Philip Morris International Inc (PM) — Q3 2015 Transcript

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 the 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 review of the various factors that could cause actual results to differ materially from projections or forward-looking statements. 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 the 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 the 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 result in the third quarter has derived 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 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 rates, 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 the 9% to 11% range that we provided in July. The evolution of the impact of exchange rates in our 2015 reported diluted EPS guidance is presented on this slide. While exchange rates have been volatile throughout the year, the negative impact on our guidance has been relatively stable with the slight increase in our latest guidance mainly due to the weakening of the Russian Ruble versus the U.S. dollar. Strong 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 continuous market share gains. International market share excluding China and the U.S. increased by 0.3 points to 29.2% with strong growth in the EEMA and Latin America and Canada region. 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. Importantly, our share in the top 30 PMI OCI markets grew by 0.5 points to 37.8% with share up or essentially flat in 18 of these markets. I'll 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 I forecast a 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 points 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 the share of L&M increased by 0.1 point to 7.1%. The combination of our strong pricing, the more favorable cigarette industry volume trend, 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 volumes 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 remained strong. Our quarter-to-date share increased by 1.3 points to 28.7%, driven by low-priced Bond Street and Super Low Max. Both brands continued 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 gross, we announced a further retail selling price increase of 5 rubles 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 one point to 44.1%. This marked 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 the 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 which has continued its growth trend despite its main volume having crossed the critical CHF15,000 per pack price point. Dji Sam Soe also continues to gain share, thanks mainly to its machine-made magnum volumes. Estimated cigarette industry volume declined by 1.1% in the September year-to-date period. We attribute the decline primarily to a softening in the economic environment, and we 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 CHF77,000 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 for Sampoerna from the rights issue will amount to approximately $1.4 billion. After completion of the transaction, 7.5% of Sampoerna's issued and outstanding shares will be publicly owned in compliance with the Indonesia Stock Exchange's minimum public shareholding requirement that takes effect from 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 the 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, although share trends based on the total tax-based cigarette market remained distorted due to higher estimated tax declarations by our principal local competitors. 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 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 smokers upgrading 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’s 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 movements. 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 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 today, 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 claims. Clinical trials are a cornerstone of our robust evidence package to substantiate reduced exposure and reduced risk claims. We are conducting four types of clinical studies: pharmacokinetics studies, one-week reduced exposure studies in the clinic, three-month reduced exposure ambulatory studies, and the long-term exposure response studies. We have completed all of this except for the long-term studies. 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 HVACs in adult smokers who switched 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 clinics 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. The data show that compared to adult smokers who continued smoking, the reductions in exposure biomarkers for adult smokers who switched to iQOS approach those for the adult smokers who quit for the duration of the study. In the study, we measured a total of 15 biomarkers of exposures to 15 HVACs. As illustrated by the chart, the average reductions in biomarkers of exposure for adult smokers who switched to iQOS reached over 95% of the reduction observed in smokers who quit for the study duration. We expect to finalize the study reports by year-end and intend to publish the data in peer-reviewed scientific journals in 2016. Recognizing how important it is for iQOS to be 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 reached levels similar to those of 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 $4.5 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. In 2015, we continue to forecast free cash flow broadly in line with the last year's levels despite the significant currency headwinds. In September, our board approved an increase in our quarterly dividend to an annualized rate of $4.08 per share reflecting strong confidence in our business fundamentals and future prospects. These marks the eighth consecutive dividend increase since the spin-off in March 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 gains. We continue to make progress with the commercialization and clinical assessment of iQOS. Our resilient free cash flow in 2015 has been supported by our prudent management of working capital and capital expenditures. Finally, on a currency-neutral basis, our 2015 EPS guidance reflects a 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 now be happy to answer your questions.

Hi, good morning.

Good morning, Vivien.

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 reflects the incremental investment spending effect that you just called out. Can you help dimensional 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 Q4 will be driven by our accelerated and increased investments behind iQOS and combustible cigarettes. I think, as we look at this today, differential it should translate to being slightly below the fourth quarter of last year, maybe at par with the fourth quarter of last year. So yes, there will be quite a step-up in investments mainly behind the iQOS and the combustible business.

Okay, fair enough. Thank you. And as we look at the EU and the increasingly more favorable volume dynamics that we are seeing, I know you guys called out production in illicit as well as reduced uptake, but can you comment on the evolution of price elasticities in that market? Because the volume trajectory looks particularly impressive given the pricing we are seeing in the region.

The volume trajectory is impressive, and there are reasons for that, and there isn't one. As you remember, we are revising the outlook for the total industry volume in the year. I think it is the second or third time, actually. I think this year, and it has also led us to increase our overall EPS guidance for this year. Our elasticity is now turning over some period into a more attractive territory; we could call it like this. That's for us always elasticity in the range of -0.3 to -0.5. This is what we think is the source of the underlying elasticity for the tobacco category, and we observe this essentially in most of the countries, including Southern Europe. Hence, the very strong performance coming from Spain and Italy. Obviously, Italy will have its own challenges with Marlboro closing at the 5 Euro price point. But overall, I think the industry is pretty strong, and our volumes obviously are pretty strong as well. I think that many of the positives for the EU adult from the overall better volume trends, to some extent, depend on geography supported by more attractive elasticity. Overall, the reduction in illicit trade should continue through 2016, so the way we look at this, and I know that everyone is now puzzled with Q4 performance, but 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.

Perfect. That’s helpful. Thank you.

Thank you.

Hi. Good morning, everyone.

Good morning, Matthew.

Thanks. Yeah, just 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 Asia 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 the profitability and margins of the Indonesian business have been progressing year-to-date?

Yes, I am very comfortable. I mean, what we have seen in Indonesia was more in the, I think, event of the third quarter where we’ve been also adjusting capacity, and it resulted in some extra costs which we had to incur. But overall, I am not that much worried about the short-term trend of the industry volume. If you look at the smoking incidents in Indonesia, it’s relatively flat. Indonesia is the market where 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 daily consumption, but as I said in my remarks, I think if you look at the overall positive demographics of Indonesia and growing income levels, etc., I am still confident that a 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 tax discussions in Indonesia will unfold for next year. A positive note is that the government is recognizing that there was an issue as they inflated the tax base due to the change in payment terms for this year, so conferring on the collection side from a government perspective 14 months to 12 months. Let’s remain hopeful that the rates announced for next year will take this into consideration at least to some extent; we’ll have to see. But in terms of bottom-line growth in Indonesia, I am very confident. Our infrastructure and brand portfolio is very strong, and market share development looks very attractive. I think Indonesia is the market in which we obviously have high expectations for high growth. So I don’t think it’s anything that should worry me at this stage or that 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 businesses are performing this year? Are you seeing growth, or is this better characterized as a year where you are reinvesting a bit back into the market?

Well, I mean, we have been investing in Indonesia last year and this year behind the deployment of a commercial organization. As you know, it’s a large country. There is a large sales force; the retail selling universe is one of the largest in the world. So that obviously requires some appropriate investments if we want to continue to have the right support behind the brands. We have markets in other parts of the world which also on an emerging side, and volumes are actually a little bit developed 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 good shape to deliver solid OCI growth and bottom-line growth and remains one of the key contributors to Asia and PMI.

Okay. Thanks, Jacek. And then just one question on the regulatory side, just wanted to get your thoughts on the draft version of the PPP agreement, which I know right now is sort of under negotiation and on hold. But assuming this is going to be negotiated and will go forward, what do you see as the practical impact of the tobacco carve-out? If it stays in, is there still a realistic potential for it to be negotiated out?

Well, as far as the PPP has no impact on pending cases, right? So it's mainly Australia and the UK. But we'll have to see how PPP will be adopted and rectified by the signatories. If I may say on my side, just say there is, unfortunately, during the negotiations, people who are participating can trade away fairness and access adjustments for all investors and instead they embrace the discrimination against a single industry. I'm not sure that people have worried about the five or six countries actually reported cases when there was a state investor dispute related to tobacco. So I think the whole process went in a completely wrong direction. What is important for us is that it hasn't deteriorated our position and that we are defending very much the trademarks around the plain packaging and that it does not impact any of our pending cases, and we are sure that PPP adopts.

Okay, great. Thanks, guys.

Thanks.

Thank you. Good morning.

Good morning, Judy.

So just in thinking about 2016, I know it's a little bit too early, but you talked about how you focused on continuing to grow in 2016. So as we look at this year, obviously 11% to 12% expected currency growth above your near to medium-term target 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. Just any reason to think that that kind of above-average or above near to medium-term growth in 2016 can continue at this point?

Look Judy, the outlook for the tobacco market has improved this year. For us in particular, in terms of the volume versus pricing and overall profit growth. So many of the projects which will have offset this year should continue in 2016. I think it’s pretty much premature at this stage to talk about the specific guidance for 2016. Our target of 8% to 10% on EPS seems obtainable, but we need more information to come up with formal guidance for next year. I think in February, we will be in a good position to talk about that. But yes, the trends from Europe to Russia, all the way, EEMA remains our worst place. The headline macros are not extremely positive; although the tobacco market size and the cigarette market size seem that consumers are navigating pretty strongly. You will also have to understand that this year we're very pleased and happy with the performance of this year, but not necessarily we've had the most challenging performance like the year before. Correspondingly, we’ll have to see how 2016 will compare to 2015. I remain very optimistic; I have to admit we surprised ourselves with the strong performance of the EU region. I’m very glad that it comes from a number of markets being total markets, but also strong pricing and market trends. EEMA is very strong, Latin America is very strong. Asia, we know that we have a couple of issues, mainly in Japan, which I have to admit is disappointing and below our expectations with regards to market share. 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 hedged about, I can't remember the 60% on the Yens and the effective hedge rate was one-tenth or around that level. So can you just update us on how you are hedged at this point and what the effective rate is?

We don't talk that way at the beginning of the year; we only give the hedge coverage ratio for the current year. So in February, we are going to give currency guidance. We said that we will hedge up to 60%. Obviously, there were moments during the year when the Yen strengthened at least for a short period of time, so we took advantage of that. If you remember, our policy tends to look at having 12 to 18 months, so we prefer to assume that we already have hedged some of our cash flow from Japan going into 2016. We’ve already disclosed this number, and we will give guidance in February next year. When it comes to effective rates, let me help a little bit to estimate the currency impact in Q3; our effective rate of Yen to the Dollar for us was slightly above 111, which compares to about 98 Yen in Q3 of last year. So, you could see for the hedging strategy we had about 9-10 Yen below the current spot rates of Yen.

Okay, that's helpful. Thank you.

Thank you.

Hi, good morning or good afternoon in Switzerland.

Good afternoon, good morning.

Thank you. I have two questions, please. The first one is just around pricing in Europe. You have pricing around 5%, which is a little bit softer than the first two quarters of the year. I just wonder if there’s anything specific you want to call out there or if that’s strictly a mathematical effect?

No, this is mainly due to the timing of implementation. You might never achieve perfect timing alignment. Some of the pricing from 2014 to 2015 depends on the counterfeit. There’s nothing specific to note; I believe the pricing in Europe is solid so far, and this full year is expected to be very strong, significantly better than we experienced last year.

Okay, thank you. And then just to drill in a bit more on Italy. You obviously have good pricing this year. I wondered if you could comment on what the outlook might be for the tax policy in 2016 now that Marlboro is really above that ramp-up front, which has hurt you on the share basis? Are you comfortable that moving it out further will not have a similar effect? How are you thinking about the share loss of Marlboro in Italy?

Well, I mean, it's not anything which comes by surprise. I mean usually when we cross over importance from a psychological perspective one price point, Marlboro is usually the first brand in the market to do this. It's not really, as I said, surprising that Marlboro has a bit of a headwind at that time. I’m happy that the prices went up in Italy. There was a small reduction in the price; I mean that's very helpful. You cross that price point, and later on, consumers tend to be less sensitive with the next price increases. I think it’s good that Marlboro is behind the price point. Let's put it that way.

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

No, we'll have to see. I mean usually these 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. If they make a 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.

Thank you.

Hi, good morning.

Good morning, Chris.

Good afternoon to you. Thank you. 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 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 the overall line performance being stronger than certainly I thought for the quarter, and we're just talking for like a 1 to 1.5% decline in volume for the year. Are we just pushing more towards the lower end of that range, or just wanted to get some color around some of the big markets that are improving 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 are in a position now to speculate we’ll be closer to 1%. As you know, Q4 is always there a quarter when you have some distortions coming from the fact that at the end of the year, or beginning of the year, there are tax increases, price changes, etc. So I think for the cost of doubt for 1% to 1.5% is pretty realistic. The EU has good volume; there’s no question about it. Russia, we are rolling out the 5-ruble per pack price increase, so some of these prices will already roll through the market, and we’ll see how that’s going to impact the overall industry and our shipments volume. From there, we have a sequential good performance in Korea and Philippines. There is good performance overall. We’ll see how we close, but it looks good. As I said before, I think some of the positive industry trends—this is not just the quarter-on-quarter but longer term, I think they should continue to happen in 2016.

Okay. Just one other question probably which is around the Asia division overall, and we talked last quarter on the call about the Asia division approaching in your mid-term guidance sort of range for profitability this quarter, and I think year-to-date you are 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? It’s been kind of an up and down pattern for those this year.

No, we are taking the inventory adjustments related to the lower than expected market share, so obviously we don’t want to—high inventories and try to have something which reflects at least short-term forecasts. So, depending on how we perform in Q4, there might be some inventory movement. We are also comparing Q4 to the distorted Q4 last year when we were going to shut down the factory in Holland in Europe, which shipped most of the product to Japan. We used to be shipped from this factory. So we are building some inventory to be on the safer side. If 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. Because 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 open more iQOS flagship stores, so there will be a cost impact there, and there was increased investment behind the cigarette category in the Philippines behind the very strong momentum and the narrowing of the price gaps continuing investment in Indonesia. So Asia will not have a spectacular performance this year, better than last year but we will not have a spectacular performance this year.

Okay. Thank you for your time.

Thank you.

Good morning.

Good morning, Bonnie.

I have a question on iQOS in Italy and the draft tobacco products directive. Are you broadly happy with the directive as it's written such that you will be able to ultimately make reduced risk claims on iQOS? And then 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, as it’s being transported into the Italian legislation. I think critical for us is—and therefore we announced publicly today the results of our 90-day or three-month exposure study because that’s one of the key elements for confirming our discussions with regulatory bodies on the claims. We're now at this stage of finalizing the claims and we have pretty solid evidence to progress and support iQOS rollouts with at least reduced exposure claims. In terms of the new innovations, yes, there is a pipeline of new developments behind iQOS. For obvious reasons, Bonnie, I can't tell you at this stage, but yes, I believe that pretty strong innovations will come into the market for this year and that to the new market, as the large group of new markets next year where they will see the further enhanced and improved versions of iQOS in terms of HeatSticks and a variety of the blend type directions which we can offer, as well as iQOS becoming more user-friendly and electronic. And I think we’ll be deploying more of these innovations as we speak.

Okay, thanks. And 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 and down-trending pressures easing or moderating, just in summary?

Overall, the EU is performing well and has actually improved significantly. The mix issue we face does not apply in the EU market, which is a positive development. In the EEMA region, there is strong performance, particularly with up-trading in much of North Africa. Turkey is also doing well, despite the fact that total industry volumes are rising and early-stage recoveries typically boost the lower end of the market. However, if I look at the performance of Parliament and Marlboro shares, they remain solid even in a strong market. In the Philippines, we are experiencing substantial up-trading, largely due to the closure of certain products. It's crucial for us that this up-trading is not limited to just one variant of Marlboro but is seen across all variants. While we need to monitor how pricing evolves in the Philippines, so far this year is aligning with our initial plans, despite the challenges we faced in prior years, and the recovery appears to be on a positive path.

All right. Thank you.

Thank you.

Hi, good morning.

Good morning, Bill.

Just kind of building off that question, actually. I want to talk about trade because it feels like you mentioned 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, is this indicative of up-trading and down-trading? 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 market where we have a well-sharp growing illicit trade at least at this stage is Australia. Okay, it would be something in Pakistan, but the adjustment there is a little long. You have generally we can observe better illicit or lower illicit trade levels in the EU in a number of markets, not just one particular market, 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 a mighty, I mean that's clearly the recovery of that tax not paid volumes, and Turkey has had an 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 shrunk to about 11%. So that's really the lowest over the long period of time incidence of the illicit trade in Turkey. If you pay net-net, that's about a 10-point recovery, and you see year-to-date market in Turkey is about 10%. There was underlying growth, secular growth in Turkey, but still 10% only can be explained by the recovery of the illicit trade. So we see it in a number of geographies. Now we have invested a lot of efforts, manpower, and engagement with the government, engaging with key stakeholders, being the customs, law enforcement, etc., international organizations. I think it’s finally starting to bring very good fruit, and I think many of the positives have developed in the illicit trade. So my opinion continues at least in the near future.

Okay, 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 on track for the plan how you saw it earlier in the year? Thank you.

I think we have more of the push from 2016 into 2015 as we revised our plans and we rolled out iQOS to more geographies than we initially planned at the beginning of the year. You might have some distortions in the timing between Q3 and Q4 because once we accelerated our plans for deployment, spending usually follows a little bit after the plans are discussed, approved, and released to the market. But I think it’s more of the 2016 going into 2015 in terms of iQOS over an acceleration than just the Q3 to Q4. And if I remember correctly, we have been indicating that in the back half of the year, we expect higher spending on iQOS and throughout the lens, as we observe during the first three quarters of the year, much stronger momentum behind the cigarette business, which have also seen stepped up investments behind that cargo of our portfolio.

Perfect. Thank you very much.

Thank you.

Good morning, good afternoon.

Good morning.

I just wanted to follow up on Vivien's question first and clarify to make sure I call what you said. You said that it might you are talking about Q4; you are talking about parity to last year’s Q4 or maybe slightly below; was that on an EPS basis?

Yes, this was on an EPS basis. Thanks for helping to clarify. I said this could be slightly below last year, maybe at parity. But this is on EPS currency to formally drive.

Also then if my math is right, you’ve got $3.61 for the 9 months to date this year. It looks like that would mean a 74 to 79 in the fourth quarter for your full year guidance. But I reconcile it with slightly below last year? It felt like that's quite a bit below even with currency included.

Well, I mean, I think you mark these both right. I think the guidance depends on which point of a new guidance you are going to base the calculation to take out what we had in the Q4 and that's about the results.

Okay. And then just what maybe to dig into that a little bit more and get some color on that spending; you've got year-to-date an average quarterly organic growth rate of around 6.5% and organic EBIT growth around the 11% average. Last year’s Q4 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 in that? I mean 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 have a very large organization. I think 400 is on the high side, but I think it will be obviously substantially do the comps. When you do the comps, you have to just notice the one thing that growth on those CI level last year vs lowering the EPS level; I mean it's slightly different from the few items that's below their CI level. But it will still stay with my maps on EPS in Q1 and on an ex-currency basis we put the below what we had last year.

Okay, now that's very helpful. Thanks. And then just touching 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 be meaning about a 3% gain in Q4, or about a 7-point improvement. Obviously, there is 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 Q4 or maybe we're missing?

Well, this is an estimated cigarette industry estimate on a quarterly basis. And I said that 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 the quarterly basis. I think for the full year, yes, I mean you have the softer end of volumes in Indonesia; I mean that's slightly a lower performance. But as I said in my remarks, it hasn't anything really comes in Indonesia that would trouble us in our view then in the longer term, the market has the potential to grow at 1% to 2% range. What’s critical for us is to know whether the tax rate for the next year and then we can have a better estimate of how Indonesia's market will perform. We think that pricing is very strong; I think a lot of investments which we have made behind the commercial organization, as well as the capacity restructuring between handmade and hand—all the machine-made cigarettes is done. There is solid performance next year.

Okay, now that's helpful. And 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 the minimum now getting the same attention because it's improved a good bit. Can you just put that total business there in context and how you see the maybe next rest of the year or beyond in terms of outlook for that?

I don't think we've fully addressed Australia yet. This year, Australia has experienced a significantly smaller decline in our Asia and total PMI performance compared to last year. However, we cannot say that these segments have moderated their growth, especially considering how rapidly they were expanding throughout last year. We are showcasing the segment with Bond Street, which has made notable advancements in market share. There is still a considerable amount of discounting occurring in the market. The overall market size is somewhat distorted due to the recent tax changes, and we anticipate that once we move past these tax changes, we should hopefully see a reduction in the heavy discounting at the lower end of the market. The trends appear to be slightly improving, but I wouldn’t characterize Australia as lagging behind.

Okay. That’s very helpful. Thank you.

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 that this will be the category that emerges with the highest acceptance rate among consumers? And then what’s the implication of that on other categories? Would it still make sense to spend behind platforms three and four, for example? Thanks.

I maybe start with the second part of your question. I think it makes sense to continue our investment in terms of product development and our assessment of the scientific assessment behind the other platforms because we think that there is a market for both fully electronic cigarettes as well as the products which are based on heat-not-burn. Today offers consumers that we observe in the market a level of satisfaction which is very comparable to combustible cigarettes. 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 the consumers versus continuing smoking combustible cigarettes. I think we will be in a position to demonstrate based again on our studies and the whole portfolio of evidence that the product is reducing significantly the risk for smoking versus the traditional combustible product. Acceptance is a very important component also in a few of our strategies of not only demonstrating that we can reduce the harm to individuals but we can reduce the harm to populations. Because you might have a great product which is accepted which has a reduced risk profile but is not accepted by consumers, then frankly speaking you do not address the problem. So yes, we remain very confident that the current product we have, iQOS, has big potential, but we also think that consumers, not all consumers will like to stay within tobacco-based products and they may, for a variety of reasons, elect to go into strictly non-tobacco-based but nicotine-based electronic cigarettes like with initial high interest in many markets including the UK and some others in Europe or the U.S. So yes, we will continue investing behind all four platforms as we believe there is room and potential for each of these platforms going forward.

Okay, great. Thanks, Jacek.

Thank you.

Hello. Thank you 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 versus in every country? Would it require EU central permission from Brazil for EU countries? Thank you.

Well, in the case of United States, that’s clearly FDA. In the case of the EU, the way that the European tobacco product directive is being transferred, it is being delegated to the individual member state. So we will have to determine what sort of a process individual member states want to have in the territory to allow for claims, etc. But it’s very specific or very different country by country and market by market. There are some markets today where we can go and make claims already, as we say today.

And just follow-up. Within the markets that you are currently we’re talking about, which I guess are the European markets particularly Italy, Switzerland, which is obviously non-EU, Japan, wherever countries where you have the best dialogue, and you think you got the best chance of making a health claim or reduced risk, reduced exposure claim?

I think you know the countries we have a good engagement with. The critical issue is that we need to support the discussions, the engagement with the regulatory bodies. Very critical for us is that we progress as per plan in the conducting this study as we announced today, the 90-day study, which was important, I know beyond the one piece of EBITDA which you are bringing to the table. Obviously, the more evidence you have at the table, the more constructive discussions you have. As I think we’re on a good path in each of these countries, despite the fact that they have some differences in their regulatory projects.

Okay. Thank you very much.

Thank you.

Hi. Congratulations on wonderful numbers, keep up the good work. I was curious; I may have missed the comments on that Transpacific partners backed up forward revising legislation. And wondered what comments you may have made or what you might make on that.

So thank you very much for the congratulations. On the PPP, I've made two comments. One is that PPP has no impact on pending phases which you have. So it’s been mostly the case which we have in Australia will not be impacted by the PPP. Going forward, we’ll have to see if PPP is going to primarily be adopted by the individual signatories to the streets. As I hear, I mean in the US in particular, although we’re seeing in some other places, it’s not necessary that it receives enormous reception for obvious reasons which I mentioned because the net of may have things allows one in Australia and if you look at the statistics of all the investors' state disputes so far, it will be more going to see this comes with disputes between the investors and the days and on the two businesses related to tobacco. So all in all, it’s difficult to find the logic while the industry is converting. It was all about the later of what we called treatment; it will access adjusted and some 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 our abilities to defend our positions with regards to protecting our trademarks more.

Thank you. And so do you feel challenged because it’s a present issue, arbitrary and we don’t think it will happen this year is that cause of action regarding Australia?

That's correct.

Thank you.

Thank you very much. This ends the call. If you have any follow-up calls, the Investor Relations team is in Switzerland and will be happy to take your call. Thank you very much. Have a great day.