Good day, and welcome to the Philip Morris International Second Quarter 2016 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. 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. Please go ahead, sir. Nicholas M. Rolli - VP-Investor Relations & Financial Communications: Welcome, and thank you for joining us. Earlier today, we issued a press release containing detailed information on our 2016 second quarter results. You may access the release on our website at www.pmi.com or the PMI Investor Relations app. During our call today, we will be talking about results for the second quarter of 2016 and comparing them to the same period in 2015 unless otherwise stated. Please note that in this presentation net revenues exclude excise taxes. A glossary of terms, adjustments and other calculations as well as reconciliations to the most directly comparable U.S. GAAP measures are at the end of today's webcast slides which are posted on our website. Reduced-Risk Products or RRPs is the term we use to refer to products with the potential to reduce individual risk and population harm in comparison to smoking cigarettes. Today's remarks contain forward-looking statements and projections of future results, and I direct your attention to the forward-looking and cautionary statements disclosure in today's presentation and press release or review the various factors that could cause actual results to differ materially from projections or forward-looking statements. It's now my pleasure to introduce Jacek Olczak, our Chief Financial Officer. Jacek?

Thank you, Nick, and welcome, ladies and gentlemen. As announced this morning, we are raising our 2016 reported diluted earnings per share guidance by $0.05 to a range of $4.45 to $4.55 at prevailing exchange rates. The revision is driven solely by currency. Our full year business outlook remains strong. Our guidance therefore now includes $0.40 of unfavorable currency and continues to represent a growth rate, excluding currency, of approximately 10% to 12% compared to our adjusted diluted EPS of $4.42 in 2015. We expect our currency-neutral adjusted diluted EPS growth in the third quarter to be broadly in line with that of the second quarter. Consequently, our full year 2016 adjusted diluted EPS growth on the same basis is expected to be heavily skewed toward the final quarter, largely reflecting a favorable comparison versus the fourth quarter of 2015, during which we made significant investments behind iQOS and our cigarette brand portfolio. As seen on this slide, the $0.05 moderation in the currency impact on our guidance primarily reflects the appreciation of the Japanese yen and the Russian ruble against the U.S. dollar since we last provided guidance in April. Let me now take you through our second quarter results. Our organic cigarette shipment volume declined by 4.8% or by 4.3% excluding estimated inventory movement due in large part to decreases in low margin volumes in Pakistan and the Philippines. These markets accounted for approximately two points of the organic cigarette shipment volume decline. Net revenues and adjusted OCI in the second quarter increased by 1.4% and 1.8% respectively excluding currency. The growth in adjusted OCI reflected favorable pricing, partly offset by negative volume mix, particularly in the EEMA and Asia regions, as well as higher costs related to the commercialization of iQOS. Adjusted diluted EPS increased by 1.7%…

Thank you. Our first question comes from the line of Matthew Grainger of Morgan Stanley. Matthew C. Grainger - Morgan Stanley & Co. LLC: Hi. Good morning, everyone. Thanks for the question. Jacek, I just wanted to ask two questions about guidance, I guess. One, just from a volume perspective, in the past, you've talked about an expectation for volume declines down 1% to 1.5%, and the industry down 2% to 2.5%. Obviously, you're down about 3% in the first half, so just have your full year expectations changed? And when we look at the impact of a few large excise tax increases like Argentina and Algeria has the excise environment in any way shifted or become more challenging?

First, on the volume, look, I think at this stage, I think we prefer to say that we will likely, very likely miss our volume expectations, initial expectations for the year. I think we'll come definitely lower than 1.5% decline, which – 1% to 1.5% decline. We might be as low as 3% for the full year. This will be coming from the few geographies which not necessary put a big pressure on our bottom line, but it's – at this stage, that might be the outlook for the full year. This obviously may result in some industry volumes to be adjusted accordingly. I think initially we say that the industry somewhere should be in the range of 2% to 2.5%. I think industry might be lower by 2.5%, but we'll have to see, okay, just to be on the cautious side. Now, when it comes to tax increases, yes, Argentina was a very large increase and resulted in a very high price increase. So there is I think at this moment we could see the impact on the volume, and I think it may continue for some time. Maybe not for the long time because this outsized tax increase happens in the high inflationary market. I guess the time will be – will help the consumers to accommodate to the price level, I would argue faster than in other situation. And outside Argentina, frankly speaking, we have not had anything which would be a very disturbing on excise increase. And in Algeria, it's much more – the whole context of North Africa, the political instability, what is happening at the borders in the individual market countries there. Plus we have a specific-to-us issue which I highlighted in my remarks connected with the rollout of Architecture 2.0 for the Marlboro…

Look, for the full year, we said that our total cost, conventional combustible cigarettes and RRPs will not be higher than 1% excluding currency full year 2016 versus full year 2015. Now, for part of this cost and the timing of the cost increases year-on-year are more in the beginning of the year rather than the second half of the year. So, when we enter into Q3, but Q4 very much, we really will have very favorable comparisons not only on the cost line, also on the revenue. I just want to remind that, you may remember the number presumably very well, where the EPS minus almost 4% in Q4 last year, so I mean it clearly will come very strong, with very strong growth this year. And then it just happened, this is a phasing and a timing of the quarters, partially the comp, partially the events of the current year, how we're going to make it. Look, we're very confident of achieving 10% to 12%. But do understand that the pacing of the quarters is not maybe ideal, but the year has four quarters and we're working on delivering the 10% to 12% EPS growth, ex-currency. Matthew C. Grainger - Morgan Stanley & Co. LLC: Okay. Thanks again, Jacek.

Thank you.

Our next question comes from the line of Bonnie Herzog of Wells Fargo.

Hi, Jacek.

Hi, Bonnie.

I wanted to circle back with a quick question on the volume deceleration you mentioned in the year. You are now expecting shipment volume to be worse than you originally anticipated, so I guess I'm curious to hear from you, what is offsetting the weaker volume to give you the confidence to maintain your currency-neutral EPS guidance of 10% to 12%? And should we assume growth will be closer to the lower end of that range, given the weaker volume?

Look, it's a difficult question. Thank you, because actually, it reminded me that I forgot to put it in the context of iQOS. That the volumes which we did the guidance or the expectations for the volume which we share obviously on combustible cigarettes, and as you noticed presumably on the quarter already, we started selling quite a significant volume of iQOS which are not included in this number. Now, clearly, iQOS sales or HeatStick sales for the year will, to some extent, offset the volume declines which we have on the combustible business. That's on a positive side, will not fully offset because we have a capacity limitation on the HeatSticks which I will cover in a second. Having said so, I mean, some of the volumes, which we – may come short this year. They're coming from the relatively lower margin places except for Algeria, where we have a problem with Marlboro. And in the Pakistan volumes or Philippines volumes, they count in statistics, if you like, but they're not really make a big impact or big change at the bottom line. So we're pretty comfortable, especially Philippines, because the market is losing and we're losing the extremely low margin volumes or zero margin volumes at the bottom of the market and we're having some positive recovery through the mix for Marlboro. Now, coming to iQOS is that, as you might have noticed, the shipments for the total PMI for iQOS in the quarter to 1.6 billion. They're almost four times higher than what we had in the first quarter, so we can see the dynamics of the acceptance of iQOS. Obviously, it's very much driven by Japan, and we have to be very much focused on Japan this year because we don't have unlimited capacity. You might remember, we have accelerated the launch plans of all markets, including Japan by about a year, not being fully ready on the manufacturing side. Initially, our capacity was to be in the range of 5 billion units. We have made some efforts to increase that capacity by a billion or so this year, but I wouldn't expect any further miracles on the capacity this year, and we may continue with some pressure on capacity for the beginning of this year. We are right now revising our CapEx plans, and we, in order to accelerate not only the increase or the acceleration of the 30 billion capacity plant which we're building in Italy in order to be able to satisfy the market demand.

Okay. That's helpful. And I actually did want to ask you also about what you're seeing in Japan with iQOS. You called out in the press release your combustible cig share in Japan was 25.8%, and then for iQOS, your HeatSticks, I should say 2.2% and you noted that your combined national share in Japan is 27.5% which is a nice share gain of over two share points versus the year ago period. So I was hoping you could talk about the rate of cannibalization from iQOS that you're seeing, it seems maybe low. And are you seeing lower cannibalization in Japan, for instance, versus other markets? I'd just love to hear sort of the differences in cannibalization rates by market.

We did, and we do indeed see a better cannibalization, i.e. lower cannibalization rate in Japan now as we had six or so months ago. So I had the numbers and mentioned the numbers in my remarks. I mean that's a pretty nice improvement. And we see the same in other places, okay, in other markets outside Japan, although obviously, we're in a much more focused smaller territories, et cetera. Now Japan's share which we have disclosed today allowed us to leave the total corporate share, i.e., for both combined territories by more than two points. I think that's significant especially in Japan. Now, what's more important, if you look at the exit shares of June, so if I take the last week, the last two weeks, how it's been accruing in Japan, we have crossed the five points, 5% share of market mark in Tokyo, okay. And we're still growing. So I mean the volume growth is somewhere in the range of about 20% plus on a monthly basis. So we could see the push, we could see the consumers coming to iQOS stores and to other places in which devices are available. Almost fully prepared, fully, one could say converted already to the use of iQOS as the conversion rates are doubled of what we had at the beginning of our iQOS journey in Japan. We estimate, Bonnie, that at this point in time, we must have about 600,000 exclusive or fully switch users of iQOS in Japan, essentially translated the 600,000 people in Japan who quit combustible smoking and they fully adopted iQOS. I think it's spectacular.

That's great to hear. Thanks for the color there. And just one final question, if I may, on your margins. Your operating margins were down 200 bps in the quarter. So I guess I'm trying to understand what some of the key drivers of the margin contraction were? Also curious to understand why margins were down this much, considering your volume declines that you mentioned in the quarter were really mainly in the low margin geographies. So I guess I would have assumed you would have had a little bit more of a positive mix there?

I think the inventory comps in which we had, and the shipments driven comps which we had in Japan were very much behind the PMI and the Asia margins. I mean you're talking about 1.9 billion difference in the shipments in Japan on the conventional cigarettes, on the combustible cigarette, and this would clearly give you the impact just from that in the north of $70 million. So I think that is what we've been missing. We have – the way we're looking at this thing also is lifting the margins Q2 to Q1 because we ended up Q1 with not so great margins and I think sequentially we're going up, and I think we will have more of the margin improvement for the year when the pricing realization is getting usually stronger in a number of places. We have much better situations with the pricing in Ukraine which relative to a lot of other margins in Q1, a bit less or much less in Q2. And I think that things are going in the right direction. And as I said, I mean some of the volume headwinds which we have going forward, except for Algeria, they're not really coming from a high unit margin countries.

All right. Thank you.

Thank you.

Our next question comes from the line of Judy Hong of Goldman Sachs. Judy E. Hong - Goldman Sachs & Co.: Thank you. Good morning.

Good morning. Judy E. Hong - Goldman Sachs & Co.: Jacek, I wanted to ask about pricing. In 2Q, your pricing variance of $344 million is still tracking a bit below kind of the full year run rate. So I know you called out a couple of factors, but maybe if you can just quantify the key drivers. And then it sounds like you're still expecting a 6% pricing variance for the full year which implies a big acceleration in the back half, so just wanted to get your comfort level around that. And then related to that, you also called out some increased promotional support on iQOS, it sounds like in Japan that kind of hurt pricing, so maybe you can give us some more color on that as well.

Okay. I think the first half of the year Q1, a bit of Q2, is still impacted by Korea, right, so the price realization obviously looks at the lower level due to the comps. And as we had quite significant price reductions in Ukraine at the beginning of the year which I just mentioned a moment ago is phasing out and the situation is improving. So Korea impacting the outer quarters is no longer there, negative drag is no longer there. Ukraine should get better, plus we have a pricing which was taken in the quarter. So I think we'll have more of the realizations. Indonesia always plays a significant role, because beginning of the year, they're not really in the net price increases. Now they're moving into the positive price territories. So I think the 6% is achievable and I think we feel confident about this. There is a pricing – some price negativity due to the allowances of discounts which we're giving to the iQOS purchasers, not the HeatSticks purchasers in Japan. And although over a period of time, we have reduced in the end, per device discount, due to the higher volume of the devices which we're selling, I mean that puts a little bit of a negative on the pricing variance due to the allowances behind iQOS. But on the other hand, you always pre-sell devices first and then the HeatSticks with the adoptions rate are following very soon. And the HeatSticks actually are bringing the whole margin to the business. I think that's on a positive side. Judy E. Hong - Goldman Sachs & Co.: Okay. That's helpful. And then I was hoping to get a little bit more color on Russia. I think your industry volume forecast is now a little bit better, down 7% for the full year. But it seems like your market share trends have worsened, particularly in kind of the low- to mid-priced brands. So, when you compare the situation this year versus last year where you were actually gaining share, what sort of changed in terms of the market share performance? Is it kind of your decision to not be as aggressive in the low- to mid-priced brands from a pricing perspective? Has the competitive landscape gotten worse? So just color on Russia.

No. I think from the beginning of the year, we observed a bit of lower or slower price implementation from competition. So, yes, I mean I think I have said already in Q1 that we might feel some share pressure in Russia. We just stick to our plan and then we target double-digit OCI growth and I think we can deliver on that. I mean a part of this share pressure is literally the timing of the price implementation. So I don't think there is anything fundamentally broken with the brand. It's just the temporary opening of the price gaps in the market. So I wouldn't be too much worried about this. On the positive side, I mean, you remember, initially, we thought that the market with this price in mind should stay about a 9% or so decline since the elasticity continues to be on the more positive side for us. So I think 7% is the recent outlook for the industry volumes. I think we should be okay. Also, important is that we see a guidance-to-guidance improvement on global exchange rates. So I think that the whole pressure on the Russian economy is a little bit less which is improving a bit than initially we thought. Judy E. Hong - Goldman Sachs & Co.: Okay. So just if I can clarify, the pricing, the timing of the price increases and the competitive actions, are, at this point, all of your competitors now in line with your pricing?

They're all in line with the pricing but if I would be – for example, 80% of price implementations, coverage of the product with the new price in every retail outlet in Russia, competitions might be at the 60% or 50%.It's just rolling out the prices. The price increase does not just happen at the one day in all outlets, okay. Shipping the old product, new product, more of the new product, the new priced product. This is a typical price implementation in Russia, and actually in many other places as well. So we just see that the prices which they implemented in the market are in line with – if you like our pricing. It's just they have less of distribution, if you like, of their product with the new prices than us in a given moment in time. So, obviously, in this outlet, when the price gap is opening, at least temporarily, some of our brands might feel pressure. Judy E. Hong - Goldman Sachs & Co.: Okay. That's clear. And then just last question, just quickly on currency. So, on the yen, obviously it has been a big favorable move in the last few months, so wanted to just get an update on your hedged position on the yen? How much you're covered for this year, and what the effective hedge rate is for this year?

Well, with the forecasted cash flows, et cetera, from Japan for this year, we are about 70% hedged, and I think it was the first quarter in a long time when effective rate of the yen this quarter was by a bit but better than the effective rate of a yen the same quarter last year. So we're essentially moving the yen into positive territory. Judy E. Hong - Goldman Sachs & Co.: Got it. Okay. Great. Thank you.

Thank you.

Our next question comes from the line of Vivien Azer of Cowen & Company. Vivien Azer - Cowen & Co. LLC: Thanks.

Hi. Vivien Azer - Cowen & Co. LLC: Look, just wanted to follow up on iQOS. Sorry to belabor the point, but certainly your results are very encouraging. As we think about the outsized demand that you're seeing in Japan, how has that influenced your outlook for spend more broadly in the 20 markets that you're targeting?

Well, we're still aiming at commercializing iQOS in the 20 cities market by the year-end. Obviously, as I mentioned earlier, I mean we have to bear in mind that we don't have a fully available capacity, and we are today in a situation that we have a national coverage – the only place where we have a national coverage is Japan. And we know that those who switch to iQOS, so 600,000-plus consumers in Japan, we cannot put them in a situation of out-of-stock because they themselves told us that after two or three weeks of smoking iQOS, they actually don't want to, don't like to and they cannot switch back to cigarette. So we're a little bit trapped now in this situation that we have to make sure that Japan has a continuity of supply before we start put foot stronger on the pedal in other places. So we're preparing our iQOS stores. I think by now we have more than 20 flagship stores in a number of geographies obviously including Japan. We're preparing the Internet. We're preparing the sales force to the whole commercialization, so we can start. We're recruiting the first consumers, the first smokers in these places. But frankly speaking, at this stage, throwing more resources would just generate a higher demand. And we are not in a situation where when we can meet the demand with our supply constraints at this moment in time. So this is how we have to work. The second market which is close to national expansion, not full expansion, is Switzerland. And in Switzerland, we started moving, if you remember the market share in the German part, I think we grew the volumes in that part by about 50% quarter-on-quarter. We continue growing the market share in the French part. I think we crossed about a 2% market share at the end of Q2. So it's not in our interest now, knowing that we don't have a continuity of supply at this moment, to push too much on iQOS. Vivien Azer - Cowen & Co. LLC: That's very helpful. Thank you. And just to follow up on that. When you're referring to kind of national distribution, should I understand that to mean that you've got kind of 100% of your targeted retail penetration in a market like Japan or you're getting close to that in Switzerland? Or are there more stores you that want to enter?

Japan I guess is fully covered now. I mean there may be a few outlets, okay. We have some limitations on the device sales because the only way we can manage the constraints on the HeatStick capacity is to limit the iQOS device sales. And actually to be frank, in all outlets in Japan, key accounts, general trade, et cetera, there are the purchase limits per store. And I think we're shipping the product only twice a week with very limited quantities in order to stop or slow down the conversion because it will result in a higher demand for the HeatSticks. And the HeatStick is a bottleneck which we have for now. And the same applies, to large extent, to other places. Now if I compare Switzerland, I think iQOS is now available in 200-plus outlets. So we're not really in the full national coverage in any of these places. Moscow, we're in a couple of stores. We have one store in Lisbon. So it's really very small. But if I look at the volume trend which you might remember from my presentation a few minutes ago, the volume trends are extremely encouraging. I mean you have a truly exponential growth. Vivien Azer - Cowen & Co. LLC: It's very helpful. Thank you very much.

Thank you.

Our next question comes from the line of Michael Lavery of CLSA.

Thank you. Just coming back to currency, I know it's early to look ahead to next year. But in our numbers, it looks like you've actually got a slight tailwind which of course we haven't really talked about for a long time. Just very roughly, does that seem accurate? And I guess related to that, can you just remind us some of your thinking about if and when you would consider resuming buyback?

Well, Michael, look, I wish I knew what the currency's going to be next year. But let me put that way, we had headwind on the currency for the last three years. So I think it would be very fair if some of this headwind converged into tailwind to us. Now once we have a strong tailwind on the currency, I think we might be then only in the situations to reconsider the buyback.

Would it be fair to say that you want to be careful so that you don't resume buybacks just to have to suspend them again? Is that part of how you think about it?

Well, we'd rather – I think if we were to arrange the buyback, we would like to see the positive outlook for the next few years, so have something of the, I guess more longer lasting program than just one quarter or one year with the buyback. Remember, our focus always more strategically is on the dividend and creating the room for the dividend growth. And buyback comes – after all of other opportunities to invest, I mean buyback will come last.

No, that's helpful. Thanks. And then back on iQOS, can you remind us when full capacity comes online? I think you've said the end of this year, but how specific can you be? And then related to that, you have acceleration in, looks like every market, especially Japan which is the biggest, if that continues, is it possible you might need to postpone the other 10 markets that you expect to launch in this year just to be able to keep servicing the ones where you're already present?

Well, the other markets which we have in a plan for this year is they will – I think postponing the market would delay the entire commercializations. And we know that as of Q1, Q2 latest next year, based on our sales forecast obviously, we should be in a comfortable capacity territory. So I think we rather let the market go as we had per plan. One iQOS store will not put that much of a stretch initially on our capacity which is very mindful in the developments in Japan because that's every few percentage error on the forecast which we have translates into tens of hundreds of millions of HeatSticks. And this is where the focus is for the time being. Capacity, the initial plan of the building, the factory for 30 billion, we're actually accelerating that delivery of that capacity. And as I said, as of Q1, we should month-by-month see the progression in available capacity, but this is obviously confronted with the pretty steep growth curve which we have in Japan. So we have a little bit of a vicious cycle on this side, but we're right now also working on resolving that problem.

But so just to clarify, I think you've got the 5 billion to 6 billion capacity out of Neuchâtel, the plant in Italy, when would that come online?

We already started producing in Italy, okay. We're producing a little bit in still in a development center in Neuchâtel in Switzerland, and this is mainly to keep demand satisfied in Switzerland. And Bologna plant, both the training center and the new factory actually started producing the HeatSticks and they're already shipping everything to Japan and a few other places. So to start a factory from the structural perspective and infrastructure is ready. We're just in the phase of installing the machines. So there is a phase of installing the production line. And every month we will be better with the capacity. But we cannot just install 30 billion in one go. 30 billion translates into X number of machine groups, and one by one have to be installed, tested and moved into commercial production.

Okay. That's helpful color. And then just lastly on Italy, it looks like in your one slide you've shown an acceleration in momentum there from the beginning of the year. Obviously, that's a market where there have been relatively little traction. How much has that picked up? What kind of share are you seeing now? It seems I'm guessing still pretty small. But what have you seen made a difference that it's better than it was?

Because we see the higher conversion than we initially had, so Italy, like Japan, a month ago started with 30% or so conversion. And I think Italy is approaching 70% conversions. From every hundred devices which we sell, iQOS devices which we sell, 70 devices are in permanent use, so a consumer is fully switched to iQOS. And that share for total Italy is not a firm number because we're not really present in whole Italy, we're taking the places where we are, and assuming that we properly can estimate an underlying market in these places, it's a little bit of science and art actually together. I think we're approaching about a 0.3%, maybe above the 0.3% in the market share. So versus where we've been at the beginning, remember, Milan was for the long time 0.1%, 0.2%, 0.2% to 0.3% is quite a significant improvement. If I take it from a volume perspective, I mean we see in Italy, like in other places, about 20% volume growth every month, month by month. So we're starting with a slow base, I admit this thing, but the growth is there. So I think the moment when we'll be able to amplify Italy to the national coverage like we did in Japan, obviously, we need to discount the different channels of communications which we have available in Italy versus in Japan. But I think the prospects are there. I think we should see more and more of Japan – of Italy improvement or strong performance towards in the second part of the year. And the trend of the volume trend as of Q1, Q2 which you had on the slide in my part of the presentation is just highlighted. We start pushing the right buttons there.

That's helpful. Thank you very much.

Thank you.

Our final question comes from the line of Philip Gorham of Morningstar.

Hi. Just a quick one from me.

Hi.

Clearly last month or so, we've had a number of geopolitical shocks, and I appreciate it's early days, but have you seen any signs in your categories in any of the effective markets that the consumer is in any way sort of changing their spending behavior. Thanks, Jacek.

Well, you have some downtrading in some places in the North Africa, Egypt which, as you know, the macro economic situation is challenging. And Egypt will remain on the watch list for the remainder of the year. Algeria, which on the one hand is in our marketing of Marlboro, but on the other hand is a bit of a downtrading followed by the few steps of excise price increases. So, yes, I mean the macros are a bit weaker. I mean long-term I guess the region has a great potential. If the economy is in the south direction rather than the north direction, we'll put a pressure on the consumers.

All right. Thanks.

Thank you.

That was our final question. I'd now like to turn the floor back over to management for any additional or closing remarks. Nicholas M. Rolli - VP-Investor Relations & Financial Communications: Thank you very much. That concludes our call for today. If you have any follow-up questions, please contact the Investor Relations team here in Switzerland. Have a great day. Thank you.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect.