Philip Morris International Inc (PM) — Q1 2023 Transcript

Welcome. Thank you for joining us. Earlier today, we issued a press release containing detailed information on our 2023 first quarter results. You may access the release on pmi.com. A glossary of terms including the definition for smoke-free products, as well as adjustments, other calculations and reconciliations to the most directly comparable U.S. GAAP measures for non-GAAP financial measures cited in this presentation and additional net revenue data are available in the exhibit to the Form 8-K published this morning and on our Investor Relations website. Growth rates presented on an organic basis reflect currency neutral adjusted results excluding acquisitions and disposals. As such, figures and comparisons presented on an organic basis exclude Swedish Match up until November 11, 2023. Today's remarks contain forward-looking statements and projections of future results. I direct your attention to the Forward-Looking and Cautionary Statements disclosure in today's presentation and press release for a review of the various factors that could cause actual results to differ materially from projections or forward-looking statements. It is now my pleasure to introduce Emmanuel Babeau, Chief Financial Officer. Over to you, Emmanuel.

Thank you, James, and welcome everyone. I am pleased to report that our first quarter performance exceeded expectations, driven by strong momentum from IQOS, ZYN, and our combustible business. As we indicated during our full-year earnings in February, we anticipated this quarter would be the weakest of the year due to various temporary factors affecting both our revenue and profits. Nevertheless, our business delivered solid results, and we are optimistic about the rest of the year. Smoke-free net revenues accounted for nearly 35% of total PMI, despite some negative timing factors affecting HTU shipments, with more markets surpassing the 50% mark. IQOS continues to show significant growth in both share and users across different regions, aided by the blade version and ILUMA. Where it has launched, ILUMA has gained traction with both existing IQOS users and legal-age smokers, further demonstrating the value of our ongoing innovation. Notably, ILUMA’s performance has been impressive in Japan, where market share growth has accelerated in recent quarters. In combustibles, improved pricing in various markets contributed to strong organic net revenue growth. Swedish Match showed notable results, particularly with ZYN’s 47% U.S. shipment volume growth compared to the first quarter of last year. Following a positive start to the year, we are positioned to deliver strong performance in 2023, including significant growth for the rest of the year. In terms of headline numbers, our Q1 organic net revenues grew by 3.2% compared to a robust previous year quarter with 9% organic growth. This growth reflects IQOS's sustained strength and increased pricing, though it was partially countered by expected HTU inventory movements, which I will address shortly. This organic figure does not include the impressive 14% ex-currency top-line growth from Swedish Match, led by ZYN. Our total reported currency-neutral net revenues increased by 9.6%, with combined pro forma adjusted net revenues rising by about 4%, excluding currency impact. Our total organic net revenue per unit grew by 4.4%, with strong combustible pricing contributing 7.4%, though this was partially offset by HTU dynamics in Japan and Germany. We achieved an adjusted diluted EPS of $1.38 in Q1, surpassing our earlier expectations. This reflects solid performance from our ongoing operations, strong results from Swedish Match, and favorable interest cost timing. Compared to a record high prior-year quarter, our adjusted diluted EPS did contract by 4.4% due to various headwinds such as inflation, supply chain inefficiencies, and timing factors, which I previously highlighted. Now, let’s review our Q1 net revenues. We posted overall adjusted net revenue growth of 4.6% amid an organic shipment volume decline of 1.1%. Although this figure does not include Swedish Match’s strong smoke-free volume growth of 10%, which bolstered our overall growth profile. Combustible and HTU pricing contributed 5.3 points of growth, with positive pricing dynamics occurring in several markets, partially offset by a negative 1.3 point impact from Germany and Japan due to specific tax increases. Specifically, Germany's decrease corresponds to the 2022 excise tax increase; we await a court ruling on this later this year. In Japan, both the recent excise tax hike and transition to ILUMA have affected our top-line, although we expect some of this impact to lessen in the second half of the year. While the ongoing shift towards HTUs in our portfolio positively affects our performance, lower shipments this quarter in Europe due to inventory movements limited these benefits. This also explains the difference between our smoke-free organic net revenue growth and HTU shipment volume growth. We expect this favorable mix shift to accelerate as both smoke-free revenue and HTU shipment growth align more closely with market trends, as we saw in 2022. The positive mix of HTUs, overall volume growth, and pricing are critical to our transformation and growth. As expected, Q1 was impacted by peak margin pressures at both the gross margin and adjusted operating income level. Our gross margin decreased by 0.6 percentage points due to a variety of factors, including COGS inflation, pricing, volume, mix, and productivity savings. We anticipate that pricing, productivity, and favorable HTU category mix will increasingly compensate for inflation as we progress through the year. Supply chain disruptions and the swift transition of consumers to ILUMA accounted for an additional 0.6 percentage point impact. We expect these issues to improve as we launch ILUMA and gain efficiencies in our supply chain, including a return to regular sea freight. Additionally, specific cost phasing and inventory movements in Europe impacted our gross margin by 1.8 percentage points this quarter. Despite these Q1 challenges, we continue to project a favorable full-year impact from our heat-not-burn business as inventory adjustments and ILUMA-related factors diminish. Therefore, we foresee a gradual improvement in our gross profit and operating income margins, particularly weighted towards the second half of the year as pressures ease and the drivers of our transformation strengthen. In Q1, our SG&A costs represented around 26% of adjusted net revenues, similar to the ratio for the full-year 2022. However, there was a noticeable increase compared to Q1 of 2022 due to reduced commercial spending at the beginning of last year, inflation, cost timing, and upfront commercial investments. Our cost efficiency programs are yielding positive results, allowing us to make continued investments and mitigate inflation, with $150 million of gross savings realized in Q1, almost $50 million of which came from SG&A. We anticipate a significant slowdown in SG&A growth, bringing it below the rate of net revenue growth for the rest of the year, which will support improvements in operating income margins. Let’s now turn to the outlook for 2023. Our strong Q1 results provide confidence in achieving robust full-year growth. We expect organic top-line growth of 7% to 8.5%, with anticipated acceleration in HTU shipment volume growth compared to 2022. As detailed in this morning’s press release, our other operating assumptions remain unchanged, and we remind you that our organic metrics don't account for Swedish Match for most of the year. Our revised full-year adjusted diluted EPS forecast is $6.10 to $6.22, factoring in an estimated unfavorable currency impact of 30 cents. While positive movements in the Euro and other currencies are present, they are outweighed by weakness in the Japanese Yen, along with significant depreciation in the Russian Ruble and Egyptian Pound. This range reflects 7% to 9% currency-neutral growth and does not include any contributions from a potential favorable excise tax ruling in Germany, which we believe could add around 3 points to our adjusted diluted EPS related to 2023 tax payments. We expect Swedish Match to positively contribute low single-digits to our adjusted diluted EPS for 2023 after financing and for an increase of about $200 million in our non-acquisition related interest costs, despite a relatively modest increment in Q1. As highlighted during our full-year earnings discussion in February, the bottom-line results for this year are anticipated to be significantly weighted towards the second half. However, we expect our organic net revenue growth to accelerate in Q2, reaching high single digits. We forecast HTU shipment volumes for Q2 to be between 30 and 32 billion, with adjusted diluted EPS between $1.42 and $1.47, including an estimated unfavorable currency impact of 13 cents. For the second half of the year, we anticipate nearly double-digit organic top-line growth and a return to margin expansion. Despite temporary Q1 headwinds, we expect strong performance for the remainder of the year. While continuing to face margin pressures and ongoing investments, we anticipate organic top-line growth of 8% to 10%, improving margins in H2 and currency-neutral adjusted diluted EPS growth of 10% to 13%. In Q1, our HTU adjusted IMS volumes grew by an estimated 16%, reflecting strong growth momentum. HTU shipment volumes reached 27.4 billion units, aligning with the higher end of our forecast range, with growth of 10.4%, although this was lower than actual market trends due to inventory movements. As indicated by our full-year HTU shipment forecast, we expect shipment growth to increase throughout the year as shipments align with consumer behavior, growing at a faster pace in 2023 than in 2022. It’s worth noting that in some markets, such as Germany, IMS sales volumes do not capture distributor sales dynamics, and we use shipment data as a proxy. Shipment fluctuations may alter both IMS volumes and reported market share, potentially not reflecting true consumer behavior. Given the volatility seen this quarter, we will consider providing adjusted IMS metrics to better reflect market conditions where necessary. In Q1, HTU shipment volumes in several European markets lagged behind consumer behavior, due to some reversing of prior inventory builds to meet ILUMA launch needs and ensure safety stock against production risks from energy shortages. During Q1, we adjusted this stock level as risks diminished. We also lowered IQOS blade HTU inventories in several markets to mitigate excess stock risks amid the shift to ILUMA. Italian Q1 IMS volumes increased by 21% year-over-year, with market share rising from 15.4% in Q4 to 17.4% in Q1. In Germany, adjusted Q1 IMS volumes surged more than 30% from the previous year, with market share climbing from 4.7% in Q4 to 5.3% in Q1. Overall, while total Q1 cigarette and HTU shipment volumes dipped by 1.1%, our total IMS volumes remained stable and even grew when excluding inventory adjustments. Our cigarette shipments fell by 3.1%, yet many markets showed resilience. This decline includes a clear impact from a high comparison quarter in Japan and an abrupt excise tax increase in Pakistan, leading to considerable illicit trade and a substantial industry contraction. Volumes also reduced in the Philippines due to pricing pressures amid strained consumer purchasing. We continue to aim for stable to positive combined cigarette and HTU shipment volumes this year, building upon growth in recent years. This does not account for our substantial growth in oral nicotine, which saw shipment volumes increase by 10% in Q1. The robust combination of IQOS and ZYN positions us well for growth in the coming years. In combustibles, our portfolio recorded a healthy Q1 organic net revenue growth of 3%, reflecting strong pricing of 7.4% across numerous markets including Germany, Indonesia, and the Philippines. With over 80% of our planned combustible pricing implemented or announced for 2023, we expect good visibility for full-year performance, though some positive Q1 variances reflect earlier pricing compared to last year. We now forecast a full-year variance of 6% to 7%. Our cigarette category share declined by 0.3 percentage points in Q1, attributed to geographic mix, as the overall industry shrank in major markets like the Philippines and Pakistan. Share movements within markets balanced out, with gains in Egypt, Poland, and Turkey offsetting losses in places like Ukraine, the Philippines, and Iraq. Despite the effects of IQOS cannibalization, we aim to maintain a stable category share in 2023 and beyond. Shifting to smoke-free products, we estimate there are 25.8 million IQOS users as of March 31st, reflecting growth of nearly 1 million users since December, particularly in Japan and Europe, along with many other regions. The introduction of ILUMA has spurred volume and share growth in various launch markets, enhancing our position in the heat-not-burn category with a better user experience while also driving category expansion. ILUMA encourages existing IQOS users to upgrade, which improves retention and paves the way for future conversion, with an expected temporary margin impact from concentrated device sales. We are nearing an estimated 10 million ILUMA users, with ILUMA comprising over 85% of HTU volumes in initial markets such as Japan, Switzerland, and Spain. The product simultaneously facilitates the acquisition and conversion of new legal-age smokers, evident in market share acceleration in early and newer launch locations like Italy and Korea. Our focus in Q1 has been on ensuring ILUMA’s success in the 16 markets launched by the end of 2022, covering over half of our IQOS business by volume. We launched ILUMA on a limited basis in Indonesia in February through our IQOS club members program. This initiative, introduced in 2019, boasts over 100,000 users across ten cities, gaining traction from the ILUMA launch. We plan to gradually expand ILUMA to additional markets this year. With ILUMA driving IQOS growth in launched markets, PMI HTUs have solidified their position as the second-largest nicotine “brand” in markets where IQOS is available, attaining a record high share of 9.0% in Q1. Notably, as of Q1, PMI HTUs have become the leading nicotine brand in 10 markets, gaining ground in Italy and Greece during the quarter. In Europe, under our revised regional structure including places like Ukraine, our first quarter HTU share increased by 1.7 points, reaching 9.2% of total cigarette and HTU industry volume, adjusted for estimated inventory movements. Adjusted IMS volumes have shown continued sequential growth, achieving a record high of 11.1 billion units on a four-quarter moving average, illustrating strong regional advancement. We anticipate our Europe HTU volumes to expand robustly in the remainder of the year but remain aware that quarterly HTU market share may be affected by seasonal cigarette consumption trends during Q2 and Q3. To provide additional context on our remarkable regional progress, slide 16 illustrates a selection of recent key city offtake shares. The momentum of IQOS is evident across numerous regions of Europe, including both those with and without ILUMA. Noteworthy successes include Budapest, exceeding 35% offtake share, along with Rome and Athens garnering high twenties. We are pleased with developments in Germany, where Munich surpasses 10% offtake share for the first time. Recent positive regulatory news from Greece, allowing differentiated health claims for heated tobacco products based on scientific evaluations, is encouraging. In Japan, heat-not-burn products now represent over 35% of total tobacco, with IQOS fueling continued category growth. The upward trend experienced in previous quarters extended into Q1, with adjusted total tobacco share for our HTU brands increasing by 3.4 points to 26.2%. Offtake share exceeded 32% in Tokyo and 30% in Sendai. Sequentially adjusted IMS volumes again grew, reaching a record high of 9.0 billion units on a four-quarter moving average. Japan's outstanding progress reflects our commitment to ongoing innovation and a diverse consumables portfolio. Our premium-priced TEREA HTUs and mainstream SENTIA HTUs have shown growth through Q1, reinforcing their positions as the leading heat-not-burn brands. We are optimistic about strong volume growth in Japan in the upcoming quarters, while also reminding you of the seasonal impacts on quarterly share metrics. Beyond strong IQOS growth in developed countries, promising expansion continues in Low and Middle-Income markets, which are approaching 30% of our total HTU volumes. Key city offtake shares in markets within Eastern Europe, the Middle East, Asia, and Latin America reveal success stories such as Bulgaria, with over 16% offtake share in Sofia, and Egypt, where Cairo's share reached 7.5%. Robust offtake volume growth is evident in these important future markets. Regarding Swedish Match, the business delivered an exceptional Q1 performance with currency-neutral net revenue growth of 14% and smoke-free products comprising 77% of total net revenues. Of particular note was ZYN’s outstanding performance in the U.S., achieving 47% volume growth to 73 million cans. While some growth benefited from inventory changes, especially restocking in California after the December flavor ban, underlying volume growth was very strong and estimated to exceed 30%. We are also pleased with Q1 performance in other U.S. smoke-free categories, such as moist snuff, which gained 0.8 percentage points in category share and delivered volume growth of 3%. The smoke-free category in Scandinavia continued to expand, fueled by nicotine pouches, though this rate slowed post-January excise tax increases in Sweden and Norway, leading to destocking challenges for Swedish Match’s premium snus portfolio. The cigar business reported positive pricing and strong shipment volume growth of 4% within a declining market, propelled by the successful development of natural leaf products. I commend the employees of Swedish Match for their remarkable continued results as we integrate our operations thoughtfully. The integration is progressing smoothly, and we look forward to discussing our combined growth strategies later this year. Let’s now delve into ZYN’s recent performance in the U.S. Shipment volumes reached a record twelve-month rolling increase of 23 million cans, reflecting 40% growth. Despite competitive discounting from less premium products, category volume share remained stable. Importantly, ZYN continues to hold a strong retail value share of 75.6%, underscoring its premium positioning and brand reputation. The key drivers of ZYN's U.S. growth are twofold, as highlighted at CAGNY: a significant increase in distribution—up 13% from Q1 2022 to around 140,000 stores—with room for further expansion; and improved velocities, or cans sold per store each week, which rose impressively by 21% year-over-year as the brand resonates with adult users. We are excited to share our plans to accelerate our smoke-free trajectory. As mentioned, the global roll-out of IQOS ILUMA is a top priority, and we are making significant strides this year as HTU manufacturing constraints begin to alleviate. We are refining our IQOS U.S. commercialization plans for a Q2 2024 launch aligned with the principles presented at the recent CAGNY conference. Benefiting from our vast experience successfully launching IQOS across over 70 international markets and a clear regulatory framework in the U.S., we are optimistic about the potential here. Importantly, we believe we can invest appropriately in our U.S. operations, driving top-line performance while also achieving strong bottom-line growth during the investment phase. Alongside our premium products, we are also focusing on BONDS, our latest heat-not-burn innovation, which is particularly relevant for Low and Middle-Income consumers. Initial pilots in the Philippines and Colombia are progressing well, and we plan to take insights from these markets before wider deployment. Another significant mid-term growth opportunity is the international expansion of nicotine pouches, especially with ZYN, the leading brand in this category. We aim to initiate up to ten launches or relaunches this year to grow this segment among adult smokers who appreciate the convenience, specific use occasions, flavor, and satisfaction related benefits. We anticipate this will begin in several markets this summer, across both developed and emerging regions. While our priority remains on heat-not-burn and nicotine pouches—representing the largest and most lucrative growth opportunities—we are revising our VEEV e-vapor portfolio strategy. Our emphasis will be on select market commercialization, with a focus on profitability given the known challenges in this category. VEEV ONE will be our new pod-based system offering an enhanced user experience, produced through fully outsourced manufacturing for efficiency. VEEV ONE will take the place of the prior VEEV product, and we no longer plan to file a PMTA for the former technology, directing near-term FDA efforts towards IQOS and ZYN. For disposables, a rapidly expanding e-vapor segment, we are rebranding VEEBA to VEEV NOW, consolidating all of our e-vapor offerings under the unified VEEV brand for a consistent consumer experience. We plan to introduce the new VEEV ONE in Canada later this month and will adopt an agile, disciplined approach to future VEEV rollouts this year. Regarding sustainability, I’d like to highlight our recently published 2022 Integrated Report, which details our progress towards our purpose and smoke-free future. This report thoroughly addresses our most relevant sustainability topics, including those important to investors such as post-consumer waste, preventing youth access, decarbonization, and how we allocate resources to support our smoke-free transformation. In conjunction, we released an updated ESG KPI Protocol with a robust framework for defining success and measuring ESG performance. This aligns with our Sustainability Index KPIs, which continue to represent 30% of long-term performance-based equity compensation for our executives. I am also proud to report that we released our inaugural TCFD Report yesterday, compiling our previous disclosures on implementing the recommendations from the Task Force on Climate-related Financial Disclosures into one cohesive document, a pertinent topic as reporting regulations evolve. To conclude, we are on track for a robust performance in 2023, despite encountering margin pressures. Our strong growth fundamentals remain in place, with expectations for easing headwinds through the year. In fact, our Q1 results surpassed expectations, setting the stage for our third consecutive year of high single-digit organic net revenue growth. The ongoing excellent performance of IQOS and ZYN fortifies our position as the global leader in smoke-free products, championing the heat-not-burn and rapidly growing oral nicotine categories. We are actively addressing cost inflation in combustibles through pricing and implementing cost-saving measures to drive us closer to our goal of becoming predominantly smoke-free. We remain committed to generating strong cash flow while adhering to our progressive dividend policy, aiming to reward our shareholders as our transformation yields sustainable growth. Thank you, and we are now ready to answer your questions.

Thank you. Hi, everyone.

Good morning, Bonnie.

Hi, I have a question about your guidance for Q2. It appears to be somewhat lower, suggesting that a lot of the growth is now expected to occur in the latter half of the year. I’m trying to understand how conservative your Q2 forecast is. Additionally, Emmanuel, how confident are you that your business can accelerate and exceed expectations in the second half? Could you also highlight some key factors that contribute to this confidence, where you see the most potential upside, and provide some insights on what's not clear?

Thank you, Bonnie, for your question, as it allows me to clarify the timeline for profit generation this year. We're not changing our approach from what we communicated in February. We anticipated facing several challenges to profitability in the first half, particularly related to inventory movements. As we mentioned before, we expect to see margin improvement in the second half of the year, and that message remains the same today. We're pleased that our Q1 results exceeded our initial expectations. While we haven't provided guidance for Q2 until now, we're seeing many positive indicators. We anticipate an acceleration in our top line, aiming for high single-digit growth in the second quarter, which will significantly contribute to our performance. This underscores the strong momentum of our business, particularly with IQOS, not yet factoring in the growth from ZYN, which adds to our organic growth. This illustrates how dynamic and well-positioned our business is. However, in Q2, we will still face several headwinds, particularly concerning gross margin due to ongoing inflation impacts. While this decline will gradually improve, we do expect a substantial decrease in gross margin compared to 2022. The second half of the year will show further improvement in line with our expectations. Regarding SG&A costs, we experienced some deterioration in Q1, but I do not forecast SG&A growing at a slower rate than revenue in Q2. Instead, I expect SG&A growth to align more closely with revenue growth, which will lessen the pressure on our operating income margin. This outlines the anticipated progression for the year. We foresee a strong acceleration in our top line, affirming the positive momentum in our business, with a gradual improvement in margins, first reflected in the SG&A to revenue ratio, and we expect better gross margin rates in H2.

No. That's super helpful and just sounds like you've got some pretty good visibility. So that's definitely helpful. And then, I guess, just maybe a quick high-level question on the health of the consumer in, sort of, your key markets. If you could kind of touch on that for us? And then in the context of that, you've certainly been putting in a stronger combustible cig pricing. So just love to hear a little more color on how the consumer has been responding to those actions and really how confident you are that you're going to be able to continue to push through that pricing for the remainder of the year? Thanks.

Yes. While there is noticeable pressure on consumers globally, particularly in markets like the Philippines and Indonesia, where purchasing power has been affected, we have not seen significant signs of trouble in many other markets so far. We must remain cautious about potential consumer pressure and downtrading, though it hasn't been evident yet. Marlboro's market share dipped slightly, but I don't think it reflects pressure on our premium offerings at this point. We have implemented significant price increases, and while competition hasn't fully matched these increases, it may impact our market share. Nevertheless, it appears that in the current inflationary environment, consumers are adjusting normally and are not reacting negatively to the price hikes on tobacco products.

All right. Thanks for that color, Emmanuel. I appreciate it.

Thank you.

Hi, good morning and thank you for taking my questions.

Good morning, Gaurav.

Good morning. My first question is about foreign exchange. In February, you projected a $0.15 headwind. Now it has increased to $0.30, as the Egyptian pound depreciated by January. The yen has decreased slightly, but the euro, which is more significant for you, has risen a bit more than that. The ruble can't be that influential, right? Or is it having a larger impact this year compared to last year? Can you clarify its effect for us?

Yes, Gaurav. You pointed out the ruble, and if we don’t break it down by currency, the ruble alone has a greater impact than the anticipated net effect of $0.30 for the year. This indicates that the ruble is having a significant influence. Additionally, the Egyptian pound continues to devalue after January, so we may not have observed its full effect yet. When you combine the ruble and the Egyptian pound, they account for 80% of the net impact of $0.30. It's important to note that there are also other factors at play, such as the negative effect of the yen and the positive contributions from the euro and several other currencies. However, the ruble and the Egyptian pound provide a clear understanding of the net impact. I hope this clarifies things.

Okay, sure. The U.S. cigarette industry is facing significant volume declines, down 9%. In contrast, the European data shows that industry volumes are flat compared to already strong comparisons. The factors contributing to the weakness in the U.S. market—such as macroeconomic conditions, weak consumer sentiment, the end of stimulus payments, and the rise of disposable e-cigarettes—could also be applied to European consumers. However, European smokers are still performing much better than the trend indicates. Can you clarify why U.S. smokers and European smokers are behaving so differently?

Gaurav, I cannot say for certain, and I need to acknowledge that I'm not the foremost expert on the U.S. consumer for combustible cigarettes. I find it challenging to provide a thorough analysis. However, I believe it aligns with my earlier statement regarding the strong resistance we have seen from consumers to price increases and their ability to cope with inflation in Europe. I can't explain the difference in consumer behavior here. We understand that the social model in Europe is distinct, and there may be more protections and safety nets in place which could be mitigating the effects of inflation. There have been government compensations aimed at countering energy price increases and addressing agricultural product inflation in various regions. This could be one reason why European consumers are showing better resilience. That said, I don't have a definitive answer to your question.

Okay, thank you so much.

Thank you.

Hi, good morning.

Good morning, Pamela.

I was hoping that you could elaborate a bit more on your SG&A investment for this year? What are the key areas that you are investing behind and the step up in that investment in Q1? I guess how much of this reflects structural increases in inflation driving higher costs versus incremental investment that you're making behind ILUMA and your Health and Wellness and Swedish Match businesses?

Again, I'm going to try to go as far as I can, as you can imagine, some of that is super sensitive, so we're not going to share in detail what we are investing and where. First of all, trying to give you perspective for the full year, we believe we're going to have our SG&A growing faster than revenue organically. But nevertheless, we expect a limited discrepancy between the two. So that means that as we progress through 2023, you should expect the growth of our SG&A to converge with the top line growth, I'm speaking here organic. And Q1 is really, I would say, impacted by a number of one-off both, by the way, on the basis of comparison, if you look at our Q1, Q2, Q3, Q4 numbers last year, sequentially, you will see that Q1 was very low, both because we did not invest at the same moment of the year. So there is a phasing in investment and also because there was some one-off positive last year, so don't take Q1 as a reference. Having said that, we are facing inflation, of course, in our SG&A. It's a lot of people cost. And of course, we are increasing salaries. But we're also indeed generating some efficiency. So that is giving us some leeway to invest on our priority. It's about, of course, commercial investment on our priority, as you can expect. So it's everything on marketing commercial to boost IQOS. That is, of course, a big driver. It is the investment that we are making to prepare the U.S. We talk about the investment that we are making in Wellness and Healthcare. We continue to innovate a lot. We have innovation in the pipe for all our smoke-free product. And of course, that is also having some impact. So that is really what is driving this growth, and we continue to see as important this capacity that we have to cope with inflation, to invest for the future and at the same time, to have an SG&A evolution that thanks to the dynamism of the business is allowing us to still generate nice operating income and net profit growth. That's what I can share with you.

Okay. Thank you. And then can you talk about your change in your e-cig strategy? What prompted your strategy towards IQOS view? And how are you thinking about the category over the long-term and your participation in it?

Look, I think we've already been clear that while we were clearly developing some offering on the vaping category, this was not our priority. We had IQOS. And now I would say we are even more taken by two priorities, which are IQOS and ZYN. When you have such a fantastic team and the potential that they have to deliver very strong top line growth, volume growth, revenue growth and in a very nicely profitable fashion, that's really the priority. I guess you listened to us at CAGNY and we expressed the questioning that we have on the vaping category today, which are around the absence of clear regulation in many countries. The fact that, that is giving way to an appropriate marketing activities, risk of underage consumption. And also the fact that this is a category where so far it's difficult. I'm not saying impossible, but difficult to see a lot of profitable model being developed. And therefore, that is pushing us to look at that and continue to work on this category and the fact that we are coming with this evolution of the range, I think, is just in line with the fact that the technology is evolving. We see the customer needs evolving as well. That's why we are developing VEEV now. But we're going to be focused. So it's not going to be across geography. It's going to be where the vaping category is relevant. It's going to be where we have a differentiation where we have the commercial strength to make an impact. And I think it is a much better strategy to do that, develop a few successes instead of exhausting ourselves in trying to develop something global today, when we don't see necessarily the ingredient of the driver for that to happen in an interesting manner, both in terms of growth, top line and bottom line progression.

Thanks. That’s very helpful.

Thank you.

Hi, good morning.

Good morning, Vivien.

So my first question is a follow-up to Gaurav's, please. In terms of your current FX outlook, does that contemplate another devaluation of the Egyptian pound, because my understanding is that's pretty well expected at this point?

So it does not because, of course, we don't have any idea of what it could be, when it could happen. So these are really an average that we take on the spot in the day before the announcement and not taking any kind of forward-looking or whatever consensus for currency evolution. You have a lot of people today that believe that the euro is set for a nice wide against the dollar in the coming months. Frankly, we're not betting on any kind of possible evolution, but really just working on the spot.

Okay. That's fair. I understand you're not in the business of predicting currency. It just seems like this is tied to the IMS bailout. So it seems reasonable to that. My follow-up question then is on the Swedish Match margins, which came in quite nicely. I was just curious, given the incremental inventory benefit that you saw in California, like how should we think about the 1Q margin in context of a normalized margin? Was there an incremental margin benefit that we should be backing out mentally as we think about what the appropriate level of profitability is for that business? Thank you.

Well, Vivien, I think what I can share with you is that I believe Q1 is just the bright confirmation of what we said, i.e., Swedish Match is coming with a very nicely accretive impact to the PMI growth. It is true for the volume, it is true for the revenue, and it is true for the profitability. So indeed, ZYN growing in the U.S. very nicely, and I don't come back on this north of 30% growth without the impact of California. That is driving a business that is nicely profitable, that is itself accretive to the Swedish Match average business. And therefore, of course, to PMI. And it is just very good news to have this engine for growth. Frankly, I mean, I don't want to repeat myself, but IQOS and ZYN together, that just a very exciting pair, and ZYN is coming as a very nice top line and margin enhancement role, and we expect that to continue.

Understood. Thank you very much.

Thank you.

Hi, Emmanuel, thanks for taking my question.

Hi, Andrei.

Hi, I have two questions, please. Firstly, regarding input cost inflation. Your ILUMA margins will have efficiencies coming online later this year. However, could you provide any insights on the other headwinds you mentioned, specifically related to leaf and acetate tow, and how significant these challenges are?

They are quite significant, and we have highlighted this before. Once again, we mentioned this in Q1, and we anticipate it will carry over into Q2. The substantial rise in energy prices, leaf prices, and acetate tow will be the main factors putting pressure on our gross margin. As we move into the latter part of the year, particularly towards the end, we expect to already be dealing with some of the challenges in H2. Therefore, the comparisons from one period to the next will likely be easier. We are continuously working on improving productivity and optimizing our cost of goods sold. While this negative pressure won't completely vanish, it should lessen compared to what we faced in H1. However, I do expect that Q2 will still see strong pressure at that level.

That's very clear. Thank you. My second question is more long-term. We observed one of your peers launch a new product in the nicotine pouch market at their Investor Day for the U.S., while other competitors introduced European products. Is there potential for similar innovation with ZYN, considering the criticism about it being a much drier product?

Yes, I believe that with Swedish Match, we have the leading expert in the oral nicotine category. We have been enhancing that expertise with our acquisition of a company specialized in product formulation, including nicotine, which has led to innovative product forms. While I can't provide specific details, you can certainly expect us to introduce interesting innovations. There is definitely consumer interest in exploring new offerings in this oral nicotine category, especially in areas where they may not yet be aware of what can be developed. It is our responsibility to present these proposals. You can expect us, and I think we have shown both PMI and now through our acquisition of Swedish Match, that we will continue to lead innovation in this sector moving forward.

Fantastic. Thank you very much.

Thank you.

Hi, thank you for the question.

Hi, Matt.

The incremental number of IQOS users stepped up in the first quarter to about 900 million additional users on a sequential basis. Can you provide more details regarding the favorable conversion trends you've seen behind ILUMA? And should we expect IQOS user growth to accelerate in the second half as ILUMA capacity improves and you expand the geographical footprint of the product?

Thank you. We are approaching 1 million additional IQOS users in the first quarter, which is a solid figure. While it may be challenging to surpass, I believe there is potential to further increase this as we move into the second quarter and beyond. However, I want to express some caution; this number is an estimate and could vary based on several factors. Nonetheless, it seems to accurately reflect the strong momentum of IQOS, supported by the consumer offtake we've discussed. ILUMA has played a significant role in this transition, as it offers a more seamless experience that resonates closely with the ritual of smoking combustible cigarettes, resulting in a lower abandonment rate. Additionally, our net user acquisition is benefiting from the enhanced user satisfaction we've observed across different markets. This increase in consumer satisfaction likely contributes to the reduced abandonment rates. As we expand ILUMA, we anticipate an acceleration in conversions. In Japan, we've seen impressive growth since the third quarter, surpassing our expectations and indicating that ILUMA is gradually gaining consumer traction, perhaps through word of mouth. The market share has increased significantly, exceeding 26% on average across Japan, which is remarkable considering it started gaining momentum in the fourth quarter, a year after its launch. This highlights that significant growth can occur after the initial launch phase. We have presented charts that illustrate this trend. Looking ahead, we are optimistic about user acquisition growth in the upcoming quarters, especially as we continue to roll out ILUMA in various countries, with expectations for this positive impact to extend over time.

Yes. Thank you for that detail. And a follow-up on a comment you mentioned on the call about maintaining profit growth in the U.S. as you launch IQOS. Can you talk about the investment needs in the U.S. to support commercialization? And how the $75 million or so of investment here in 2023 against this begins to build out the infrastructure necessary for a broader IQOS launch?

Yes. Well, that's the additional investment. But of course, we are already starting with some investment in the U.S. We'll come at the time of the Investor Day in September with detailed plan on how we intend to grow IQOS in the U.S. And at that time, of course, we share much more color on the level of investment that we believe is going to be necessary. I think the important message, because we have a lot of questions here is the fact that, yes, of course, in order to express what we think is a great potential of IQOS in the U.S., investment will be needed. By the way, we've been investing to build this phenomenal business for IQOS in Japan and Europe. I mean we've been investing. It didn't come by chance. So we will invest in the U.S. But what we are seeing is that, given the growth momentum that we have in the business, we think that investing in the U.S. behind IQOS will, first of all, provide even more momentum on the top line and that we can absorb this investment while continuing to grow the bottom line very nicely. We're not ready to compromise on bottom line growth because of investment that we need to make in the U.S. If I want to repeat something that I said already, I think the question mark will be, what is the differential that we can generate between top line growth and bottom line growth? Remember, the last algorithm was 5% and 9%, above 5%, above 9%. Well, if we increase more than 5% the gross rate perspective, it doesn't mean that we're going to keep a 4 points of difference between top line growth and bottom line growth. That's the sense of the comments. I hope it's helpful.

Very helpful. Thank you very much.

Thank you.

Yes. Hi, guys. I want to ask about ZYN growth in the U.S., which seemed to actually accelerate in the offtake data, despite the base continuing to grow, and it's actually pretty sizable now. Do you think there's any benefit there from the investments that you started to make as part of your IQOS preparation in terms of building out maybe a sales network? Are you also increasing SG&A investments in ZYN alone? I'm just thinking of this in the context of the brand is getting bigger, we're seeing the cigarette data has clearly been very weak, but yet the trend continues to do very well. So just trying to understand what's really driving that?

Thanks, Jared, for the question. Well, first of all, yes, we are, of course, extremely pleased with the performance of ZYN in the U.S. And I want to pay a tribute to the work that the team is doing there, which is absolutely fantastic. No, I don't think that there is yet a sizable impact coming from our investment in the U.S. I think it's being developed on the merit of the great commercial plan and action. The brand has amazing traction. I think that it's extremely highly regarded by the consumer premium brand, a very nice franchise. And they are building on these two drivers, as explained, one geography. The other one is consumption per store. We just show that two things. One, of course, we have enriched the full geographical coverage. And that's where probably in the coming quarters, you will see some acceleration as we're going to put more feet in the street and more capacity to visit retail stores. And the other thing is that there is a growing knowledge, understanding and appetite for the category and for ZYN that epitomizes the category, and that's what we are seeing. So, so far, no really increased investment behind the natural increase when you have such a nice growth, of course, increase investment year-on-year. So we do increase investment in the U.S., but nothing, kind of, at the stage accelerated plan and not yet impact coming from investment on IQOS that should come in the future.

Perfect. Thank you.

Thank you.

Hello and thanks for squeezing me in. Emmanuel, I was hoping that we could touch on your cash flow performance in the quarter a little bit. It sounds like the weakness was somewhat related to timing factors, because 1Q is seasonally your weakest. But if you could just walk us through sort of what the drivers for that negative cash flow from operations figure.

Yes, absolutely. So indeed, Q1 has not been great in terms of cash flow performance. But that was, again, expected. That is linked with the timing of shipments, excise duty payment and some of the working capital. And there was nothing surprising. I mean, I would prefer to see higher operating cash generation in Q1, but that was expected. And we are absolutely confirming the objective for the year of an operating cash flow between $10 billion to $11 billion.

Okay. And then just a housekeeping item. Can you give us the pro forma leverage, including the benefit of Swedish Match, for a full-year versus the reported numbers that were in the release?

No, I don't think it was in the release. I don't know whether we'll communicate that. But I mean, you can come to it. I'm not sure to understand fully what your question I think you have the data to calculate things, but you can come back to us and we'll see whether we can show where the information is available.

Sure. I think that the sequential increase in leverage, if you put in a full year's benefit of Swedish Match, just closer to about 0.2 of a turn versus the higher figure that was reported directionally.

No, I think you're alluding to the fact that we concluded 2022 saying, well, we are around 2.9 times, but of course, that would be lower and significantly lower. And maybe about what you are seeing here, if you were to take the full-year of Swedish Match.

Okay, perfect. Thank you so much.

You’re most welcome.

Thank you all for joining today. That concludes our call. If you have any follow-up questions, please contact the Investor Relations team. Thank you again, and have a great day.

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