Philip Morris International : Script (PDF 73 KB)

Philip Morris International Inc.

2020 Fourth-Quarter Conference Call

February 4, 2021

NICK ROLLI

(SLIDE 1.)

Welcome. Thank you for joining us. Earlier today, we issued a press release containing detailed information on our 2020 fourth-quarter and full-year results. You may access the release on www.pmi.com.

(SLIDE 2.)

A glossary of terms, including the definition for reduced-risk products, or "RRPs," as well as adjustments, other calculations and reconciliations to the most directly comparable U.S. GAAP measures and additional heated tobacco unit market data are at the end of today's webcast slides, which are posted on our website. Unless otherwise stated, all references to IQOS are to our IQOS heat-not-burn products.

Comparisons presented on a "like-for-like" basis reflect pro forma 2019 results, which have been adjusted for the deconsolidation of our Canadian subsidiary, Rothmans, Benson & Hedges, Inc. (RBH), effective March 22, 2019. Please also note that growth rates presented on an organic basis reflect currency-neutral underlying results and "like-for-like" comparisons, where applicable.

(SLIDE 3.)

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.

(SLIDE 4.)

Please also note the additional Forward-Looking and Cautionary Statements related to COVID-19. In addition, please be aware that today's remarks and question and answer session will focus on the performance in 2020 and the outlook for 2021. We plan to address the outlook beyond 2021 at our virtual Investor Day next week on February 10.

It's now my pleasure to introduce Emmanuel Babeau, our Chief Financial Officer. André Calantzopoulos, our Chief Executive Officer, and Jacek Olczak, our Chief Operating Officer, will join for the question and answer session. Emmanuel.

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EMMANUEL BABEAU

(SLIDE 5.)

Thank you, Nick, and welcome, ladies and gentlemen. I hope everyone listening to the call is safe and well.

Our business delivered a robust performance in 2020, despite the unprecedented challenges of the global pandemic.

Most impressive was the continued strong growth of IQOS, which made up over 10% of our volumes and almost one quarter of our net revenues for the year. The daily consumption of HTUs by IQOS users saw minimal impact from social restrictions, and despite significant constraints, we were able to continue acquiring new users, in-switching from cigarettes, at a very good pace to reach a total of 17.6 million, of which 12.7 million have switched to IQOS and stopped smoking. HTU shipment volumes grew 28% compared to the prior year, with record market shares in key IQOS geographies in Q4. Moreover, 10 markets exited 2020 with double-digit national share in December.

Our rate of user acquisition was again strong in Q4, propelled by the increasing sophistication of our digital commercial model and the positive word-of-mouth effect from this increasing prominence, despite tighter restrictions in a number of markets.

The most significant pandemic-related headwinds we faced were in the combustible business, with the highest impact in Duty-Free and Southeast Asia, where we also faced additional challenges in Indonesia due to the excise tax structure. The least impacted Region was the EU. While the timing and duration of the recovery remains uncertain, we expect a rebound in industry volumes over the next 1-2 years as the pandemic recedes.

Despite these challenges, our operating margins were again significantly ahead in the fourth quarter and the full year. This reflects the increasing weight and profitability of IQOS, and the delivery of our 3 year cost efficiency target one year ahead of schedule, which also enables reinvestment in the business. This drove excellent EPS growth and cash generation, where we also exceeded our prior targets.

From a product standpoint, we broadened our smoke-free portfolio with a wider range of consumables, such as HEETS Dimensions and Fiit, and the launch of IQOS VEEV in e-vapor, and LIL in heat-not-burn.

We also continued to make good progress around the world on the recognition of the positive impact of switching smokers to scientifically substantiated RRPs. The FDA's Modified Risk Tobacco Product authorization of a version of IQOS was a major milestone in this regard. This was also followed by the pre-market authorization of the IQOS 3 device in December.

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(SLIDE 6.)

Turning to the headline numbers, our full-year net revenues declined by 1.6% on an organic basis. This was an exceptionally resilient performance, in the context of the pandemic. We estimate that Duty Free, net of partial volume recapture in local markets, and Indonesia alone were a mid-single digit drag on our top line growth. Despite these factors, we saw strong organic growth of 6.9% in our net revenue per unit, driven by the increasing weight of IQOS in our sales mix.

Combustible tobacco pricing was 3.7%, reflecting solid pricing in many markets, partially offset by headwinds in Indonesia. Excluding Indonesia, combustible pricing was around 6%.

Despite the decline in organic net revenues and combustible volumes, our adjusted operating income margin increased by 240 basis points on an organic basis. This reflects the positive impact of IQOS on both our gross margin and the ratio of SG&A to net revenues, which I'll come back to. The resulting 7.0% adjusted diluted organic EPS growth exceeds our previous guidance of around 6%, and also reflects a strong end to the year in Japan.

(SLIDE 7.)

This brings me on to the fourth quarter, which had very similar dynamics to the full year. Organic net revenues declined by 3.5%. While a significant improvement from the decline of almost 10% in Q2, continued weakness in Indonesia and Duty-Free, and a lower total market in the Philippines, including price increase effects, more than offset a strong performance from IQOS.

Our net revenue per unit again increased solidly by 5.2% due to the same factors as the full year. Our adjusted operating income margin expanded by 200 basis points to deliver 7.4% adjusted diluted EPS growth, all on an organic basis.

(SLIDE 8.)

Before we turn back to the full year, I will now expand on the strong underlying Q4 dynamics in a little more detail.

Our HTU shipment volumes continued to show strong growth and reached a record 21.7 billion units -- driven by the EU Region, Japan and Russia.

In Japan, the industry was weak as expected, as consumer and trade de- loading following the October tax-driven price increase led to a 13% decline in the total tobacco market, including cigarillos. We outperformed this trend significantly as a strong finish for IQOS offtake and share gave rise to higher shipments for both in-quartersell-out and to provide appropriate inventories for a strong expected start to 2021.

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With social restrictions starting to tighten toward the end of the quarter in a number of markets in response to a second wave of the pandemic, combustible volumes and revenues saw some impact from reduced mobility and social occasions; albeit to a significantly lesser degree than the second quarter. Nonetheless, the strength of the IQOS business enabled the EU, Eastern Europe and East Asia & Australia Regions to deliver mid-single digit top-line growth.

Elsewhere, the continued challenges in Indonesia and Duty-Free against a tough comparison, and a lower total market in the Philippines in the immediate aftermath of a price increase, weighed on revenue growth. Despite the ongoing restrictions in many markets in the first quarter of 2021, and a tough prior year comparison, we expect better top-line performance, which I'll come back to later.

(SLIDE 9.)

Let me now go into the drivers of our 2020 margin expansion, starting with gross margin, which expanded by 200 basis points on an organic basis. This is driven by multiple levers. First, our ongoing transformation is delivering an increasing mix of IQOS consumables in our business. Second is pricing on combustibles. Third, is our focus on overall manufacturing and supply chain productivity which compensated for lower combustible volumes, exacerbated by impact of the pandemic, in addition to inflation, investments and extraordinary COVID-related costs in our supply chain.

(SLIDE 10.)

Gross margin expansion was augmented by our focus on SG&A efficiencies, with our adjusted marketing, administration and research costs 40 basis points lower as a percentage of net revenues, on an organic basis. This reflects the ongoing digitalization and simplification of our business processes, including our IQOS commercial engine, and more efficient ways of working.

(SLIDE 11.)

A clear focus on cost efficiencies allows us to improve profitability while continuing to invest in the growth of IQOS. I am very pleased to report that we have already achieved our 2019-21 target of over $1 billion in annualized gross savings in only 2 years, with $1.1billion delivered by the end of 2020. Over two-thirds of these savings came from manufacturing and supply chain productivity and device costs, where our focus on efficiency, quality and footprint more than offset inflation, supply chain investments, extraordinary COVID-related costs and the effect of lower combustible volumes.

The remainder came from commercial efficiencies and G&A costs. Importantly, these savings do not include those resulting from the pandemic, such as reduced travel and the necessary shift of consumers to digital channels. Between higher manufacturing costs and SG&A savings such as

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