Philip Morris International Inc (PM) — Q3 2021 Transcript

Welcome. And thank you for joining us. Earlier today, we issued a press release containing detailed information on our 2021 third quarter results. You may access the release on www.pmi.com. A glossary of terms including the definition for reduced risk products for RRPs, as well as adjustments. Other calculations and reconciliations to the most directly comparable U.S. GAAP measures and additional heated tobacco unit market share data are at the end of today's webcast slides, which are posted on our website. Unless otherwise stated, all references to IQOS or to our IQOS Heat Up Burn products, all references to smoke-free products are to our RRPs. Growth rates presented on an organic basis reflect currency-neutral underlying results. Following the acquisitions of Fertin Pharma, Otitopic, and Vectura Group, PMI added the other category in the third quarter of 2021. Business operations for the other category are evaluated separately from the geographical operating segments. 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. Please also note the additional forward-looking and cautionary statements related to COVID-19. It's now my pleasure to introduce our Chief Financial Officer, Emmanuel Babeau. Emmanuel.

Thank you, Nick, and welcome ladies and gentlemen. I hope everyone listening to the call is safe and well. Our business delivered another strong performance in the third quarter of 2021, coming ahead of our expectation to achieve a record quarterly adjusted diluted EPS of $1.58. Most notable was the continued excellent growth of IQOS driving 33% Q3 organic growth in RRP net revenue, and 7.6% for total PMI. HTU shipment volumes grew 24% compared to the same quarter last year to reach 23.5 billion units with broad-based growth for both our volume and the category across key geographies. This was delivered despite ongoing tightness in device supplies, due to the global semiconductor shortage, which affected IQOS user growth rates. In combustibles, further sequential share gains supported total PMI giving growth of 2.1% in Q3. And we continue to expect total cigarette and its goals for the year. We are firmly on track for a strong 2021 organic growth performance with an expected currency tailwind providing additional growth. We are also delighted to share outstanding initial results for IQOS ILUMA in Japan, and growing traction for IQOS VEEV in early launch markets. In the quarter, we made three milestone acquisitions as we build our business for the long term to include products that go beyond tobacco and nicotine. Our smoke-free transformation is now also reflected in our financing with the launch of an industry for business transformation linked financing framework. And we continue to prioritize return to shareholders through a 4.2% increase in the dividend and ongoing share repurchases. Turning to the headline numbers, our Q3 net revenue grew by 7.6% on an organic basis or 9.1% in dollar terms. This reflects the continued strength of IQOS and the recovery of the business in many markets. We witnessed good organic growth of 5.4% in our net revenue per unit, driven by the increasing weight of IQOS in our sales mix and pricing on both HTUs and combustibles. Our adjusted operating income margin decreased by 10 basis points on an organic basis. This reflects the expected initial higher unit cost of IQOS ILUMA and increased commercial spend partly related to its launch, offsetting the continued positive effect from the increasing weight and profitability of IQOS, pricing, and productivity savings. Our resulting adjusted diluted EPS of $1.58 represents 8.5 organic growth. Looking now at year-to-date performance, our adjusted net revenues grew by almost 11% in dollar terms and by 7.3% organically. This reflects the consistent growth of IQOS, where progress throughout the pandemic has been impressive. We delivered strong organic growth of nearly 6% in our net revenue per unit, again reflecting our shifting business mix and pricing with pricing on combustibles at just over 3% or around 5%, excluding Indonesia. Our year-to-date adjusted operating income margin increased by 280 basis points on an organic basis, an excellent performance driven by our top-line growth and profitability of IQOS, combined with operating leverage and productivity savings. Our adjusted diluted EPS grew 15.8% organically and 20.4% in dollar terms; also obviously a very strong result. This brings me to guidance for 2021. We are revising our organic growth outlook for net revenues to 6.5% to 7%, representing the upper half of the previous range and reaffirming the strong outlook for organic OI margin expansion of around 200 basis points. We also confirm our currency-neutral adjusted diluted EPS growth forecast at the upper end of our previous range, reflecting 13% to 14% growth, or 16% to 17% in dollar terms. This translates to an adjusted diluted EPS range of $6.01 to $6.06, including an estimated variable currency impact of $0.17 at prevailing rates. Following on from our most recent comments, as the tightness in device supplies persists, we now expect our HTU shipment volume to be around 95 billion units as we prioritize devices for user retention. Given the continued growth of HTUs and the need to maintain inventory duration, we continue to expect our full-year shipments to be slightly ahead of IMS volumes. This guidance does not include any material impact of share repurchases or acquisitions. Share repurchases through October 15th amount to around $117 million after some limitation during Q3 from blackout restrictions. In terms of other assumptions, we are assuming only a limited Q4 recovery in duty-free following a modest improvement in Q3 with intercontinental and Asian travels still very subdued. We continue to assume fully accomplishable pricing of 2% to 3%, with a softer expected Q4 reflecting continued pandemic-related challenges in certain markets, notably in South and Southeast Asia, as well as tough comparisons in Germany and Australia. Lastly, in 2021, we continue to expect around $11 billion of operating cash flow at prevailing exchange rates, subject to year-end working capital requirements. We also update our expectation for full-year capital expenditures to around $0.6 billion reflecting latest launch plans and pandemic-related planning factors. Before discussing depth, I am pleased to report some recent positive regulatory developments following comments in previous quarters. For example, Switzerland adopted a new federal law on tobacco products and in cigarettes defining dedicated product categories and differentiated warnings. In New Zealand, the government has now published new regulations for smoke-free products, which allow branded packaging to be reintroduced with specific text as warnings. In Egypt, earlier this year, smoke-free products were clearly differentiated from combustible cigarettes in both fiscal and regulatory treatment. There is a growing body of scientific and real-world evidence of the substantial risk reduction potential of non-combustible alternatives compared with smoking. While fluctuations across different markets are to be expected, we continue to support regulatory and fiscal frameworks that recognize this critical risk reduction opportunity. Turning back now to our results, Q3 total shipment volume increased by 2.1% and by 1.5% year-to-date. This reflects continued strong growth from HTUs of 24% driven by the EU region, Japan, Russia, Ukraine, and encouraging progress from recently launched markets in the Middle East. HTU shipments were around 1 billion units below IMS volume for the third quarter, primarily reflecting timing around the August ILUMA launch and the October tax-driven price increase in Japan. We expect this dynamic to reverse in Q4. The 0.4% decline in our Q3 cigarette volumes reflects the continued sequential recovery of total industry volume and our market share. Due to the impressive performance of IQOS, heated tobacco units comprised 13% of our total shipment volume year-to-date compared to 11% in full-year 2020, 8% in 2019, and 5% in 2018. Our sales mix is changing rapidly, putting us on track to achieve our aim of becoming a majority smoke-free company by 2025. Smoke-free products made up almost 30% of our adjusted net revenue year-to-date compared to 23% for the same period in 2020. IQOS devices accounted for over 6% of the $6.7 billion of RP net revenue. With a step-up in Q3, reflecting the IQOS ILUMA launch, which outweighed the effects of supply constraints on other acquisitions. The 7.3% organic growth in year-to-date net revenues on shipment volume growth of 1.5% reflect the twin engines driving our top-line. The first is pricing on combustibles and, in certain markets, on HTUs. The second is the increasing mix of HTUs in our business at higher net revenue per unit, which continues to deliver substantial growth and increasingly powerful driver as our transformation accelerates. Let me now go into the driver of our year-to-date margin expansion, starting with growth margin which expanded by 240 basis points on an organic basis. While expansion was lower in Q3 as ILUMA devices were shipped to Japan for the launch, the multiple positive factors discussed in prior quarters continue. Our significant effort on manufacturing and supply chain efficiencies are also bearing fruit with around $450 million of gross productivity savings benefit. This was accompanied by robust SG&A efficiencies with our adjusted year-to-date marketing, administration, and research costs, 40 basis points lower as a percentage of adjusted net revenue 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, partly offset by increased commercial investment in Q3. With SG&A savings of more than $200 million before inflation and reinvestment, this means we have generated over $650 million in overall growth efficiencies year-to-date. This is strong progress toward the combined target of $2 billion for 2021 to 2023. Moving to market share, sequential gains for both our IQOS and combustible portfolios give us strong momentum going into Q4 and next year, despite an approximate 3-point year-over-year drag in Q3 from market mix. Importantly, we expect further improvement in the fourth quarter for HTUs with record shares across key IQOS geographies. For combustibles, the improving total market volume backdrop includes notable recovery in Indonesia, Turkey, and Mexico, and close to stable Q3 industry volumes in the EU region. Our share of the combustible category has strongly recovered on a sequential basis, moving us one step closer to our target of stable share as our portfolio initiatives bear fruit and pandemic-linked restrictions recede in many markets. In South and Southeast Asia, renewed COVID-linked measures have somewhat dampened the recovery, though industry volumes have nonetheless improved sequentially in Indonesia and in the Philippines where the year-over-year trend is impacted by a challenging prior-year comparison. Our share in the region grew sequentially albeit less than expected, primarily given pandemic-related developments in the Philippines. Let's now turn to the tightness in device supply due to the global semiconductor shortage. As we communicated in September, with demand continuing to grow, this has already affected the availability and assortment of IQOS devices in certain markets in Q3, which impacted our ability to run at full commercial and competitive capacity and fulfill consumer demand. Device shipment outside Japan was limited to a 7% year-over-year increase, significantly below the growth in net sales. This resulted in slower user growth of several hundred thousand in the quarter, notably in Russia, given limitations on the IQOS 2.4 device. At this stage, semiconductor supply forecasting remains volatile, so we assume the tight supply situation will persist into the first half of 2022. We will continue to carefully prioritize necessary device replacements for existing users, followed by device sales targeted at acquisition. The successful start of IQOS ILUMA in Japan confirmed it would be a significant driver of acquisition and retention. Nonetheless, at the beginning it triggered significant upgrades from existing large IQOS user base, many of whom didn't really need to replace their devices. This is a highly desired consumer behavior in normal supply situations but increases constraint in the shortage. Therefore, we now assume that additional major launches would only take place in the second half of next year. Given this evolving situation, we have continued important commercial investments in key areas. This includes portfolio expansion and product launches such as IQOS ILUMA in Japan and IQOS VEEV, a smoke-free category understanding and awareness campaign, and a number of commercial development projects. Including the investment already made in Q3, we anticipate around $300 million of incremental H2 spending compared to the first half. Overall, this is a temporary phenomenon and with demand remaining strong, we expect user growth to reaccelerate once shortages ease. We have a pipeline of exciting innovations on devices and consumables, including but not exclusive to ILUMA, and a number of new market entries planned. However, there are short-term shortage scenarios under which the transitory supply impact on user growth could result in 2022 organic growth below our targeted average rate for net revenues, OI margin expansion, and adjusted diluted EPS. Nonetheless, with a strong 2021 as a base and a robust reacceleration post-shortage, we confirm our confidence in our 2021-2023 growth targets. Moving now to IQOS performance, we estimate there were 20.4 million IQOS users as of September 30th. Excluding the impact of international sanctions in Belarus, this reflects growth of around 0.4 million users in the quarter with the rate of growth subdued by the tightness of device supply and the time needed to adjust our commercial programs. As demonstrated again by the ILUMA launch in Japan, the underlying momentum of the IQOS brand remains strong. Following adjustments to our program and assortment, we expect Q4 user growth to improve by a few hundred thousand compared to the growth seen in Q3. The reduced user growth for the second half should therefore be broadly consistent with the potential 2 to 3 billion HTU impact flagged in recent communications. We estimate that 73% of total users or 14.9 million adult smokers have switched to IQOS and stopped smoking with the balance in various stages of conversion. The user growth again reflects acquisition across key IQOS geography, despite device constraints. In the EU region, third-quarter share reached 5.3% of total cigarette and HTU industry volume, 1.4 points higher than Q3 last year. As mentioned last quarter, we expect a sequential share for HTUs to be broadly stable due to the effects of seasonality and pandemic-related fluctuation on the combustible market. Underlying IMS growth trends remain excellent. As in the prior year, we expect a strong Q4 in both volume and market share terms. This very good performance includes strong growth across the region with Italy, Germany, and Poland as notable contributors. Robust performance continued in Russia with our Q3 HTU share increasing by 1.1 points to 6.9%, while lower than Q2 due to the seasonality of the combustible market, we expect further sequential growth in IMS to deliver strong quarterly share increases in Q4 as in the prior year. We had the largest limitations on lower-priced devices and related commercial programs in Russia. We have seen some increased consumer trial of discounted competitor offerings, particularly disposable e-vapor products. However, we continue to see high interest in the category and, with both our existing price tier portfolio and future innovations, supporting our clear category leadership, we see ample room for further strong growth over time. There is also growth across the eastern Europe region with Ukraine, Kazakhstan, and Southeast Europe contributing. This slide shows the positive overall regional growth trend in adjusted IMS albeit somewhat dampened on a sequential basis by the halting of shipments to Belarus due to international sanctions and timing factors in Kazakhstan. In Japan, the adjusted total tobacco share for our HTU brands increased by 2 points versus the prior-year quarter to 20.8%, and adjusted IMS grew sequentially to reach a record high of 8.2 billion units, reflecting the strength of our portfolio and the launch of IQOS ILUMA. Adjusted sequential share fell by 0.2 points sequentially reflecting volatility in the total market ahead of the October 1st excise increase in addition to normal seasonality. While consumer pantry loading effects may weight on Q4 IMS, we expect further robust underlying growth in volume and a nice sequential improvement in market share. The overall heated tobacco category continues to grow, making up almost 30% of the adjusted total Japanese tobacco market in Q3, with IQOS maintaining a high share of the segment and capturing the majority of the category's growth. In addition to strong growth in existing markets, we continue to drive the geographic expansion of our smoke-free products as we aim to be in one other market by 2025. During the quarter, we launched IQOS in Egypt, the first in Africa, and reached an off-take exit share of 2% in Europe and Cairo. We also now add Norway and Iceland, where our recent acquisition gives us a presence in the smokeless tobacco and nicotine pouch category. This takes the total number of markets where PMI smoke-free products are available for sale to 70, of which 28 are in low and middle-income markets, where we are introducing more robust measures to make smoke-free products available to adult smokers in emerging countries. Again, we may have some delays in this market expansion program in the first half of 2022. Given our smoke-free leadership and global reach, let me pause and share a few words regarding the strength of our intellectual property. Across all our smoke-free products, we have strong patents and have been the clear leading innovator in the tobacco category over recent years, investing billions of dollars in the process. Despite attempts to disrupt our business through litigation by competitors who lag behind on R&D and innovation, we have been successful in defending our products against IP challenges in 11 rulings outside of the U.S., including the UK High Court and at the European Patent Office. The U.S. ITC is a federal agency which, among other things, deals with import trade to ensure domestic industry of U.S. intellectual property rights. We also note that the two avenues I mentioned in the ITC final determination were both drafted after IQOS had been launched. The FDA, fulfilling the exclusive interest mandate given to it by Congress for tobacco products, has already found that IQOS is appropriate for the promotion of public health and expected to benefit the health of the population as a whole. We are hopeful that the U.S. Trade Representative will consider the impact on current American IQOS users and the many more that would be denied access during the current presidential review period. In the scenario where the ITC determination is upheld, the financial impact of this time is immaterial, given the early stage of the U.S. IQOS rollout. This would unfortunately mean that U.S. consumers would be unable to buy IQOS for a while. Meanwhile, our contingency plans are underway and include domestic manufacturing. The U.S. patent office is also reviewing certain claims of the patents in question, with initial rulings expected in 2022 and subject to an appeal process. While the ITC ruling may cause near-term disruption to U.S. availability of IQOS, we continue to see a large opportunity for IQOS in the United States over the coming years. The global IQOS innovation story took a historic step forward in August with the launch of two ILUMA devices and a range of HTUs in Japan. Building on the success of IQOS 3 Dual, we believe the simple and intuitive device will support easier switching and higher conversion for adult smokers using SmartCore internal induction heating technology. With the national rollout taking place at the start of September, initial results were outstanding, with device sales well ahead of all comparable past launches at the same stage despite some limitations on device availability and the proportion of new users growing to 18%. Purchases are growing rapidly, exiting the quarter at over 10% of total PMI HTU off-take volume. Consumer feedback has also been very positive, with significant increases in the net promoter score. Following this success, we plan to launch in our second market of Switzerland next month and look forward to additional major launches in 2022 when circumstances allow. We continue to commercialize IQOS VEEV with good progress in the first group of markets, where we started in our own channels with a limited range of taste variants and nicotine levels. IQOS VEEV is a premium product, providing a superior experience. The commercial infrastructure of IQOS allows it to deploy efficiently and at scale through a bespoke route-to-market approach. As we start to expand distribution and the consumable offerings, we see signs of increased uptake and clear positive consumer feedback related to competitive products. We see encouraging early success in Italy where VEEV reached an estimated 7% national exit volume share of the crude system product, despite not yet being available nationally. And in the Czech Republic with an estimated 8% national volume share. We also launched in Croatia in Q3, Canada in October, and plan to launch in Ukraine before year-end. We also continue preparations to apply for a PMTA from the U.S. FDA in the second half of 2022. Turning now to our strategy to move into new business areas beyond tobacco and nicotine, which focuses on leveraging and complementing our existing capabilities in the healthcare and wellness space. We see significant opportunity in adjacent areas with our two focused corridors of self-care wellness, including botanicals and inhaled therapeutics, expected to have an addressable market of around $65 billion by 2025. The acquisitions of Fertin Pharma, Otitopic, and Vectura enabled us to more rapidly expand our development capabilities with over 250 scientists, infrastructure, technology, and expertise in innovative enameled and oral product formulation while continuing to grow CDMO activities. This opens up a number of highly complementary opportunities and new focus areas. These acquisitions will fully leverage PMI's existing capabilities like science, product innovation, and clinical expertise related to innovation. We look forward to updating you more in the future on our plans and progress in these exciting new areas. Moving to sustainability and our ESG priorities, we continue to make good progress throughout our transformation by advancing our transformation and addressing our most material impact on society. We broaden access to our smoke-free products by increasing the availability to adult smokers around the world with new product launches across the growing range of markets and smoke-free categories. In addition, our recent acquisitions build our human, intellectual and social capital, adding smoke-free capabilities and laying the foundation for a strong business in areas beyond tobacco and nicotine, as we strive to develop commercially successful products that seek to have a net positive impact on society. I am proud to highlight the recent publication of our business transformation linked financing framework and subsequent refinancing of our revolving credit facility. The framework, which follows ICMA principles and received a second-party opinion from S&P, links our financing to targets in our transformation. Last, we remain on track to achieve carbon neutrality of our direct operations by 2025, five years ahead of our 2030 target. In addition, with the United Nations Climate Change Conference approaching, we plan to publish a robust low-carbon transition plan and white paper on climate justice, which highlights the connectivity between environmental and social issues. Overall, we are on track for excellent top and bottom-line growth performance in 2021 with strong underlying momentum for IQOS and robust cash generation. We are investing in the broadening of our smoke-free product portfolio and geographic reach. This is critical as we seek to accelerate the number of adult smokers who switch to better alternatives with a growing positive impact on society. In addition, we are investing in the capabilities of tomorrow as illustrated by our three recently announced acquisitions, which provide a comprehensive development platform in self-care wellness and in health therapeutics, and strengthen our position in modern oral nicotine. We have increased cash return to shareholders in Q3 through a higher dividend and our share repurchase program in line with our objective to deliver sustainable value and return to investors as we continue our journey towards becoming a majority smoke-free company. For 2022, we have a pipeline of exciting innovations for both devices and consumables. We expect IQOS user growth to reaccelerate when device shortages ease. We continue to see a strong future for our business and remain confident in our 2021-2023 organic growth targets. Thank you very much, and I'm now happy to answer your questions.

Hi, good morning. Thank you for taking my questions. My first question is on the 2022 comments around growth rate being lower than the range you have given for 2021-2023 because of the issues around device supply. Now, if device supply is lower and your IQOS acquisition is lower, then doesn't it imply that your commercial investments are also lower and so it should be beneficial to your EPS, or is that a correct way or incorrect way of thinking about things?

So thank you, Gaurav, for the question. First of all, let me repeat that this is one scenario. The fact that the constraints are going to stay with us in H1 next year is not the only scenario. You have more favorable scenarios. At that stage, frankly, it's a fast-moving, super-fluid situation. We don’t know, but I think it was really important to share the possibility that the pressure on availability we are seeing in H2 2021 we’re still going to see in H1 2022. So that’s the scenario you are referring to, and in this situation, we would see after this six-month period of H2 2021 another six months with reduced acquisition that is the underlying potential we have seen in H1. In this situation, there is no doubt that, of course, the spending would be impacted by the fact that the number of launches or commercial activities happening, that’s very clear. But at the same time, I think we’ve been very clearly saying it today, we are absolutely sure of the very strong potential of IQOS. We think this potential remains absolutely unchanged. So there will be, when the shortages ease, a very nice acceleration. On top of that, we will be coming at the same time with very exciting innovations. You know ILUMA, and there’s more in the pipeline. So we’re going to make sure even when there are limitations on availability that we keep building awareness and building the category, but also the IQOS franchise. So not all costs will go away because we’re in it for the long term and not managing only six months. So yes, there would be in this scenario, once again it’s one scenario, among others. There would be a reduction in investment. But as you can see in Q3, we continue to invest even when there are limitations because we’re building this long-term success.

Thank you. And a follow-up question on your U.S. strategy. And there are a number of almost like cross-currents going on that you're partnering with Altria for IQOS and now you have lost the lawsuit versus VAT. There is a potential that you have to do domestic production of your devices. You are also planning to file a PMTA for IQOS VEEV later next year so that could also be a potential new product in the U.S. market. You have also acquired Fertin, which gives you capability to potentially launch a modern oral product in the U.S. if you file for that PMTA as well. How should we think about, in some parts you will be partnering with Altria, and in other parts you could potentially be competing with Altria? So how does it all fit together?

Thank you, Gaurav, for the question. Let me clarify it again. We have commercial partnerships with Altria for each of their tobacco products, so that’s very clear. We will see what is the final outcome of this ITC question. I will not rest with the final conclusion. We are at the time of the presidential review. We frankly think it’s going to be a defining moment for the FDA’s tobacco harm reduction objective. I think the administration has a great opportunity here to flag how important this tobacco harm reduction policy is. That would mean protecting IQOS, which is the only inhaled nicotine product today benefiting from this situation in the U.S. We are still hopeful that we’ll get a positive conclusion after the presidential ruling. In the case that it’s not the final outcome, of course, we’ll continue to work with Altria. The development would be a bit delayed. We’ll find a solution to overcome the ITC decision. We’ve been flagging the fact that it could move to local production. As I said in my notes, we remain absolutely convinced of the very strong potential of IQOS in the U.S. So that’s one thing. You mentioned the other Altria categories where indeed we have ambition, and you’ve said it—we are going to file for a PMTA for VEEV. We could also be considering launching modern oral products at a certain point in time as well. On this point, all options are open, so we don’t have any commercial agreement today. We will decide in due course how we want to launch and with what kind of setup or partnership, but no decision has been made at this stage.

Thanks a lot, Emmanuel.

Thank you, Gaurav.

Thank you. Hi, Emmanuel. I had a couple of questions on IQOS' performance during the quarter. First, is there any sense of how much stronger device sales could have been in the quarter without the supply constraints? In other words, I’m curious to hear from you how strong orders might be for new devices, especially on ILUMA. And then maybe if you could share how big of a backlog there is. Surrounding this issue, I just was curious to better understand what gives you the conviction that these issues are going to subside by the second half and just thinking about the risks if these shortages last longer. Are there any contingencies you guys might be working on, or any way for you to be less dependent on the semiconductor suppliers going forward?

Thank you, Bonnie. So first question on the IQOS potential in terms of sale of devices during Q3 without the constraint. We are seeing that we've missed several hundred thousand of sales of devices. So it's obviously very, very material, and we've been reporting the fact that outside Japan, devices have been growing by 7%, which is, of course, significantly below the underlying growth of our markets. And we are growing still close to 25% even in Q3. So that I think gives an idea of the gap we may have faced during this quarter. We believe, as I said, that during Q4, as we now have a better grip on things, we’ve been managing on the reassortment and reallocation. We have a better understanding of the commercial actions that are giving the best possible return. We have a very clear view on how we're going to prioritize. We believe that we are growing even still with the severe restriction on devices; I can't say whether it would be exactly the same level, but let’s take that as an assumption, the same level as Q3. We believe that in terms of user growth, we could do better than in Q3 and we mentioned a few hundred thousand better user growth acquisition. Thus, altogether, that means that if you believe the underlying growth rate was between 4.5 to 5 million users a year that we’re seeing in H1, we’re going to miss anywhere between 1 to 1.5 million user growth in H2 altogether. That is absolutely consistent. That was already clear in September at the beginning of September; that is consistent with the 2 to 3 billion impact that we mentioned at the beginning of September. I hope this helps you have a better understanding of the impact of the device shortage. Regarding the supply, we are working around the clock to manage the shortage. We are using all possible levers. Of course, we are in very intense discussion with our suppliers exploring all possibilities. We are dominantly optimizing the planning. It’s quite complex because we are dealing with shortages on various types of ICs, and they do not all fit within the same kind of reference of our range. We’re managing that as well. We are looking at the split by market as well, and we've been buying a little bit and may be able to have even more success there. So we are really putting every lever we can to minimize the impact. Today, what we’re hearing is that capacity should kick in in the first half of next year. I would tend to think there is a sort of consensus that H2 next year should be much better in terms of constraints, if not fully back to normal. So this is an assumption we have today. Does it mean that another scenario has H2 could be with more question marks? Well, maybe. What we are hearing from our partners and suppliers so far seems to be optimistic.

Okay. Super helpful. If I may, I'd like to maybe squeeze in another quick question. Just during this period of slower IQOS device sales and new user acquisition, how should we think about your total volume growth? So is it safe to assume your combustible cigarette volume will be elevated during this period of slower IQOS device sales and essentially be strong enough to offset this? Given this dynamic, how should we think about this mix impact on your margins in the next few quarters? Thanks.

Sorry, your line was not very good, but you were asking how we should expect the impact on user acquisition versus volumes, correct?

More so on the mix, Emmanuel, because I’m thinking during this period of slower IQOS device sales, combustible cigarette volume could be elevated.

Look, we continue to target very nice growth for IQOS. The IQOS is a brilliant category altogether. As the EPS leader of this category, we see that continuing in the coming quarters, and as you know as well, that is coming with a very nice mix in terms of revenue per stick, and it’s still visible in our Q3 numbers. We flagged the fact that that was positive in terms of gross margin rate for the consumable business, the IQOS business. So maybe if the growth is a bit weaker because of the situation, the positive mix will continue to evolve; has already, but at a lower pace. But that’s going to continue to be nicely positive. On top of that, of course then there’s a question of, okay, what are we going to spend in terms of SG&A in this kind of situation. So it’s difficult to say that it’s going to be necessarily a negative impact on the margin. We are talking about a very powerful driver on our financial performance. Even once again, as the growth rate is going to decrease a bit, it will still be significantly higher than any evolution.

All right. Thank you so much again.

Thank you, Bonnie.

Hi, good morning. I have a follow-up question.

Good morning.

Good morning. I have a follow-up question about the outlook for next year and the scenarios that will drive the risks to be below your midterm target. It sounds like you're anticipating weaker 1H supply and an improvement in the second half. Would this scenario drive your results to fall below the 6% to 9% revenue and earnings growth target, or would supply conditions need to worsen relative to these assumptions?

We can certainly explore that scenario. It's clear that we have been observing a decline in user growth during Q3. While we anticipate an improvement in Q4 compared to Q3, it will still fall short of the underlying trend. If supply shortages persist into the first half of next year, we will likely encounter pressure on growth at that time. It's challenging to comment on just one scenario, but the trends from the second half of this year and potential developments at the start of next year could lead to a decreased growth rate next year. This decline would be temporary, and we believe growth will rebound afterward, but this combination could result in outcomes below our average growth targets.

Thank you. That was helpful. My next question is on the ITC decision. Can you elaborate on your contingency plans for making IQOS available in the U.S.? What would be the timing of manufacturing IQOS in the U.S.? And just to clarify, does the ruling also pertain to ILUMA technology? In terms of bringing ILUMA to the U.S. market, is there an opportunity to bridge IQOS's PMTA application for ILUMA to accelerate its entry into the U.S.?

Regarding the ITC contingency plan, if eventually the presidential review was not favorable, I want to repeat that we are hopeful that this presidential review will have a positive outcome for us for the reason I mentioned previously. I cannot elaborate further, unfortunately, but that clearly it’s part of what we described, the fact that we could have some local production as an element. I won’t elaborate further on how this could happen and how we would get there. On the ILUMA PMTA, frankly, we will need to have a discussion with the FDA on the process, and all the processes would be carried by the FDA. At this stage, I'm not able to answer you. So we will certainly require a PMTA on ILUMA at a certain point, but no position today to comment on timing.

Okay. Understood. Thank you.

Thank you, Pam.

Hi, thank you. Good morning.

Good morning, Vivien.

I apologize for belaboring the ITC issue, but I've got a question on that too. You've noted your track record of success in defending against litigation internationally. Two questions, please. Number 1, are there current cases that are still pending internationally around IP litigation? If so, can you outline where those exist? Number 2, can you just clarify that the litigation that you've successfully defended addresses the exact same claims that were reviewed by the ITC?

Well, there are a number of cases pending, I won't elaborate on that. Not all of them are public. Notably in Europe, I just want to repeat that so far in Europe we’ve been in 11 cases, trial or at appeal, and we’ve been successful. I think that tells a lot about the strength of what we’ve been doing. Yes, some of the patents on which the ITC based their decision have already been reviewed by a number of courts in Europe, including the UK court, which has invalidated two families of patents that are at the core of the original ITC decision. The European Patent Office has also already evaluated one of these families of patents, so even fundamentally on the merits of the patent and its validity, we have seen success in Europe.

That’s helpful. Thank you. And then my follow-up question is on combustible cigarettes. The outlook is getting modestly better; pricing, you’ve reiterated. If I recall correctly, at the beginning of the year, there was a point of caution around pricing with COVID uncertainty, etc. What is your view of the consumer? I know it's a broad question; you operate in a lot of markets. But if you were a little bit conservative or cautious on pricing when we started the year, what is your feeling about your ability to take pricing today?

Well, you have to still give me the remaining weeks for the year before I can elaborate on next year. I think it’s still quite unclear what’s going to be the environment. One might think that inflation clearly is accelerating in many countries, which may build a global environment that could be better than what we thought initially, but that’s still early time. I’m not able to comment at that stage, so I will keep a cautious stance, which was built on the aftermath of COVID and the impact on many economies being under shock. We were seeing that this may not create a great landscape for price increases, but I have to admit that I don’t know what's going to be the impact coming from what seems to be a general increase in inflation. That could create a more favorable situation, but bear with us, it's still a couple of months before we can have a clearer view on that one.

Understood. Thank you very much.

Thanks, Vivien.

Thank you. Good morning.

Hi Chris.

I had a question. Hi, Emmanuel. Thank you. I just had a quick follow-up on the supply shortage. Sorry to keep going there, but I did hear some effect on the 2.4 device. I know it's limiting ILUMA's launch in some markets. Is this chip shortage true for all your products, those 3.0 and duo? Just to be sure, are those also affected by the chip shortage?

Well, Chris, that would mean that we need to enter into great detail about how we are prioritizing our portfolio, and I don't want to do that because that’s quite strategic for us. What is very clear is that we have our North Star, if you want, which is to first protect our existing IQOS users and to ensure we make devices available when they want to renew. Second, we want to optimize any commercial action to ensure we have the highest return on any new devices sold and that we avoid as much as possible selling devices with a very low percentage of utilization afterwards. Certainly for us, moving and taking the benefit of that to step up the blade technology and move IQOS 3 as a priority instead of IQOS 2.4+ was one of the moves we’ve made. That explains why we have some more limitations on top of the fact that the components also bring more pressure on 2.4, but in these kind of moments where many things are on the table, you are managing constraints as well as long-term strategic vision.

Thank you for that color there. Just a separate question regarding some of your beyond nicotine and tobacco acquisitions, Otitopic and Vectura, in particular respiratory drug companies. I just had a simple high-level question. Do you need more pieces to fit that vision you have for respiratory drugs? Just to understand kind of what stage we’re at in terms of your acquisitions, do you need to do more here in the short-term, or is this a good base to which you can build this element of your beyond nicotine sales?

Globally, we think that we have put together great platforms for beyond nicotine, if you want, particularly in terms of R&D. We think there is a lot we’re going to be able to do already with these acquisitions. Now, does it mean that in the future, we could think of other acquisitions that would bring additional capacity we don't have at this stage? Maybe. But I think for now, we’re focused on integrating this acquisition and maximizing the synergy. As I said, in terms of R&D, our two big objectives are to combine strengths on R&D and optimize by integrating our skills and talents, both in therapeutic opportunities and in self-care wellness.

And just to be clear, these acquisitions should not take you away from your separate goal of repurchasing shares? That’s kind of the main thing I was looking at just to understand future capital commitments.

Nothing has changed on our buyback program. Absolutely.

That's great. Thank you so much. Have a good day.

Thank you.

Thanks for the question. I was just wondering if you could talk about the tax situation for IQOS in Germany, recognizing that the political landscape is still shrouded in some uncertainty. It does seem like the proposed tax changes would be a material headwind to price mix and profitability next year, so just hoping that you could frame the magnitude of this impact. And then maybe sort of slightly bigger picture, do you see an increased risk of contagion for this kind of big IQOS tax increase in other markets?

Well, on Germany what I can certainly repeat is that it’s a mixed feeling about the German decision because on one side, we are very happy with such a prominent country as Germany, putting in place the fact that these products are better and should be treated differently than cigarettes, and I think it’s really great that this tobacco harm reduction principle is recognized. At the same time, a 20% differential seems too low. Yes, of course, it will have an impact as we are progressively going to be impacted by it. It's too early for me to give an idea of the impact next year. There will be some impact, but it’s not going to derail our fundamentally the trajectory on IQOS and its profit growth. We believe that 20% is not enough. We are hopeful that, at some point in time, and it’s too early to say, the new coalition will be formed and be clarified regarding that. We do not expect contagion today. On the contrary, we see, when we look at the latest countries, they are now coming to a differentiated treatment when it comes to each of them against combustible cigarettes, and we see most cases significantly higher, even differential versus Germany. For instance, that's the case in Egypt.

Thank you.

Thank you.

Actually, I think Emmanuel has a few brief remarks.

Yes. Thank you, Nick. Just give me a moment to wrap up with some brief closing comments. First of all, 2021 is on track to be a great year for the growth of IQOS and the financial performance of our business. We see continuation of strong underlying fundamentals, demand, and momentum for the IQOS brand. Last, but certainly not least, despite near-term challenges with device supply, we remain on track for our three-year growth targets supported by a rich innovation pipeline. So thank you very much for your time today, and we look forward to talking to you soon.

Thank you very much, Emmanuel. That concludes the call. If you have any follow-up questions, you may contact the Investor Relations team. Thank you again. Have a nice day.

Thank you. Talk to you soon. Bye-bye.