PM - Earnings call transcript Q3 2017 | Philip Morris International Inc.

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Operator

Good day, and welcome to the Philip Morris International Third Quarter 2017 Earnings Conference Call. Today's call is scheduled to last about one hour, including remarks by Philip Morris International management, and the question-and-answer session. [Operator instructions] Media representatives on the call will also be invited to ask questions at the conclusion of questions from the investment community. I will now turn the call over to Mr. Nick Rolli, Vice President of Investor Relations and Financial Communications. sir. ahead, go Please

Nick Rolli

you release us. our containing quarter thank issued XXXX today, a results. press detailed for and Earlier joining we third Welcome, information on

Relations www.pmi.com, access the release may on You PMI the Investor app. or

During our following stated. note unless otherwise today, call please the

we’ll for third XXXX about quarter same period results to comparing them the talking in be of First, the and XXXX.

to products who versus that results present statements commercial to attention of to industry, reconciliations PMI’s likely sales contain most and market share our we refer remarks to markets of from risk harm slides, cigarettes to and and or which heated well or RRPs Second, to of units site. and PMI your that the U.S. potential as release the forward-looking webcast factors statements IQOS. forward-looking terms, the all projections use of performance other to of switch future and cause a and forward-looking on presentation materially and direct have posted I press disclosure in or for references could present, that have A glossary the term Web present, GAAP calculations, at measures, various smoking. the PMI are volume to those are to today’s Reduced-Risk Today’s are tobacco results, total review cautionary to differ for adjustments, these comparable actual today’s smokers the statements. less reflects continued of end products Products directly projections is as

calls. for our Jacek Financial introduce to on Chief my earnings time last Officer Now, it’s quarterly the our pleasure Olczak,

Chief the on that of assuming be Operating Jacek? X, I’m know XXXX. you duties most he As Officer will January sure of

Jacek Olczak

Thank you, and ladies welcome gentlemen. Nick and

heated by XX.X%; the tobacco reflecting IQOS total and supported notably continued and positive Korea. geographies, volume shipment We’re all international total market, for diluted of performance result, and units; Japan and EPS in strong excluding the performance, currency by momentum our third and both improvement financial particularly S., sequential in including China quarter growth very cigarettes adjusted pleased higher in our U.

dynamics moderating retail our and outlook year. the in growth are prices, we for is than that on and in pricing In Russia, increase brand. of where declines results driving putting segment resulted previously leading by Saudi significant in wide industry especially in industry net pressure our the the Marlboro Saudi volume environment. in However, the Russia anticipated tax have the higher than market excise expected, June, cigarette which Arabia cigarette doubling while Arabia, volume, remains competitive the In in profitable highly is softer also constrained industry currently is premium the flagged

continue XXXX prevailing $X.XX We reported rates. diluted $X.XX EPS are therefore exchange reported revising range at to a to guidance our

to now $X.XX also guidance Our compared currency of previously includes unfavorable due Egyptian $X.XX principally to approximately pound.

Excluding to XXXX. favorable currency in adjusted in growth of the first rate compared $X.XX approximately XX% EPS item diluted a tax $X.XX to our guidance our X% of and represents recorded the quarter,

investments X% at around growth Saudi last in IQOS revenue Our neutral our low with that of X% with decline over X% range of impact of moderate a future. reflects industry high currency adjusted This the reflect anticipate coupled to excluding for the supporting a We the well and our of this volume primarily smoke commercialization as Russia, earlier do X%. the year OCI decline in margin, outlook net full expected to of full free total currency. continues shipment end year, a year however as decline the duration dynamics we consistent

impact which EPS has S. the on exchange to comparison significant our to diluted dollar. due Egyptian variance our in transactional to due versus the we reported quarter, rate. related XXXX fourth its This the U. Additionally, fourth favorable currency devaluation quarter currency estimate of on for results pound, positive is at prevailing an the the adverse

through you results tobacco by X.X% largest coupled sequential of volume Philippines, detail, Japan as a decline which shipment The cigarette well take markets. quarter decline, improvement inventory the in volume cigarette now notably movements. growth excluding in me deceleration heated driven volume, our our by in Indonesia volume in in and and the grow our third as Let declined greater X.X%, total volume Pakistan beginning Korea, volume one with shipment cigarette total our with reflected

higher that driven on building momentum of supporting in sequential increased favorable quarter, Japan volume X%, sales, XX% pricing from total the OCI results industry first expect tobacco by volume third driven in up units Arabia partly and and should new average XXXX, tax combustible by our primarily volume offered expected which to $X.XX the the portfolio. quarterly commercialization XX% the device September co-operation approximately increased quarterly based this Egyptian remain of this growth region. since our heated despite very to IQOS switching. particularly accelerate recorded fourth by for quarter commercialization negative structure quarter devices, and impact revenues currency as financial a rate the similar the in keep discount year-to-date tobacco Saudi revenues, are the neutral phase reflecting on reached IQOS depreciated pound, mind We which margin initial impact total exceptional the Arabia. of the the which offset EPS. that markets, net introductory basis over XX% of council Adjusted net Adjusted of revenues. tobacco the portion weak the U. Thanks dollar $X.XX negative of to in net that quarter reported of versus total S. We impacted cigarette for by to net X.X%, note currency of revenues the a were in heated the notably contributed performance for by Please gulf quarter revenues Please higher from into drive and in of approximately nearly XXXX the by on IQOS, Saudi IQOS, and declined third results strong growth are diluted $XXX financial of where our EPS increased other accounted quarter, by unit as adult smoker by our well anticipated our supporting the in yield year. implement third increased by Net the half investments due X.X%. third million in XX.X%, in and of RRPs our

this remain to in already are smoke-free we our exciting progress of the of revenues the journey. on the confirms we size stages a While net future, our that RRP early transformations making

positive regions, and $XXX of all in Asia & four driven and by particular. quarter America reflects contributions variance in from the million Canada, pricing was Our Latin

pricing no essentially Our September variance of year-to-date billion in came Russia. $X.X pricing despite net

Turning We quarter and and our by the U.S., straight recorded brands. China share. driven sequential a to strong growth in cigarette heated of excluding market share, our both international second tobacco total

declined mainly of Our key was the versus Region. the in inventory now U.K. XXXX beginning industry international movements will the geographies, of with the discuss September industry by XXXX. X.X%, with few to X%. forecast volume due X.X%, slightly Directive, X% decline the Products market Tobacco to estimated also full-year share Italy, EU of declined and consistent our our in to quarter part trade up France a third related year-to-date in quarter by I Total third volume

cigarettes flat including discussed the remained some was share, move market regional Germany and Share quarter. above in pressure, due heated in under and tobacco prior which to quarters. essentially round price in have units, largely points, Spain Marlboro’s Our I

by share the gains, HEETS. strong in recorded market France Chesterfield, driven Poland growth However, strong and of Share respectively. Marlboro slightly, and increased driven by Italy

We reflecting the OCI have of the higher consecutive investments excluding behind our Italy commercialization now IQOS. Regional quarter quarters. primarily in in by share declined for currency, X.X%, grown sequentially three adjusted

return volume industry by OCI heated fourth currency-neutral We in growth to comparison. a cigarette quarter, the and expect unit a higher tobacco volume adjusted driven favorable

volume X.X% growth Moving price in the Total illicit as the impact trade. in recent declined to quarter, by largely to excise-tax driven of due as well industry further increases, Russia.

mainly range XXXX tax illicit to the a expected and to increase the compared movements July. around reflecting we anticipate January the from a planned in growth shift full-year, of For trade to to X% due end trade year now X% in of decline at excise previously, a inventory X% lower

cigarette XX The driven Our the in same well successful consolidation portfolio versus low-price period the was last as by downtrading as points increased quarter-to-date growth year. the basis of largely brands, market. reflecting August local share Morris, by notably smoker adult Philip

basis Our versus quarter-to-date sequentially, share growing by also second increased the XX points quarter.

to is Russia continued challenge net a due the year In ongoing third this profit by earlier, higher growth Philippines, price pricing. competitive primarily the quarter, driven our in environment. realization the noted As in

Marlboro, gaps, the Fortune. in the quarter. narrowed market, lower to increase Importantly, Marlboro price contributed the a delayed, of price and the to X.X of from brand particular, further increases the priced narrowing albeit at for points price gaps of has benefited brands bottom have the share which in

While grew our reflecting share with was declined X.X%, Ramadan. In versus movements, Marlboro cigarette industry Indonesia, mainly total by quarter, by for share X.X points, in finally by reflecting to volume timing the third cigarette X.X gains and up a inventory Fortune. of associated second the points related both the it quarter favorable primarily comparison

Excluding this movement, stable. industry was volume

anticipate environment For the decline due pressure on cigarette and X%, the economic industry a we related full around continue soft spending. to mainly to year, of consumer

reflecting primarily by up price the results. expansion, above price Soe declined driven our U Marlboro the In the to performance Our by due the per for of Sampoerna of XX,XXX performance whites X.X and This partly pack. Sam XX the by price was by to the IQOS by basis in increased offer, increase Filter of kretek mainly share due Magnum offset Share distribution its in points, XX Japan, spectacular impact the offset decline of cigarette to Mild. Rupiah growth mainly Marlboro of our by drive the market machine-made segment. points Dji of round basis strong Black continued Marlboro increases A, point points, Sampoerna continues following partly quarter

quarter largest total X.X inventory is in second-largest introduction points industry for brand up share cigarettes Our the movement, by prior consistent with excluding X.X volume X.X%, by decreased by brand the Japan of our in HeatSticks to decline market IQOS. third September to XX.X%. to points the range and HeatSticks total XX.X% secular year-to-date industry-wide. increased the with currently

of share quarter competitive versus and IQOS, closed up week all presence products. quarter, in retail with Our success by a the smoke-free nationally, HeatSticks of off-take of last areas. share the second XX.X% Japan further geography weekly across X.X with highlight shares of gains offtake of the the points irrespective

to normal Importantly, in that we HeatSticks we the demand, process build levels inventory with a supply in Japanese are expect beginning commensurate the and to fourth market fully continue the with growth quarter.

to process effort, the shifting to third HeatSticks part our freight began the of As sea air this we during of from shipments quarter. freight Japan

in capacity. the due supply-constrained remain supplier. market due effectively increasing coming in device months, However, should the gradually to limitation our ease second devices the contribution we of over IQOS This part from to

We XXXX to own devices fully expect on latest of to market to supply to choose devices initially who than our consumers assumed. on able growing constraint based current The devices in device a the who current we had early demand with reflects upgrade model forecast. the number also multiple or be sooner

market by Turning National for of despite among relatively continues. part Seoul exceeded to just and distribution focusing the in Korea, the a quarter, in has reached cities. smokers months been large exceptional adult major nationally four IQOS limited which early other launch. within This HEETS X.X% XX% success awareness, of on IQOS performance high driven share

even launched IQOS fact, around its had XX%. In was Korea, reached in awareness before

is of above September. the more XX% the conversion, full our high which measure in success This and reached Another to established observed Korea IQOS IQOS the early XX% predominant in is in launch of markets. XX% of generally already range level

launch solid Looking with some of third our even EU approaching growth to XXXX. share Greece, markets of we're case now of in national exceeding, a the compared the the Region, quarter at of market IQOS and in X%

to marketing we As distribution our our around and weighted ranges XX%, shares where are distribution within clearly only areas still efforts. in this higher market from this focusing the XX% implies

slide, compared share five Additionally, Canada we markets market as progress. pleased targeted Region America In & with our slide, where in also our quarter. overall on this markets, the Latin more this increased EU, second focus such to remains and EEMA on our all presented sequential those we’re launch presented

and the share With XXXX, past offtake least quarter where increased to quarter. note in each only IQOS grew smokers have product also largely stricter over the more focus the the high the outside second points for to It adult we to was on achieved communication. that fourth IQOS area purchase in IQOS Furthermore, building despite XX consumer exception of launched sequentially the conversion. adult among due positive momentum which is our share product at important comprehension IQOS basis and outside of Asia generally compared our by Spain year, has market of levels for is challenging been limitations Asia who the awareness environment similar smokers,

shareholders Turning now increased returns. of dividend in of to September, compound tenth a a increase representing has company total since of X.X% marked our share. in its per rate quarterly $X.XX a This increase became In year our growth an Board dividend, annual to PMI XXX.X% public approved annualized in XXXX. an the which or rate PMI consecutive

combustible X, as six slides geographic from the of operate should e. reduced smoke-free enable detailed presented. a up glossary are the comments included segmentation, business, and in on January and intended maintaining region drive to changes management A while Effective the few PMI announced performance. can see markets towards the share decision-making parts Company's risk in of the focus current me XX, four, both by let our presentation. is i. future this which new on financial product. of split a concluding, September will greater faster geographic regions, its transformation the changes a and from XXXX, Before you These the on

the will first-quarter of than strong year. our by three the We stopped based structure recorded new and XXXX markets total in IQOS switched April structure release the IQOS. than XX years conclude, million adult launched begin To-date, historical cities later our performance. volume in new results reflecting quarter on no in financial supported very have next sequential smoking results in a already strong more IQOS of To data, of improvement to continues. currency-neutral The plan as shipment quarter, for the provide momentum and we in we key earnings consumers first reporting to X.X have and regional

EPS XX%, growth XXXX. of X% X%. in full-year adjusted a outlook Our compared strong This net approximately revised reflects XXXX of currency item EPS revenue to rate above the diluted tax guidance and to excluding favorable currency-neutral reflects $X.XX growth

focused remain generously shareholders flow. on robust our we Finally, cash rewarding with our

the For you. answer of billion. of a expenditure to will we flow cash approximately happy billion, I to continue target questions. $X.X your and And capital year, Thank $X.X be operating now

Operator

Thank you.

from We will the now Our question portion Citigroup. [Operator first conduct of Adam the Instructions] session conference. question-and-answer from Spielman comes

Adam Spielman

have a of couple please. I And questions

that you seen And than nonetheless growing And devices. obviously fact was you’ve share That in competition. about market is the have basis all, grow it supply you is to harder, on growth the Japan, XXX or QX. your would on share talking it is basis due somewhat constraints -- of First now the but first as should not entirely quarter-on-quarter question. is you I XXX market growth good Or I’m be that slower the because growing versus the with my saw in IMS quarter. last wondering perhaps

Jacek Olczak

July. some instead own consumers. devices of we supply decided obviously is the new converted to But creates mean, Obviously, by than the additional consumers, bottlenecks of consumers more on to observe there more the weight who largest and products. consumers in in compound to device. going more that that competitive fact go The they we existing I shipped devices, impact some those of which one

you in are available, grow. the that As nationally places mean know, are I even they I’m where they very available. continues IQOS not pleased

have rather availability say than to it’s said, you we runway Adam deliver device the Japan. grow. our would I our highest market, to to presumably the the I higher more still you’re in total are right but quite difficult But to in weights the As dynamic think that

Adam Spielman

And then turning to Europe.

continue rates looking growth strategy is that there East than forward, between was contrasting things you me which is do that Asia. to the and whether Europe which to do but market can the accelerated what grow big at if I share growth the to is or you’re to is wondering much anything rate, East Asia? do, of And One in strikes the is slower a

Jacek Olczak

share channels and level, market communications, not the in in grow market, available have the mean environment we just to to in available communication Europe. IQOS wish in the Korea, Europe is not the for the necessarily the Japan are in and are Asian us market available in different. we which mean I I which of the are operating

So July. based efforts doing it mainly also we’re in and in we one-to-one time. And regulators our obviously because are the on discussions is marketing with the takes

So, the in if compare efforts productivity putting place Europe, of I would efforts pretty which to high. and we’re they’re the those in

I than to the a that despite of I particular IQOS are comparable perceive in my in don’t IQOS well why be All we that about product are experiencing know markets, but lower European excited the with we’re growth this one any ahead some fact combustible reflects I of Now, company in company a people may the the launch have expected Asia, category. thing. into

we that So in a product continue is a on in that. market discussions we're that market. right pushing know will the the we no focus And that with right there product

we just crossing I after as of will a is purchase to what device Italy rates But seeing to on time approach those period in some Europe turning than who working point. the the a we’re is that one in have now ways of continue who think level. noticed markets high many focused XXXX in I very be market, XXXX conversion from share we you think stay

in observe So mouth much the to going will the and there it’s would this or where Korea. the playing start of markets I point to and think as a we tipping of point Japan be just effort the extent come, in word role matter are and results turning higher

Adam Spielman

question one me. final from And

we’re inventory if will when looking further, said is the of Europe want well? build the or any be you levels QX. you in build in comfortable it and to you XXXX, will in East at feel you Asia, at need in guess IQOS you is as You inventory do Really question further

Jacek Olczak

down. movement something We moment have build-up, Japan. thinking I supply typical you on period, that bringing allow which or in which of adjustment correspond figured inventory ahead inventories This combustibles, level, it will cetera, that volumes later this which low inventories expect contains is to not would as than normal going the of the billion essentially bit the on we Japan, have to next X are device for of any and have number not the capacity, more out disturbance. pipeline the the do billion And demand inventory the contain the of IQOS to or start Japan of driven highlighted where our reduction XXXX. little have because us yourself continue would X the inventory might consider sustainable which you you take -- market et It for without product to the level, reversed anticipated in launch a be to to you

we inventory this one which traditional, I that a resulting a is this the to conventional periods happen payback one movement in business not quarter had negative do a this think, positive in to one. next not period, in with So or expect the classical we’re period. is payback period,

operations stay yes, the need So ahead to sales, normal but inventories in operation, XXXX. cannot we revenue also this highlighting market run that base or to we our our we and a IMS they shipping we base for of should be in of growth product build will

Adam Spielman

build we're to 'XX, seeing… you're as think in actually be inventory So I going

Jacek Olczak

And of question to duration outlook you forecasted the durations. the we three therefore, inventory know your as demand months the the sales when And obviously, is future where building the always know, inventory. We’re for of is. desired targeting

manage or inventory, ago. in but the trying the moment, level. year months is in create supplying surges today months three to Japan the a have have example, considerations in much that what inventory the that terms new think other any of right that into continue conventional bearing locations to of time to the business, the essentially risk a absolute that the the in to in higher and in other Bologna much fact just higher is demand we in inventory keep a tree build products in And product until obviously we the that subject full a I'm Taking creates market. mean is optically of For inventories of than inventory launch capacity each the

Operator

comes question Judy Goldman next with Hong Our from Sachs.

Judy Hong

combustible One just with business. or two start the

Germany. year arguably of has Russia your competitive So this some and been markets, pricing more in the environment challenging like and

there? you get what just wanted thinking just So of you is and to this you different your how color about are need strategy shift really terms in year, to whether think your

Jacek Olczak

deadlock. Purely net the And on launch the negative as surprise biggest Russia. and numbers. pressure net I getting on to our a as pricing came have the that market not it's already unfortunately the manufacturers’ clearly position due the year, size we in market that that a at pricing a the beginning came front, the the that that in put to that of from just expect, year, admit all of we for January pricing passing beginning Like surprise. bit the going readily their to last big of pricing, we And for the is the pricing our knew I year a talks, admit to at didn’t -- talk but

go rainbow, you to to see the will have want maybe for If rain. you a

prices much the so Russia few at pricing, the we XXXX increases if Judy, other to only us saying to moving which well some always should look this. place it took got Russia, the at now. the So market 'XX delay slowly clearly are I should markets, have presumably I in et better in go least negative a German by on was was reached ’XX because price like to as it’s for you’re the the was But price. and look referring If cetera, versus

industry there. is as XXX% it's in it, increase. platform the But normalcy is Arabia, a the particular which about is is then up high of bit seen in reacting the quarter, it’s And GCC little whole a so happy it reacting increase. is to not which very this very not surprising. in price the but the So in have market this mix so is the target -- obviously prices I something Saudi that I'm heavy, of went

investors think of where Marlboro actually putting see is or -- and more PMI units. is significant in of of XX%, say the the like Morris PMI than and half least but available underappreciated correctly, clearly Philip a XX% of, more was average many profitability. this our around XX% you that than share, XXXX I or this. the volume, in average that it half margins. And well billion about stage pressure will margins Saudi starts is have Saudi PMI also above and that at size of if XX Marlboro it Marlboro I of margins has terms a remember there. financial. down underestimated market the Marlboro quite market goes to XX at I this have a is on the GCC Margins by

Russia We to Saudi Knowing have, XX%. of growth, well comes if flying above Russia and happened and flying strongly. not this and wouldn’t which be year above be the have what the both would XX%, at know If well above very XX%. beginning I that today XX% has Saudi guidance we I IQOS, a would of well X% EPS we to

Judy Hong

going tracking up IQOS of just get as IQOS, then indicated seems and wanted it I in should mean, like if before. a as phasing about and markets in XXXX? in distribution think the a about terms is plans the should market how that profitability then the ramp, pretty of in significantly expected investments you we sense EU fuller some the And be these think of to I expansion of to So see EU, we you’ve year-to-date. breakeven in on to

Jacek Olczak

total will the that in We line. the said actually IQOS to XXXX. in already quarter, contributed And IQOS bottom breakeven have be PMI

So, actually we’re do going to the better... as

Judy Hong

Can you how much? quantify

Jacek Olczak

will, perspective said one coming breakeven, a we a bottom net if handy, also is like, again QX the I you maybe from breakeven today. that Saudi line, But Russia confirm event. very not have Judy, about that we day but in a we did the there that to essentially I and is the which QX this Russia, contributor and to we

the when investment my we basis points basis devices quarter is and So the positive consumers hand despite a to in component in IQOS. beginning, the margins, revenues, component went device, little we��re the from a strong puts our the we have of one some been a because But stay being in of consumers margin, two if result loyalty calculation about buying bit can There up of XX market. result. the devices. to on our And of really second this situations, take quite even competitive severe potential built and pressure. which QX my with good if And be margin on excluded it OCI pretty the from is margins. would saying that was it deliver, a points. devices somewhere means And opinion, range XX better very last to adverse on IQOS, is make talk my what results, still we on very one are also if the bringing the are but versus I alone our we extent would drag if devices opposite. like, inflating, not do margins you There Devices

or will know, price us to of quarter the you when As the year, second as up a device and it time device mid about leave will worldwide, go we of in of this $XXX started targeting the market. of year prices take

combustible obviously, So, the or HeatSticks will devices we’re our line to to address. margin in not bottom as be trying accretive products. as But

the look careful have when also numbers. we to be We at

Judy Hong

And in just last question then Korea. my

So of the post I this know up week of is XX% combustible. there on or vote taking XX% the to IQOS tax

conversation tax and curious, you a having just on about you’re risk I’m the the other the discussions as relative think So is there so to and Is shifting there markets structure. the difference the of rate is tax think differential XX% or the disappointing? actually that tax going is eventually are this current Or XX% to governments bit some little do level up that pursuing? more you

Jacek Olczak

we’re Well, in cigarettes. that whereas combustible the different the tax treatment opinion classical the product weighing the always

in to hand yes a I on mean So, move Korea up. tries tax one the

enjoy should have, should a combustible. the product the that recognizing are different they think than taxations I

So have understanding risk taking with product decision cetera. is if absolutely policy smokers, we’ll lag. into aspects, the a that a the you et which But we final. et The understandable consideration, combustibles, from see my not real lower taxation will any enjoy profile public is is product where this of like cetera

I in this reducing if that is do Remember this the that RRPs role. And harm countries, many tax that as benefit be I on will of long long, squarely plays or most I within you enjoy tax stays combustibles. in the also level But know the maintained, a the policies, a -- there Even as policies, differential of some think the conventional recent growing important will IQOS direction. differential lower announcements the product tax perfect. product attractive term to into a be innovation which regulatory reduced the other very fit understanding differentiate is cigarette. would the principals, in taxation that assume policy. FDA will of So the versus do risk will don’t both a think categories

Operator

question comes Vivien with next from Azer Our Cowen.

Vivien Azer

the well Russia. to It around in big GCC. your appreciate pricing drags wanted since the XX% please. change in But as X% the I in seems So guidance development you’re opted to going you’ve candor expectations, revisit February, as just the much I the guidance. very

justify that high end. offset that you're to So materialize, to like it hopping, lever another was it’s the me been seems something perhaps there

over your called to division these the the of of course you that could out up hold the given known just behind that until please some So comment negative factors if year. guidance on now, you were

Jacek Olczak

to in to situations would flying but keep X environment be us of the or clearly wouldn’t alone XX%. then Well, this the above I XX or XX%. but this before our Russia if this this one, of Russia upper want talking we said or Russia to X guidance. go improve not is be to basis points, GCC I don’t happened will have XX in about would or quantify the Russia XX well -- has end be is that I'm like, The would the year, shorter XX. -- faster or to duration would essentially in pricing earlier, in would squarely in price

that very is coming obviously strongly. as Assuming strongly stays -- coming which IQOS is, is

XX% we this on and is like, handy at Saudi will as and if I the to when mitigate Saudi. very from next great profitability the now continue perspective other will performance October. Russia that have GCC year for even at Gulf changing have change the moment countries have is of a the pressures we more. is to operation the of We’ll the have in annualization They it’s see some somehow markets So coming you hand IQOS, the of in where stabilize. Saudi the excise, this way which have year. one to said, and financially, But that council it it’s alone part least

a the there. already drag think identified have I we impact and biggest So

Vivien Azer

has given next guess And decelerated just realization is a Russia, different combustibles the I then if pricing it quite terms nuance business model. the the course this half with the multi-year But of over like aggressive. change, price around board. investors more of my mix does on the business, of at your which appreciate pricing And I been fully sustainability Latin broadly, lot across I of has the in look the exception from the harsh look America, on 'XX

mix that number So across the was that geographies, you seeing a we’re the durability model price just please. can I of if decelerating wondering comment on given of your pricing

Jacek Olczak

in been, is which have, it would a Russia normally there have like, It’s to I now. if you add should Russia would is level of just pricing

X.X% in Our we’re actually. be and pricing variance X% squarely what saying, would always

component over volumes the some few -- know delays. presumably pricing pricing now countries. it’s time years, the always no last mean pretty and Italy has is stronger I France, I Other mean every of et There a than Germany of of there in below cetera that structure have were the our that’s are Russia. pricing, that, other we been bit realization, speaking, all tax for questionable, always were which So of prices are when in a like countries, example. known a missing they still type price Frankly yes, a we taking a we But market. because trade in it's in and there’s delays effectiveness Germany. just and between of is X% big

in said success positive. not I it me mean not this anybody makes Russia is So as but that happy achieved what surprising. don’t it's has the I I think Russia Russia in is earlier, with happened

Vivien Azer

IQOS, relative am share And is at just right. lost if chart were so specifically the IQOS Germany, I'm my market much looking European the looks on just Germany in and that equitable good I It on focused reading perhaps question last market. reason on pretty to you other I'm like

third points basis quarter. the in XX share You of believe was the second? I XX in had points it basis

Jacek Olczak

the this different growth which think have a don’t I before. which but share lost which The this -- that’s small comparative for a of has the any But X.X only the But highlighted, Spain. is mean QX quarter, -- we were place. Germany quarter thing. growth -- I we going in numbers is a others X.X very other place No, is

want to Munich world. -- presented present can in on cities, in recently that start is but like not remember been in not in Germany not a is and the Therefore, thing that So Germany, time working don’t euro much in takes offend Germany few focus anybody, the the market and the do we I so I there. I'm in fast, things somewhere really looking others. produce we slowly. I’ve more I focus They markets fastest a Germany. very think

Operator

with Our Matthew next Morgan from question comes Grainger Stanley.

Matthew Grainger

observations using market any a device lot But Are that generally, are share the to that category sure a getting or in who on want switching elaborate of meaningful us launching maybe of difficult about So potentially Just products short-term the progression, just and using that in that any sample consumers the products progression consumer the Japan, and market? share, on. -- of heated is some peer hasn’t I’m is I making you from And between stopped that? decision, various know that you can which limiting competitive manner context you the still tobacco go of talked to your you think are could then products? to to that come regardless it's if topic one I in on could the clear give Could IQOS but back having I you and good. IQOS as observations to impacts in out. very interaction them constraints you it IQOS this in fully? a back have dual

Jacek Olczak

there’re because interactions buy the is some overall Well, that a strongly. cannot satisfaction using they to very and taste the versa and experience come cannot feedback receiving especially taste as from and product for and IQOS. obviously IQOS a The users products satisfaction with people important, IQOS stage. competitive is very wise we’re is and they vice seems

that the So I’m category not at worried why will this be should But competitive always a new believe other will trial category, -- stage. nothing products there in obviously, much stage, with about offering and to be are me one in a presentations product people trial this frank in here. categories, you, propositions. very have always the the would at trying which the disturb really But we other

aspect. focused we As the same our on on and improvements is guess are innovation, I further exactly products of working is competitors also

over. So, the game is

winning and I will hope we’re So continue far we winning.

Matthew Grainger

good direction does optimistic headwind very potential fact on our and on repurchase repurchases. looks sense update the share of into next thinking feel appear Could about how momentum that But a that and you estimates least make more doesn’t prospect comfortable buyback? I about you’re next mean, to earnings always pursuing much for be to would year, the you’ve hoping you currency an respect swing put been of you that with before just repurchases just that dividend you year? just in reinstituting would my neutral increase, give at the it a a effect. and it bit is given the more positive us pretty And

Jacek Olczak

on be even our balance was think at when under is or pressure. dividend, times I sheet the the our focus will continue to

haven’t don’t We’re pressure. still trends the the to desired we -- have unless coming balance is sheet the I and ratings. recovered to on thinking recover better other back near-term positive to dollar with our that of currency. from sudden prescribed I each times we ratios the for should in in where the dividends. We in line come just to in our would under a shareholders still be the a be would reverse there buyback to us, forms how have are to time There than credit will currencies we cash think we start deploy fully to recover get weak

and So growth. the I hopefully on shareholders think dividend our for dividend, remain focus reward will dividend the

Matthew Grainger

Okay.

I think that’s pretty clear. Thanks.

Jacek Olczak

Thank you.

Operator

Michael Lavery Piper Jaffray. from next with Our comes question

Michael Lavery

Or if the ended. your wondering of it same, just is Has your IQOS revenue held that’s increased? a adjustment? on on of could And I’m some that end, upper guidance have -- it just was an since you I if thinking bit curious part elaborate for you it’s specifically, maybe doesn’t guidance is little guidance open your spending.

Or So, in revenue those you’re else lower to way reconcile somewhere the margin. you’ve and What’s guidance, but just previously? X% weakness that right pieces? Arabia, is got it kept closer than it the Saudi you've you offset an all that to the that’s were is seen Russia

Jacek Olczak

revenue revenues we’ll always about to how et how able many the a ship always on be and ship devices of deliver alike. be we’ll we’ll many definitely guidance and Well, It’s cetera. X%, the factor is upper end HeatSticks the to able

volumes cetera. what's we the view et on happen going the GCC have and I now good a in to price Russia think to

So on hope I actually in think just it ago, I one. quarter a for become approaching it’s think that X% a norm I when and said Remember a up do we new we're PMI. this or revenue was time I two quarters and will have

type devices, of X%. that you this the And as not be the this quarter become can which could PMI Company with by are growth, drag on growth we said at approaching capable, is So growth revenue may good time revenue line questions what obviously, growth, the I at of we’ll can, line see earlier to margins, even pricing past top of above quarter as this necessary be the growth at But top if should on quality answering was a when and entire thing which was if offer the we is very still I as well, stage. quarter-to-quarter, never growth, we be period you adjust target, to a the the in longer contribution is the we to of would and know volume the much think I least X% of the growth time. think aggressive be we by -- achieve. seven one I our able what in the higher mix you can this The we well deliver a the now. quarters, manage -- business is focus like very I

Michael Lavery

marketing number IQOS were much and or higher your same on investment just there spend the And Is that as it. they just the… it’s -- pretty a is that are piece plans of incrementally

Jacek Olczak

year. Higher versus than not planned year, increasing what obviously, for this we've we're last

of working the on we within will while manifestation said, the consumers, of first our increases than per component, -- the on the consumers if for buy will just pricing should variable to that we're have in the essentially There a the sure more count like address implementing We’re that’s or one they But some buy more I are I and because plans. decides device that to is stay this not one as the person as investment, and we're loss We've that if devices will it. with category. variable But the hand, purchase other also schemes than earlier. one a component investment. devices mentioned devices seen loyalty because obviously, somehow product you consumers

-- read the for have means is I the that’s consumer would periods. it positively happy a proposition. and And future with we very the So this that consumer

know, of devices. you out As new the we're rolling versions

there will this will devices. so, et demand additional a the every cetera. period or accessories for was think a growing personalization, that I There become norm be for

on because stage is there forefront larger obviously serve. consumer groups be at this I will to a think Japan that the

and revenue are be will opportunities which other there hopefully big also us. from of margin the So ahead

may we period. next expected ownership device for multiple this it's a again and are the pressure, very think pressure, some the coming put faster So good little margin a year I things negative the with which And take a this of finally. but bit bit than

Michael Lavery

capacity the if get air obviously, inventory back just year? Japan, constrained have through mean… able you But stop freight. building enough and do would so, And be to you've on that in to to then the still -- been how touched you And on on this capacity expect save

Jacek Olczak

now On XX we plans be and and we you remember, the think the capacity have install. we cetera, billion, billion end installed latest targeted should with at et if installations, XX states should now, the the I a above fixed here year

We’ll numbers. the update in capacity next in the February, lifting is already community year. for we’re investors So or the for what outlook

think, I bigger We last locking also as in is should capacity this still quarter, of as be plans, which or of the that activated think one. start on we’re the offer As the Device comfortable. okay. second side, but some HeatStick getting the we fourth I quarter, even as we supplier, than first

should So I decide, the first the supply -- demand a forecast of have we have to we of for I of year is start beginning it we should what think of equation. our assuming as comes year, think operations side a the when next of normal be

Michael Lavery

Just what an your risks be? one JP bigger competitive any push with competitor impact making on thinking Indonesia, obviously that acquisition. of on in up the is Does your might some there market of that

Jacek Olczak

or right Philippines, mean you think, of JP? kind I

Michael Lavery

where part Well, Indonesia distributor of big and… specifically

Jacek Olczak

be But that dynamic so positive am think Okay. also the that to to the well, drastically saying change acquisition. Philippines I saying -- I don’t not think I'm actually I in don’t it's Indonesia. just happens going JP. yes,

the on more in Philippines and Indonesia. in than focus my So JP

Operator

Wells Our Herzog question Bonnie with comes Fargo. next from

Bonnie Herzog

you awareness. trying different IQOS you’re might why markets higher deeper required to markets. in your this of the up of in wanted A remarks to in regarding spending to terms your discussed, go something I been established consumer versus be pushing in the stepped and prepared especially the mentioned IQOS. lot some already behind more increase understand asked guess to back spend I'm But has some I of

Jacek Olczak

does in the should what to all know they about have say program not IQOS cigarette. access I information full Because we this and consumers markets what combustible that to an what think say we versus we can

are regulators if if things, thinking in in to regulation -- not then somehow it’s a which that the regulations a market a these in are what and always regulate sense is They know, market. you think, start you like As you the retroactive, difficult to do. the

operating recognize where type heated it’s a clear X, combustible that this is claims. not we’re And the Z regimes make So in can versus product. Y, of we we therefore tobacco

switching adjust to local that benefit they very mean experienced. cetera. who fully cigarette, to somehow the those they’ll very the So the conventional regulations are IQOS, so If who IQOS, well quit know all I the they to we market pretty of conditions, similar experience, the could have and smoking, to We of symptoms, they positive. out product. consumers et they which the have adopt switch to switch much realize quickly

consumers takes is bit things, this the about a more obviously So this mouth of but the time. word talked

different a consumers, still The I advertise second communication being talk in to marketing open, I when channel markets, is that et channels can thing you where cetera. can the different have

example few Some Germany. markets regulations. Germany, on say a we can we outdoors by of only -- we give it I but In outdoor can this use very things

transaction nothing and don’t development time I things. XX-XX there a things In But The we this the think be little else than restricted. restricted store the print I being, can So more seconds are outdoor bit say have to essentially communications can is Italy, will we for more some are But we for tobacco say people we soon. practically or or theoretically, when convenience the in time. the tobacco. coming

will market of each infrastructure earlier, we adjust markets with challenges this have I of actually said take is them in of will structures we all the then in essentially which that and battle. So very to one-by-one type as thing and different have or the fast X, the a whole tipping a created has a this to And our create knowing Korea. which number Japan consumer be and consumer effect, there point snowball in

Bonnie Herzog

Thanks. remainder a combustible the year final And first, in play to I that an on HeatStick market? business, increase more could how update us then guess for out questions could introductions? expect outperforming. the update on you the market And couple your Japan. And into new that give the the how us do and of price on you then variance introduced anticipate you you of just quick on you

Jacek Olczak

it flavor, the new mean was variant, menthol the very received. I with The well

we -- As we’re was produced. we're shipping producing selling what we

other Variant like, through business. which is face were in So from in and combustible some, exist presence also variant or responding variance a some you switching consumer is cannibalizations internal now the behind. There is that more variants. is taste responding of are preferences, if obviously existing

to situation. try So know in preferences, a we in the first price cater was New tried Japan. think a terms Marlboro unless up in Japan well to in try we’ll in taxations stay the And the are But OCI important markets -- current with segment the We Japan, in there nothing Year right. segment will you pricing the to an performance. terms Japan. frankly in time, long going And we Japan, for this of for is to missing of taste ended PMI so the to I it’s guess changes of -- But some increase. long there some need. essentially to with history, regards I is in around fabulous history for growth generating the speaking Thanks time a volume we’re far

phenomenal the can cake. would place. on grow it cannot have which was grow solution somehow If know frankly on OCI pricing the growth positions market. pricing. always We pricing, the it the speaking actually market it’s normally in not But what Japan the obviously you market the should have found that happened and the absent a we pricing. nice comes in the Japan and We’re in without bottleneck be taking our the that but the you in profitability cherry We

Operator

Chris Our next Stifel. from question comes with Growe

Chris Growe

So just a quick you. for question

will, the this that made particularly I through base, market? guess launch for in two go about about we just think available, do XXXX. that, got think IQOS product. end of the Europe a test to year to related and available, you understand for where may markets, XX or wanted the and you platform you I you’ve that sticks other billion growing about gave through should in how As how we at number HeatSticks launches if when And

Jacek Olczak

year, to it. Platform we're in go a not where have will the or do is annualized to test announced The but platform second the probably still XX we this about going market year-end capacity. -- start XX billion billion

obviously other have pocket. the we from on plus the shipment is production which for billion factory. then with and Italy. not from nothing year, We actually machinery shipment we just the capacity So and plan, And factories adding already next first in the activating obviously XX in have Romania the

it So, per goes I planned. mean as

the I capacity as in February. said, So on update we’ll

So we with there’s capacity XXXX. that a already capacity, the billion remember obviously we end lifted is targeted year because proportional. will And now year-end XXXX at installed will logical higher year least the capacity XXX be initially start

Chris Growe

from in here, about of have quarter. Obviously to that building the it’s XX availability sticks with as another market? that so think Korea So fourth start sufficient standpoint Is billion a national launch in well larger… you

Jacek Olczak

depends markets spreading is moment places communities to if the -- we much the to this larger to want build how of the in mean Italy, results where -- right around tried are we before therefore we this markets in we IQOS this locally we whole bigger which location. the X% are have not And the the really And Switzerland, You And I as Germany, market we territory. pockets build to X%, will across on in reflecting X%, a have we within balance thinly X%, the is well in broader a in thing want all is when focus. start But always like said share you market, go geographies. very national often I national. where

our already at we very some look in started which markets important also, you the also strategy. developing market, If is

the on Colombia, very the market we think QX, which share to X.X% start. I chart had in came strong

where et market the So starting markets, first this which is presented for time where capital one market will a two to either be availability also with we in marketing And the cities. think already markets the open city, geographies, into number is with cities was channels, of cities where in city national of to a for we taking some already cetera. expansions, we the consideration the and assess trying

from for I for is So select like next is have market the base us through how expansion a XXXX XXXX what to we to a plans. this year. think of and capital But labor very be to might created intensive, nice

think was I this our So objective.

markets go may And some go XXXX, XXXX. some full speed will

push the choosing luxury, how a we if have want We of now like, you pedal to the there.

Chris Growe

that by do should then the pretty estimate. follow more that -- and And were just Does of the you in behind think IQOS, consider fourth particular? that will they continue these just constant our quarter? quick cost in on quarter, strongly your launches, currency into total XXXX a up more continue up as And you in investment

Jacek Olczak

the impact behind cost, is you have There remembering total of right. the IOQS, investment also IQOS just

purely a due due very flat, cost cost on COGS. COGS, So cost. will The marginally on to be different, the due COGS, to to

more. on positive a have will positive you produce Now, if if because on combustibles less a like, produce because you the take volume offsets the actually on a impact, you we And that have negative, IQOS and convention. you negative on we IQOS

Operator

from Leinster Jon question comes with next Berenberg. Our

Jon Leinster

might. I if questions, of Couple

one. scale, very specific the seems on a mix all, the the put in conventional to of price In be sharply. First QX region in very to cost, business decelerated just PMI QX Asia

So Russia is understand so price through But forth. why decelerated at the for conventional and I even mix sharpening then can so with Asia the on business the in quarter?

Jacek Olczak

what by I'm be drove just Australia coming be the and thinking were positive volume on the rest those Philippines variances would the on driven from. volume, that the side. where CI would It and on mix,

Jon Leinster

up, Assuming Philippine Australia down? volumes volume

Jacek Olczak

smaller be nicely need there, is Australia mix be component. there might Australia, And Yes, lower. the the also should if guess was Philippines because I remember, is are I growing some other on there also is in presumably volumes but Marlboro there. markets positive

Jon Leinster

third on could mean you have on HeatSticks produced that And device side if more? the the in considerably side, you’re constrained does quarter, the

Jacek Olczak

side On the the third HeatSticks in quarter?

Jon Leinster

Well, the it’s as that basically mean are by the under that billion XX above device therefore on side. is you’re same units? that you you could constraint and done have the just constrained volumes, saying Does well

Jacek Olczak

versus I is I think shipped, you literally if ramping take couple still the is production year-to-date If delta production we the billion, the of what guess. like, sold because up. I would have or really, Not

So et this is somewhere pipeline in cetera. the the warehouse, factory and

on consumers So devices, not But the you the with don’t now obviously, new restricted in the some we’re having Japan. now shipping to, have you Japan inventories HeatSticks becoming generate start market if HeatSticks, much sales. we the the because is level of they but because is supply can that bottleneck.

So I I we first operations will in continue nor the guess a in will on and a supply, inventory the an the be free to HeatSticks HeatStick. devices when be and as start seeing full supply of QX result assume in device constraint quarter the in should have neither I said should

Jon Leinster

two to plus IQOS Is price number is And platform Does sort two, two platform way. correct? is next meaningful HeatSticks capacity no? mean, likely indeed the of a talked platform with ’XX platform discussion more of presumably in or that about the I in actually the year, billion one a billion also this made the or or And $XXX for end of that or end that year. in same at you’ve that be more XXX to

Jacek Olczak

one there’re extent, Well, that between processes because one is in process and to yes platform processing is two. the platform some tobacco HeatSticks, making shared two

the to different comes it So final machinery. capacity will to shared the two HeatSticks be have making the platform the product, can and have stick, when

modify year. may the to start capacity and within start this So remember, whether this we then market within we’ll test number. need we when the start capacity numbers, But that partially go is to something we’ll thinking for PX. partially, the to the assume PXE launching markets We’ll the this learn, right

XXXX don’t that we’ll expand beyond. earmarked in want for we into obviously that only going much of to for have XXXX PX a I will to that capacity is XXXX have then issue how capacity decide for us some So

Jon Leinster

on on to if -- if can produce be side, the traditional secondary PX clear, to machines the you capacity the the Just see conventional stick PX?

Jacek Olczak

people few We same. No, our as components were cigarette the facilities this concept up, the putting as or if like, the curve machinery heavily the investment. much separate and to trying wise, which can -- a require is program, the machine is together existing line HeatSticks is will the do is and or of a to you different. always therefore, And wise within picking route, but learning scale. our because use we’re possible it Therefore, saying we objective separate is CapEx formula

Jon Leinster

We in can out up. out build picks capacity PX So, of capacity? different expect another build

Jacek Olczak

we to I but Yes, capacity build how PX. have also the learned think on

factories, RRP we So, et than assurance first processes are the remember in the cetera. combustibles, different that build quality once

produced PX very likely So the be somewhere along that will PX.

made separate of is think require were that behind dedicated PX. of the a But I part So the lot there equipment. PX, which serve a will will investments,

Jon Leinster

presumably of who it costs of out sold, to gets When freight it switch the lastly, is. goes air sea the freight. for or that you somewhat? comes And at in IQOS. point, freight freight it to it or And particularly the margin to whatever lower just PNS versus benefit that sea from is Is margin benefit the benefit split or TNS that to is air factories

Jacek Olczak

benefit This full is take International Morris the Philip of… Inc who

Jon Leinster

cost. lower At the

fine… Okay,

Jacek Olczak

This today, like It’s creates because from because cetera But plane to which doesn’t loading the to of our long cover at higher cost freight when Italy is manufacturing. always the inventories, how a because call us somehow I beginning optically we of recognition, to freight. air et this Japan. is creates, plus-minus. warehouse, center somebody it’s the flight, is have air just change at It flight the the inventories, revenue anything this on was technically factories always that

it’s You could the so as for to commercialization or on on the the cigarette the on I other you day accessible obviously because a next the but When and ships weeks inventory, market eight on water. further have revenues you count assume of recognize, inventories not side. put boats the either cigarettes

is model a a or to same sea shipments, HeatSticks this significant trying put the as and to freight… operations thing. the just There air different So we’re is this But of technicality in shipments have the we which models combustible.

Jon Leinster

terms gets of benefit who shifting the of… the But Yes. in

Jacek Olczak

supply else in anybody whoever Yes, to or a us, distributes nothing it’s to it’s all chain.

Operator

have for question. more time Ladies and gentlemen, one we

question from line with come today Bennett final will Jefferies. Our Owen of the

Owen Bennett

questions Hi been asked. has guys. Thanks. My

Jacek Olczak

a have day. good Okay,

Nick Rolli

Well, thank That very call today. for much. you concludes our

Switzerland. day. please questions, team in and the If great IR have again contact have here you Again, any thank a follow-up you

Operator

call. third you International's gentlemen, joining Philip Ladies the thank quarter for XXXX and Morris conference

You lines, have a disconnect day. may your now and wonderful

Philip Morris International (PM) 19 Oct 172017 Q3 Earnings call transcript