly by pricing in Argentina and Canada.

In conclusion, our first-quarter results were in line with our expectations with year-on-year performance adversely impacted by a difficult comparison with the first quarter of 2015.

Nevertheless, the underlying fundamentals of our business continue to be strong.

We are making exciting progress with the commercialization of iQOS which is demonstrated in particular by the steady weekly growth in HeatSticks offtake share in Japan.

Importantly, our iQOS conversion model is clearly working.

We remain focused on generating strong free cash flow and continue to forecast full-year 2016 free cash flow to be broadly in line with last year's levels.

The outlook for 2016 remains strong.

To reflect currency movements we are raising our 2016 reported diluted EPS guidance which on a currency neutral basis continues to reflect the growth rate of approximately 10% to 12% versus 2015 adjusted diluted EPS of $4.42.

Thank you.

And I am now happy to answer your questions.

(Operator Instructions) Bill Marshall, Barclays.

Hi, good morning or good afternoon to you guys.

Thank you.

I just wanted to first dig in on Indonesia a little bit.

You talked about targeting double-digit profit growth in that market this year.

When we think about Indonesia over the long term, should we think about it a little bit differently where maybe it will be more of a profit growth market and less of a kind of volume revenue market going forward?

Or is this just a one-time factor in 2016 and then maybe we'll get a little bit more volume growth in the out years?

Well, Bill, to be frank actually I think Indonesia can have all three.

It can be volume, revenue and bottom-line OCI growth target.

We still remain confident in the longer run Indonesia total market can be in the growth rate of somewhere around 1% to 2%.

We have said it on a number of occasions in the past that depends on some macroeconomic factors which may impact temporarily the purchasing power, etc., the market may have some slowdown.

I think what we observed, what we forecast to observe this year due to a bit of due to the softer economy, etc., then Indonesia might go into some decline this year.

But pricing remains strong.

The cost outlook for Indonesia seems pretty positive.

And therefore we're very confident that this year as in the years in the past, meaning Indonesia not only will grow double-digit bottom line but also can remain a very significant contributor to overall PMI performance.

So I'm very positive on Indonesia both in the short and the longer term, but as many developing economies there might have some periods of a relative slowdown and then they will go through acceleration.

That's great.

If you can do all three I think that would be fantastic.

Then just a quick follow-up.

On Japan, just can you walk us through the decision not to apply for price increase on Marlboro?

Well, I think it's pretty obvious if you look at what the price increase of our key competitor has announced earlier this quarter.

So it's somehow also reacting to the price moves announced or registered by others.

So I think it's pretty obvious why we just selected that part of the portfolio.

Perfect.

Thank you very much.

I appreciate it.

Vivien Azer, Cowen.

Good morning.

So my first question has to do with the negative mix shift that we saw in the quarter.

While I appreciate the more muted price realization, the negative mix in particular in the EU comes as a little bit of a surprise given that the momentum that we're seeing in Marlboro, so can you expand on that a little bit please?

Well I think actually if I talk historically you had a relatively good mix, a relatively low mix.

I think is maybe there are some movements and timing of movements between countries.

I think the biggest challenge which we have to compete with if you like in the quarter was essentially coming the lack of a pricing variance from Korea.

And that's on a total PMI basis and obviously weighted quite largely on the Asia regions.

If I would add a lack of the pricing extra gain from Korea, our revenue would be 4.5% growth territory and this is still despite a pretty challenging comp from Q1 of last year.

So I think it is mostly the price which was driving the revenues and obviously also the bottom line there.

And then obviously you have a couple of comps which were coming from outside the EU region which were coming mainly from the volume, I mean Russia both total market and especially PMI performance with a completely different comps.

And Indonesia and Asia also contributed.

Okay, that's helpful.

Thank you.

Then on iQOS, given the strong demand that you've seen in Japan and the delay in the national launch which I guess occurred yesterday, how are we thinking about the incremental market introductions that are anticipated for the year?

Will the strong demand in Japan perhaps delay some of the I think it's 13 markets that you're targeting by year-end?

Well we targeted 20 markets to be present with iQOS on the city level, on the national level by the year-end.

Clearly the Japanese performance, I could say like this, it comes with our expectations and our expectations are very high and our expectations are rising as we speak.

So clearly the focus today is to satisfy the full demand in Japan.

I would like to remind that we are operating this year with not fully accessible capacity because the factory in Bologna, greenfield construction, will be completed somewhere towards the end of this year.

But so far I think our plan absolutely valid for this year and we're very excited not only by Japan.

I mean we have said, I have said in my presentations also a very good results which we achieved so far in the French-speaking part of Switzerland but that's very encouraging.

And in all places which we have made iQOS available today we are approaching, actually exceeding the conversions rate which we are at this stage achieving in Japan.

So it is a lot of fine-tuning of the conversion model of the route to market, route to consumer.

And I think we are on the very strong progress on this side.

So we're very encouraged by the results.

Terrific.

Thank you very much.

Matthew Grainger, Morgan Stanley.

Hi, good morning.

So as we think about the cadence of profit growth and earnings growth this year, clearly we're still in a period of more accelerated rollout costs behind iQOS.

Don't know if it's I may be asking for too much detail here, but can you give us a rough sense for how material the step-up in investment was as a headwind to earnings growth this quarter or how it compares to Q4?

And you mentioned in the release the earnings growth profile being more second-half weighted and Q4 weighted, so just wondering if you could help set expectations for Q2.

Matthew, you are always asking for a lot of detail.

Look, let me put it this way, absent the iQOS partially comps but also increasing investment against the cost for the quarter would come about flat.

Essentially it would be flat.

So all the cost growth in the quarter one can attribute to the investment behind iQOS.

There is obviously on ex-currency always on an ex-currency basis.

You know to give a bit more light into how we see the quarters going forward, we still to confirm that our outlook for the total cost for the year, and this is now all inclusive again on an ex-currency basis conventional and RRP, Reduced-Risk Product, on ex-currency basis the cost outlook still remains at about 1% for the full year.

So we'll have obviously some comps issues in the quarters.

If you look at pacing of our growth rates if I take it on an EPS level second, third, fourth quarter, look as much as we've been explaining difficult comps in the Q1 of this year, I mean clearly we will have a different situation, 180 degrees different situation in Q4 of this year.

So obviously one should expect quite a strong, very strong actually growth rate on the EPS level in Q4.

And in Q2 and Q3 we will be going somewhere below obviously the guidance which we gave for the full year.

This will very much also depend on the timing of some expenses, etc.

I think revenue line is going to be cruising closer to what we said is for the full year.

So somewhere in the corridor of a 5%, 5% to 6% quarter this year versus the quarters of the last year we should see the evolutions of revenue.

So it's much more the differences which we have in comps coming from the investment, partially behind the conventional but very much obviously driven by the deployments of iQOS.

All right, thanks Jacek.

That's a good amount of detail.

And just a follow-up on the EU.

As we think about the growth outlook for volumes and mix in the region, how do you think about the potential for the favorable immigration impact that you mentioned to potentially support stable volumes over a longer period of time or potentially positive volumes?

Because it continues to be more constructive on a volume level than we would've expected.

Look, the way we look, I look at this the EU region is that I still would maintain that all other parameters staying equal, EU is in a sort or should be in a sort of a secular decline of 1% to 2% per annum.

And I think obviously when you had the recovery of the illicit trade, when you had some much less pressure from a fine cut product, some recovery from an electronic e-vapor product, electronic cigarette, then we could see that the trends could be better than the secular trend.

As then we all are reading, watching the same news, we all hear about the immigrations, I mean these things are getting into a bit larger scale at least recently.

It's difficult to put a number how much does this contribute to the volume fluctuations.

But this will be difficult to deny at this stage at least that there is some impact of that thing.

We recognized it, I recognized it in my remarks.

But as much as I am willing, and you know me, on many occasions to give more detail I can't offer you a number but there is some impact, clearly there is some positive impact on the year from immigration.

Okay, thanks again, Jacek.

Michael Lavery, CLSA.

Good morning.

You mentioned that the cost outlook in Indonesia is favorable but there is an increase in clove costs we're seeing maybe around 20% or so.

Is that adding any pressure or is that just because you're able to source it in ways that you're not exposed to as much of that?

Or what's the outlook there?

Is that something we should be watching out for over the rest of the year?

No, I think actually the cost in Indonesia if you take it's what's in the market it's somehow at the level of somewhere at the level of last year, you're not actually better off.

And remember that what hit our P&L is the cost going through the balance sheet for the inventories, right.

So if you obviously for these reasons we will not disclose how long inventories do we have but that the impact is not immediately going through the P&L.

It takes some while to impact our costs.

But the input cost in general for Indonesia is at this stage pretty positive, I mean a stable positive.

So therefore it's another compounding factor supporting our business in Indonesia can grow at a double-digit bottom line.

Okay, that's helpful.

And we've seen [Good and Garmin] take pretty aggressive pricing in late in the fourth quarter, but then you're still seeing your share under some pressure in this quarter and you specifically mentioned some machine-made discounting.

What's the pricing environment look like?

Is it other competitors that are putting pressure on or were their price increases not maybe broad enough?

Or can you just dissect a little bit of some of your share moves and what you expect over the course of the rest of the year?

Sure.

I think everyone -- we don't see anything abnormal in speed or frequency if you like of the pricing being taken in Indonesia obviously with some positive adjustments due to the size of the relatively higher size of excise tax pass-on which the industry was confronted this year.

So I think as an industry if I follow what the competition price moves are there, there's nothing really abnormal taken there.

Obviously the prices are going a little bit higher due to this, as I mentioned this higher pass-on to be passed to consumers.

Now the four extra stick price segments of some four stick discounting which has happened, you know the segment of extra four sticks in the pack which was sold at the price of competitors' product with the four sticks left was there for some time.

I think until the relatively late maybe second half of last year the segment was at about 3% to 4%, if I am not mistaken, size of the total market.

So it is a segment, that's not very sizable segment, we have been a more sizable segment in the market.

This accelerated I think due to some offerings or introductions from some competitors.

We are not very active in the segment.

I think recent, the most recent reading of the size of the segment is somewhere in the range of 9%, maybe slightly above 9%.

So it accelerated the growth recently.

I think in that environment when the consumer is confronted with these frequent price increases and maybe of a slightly higher nature than in the past, clearly some form of a price also discounting might be attractive to some consumers.

So that puts obviously, especially if you look into the quarterly shares, the monthly shares, that puts a pressure on some of our propositions in the market.

And overall I would think it's a manageable situation.

Okay, that's helpful.

And then just lastly could we talk a little bit, could you talk a little bit about Australia?

You mentioned share gains there, but it sounds like there still is negative mix and of course volume decline.

Are you seeing that as an overall drag on profitability?

Or are the share gains able to and some pricing able to give a lift or what's the outlook there just in terms of how that's shaping up?

We're still comparing ourselves to relatively late part of our period of performance in Asia, sorry, in Australia.

I think Q4 2014, first quarter of 2015 we still were a little bit, were in a much more difficult situation in Australia.

Australia is not a drag, neither nor in the quarter, nor I would think our outlook for the full year that's sort of a drag, not even near the drag which we have had in the past periods.

A situation I think the price increase at least taking this at its face value as it is now, why the price announcement versus the excise increase, we will have to see how it develops but since the dynamics in terms of the deep discount growth segment combined with this price increases from us and competitors might be a couple of steps in the right direction.

So I'm getting very cautiously more optimistic on Australia.

But still some time to go, but I think the worst is definitely far behind us.

Okay, that's helpful.

Thank you very much.

Bonnie Herzog, Wells Fargo.

Hi Jacek, I just have one quick question first on the pricing in Japan.

When do you expect to hear feedback on your application and is this price increase factored into your guidance?

I think we should expect something, as always in Japan, I think within 90 days if I'm not mistaken.

That's about the time period when the MOF has to come back with a decision.

And to be very frank with you, the price in Japan, the price increase over 10 years and on these two brands is not fully factored in in our guidance.

But let me remind you that if the prices are approved they will go into the market in the latter part of the year.

And as you know guidance has a number of variable components and this will -- we'll see how it unfolds.

But factually this pricing is not in our guidance.

Okay, that helps.

And then the EU Tobacco Products Directive, which will be implemented in May, just curious to hear from you some of the key issues and concerns?

And then what are you doing to mitigate those and then also the cost associated with complying, were those above your expectations, Jacek?

Well, part of this cost we have incurred in Q3, very much Q4 actually of last year.

And you remember we make these decisions actually to preempt that spending and some of this preparations when it falls to the product retooling machines, etc., it's a number of cost buckets which we have to cover we decided already to take in 2015.

I think we were prepared.

The issue, the biggest challenge is that obviously this directive does not hit due to the transition periods which were put by the different member states, the transition periods are different in the different member states.

So logistically it is quite an exercise.

They might be, doesn't have to happen, but might be that there will be some distortions on a shipment level.

I don't think it's going to obviously impact the consumption or retail offtake but there might be some difference on a shipment level in the quarters going forward.

But it's difficult frankly speaking to predict.

There are a number of formats which will have to be replaced.

One format has to cease its existence at the retail level, has to be replaced by the same cigarette but in a different pack format, etc.

So it's more of the logistic supply chain type of a stretch at this stage rather than anything else.

But I don't think structure is going to change our outlook in terms of a performance both on the top and bottom line for the EU region.

Okay, and then in terms of Russia I was actually hoping you could drill down just a little bit further on your business there.

You took a price increase in that market so I guess I'd like to hear the impact of that as well as then your expectation for possible share gains in this market and essentially your outlook for the remainder of the year in terms of Russia?

I mean I start with a total market.

The first quarter again as many quarters of last year came pretty strong on a total industry side, I think 6% is clearly on the low side of one could expect from the market with a 20%, 23% on a weighted basis price increases.

So clearly the elasticities are still on what I've been used to call attractive site i.e., minus 0.3, minus 0.5, somewhere in this territory.

So that's good.

Market share, I mean it seems this year we are a little bit faster than competition with rolling out the prices, or maybe actually competition is a bit slower versus us in rolling out the prices with presumably more appropriate description of the situation.

Russia also compares this year versus pretty strong share advancements last year.

So 20, 30 basis points sort of share pressure doesn't really disturb us dramatically.

The more important is that total volume of the industry somehow seems on a stronger side relative again to the price increases.

Portfolio and the downtrading in the market as our brands perform and the downtrading in the market, it goes frankly speaking in line with what would be expecting we don't see acceleration of downtrading.

You have this medium to value segment sort of a 1 to up to 2 share points year-on-year fluctuations of difference there.

Our brands performing in their respective segments pretty strong.

So I think the outlook in terms again on profitability which I guess is the most important at this stage, I mean is pretty positive.

And yes, we might have some sort of occasional share pressure, but it is more as I said, also in my remarks, it's more the timing of whose product is going to hit first the market with the price increase, nothing structural.

Okay, thank you for that.

And then just one final quick question on iQOS.

I just wanted to confirm that you're on track to file the two applications to the FDA in the fall of this year.

We are targeting to apply towards the end of this year, that's correct.

Okay, thank you so much.

Judy Hong, Goldman Sachs.

Thank you, hi.

So one, just going back to Japan, the market share trends there continues to be soft and just wanted to get a little bit more color just in terms of your effort to improve cigarette market share in that market.

And are you increasingly looking at that market with iQOS now more holistically and trying to kind of look at the total market share including iQOS, and in markets like Tokyo where your iQOS marketshare is pretty strong, is that where you also see a bit more impact on the combustible marketshare?

Well, we try to look at this stage at the two product propositions separately.

There are challenges which we are facing on a combustible business and we are trying to get the right portfolio of innovations into the market to address the problem.

I think the launch of Parliament Crystal Blast towards the end of the first quarter with the other initiatives which we are bringing to address the pressure which we have in this new taste menthol category, the capsule product, etc.

So by no means we are focusing our attention from a combustible to iQOS.

Having said so the story of iQOS is getting more and more exciting every time we look at the results from Japan.

Now I have to admit one thing, this is not that we are trying to mask somehow our performance in the conventional business.

However, 0.8 if I take the offtake shares from the places where iQOS is available today in Japan, and I recalculate this to have an equivalent in-market sales market share compared to what we reported on the conventional business.

0.8 in a quarter knowing that there was a cannibalization from my own portfolio and very much skewed towards Marlboro I would guess if we just assume that half of that or close to half of that was through the cannibalization, clearly iQOS already has an impact also on my conventional share performance.

If I would just as I said earlier apply that to use that number to explain the market share performance of Marlboro, about half of the Marlboro decline, I could, I should actually attribute to the iQOS cannibalization.

It's a good cannibalization.

However, this is what we might observe for some time.

So, Judy, we're trying to address both conventional and both RRPs but we do have to recognize that it might be some of this interactions between both categories.

Okay, and then I had a couple of questions on FX.

One is just if I look at Q1, the sales impact from FX in Europe was much more sizable than with the euro decline on a year-over-year basis would have shown.

So I'm wondering if there's any sort of hedging you've started to do more on the euro side or if there is anything that I'm missing just in terms of FX impact on sales in Europe in the EU.

No, I don't think, Judy, you are missing anything.

We didn't do anything on the euro for the hedges which would have an impact.

I think it's just, I guess it's just the timing.

We always operate with a sort of a quarterly numbers but at the end of the day it's the sum of the parts of the monthly exchange rates which we use for our P&L for our income statement.

Maybe it's just the timing of euro was a pretty volatile, pretty dynamic in terms of the depreciation last year.

Maybe it's just the comps between the year between both quarters.

Okay, and then the other question on FX was just when I looked at your guidance for the full year, the $0.15 favorability, there is some favorability on the yen movement but it seems like some of the hedging that you put on also limits some of that impact.

So can you just remind us where you were hedged on the yen and what that impact would be for the balance of the year if you sort of look at the effective yen?

Well at the beginning of the year always when we give the hedge the coverage we're at about a 70% or so.

So clearly there might be a moment, and we always hedge as you remember 12 to 18 months ahead.

So it's not 100% of the yen positions or cash flows which are hedged for this year but a very significant portion of the yen projected cash flows are hedged.

Maybe what will help you is that some of the hedges are executed in the form of calls and put option, the collar option strategy which not necessarily have to have an impact if we see the developments of the year of the yen going outside the bracket.

And only some of that is done for the forwards.

Forwards obviously you can't walk away.

But with that collar options you have some flexibility so you can take an advantage of what is the spot rates can be.

Okay, got it.

And I guess presumably then some of those strategies would benefit as you move into the first part of 2016 as the hedges roll off?

Yes, well as I said because we always look 12, 18 months ahead there is already some portion of 2017 expected cash flows from Japan in yen which are hedged.

But obviously they hedge also at the rate which are more corresponding to some of them to the more recent relative strengthening of the yen.

Got it okay, thank you.

Chris Growe, Stifel.

Hi, good morning.

I just have two questions for you, a bit of follow-ups from earlier questions.

I wanted to ask first if I could, when I look at the price realization in Asia there was a larger effect from the Korea price benefit a year ago than I thought.

I guess it does suggest that there was even stronger pricing in that Asia region than what I had modeled given that it was positive in the quarter.

I guess I just want to understand the comparison factor on pricing was obviously was one of the major drags in the Asia division, that should help show better pricing in Q2 going forward based on what we know today.

Is that a reasonable assumption?

It is a very reasonable assumption.

You will still have a small, relative to the first quarter a small drag from Korea.

But relatively much smaller than what we had in the first quarter.

But the pricing in Asia, you know in the quarter, are quite obviously masked by the Korea but we had a very strong pricing in Indonesia, we had pricing in Philippines, we had pricing in a few other locations.

So, overall, I mean Asia should be at a much better pricing level or price realizations level of what you just saw in the Q1.

Sure.

I just wanted to reconfirm that.

Thank you.

Then the other question I had was just in relation to the development of iQOS.

And you've had this very strong development in Japan but a slower development in countries like Italy and Switzerland where it's been around about the same amount of time.

And you've talked about a couple of the undertakings by the Company to enhance the development of iQOS say in Italy or Switzerland.

I just want to understand is that about spending more money, are you doing more embassies or stores in those markets, just what you're doing to try and boost the national expansion if you will and the adoption of the product in markets where it just hasn't developed at the same rate as Japan.

I think we need to adjust for the marketing and the overall commercial environment which we have in Japan versus what we have in Switzerland or Italy or many other places.

And this covers the trade channels, what I call route to the consumer, route to the trade, etc.

So I think we are adjusting this one and trying to figure it out such a composition of all available to our blogs which would result with manageable level of spending if you like versus the conversions rate which we can achieve.

Now Italy is I think we're going to crack the Italy also this year.

I remain very positive on this despite the fact that for a couple of quarters in a row we are talking about the 0.2% marketshare.

That's not much of an issue I think frankly speaking at this stage.

If I look what we have achieved and achieving in part of Switzerland, and as you notice we in some places going deliberately very focused in order to nail down the model properly on the smaller territory, and then when we feel comfortable we explode.

Let me remind you, I mean we had as you remember the marketshares, the conversions rate which we had at Nagoya at the time of the city test, of the test market.

And no one, if you look at the progression of the share development in Nagoya you wouldn't figure it out that we can accelerate the conversions and the market share to the levels which we had in 60% of Japan including Tokyo and other main cities.

So I think we're trying to get comfortable in the smaller territory that we know that we can amplify and explode -- amplify the right components of our marketing mix, broadly market mix.

And then we go to the national level.

And actually it's in a part of obviously higher cost spend, higher investment but a more prudently invested into something which really gives you a proper result.

So I'm excited about the Japan, very excited about Switzerland.

And I am sure we're going to demonstrate later on this year what we can do in Italy as well.

Okay, that was a very good answer.

Thank you for your time.

Adam Spielman, Citi.

Thank you for taking the question.

I'd just like to come back to the question about what's driving the much better than historic volumes in the European Union.

And you've obviously mentioned four factors.

But I'm just wondering, and you've said it's really impossible or hard to quantify the impact from migration, but I guess what I'm trying to ask is what the evidence is, how good the evidence is of the impact from reduced illicit and whether -- what sort of evidence you have and whether you can quantify that in any way and also quantify the impact of reduced headwind from e-vapor?

Well I think we get a better reading at the market or in the total region level when it comes to the illicit trade.

I mean it's obviously always an estimate but because the methodologies equally apply from year on year I think we have a better comfort about saying that, yes, there is a contribution of illicit trade.

And that contribution goes in I guess and well it depends now versus what period, but you're talking about the few couple points of growth is coming from the illicit trade.

Now you would have to zoom in to Germany which presumably has a much larger impact than for example UK when the illicit trade is still on the growth.

Italy had a good result, I mean Southern Europe actually is doing better.

As you know the recent moves also over the last few months of some reinforcing the border controls and reintroducing actually the border controls in between the some EU states, EU markets and also outside clearly are another factor which somehow contributes to tightening the domestic tax paid market.

Always give an example of Turkey which I know it's outside the EU but Turkey has reduced illicit trade year on year by about 10, 11 points which is about half.

Turkey's market normally wouldn't be growing, or turkey's consumption if you like, wouldn't be growing by 10% or 11%.

We're talking about the industry tax paid volumes growing to this magnitude.

And this is clear with the recovery coming from 10, 11 points almost of the recovery from illicit trade.

So, yes, you see the correlations and that I said to one of the questions earlier, it's more comfortable for us to talk about the illicit trade because there is quite a lot of data available or estimates available and you can deduct with a high dose of probability that this is a contributing factor.

Immigration is more something which we hear about from written in those papers, etc.

But clearly there are movements in dislocation of population, immigration, etc.

In some places I think they do have a factor, they do have an impact on our industry.

And e-vapor?

And e-vapor well, if you look where the product was in some places like Italy for example a year or so ago and how much was the trial which at least temporary took consumers from a conventional cigarette and where these products are today I mean cruising somewhere at the 1% or below even 1% marketshare in most of the places, I mean clearly those consumers get back to the conventional cigarette.

So this again you would have to go into market-by-market basis, what is happening as you know the e-cigarettes category does not attract a lot of loyalty to the category itself.

There's a lot of dual usage, dual consumption.

Most of the time so far leading to consumer turning his back to e-cigarettes and coming back to the conventional product.

Okay, thank you very much.

That was our final question.

Now I'd like to turn the floor back over to management for any additional or closing remarks.

Thank you very much.

That concludes our call for today.

If you have any follow-up questions please contact the investor relations team.

We're in Switzerland.

Thank you again and have a great day.

Thank you.

This concludes today's conference call.

You may now disconnect.