Good day, and welcome to the Philip Morris International 2016 Fourth Quarter and Full Year Earnings Conference Call. Today's call is scheduled to last about 1 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.

Welcome, and thank you for joining us. Earlier today, we issued a press release containing detailed information on our 2016 fourth quarter and full year results and you may access the release on our new company website at www.pmi.com, or the PMI Investor Relations app. During our call today, we'll be talking about results for the fourth quarter and full year 2016, and comparing them to the same period in 2015, unless otherwise stated. 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 that present, are likely to present, or have the potential to present less risk of harm to smokers who switch to these products versus continued smoking. 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 for a review of the various factors that could cause actual results to differ materially from projections or forward-looking statements. Please also note that in the first quarter of 2017, we will begin to report our shipment volume on a combined basis including both cigarettes and HeatSticks. We will also report our combined estimated market share in certain markets, as we currently do for Japan, to the extent that reliable data is available. It's now my pleasure to introduce André Calantzopoulos, our Chief Executive Officer. Jacek Olczak, our Chief Financial Officer, will join André for the question-and-answer period. André? André Calantzopoulos - Philip Morris International, Inc.: Thank you, Nick, and welcome ladies and gentlemen. 2016 was a pivotal year for PMI, reflecting exciting progress in…

Our first question comes from the line of Judy Hong of Goldman Sachs. Judy E. Hong - Goldman Sachs & Co.: Thank you. Hi, everyone. André Calantzopoulos - Philip Morris International, Inc.: Hi, Judy. Judy E. Hong - Goldman Sachs & Co.: So, first, just in terms of 2017 guidance, it's now calling for 9% to 12% earnings growth. It's a little bit better than the 8% to 10% algorithm that you had given at the September meeting. So, can you just talk about what's changed in terms of thinking about 2017? And, obviously, you've talked about the IQOS contribution from a revenue standpoint. But are you expecting profit contribution to kick-in in 2017 from an IQOS standpoint? André Calantzopoulos - Philip Morris International, Inc.: Okay. The reason, first of all, we increased the range, as I explained, is because there is obviously a bit more volatility as regarding the IQOS HeatSticks sales, but also our capacity. And that explains, more or less, the vast majority of the variability, I would say, okay. Clearly, IQOS is going to play a big role in our revenue growth next year and here, I would like to give some clarification for all the people on the call and broadly to understand. There is always in the revenues coming from – a part of the revenues coming from IQOS is due to the device sales. And as I said, this initial commercialization phase, the bottom line contribution of device sales is negative. And if we take 2016 as a proxy, if you look at total IQOS revenues, 22% of those revenues were linked to device sales. And just to give you another rule of thumb, for your own projections, if we look forward, and I would think that will work for the first year…

Yes. I mean, Russia ended up with a higher inventory, but it was a pretty normal reaction to the price rollouts into the market. So, usually you hike a little bit the inventory, and I think some of this is going to unwind during the year. And the second thing on Japan is the more – look, we have a little bit, to be frank, and to link back to what André said, I mean IQOS volumes versus the combustible volumes in Japan is a little bit harder for us to predict. So, we might have some temporary disallocations of inventories to the sales there. I think we're going to correct that. But on the other hand, we ended up, frankly speaking, with almost no inventories for the IQOS combustibles – sorry, for the IQOS RRPs. So, I think you will see these corrections going forward into 2017. Judy E. Hong - Goldman Sachs & Co.: Okay. Got it. Thank you.

Thank you.

Your next question comes from the line of Matthew Grainger of Morgan Stanley. André Calantzopoulos - Philip Morris International, Inc.: Hello. Matthew C. Grainger - Morgan Stanley & Co. LLC: Hi. I guess, first question on IQOS, you've referenced it being present in 30 to 35 markets during 2017 or by the end of 2017. Is it possible to give a sense for how many markets you're targeting to potentially receive full investment in field sales resources, essentially the level of resources that you'd need to fully activate the IQOS platform and break through that 2% to 3% market share threshold as opposed to markets that you'll be in more than just an initial capacity? André Calantzopoulos - Philip Morris International, Inc.: Okay. The first thing is we need to differentiate whether in these markets we do city productions or national launches, okay, because that absorbs capacity (31:17) resources. Now, as an overall picture for this year, clearly, there is substantial incremental investment in commercial expenses behind IQOS. Despite the fact that in the relevant markets, we have also reallocated resources from our existing business to IQOS because everybody will be doing IQOS for a national launch. So, overall, I think this is all in the guidance, bearing in mind that, you know, if we see more traction and we have the capacity, we may put even more resources behind during the year in terms of field forces and other commercial activities. And if we have capacity constraints, we may postpone some launches, and we all need to live with this variability because it's very difficult for me to predict precisely how this is going to unfold. But overall, the trend is extremely positive, and that's what is reflected in the guidance. Matthew C. Grainger - Morgan Stanley & Co. LLC: Okay. Understood. Thanks, André. And, Jacek, I was hoping you could speak maybe at a general level to the potential impact of U.S. tax reform on the company. And I know there's a range of possibilities. The statutory rate may go down, that applies to your repatriation. You could have a territorial system where repatriation is tax free. Interest deductibility could be changed. So, I'm just curious how you'd contextualize the potential implications for PM?

You have mentioned all variables which are being discussed between the President Trump and the Republicans. We will have to see how this is going to reconcile. I think we'll be preemptive at this stage to give any more sound estimate. I mean, clearly – I mean a tax reform should allow – what we hear from the U.S. – I mean, it should allow for the different repatriation pattern to U.S. But we'll have to see what's going to happen. If you go to the note, I guess, 11 in our filings, I mean, you'll see we always break down how much tax we pay on a foreign basis – I mean how much the profit taxes we pay before repatriations to U.S. And the rate – the blended rate would be somewhere in the range 22%, 22.5%, that's the foreign taxes which we pay on our earnings, which we generate outside U.S. And then, obviously, to our effective tax rate, which you have today, you have to add the different various cost of the repatriations of this earnings to U.S. and, obviously, the top-up to the 35% statutory in the U.S. But whatever happens – I mean, we will not be able, with the current tax regimes staying as they are today, to go to the tax rate lower than this 22%, 22.5%. Okay. This is as the rule of thumb I would use. Matthew C. Grainger - Morgan Stanley & Co. LLC: Okay. That's helpful. Thanks, again.

Thank you.

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

Hi, André and Jacek. André Calantzopoulos - Philip Morris International, Inc.: Hi, Bonnie.

Hi.

I guess my first question is on pricing, which was very strong during the quarter. So, I'm curious what you learned from consumer behavior by taking this much pricing, and then what your elasticity was, and then with pricing consistent across your different brands. In other words, I guess I'm trying to understand if you were able to maintain the same level of price gaps within your portfolio. André Calantzopoulos - Philip Morris International, Inc.: Well, there were a couple of price increases that came a bit earlier. In the Philippines we increased, if I recall correctly, in October. We came in the quarter. And in Turkey, the government adjusted the minimum excise-specific tax, effective January 1, we took the pricing a bit ahead of that. So, all these prices appear in the quarter clearly. There is nothing exceptional, it's in the normal course of things, okay. I think the pricing was more or less the same across segments in absolute terms in the majority of the market. So, there's no any particular opening of (35:50) that I can think about, and we have not seen elasticities changing. However, the only thing we need to observe now is Turkey, because in Turkey, if you take the beginning of 2016 to the end, we took TRY 3 per pack price increase, which is around 30% plus average and Turkey grew also because of the reduction of the contraband volume last year especially in the half of the year. So, we can expect a little bit of weaknesses, I would assume, given that magnitude of price increases. And I think we will recover as the year unfolds, that's at second half, but we will see softness in the first part of the year. But that's all I can say about this whole thing.

Okay. And then I wanted to go back to something on your guidance that you mentioned, I just wanted to be clear. So, your guidance assumes that IQOS in total will still be breakeven. I think that's what you mentioned at your Investor Day, so I just wanted to clarify that. And then wanted to understand your plans for spending by IQOS or behind IQOS this year. And then maybe help us quantify how big of an increase you're anticipating, if you could do that. André Calantzopoulos - Philip Morris International, Inc.: Okay. Yes, IQOS will breakeven towards the end of next year. If you remember – I'm sorry, this...

Wait. Okay... André Calantzopoulos - Philip Morris International, Inc.: We're still in (37:31) in 2016.

Okay. André Calantzopoulos - Philip Morris International, Inc.: I'm sorry about that.

No, no. André Calantzopoulos - Philip Morris International, Inc.: This year, okay, and we still have significant capacity constraints in the third quarter, if you remember.

Yeah. André Calantzopoulos - Philip Morris International, Inc.: And then we have a very aggressive capacity build-up plan. And clearly, the whole volume is going to be skewed towards the second half of the year. This is also the reason that the first quarter is going to be probably the weakest in the year because we don't have the capacity but many European markets, for example, and others, are making all the investments ahead of the deployment in the first quarter and second quarter. So, that's how I see it unfolding during the year. And these are substantial incremental investments I can't quantify, but they're very substantial. The increment is much higher than this year. Okay.

Okay. All right. That's helpful. And then just my final question, I'd be curious to hear from you guys the feedback you've been receiving from public health experts and then governments around the world given the success you've had with IQOS and the science you've been publishing. Anything you can share with us regarding conversations and progress you're making would really be helpful. Thanks. André Calantzopoulos - Philip Morris International, Inc.: Look, I can comment generally, and I also have direct contacts with a number of people. I think there is a positive momentum building, okay, and I must say faster than I personally anticipated. Now, as you know very well, there are still people that have not embraced the principle of harm reduction of the product and that will continue requiring a significant amount of work going forward. But I believe the trend is very positive and I'm very happy with the progress we're making. Okay. I'm not saying there will be no hurdles. I'm not saying there is not going to be difficulties. But I think the way we are received and the science is received is positive, very positive.

Okay. Thank you.

Your next question comes from the line of Chris Growe with Stifel. Christopher Growe - Stifel, Nicolaus & Co., Inc.: Hi. Thank you. I just had a couple of questions for you, if I could. The first, and I hope this is not a repeat of earlier questions, but you talked about shifting resources from combustibles to RRPs, and I know you're probably trying to find the right balance across many of those markets. I'm thinking like a market like Japan, can you talk about how resources have shifted if that's a percentage or some measurement of that to explain how that shifts from one to the other? And then just to be clear, I'm sorry if I missed it, have you said how much your costs are up in 2017 and would that be inclusive of RRP investments? André Calantzopoulos - Philip Morris International, Inc.: Okay. On your first question, okay, first of all, the allocation – the reallocation is done on the relevant market. We are not reducing resources in a market where we don't plan to launch RRPs and put them behind the RRPs. And the explanation is the allocation is based on the fact that, as I said in Investors Day, we try to get as fast as possible to the 2% or 3% market share that we believe is the tipping point to go from linear (40:48) expansion to exponential growth of IQOS because then, the consumers or the adopters of IQOS become the ambassadors of the product and the brand. So, it's market-specific and the amount of reallocation you do is also based on the competitive environment, the consumer dynamics and so on and so forth. So, there is no rule of thumb. And I don't remember exactly how much money we reallocated in Japan, but there has been a significant shift of things that are very measurable like your direct marketing budget. But also that's where it becomes a little bit more difficult, it's how really the time of a field force that exists is allocated between the two categories. Okay. In many markets, as I said, you need incremental ground forces during the initial period well and above the field forces we have. Because we've seen very clearly that the more people you put on the ground, the faster the reaction, as we see in Italy now, as we see in Switzerland now, more resources. In Italy, we've doubled the market share in just 10 weeks because now we have the resources on the ground. So, that's the rule of thumb. Now, as of the overall costs, clearly in 2017, we will be above our 1% to 3% more or less target because of all these deployments. Okay. So, the cost – but they're all in the guidance, by the way. Christopher Growe - Stifel, Nicolaus & Co., Inc.: Okay.

Chris, we have said – it's Jacek here, we have said that we look to grow the revenues above the 6% or the upper-end of the current (42:45) and clearly still we're lifting EPS. So, you could see that we are not diluting the margins. I think we should look for the year when we will have a small but still the margin expansion operating profit margin expansion, not to the tune which we had in 2016. André mentioned that there is a device sales in this revenue and, for a time being, they yield a negative margin. So, that's obviously dilutive. But the HeatSticks, and still the performance of the combustibles were both (43:18) 6% pricing. I mean, that should allow us for some margin expansion, say 10, 20 basis points, and we will see how the year unfolds. Christopher Growe - Stifel, Nicolaus & Co., Inc.: Okay. And then just one other follow-up question, if I could, which is that, if you were able to get approval as a Modified Risk Tobacco Product in the U.S. in 2017, I'm just curious what that would mean to you in other international markets, in Japan? I'm obviously getting to – could you make a, or would you make, a claim and would that, for some reason, cause you to accelerate your investments in IQOS? André Calantzopoulos - Philip Morris International, Inc.: Okay, Chris. First of all, it is highly unlikely we will get approval for MRTP in 2017. Christopher Growe - Stifel, Nicolaus & Co., Inc.: Yes. André Calantzopoulos - Philip Morris International, Inc.: Okay. As you know, the FDA gave a guidance that they would – may take X-days, but I mean that may take more time. What we believe is more within the 2017 realm, is the product authorization for the U.S. market without claims, okay. And we will submit that application, the PMTA application, in the first quarter this year, okay. Now, irrespective of the approval in the U.S. – the FDA approval obviously helps the credibility internationally, but it doesn't apply to Japan, okay. Christopher Growe - Stifel, Nicolaus & Co., Inc.: Yeah. André Calantzopoulos - Philip Morris International, Inc.: In Japan and other markets, our claim structure, as we said, follows the local legislation, but also the conclusion of our own science. So, what we communicate to the consumers is driven by local laws and our own science. And the FDA cannot be applied to these places. But, obviously, it will add credibility to their entire scientific dossier, and that's why it is important to us. Christopher Growe - Stifel, Nicolaus & Co., Inc.: Okay. Thank you for your time. André Calantzopoulos - Philip Morris International, Inc.: You're welcome.

Your next question comes from the line of Vivien Azer of Cowen & Co. André Calantzopoulos - Philip Morris International, Inc.: Hi, Vivien. Vivien Azer - Cowen & Co. LLC: Hi. Good morning. So, I was hoping to get a little bit more color on your go-to-market execution on IQOS for some of the newer markets that you've entered, perhaps Canada. If you could comment on the excise tax structure, retail footprint, and relative pricing versus combustibles? Thanks. André Calantzopoulos - Philip Morris International, Inc.: Okay. First of all, the first variable is clearly what marketing freedoms you have. Okay. What we learned, as I said for many markets, is in the initial phase, unless – until you get this critical mass, you need the right amount of people on the ground that talk to the consumers, explain the product, and help the consumers in the conversion. And as a general principle, as of this year, we will start introducing digital tools to – we are a little bit too manual and labor-intensive and we'll introduce, where the law allows, digital tools to help the conversion. And that is something we'll do everywhere, but the speed by which IQOS switching occurs depends also on the freedoms we have in the market. In Canada, you have very limited ability to communicate with consumers under the current regime. So Canada is going to take some time, okay. Clearly, the tax we received is more favorable than the tax levy on cigarettes in Canada. And pricing, I don't exactly remember, because depends on the State of Canada in which we go. But I think, in any case, we will be at the premium end of the market, okay. I think we're, yeah, we're premium like Belmont price. But in Canada, it varies from…

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

Thank you. I just wanted to touch on the Philippines. We know, about a week or two ago, your local competitor took some pricing, and you took pricing in the fourth quarter on Marlboro. Mix has been a big driver there, obviously, lifting Marlboro's share up. What do price gaps look like now, and can you sustain that trading-up momentum over the course of this year? André Calantzopoulos - Philip Morris International, Inc.: Look, our major competitor increased prices but they are implementing also some discounting schemes, so we still need to see the prices flowing through to the market, okay?. Plus, as you know, there are still a lot of non-tax-paid volumes and fake stamps on the market. But I'm very encouraged that the government seems to start moving in this direction but still we need to see it happening. Now, we increased the price of Marlboro and the per-stick price is theoretically PHP 3.50. In some places, it went up to PHP 4. We have to assume there will be some impact on Marlboro initially but, so far, it looks better than what we anticipate. So, I think the up-trading may stop for a while at the beginning, but it will continue over time because still, the price gaps are very attractive. Okay. The big problem in the Philippines that we had in 2016, in terms of low-end of the market volumes, will continue. Because with the implementation of our price increase, per-stick prices still went up at the bottom end and these are pretty substantial increases for low-income consumers. The good news is we don't see smoking incidence decrease, but we see a decrease in sticks per day, which means that once we get up stability now that we got the excise tax kind of convergence of the tiers done, I hope that over time, probably towards the end of this year, we'll start seeing some stability, and then daily consumption will start coming up to the previous level. But we have to assume conservatively, at least for the Philippines, the trend is not going to change in terms of volume for the year.

Okay. That's helpful. And then on IQOS, you've touched on some of the capacity constraints. Sorry if I missed this. Can you just revisit – I believe you've been saying you thought that those capacity constraints would ease at the end of this quarter. Is that still the case? André Calantzopoulos - Philip Morris International, Inc.: Yes. But we start the year with 15 billion installed capacity which, if everything goes right, that gives you, mathematically, the equivalent of 1.2 billion per month, okay. And we'll ramp up the capacity to 50 billion at the year-end, but the average for the year is something around 32 billion given all these machines that are being installed assuming the plan goes into perfection. So, that's basically a variable. So, we'll have some constraints still in the first quarter, obviously. And we'll start getting more capacity as we move on, and we'll have the max capacity, obviously, in the fourth quarter of the year. And that will dictate, obviously, the pace of sales as well.

We talked to consumers in Korea and Hong Kong who are getting product from Japan, obviously, because you haven't launched there yet. But do you expect to move into those markets sooner than later? Do you have any sense of what timing that might look like? André Calantzopoulos - Philip Morris International, Inc.: Yes, we have a plan, obviously.

There are more markets where consumers are getting the product from other places, so... André Calantzopoulos - Philip Morris International, Inc.: Okay. So, yes, I think Korea has very good potential given the characteristics of consumers and the market and, eventually, we'll be in this markets. But you appreciate I can't say exactly when.

No. That makes sense. And then just one last one on Indonesia. We've seen the leaf crop there this year be hurt by bad weather. It looks like it's set to rebound very strongly next year. I know you have some ability to smooth – you at least have big inventories in leaf stocks. How much can you smooth any potential impact from the expensive leaf that might be coming through now? Is that any headwind there or do you have different ways to offset that? André Calantzopoulos - Philip Morris International, Inc.: It's more of the cloves (54:12) than leaf – the leaf as well. I think we are able to amortize these shocks now because we have sufficient inventory. It's a bit tighter on the leaf, a bit better on the cloves (54:24), which...

Okay. Thank you very much. André Calantzopoulos - Philip Morris International, Inc.: Okay.

Your next question comes from the line of Jon Leinster of Berenberg. Jonathan Leinster - Joh. Berenberg, Gossler & Co. KG (United Kingdom): Hi. Good morning, gentlemen. A couple of few questions, if I can, just a little quick accounting one. When you put in the $733 million of sales, is that counting all of the IQOS, HeatSticks devices at full price with the discounts going through as cost of sales? Or is that actually the sort of net realizations?

It's the net realization. Discounts go into consumers and the trade will be deducted from obviously from the revenues. You have on a net basis net after allowances. Jonathan Leinster - Joh. Berenberg, Gossler & Co. KG (United Kingdom): Okay. And just out of interest on the sort of (55:10) fourth quarter sales, how much of that was actually do you think sold on a discount.

It depends by the market. There are different schemes. Devices, they were all sold at the promotional price, on a discount. And the HeatSticks, you will have to go market by market, and the different stages, they might run different schemes. Usually, market at the beginning will have some small discount on the HeatSticks and then depends on the market situation, I mean, at the full price of cigarette price (55:43)... André Calantzopoulos - Philip Morris International, Inc.: It's mostly full price. In many markets you can't even discount the HeatSticks. It's illegal by legislation. So, it's mostly discounts.

The (55:54) from the devices. André Calantzopoulos - Philip Morris International, Inc.: It's the devices and that's why I caution everybody not to take this to the bottom line straight at the same margin as the rest because it's negative. But it pays off very quickly. It's pretty obvious. I mean, it...

And then just today the French sort of put out their price list today and obviously there has been some big tax increases going through. And yourself and one of your big competitors didn't change prices at all. What's the thinking behind that? André Calantzopoulos - Philip Morris International, Inc.: Look, I cannot comment on pricing. You appreciate that. The only thing I can tell you is in France, given the structure of the excise tax that is all ad valorem essentially, it's not a big deal because the trade-off between volume and pricing is very often neutral. And that's the only comment I can make at least temporarily.

I thought it was a turnover tax on the actual companies... André Calantzopoulos - Philip Morris International, Inc.: ...which works like an ad valorem component.

Okay. André Calantzopoulos - Philip Morris International, Inc.: The turnover of the distributors net of excise taxes, that boils down to a pass-on of around €0.18.

€0.18? Okay. Awesome. Okay. Thank you very much. André Calantzopoulos - Philip Morris International, Inc.: You're welcome.

Your final question comes from the line of Adam Spielman of Citi. André Calantzopoulos - Philip Morris International, Inc.: Hi, Adam.

Adam, your line is open. Please state your question.

Well, we lost Adam.

There is no response from that line. At this time, I will turn the call to management for any additional or closing remarks.

Well, thank you very much. That concludes the call. If you have any follow-up questions, you can contact the Investor Relations team. We're currently in Switzerland. And the next presentation will be at the CAGNY Conference on February 22 in Florida. Thank you again. Have a great day.

Thank you for participating in the Philip Morris International 2016 fourth quarter and full-year earnings conference call. You may now disconnect.