Good day, and thank you for standing by. Welcome to the Philip Morris International 2024 First Quarter Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, James Bushnell, Vice President of Investor Relations. Please go ahead.

Welcome. Thank you for joining us. Earlier today, we issued a press release containing detailed information on our 2024 first quarter results. The press release is available on our website at pmi.com. A glossary of terms, including the definition for smoke-free products, as well as adjustments, other calculations, and reconciliations to the most directly comparable U.S. GAAP measures for non-GAAP financial measures cited in this presentation, are available in Exhibit 99.2 to the company's Form 8-K dated April 23, 2024, and on our Investor Relations website. Today's remarks contain forward-looking statements and projections of future results. I direct your attention to the forward-looking and cautionary statements disclosure in today's presentation and press release for a review of the various factors that could cause actual results to differ materially from projections or forward-looking statements. I'm joined today by Emmanuel Babeau, Chief Financial Officer, and Jennifer Motles, Chief Sustainability Officer. Over to you, Emmanuel.

Thank you, James, and welcome, everyone. In Q1, we delivered outstanding performance that exceeded our expectations with double-digit growth in organic net revenue and operating income, as well as currency-neutral adjusted diluted earnings per share, all supported by robust volume growth. Excellent smoke- free business momentum continues with plus 25% organic growth in net revenues and plus 38% in gross profit, as IQOS operating leverage and ZYN mix contribute positively. IQOS continues to advance rapidly, with growth of 13% in adjusted in market sales volumes and plus 21% in shipments. IQOS ILUMA is a key driver of this progress and is now available in 64 markets, representing nearly 100% of IQOS volumes outside Russia. ZYN also continued its considerable growth in Q1, with U.S. volumes up plus 80%. Importantly, this top-line performance translated into strong operating income growth and margin expansion, both organically and in dollar terms. This was notably driven by accelerating profitability in both our IQOS and ZYN businesses, in addition to improving combustible performance. We faced higher-than-expected currency headwinds in the quarter, primarily due to the devaluation of the Egyptian pound. We are taking mitigating actions including additional pricing and accelerated cost initiatives, which allowed us to deliver Q1 adjusted diluted EPS above our prior expectation, despite these pressures. While the prior year quarter was favorable for certain growth comparisons, this exceptional start to the year sets the stage for us to deliver significantly better-than- expected 2024 currency-neutral growth, and robust growth in U.S. dollar at prevailing rates. Turning to the headline numbers, very good shipment volume growth of plus 3.6% supported organic top-line growth of plus 11.0%, or plus 8.6% including currency. This reflects continued excellent IQOS and ZYN momentum as well as strong combustible pricing. Operating income grew by plus 22.2% organically versus a softer…

Thank you, Emmanuel. I'm very pleased to be joining today's earnings call. As Emmanuel mentioned, our sustainability transformation and business strategies are one and the same. We're focused on creating value for the long term, where generating shareholder returns requires us to deliver on transformation, and delivering on transformation requires us to deliver on sustainability. As shown in our recent results, our product transformation fosters profitable growth and short, medium, and long-term value creation. However, our transformation also means reshaping both our value chain and how we engage with society. As we venture into new product categories, we actively collaborate with different stakeholders and advocate for regulatory frameworks that can accelerate industry change and end smoking. Business transformation is a company-specific journey, which sustainability reporting standards and frameworks often fail to adequately capture. To help illustrate our progress towards achieving our smoke-free purpose, we regularly report our business transformation metrics, a bespoke set of financial and non-financial KPIs. Some of them were already presented by Emmanuel in our financial results. Others you can see here. For example, the growing proportion of commercial and R&D spend on smoke-free products demonstrates the allocation of resources away from our legacy business and towards replacing cigarettes with better alternatives. As another example, increasing the availability and access of adult smokers around the world to smoke-free products are two key pillars of achieving this replacement. As our geographic expansion continues, low-and middle-income markets now make up 47% of our market presence. These metrics, together with our overall performance for 2023, can be found in our latest integrated report published last month and available on our website. It is a comprehensive document covering our most important sustainability topics, starting with our products. The report highlights progress on our continued expansion of smoke-free alternatives across categories and…

Thank you, Jennifer. I will conclude today's presentation with some key messages. Our excellent IQOS and ZYN volume momentum, best-in-class pricing, positive category mix and stepped-up cost efficiencies put us on track for a strong 2024, with accelerated top-line growth and margin expansion. Following an exceptional and better-than-expected start to the year, we have raised our full year currency-neutral growth forecasts. Critically, we are also focused on delivering performance in dollars. We are taking measures to mitigate currency headwinds through pricing, accelerated manufacturing productivities and judicious resource allocation to prioritize growth investments. Our 2024 outlook places us firmly on track to deliver our 2024-2026 CAGR targets. Beyond 2026, we have further exciting opportunities to grow our smoke-free business as we progress towards our ambition of being substantially smoke-free by 2030. Finally and importantly, our strong growth outlook and highly cash generative business underpins our ability to deleverage while maintaining a steadfast commitment to our progressive dividend policy. We look forward to further rewarding our shareholders as our transformation delivers sustainable growth. Thank you and we are now very happy to answer your questions.

[Operator Instructions] Our first question comes from Matt Smith with Stifel. Your line is now open.

If we start, the first quarter, it was a strong start to the year. You noted a better revenue and margin performance supporting your ability to raise the outlook for both organic revenue and constant currency EPS. From a high level on a constant currency basis, the first quarter EPS was about $0.20 ahead of your 1Q guidance, and you raised the full year outlook somewhat below that. Can you talk about unique benefits in the first quarter that may have changed the timing through the year? Or how are you viewing the rest of the year different now in terms of the fundamental environment or investment level?

Sure, Matt. I'm happy to explain why some of the bits, but only part of it, of course, because we started, as I explained in my prepared remark, the year in a very strong manner, in an underlying manner. But in addition to the very strong momentum that we are experiencing, indeed, there was around an additional 1 billion HTU stick because of Red Sea. So that has been a plus in Q1, and we expect that to reverse later in the year for the time being. So that's one element that is important. We may have been helped a bit by some volumes on combustible, but it's probably more marginal. And at the scale of the combustible business, it's probably smaller. And then the other element, of course, is the SG&A evolution, organically 1.4% increase only. We want to grow organically revenue faster than SG&A, but of course, we will have the 10 points of difference that we've been experiencing in Q1. So that will also reverse partially in the rest of the year as we are coming with some phasing on commercial actions and marketing, advertising later in the year and starting in Q2, where we will have more SG&A. So I think that with that, you have the key element that has been adding to what was, as I said, very strong momentum anyway in Q1.

Our next question comes from Bonnie Herzog with Goldman Sachs. Your line is now open.

Emmanuel, I wanted to maybe ask for a little bit of more color on a point you made about or at the end of your script regarding currency headwinds and how you're hoping to mitigate these headwinds. You highlighted pricing and productivity savings, et cetera. So maybe just provide a little bit more color on those, I guess, levers if you can pull them and maybe why you're more optimistic going forward, given the never-ending currency headwinds since it continues to impact your business. I think that would be helpful.

Sure, Bonnie. Happy to share our view and what we're doing on that one. So we said it at the beginning of the year and then we're at CAGNY, we want to deliver performance in dollar terms. And therefore, that means that even when we have another significant ForEx headwind and, you know, some of that, I mean, we have in Q1 actually $0.06 coming from the Egyptian pound that won't be there next year. So that's not something that's going to stay with us. So it's a kind of one-off negative impact. But we want to deliver robust growth in dollar terms. So in order to deliver that, we have two big levers, I would say. One is on price. And to be clear, when we talk about price, it's, of course, in the countries where we can see some devaluation, but not only. It's really across the board. How can we push the boundaries and push, to the maximum of the limit, the price increase? Well, we think that we're doing in a way that is not necessarily taking a big risk on market share. But we are clearly here and notably on combustible pushing on price increase. So that's something that we can do. That is taking into account a certain economic environment. And in the current environment, we are doing what we think is optimized and the best we can. Of course, if there was some more depreciation, more devaluation, we would reconsider whether more action can be done. And then on productivity and on cost efficiency, that means really accelerating everything we can do on productivity. And we are working across the board. It's, of course, on procurement. It's on optimizing the manufacturing footprints. It's on logistic. I mean, it's on everything where we can generate extra saving and playing with this environment of a strong dollar. And then on cost allocation. I mean, of course, we are working permanently as part of our 2 billion saving program on plans to be simpler, to generate efficiency, to work in a more efficient manner. So we do that. We try to accelerate that. Here again, we're trying to do things faster. And we are also making sure that when it comes to investment allocation, we really prioritize on what is having the biggest and strongest and I would say clearest return, which is allowing us to also generate some profitability improvement to partially offset the negative ForEx. So that's really everything that all the action that we are doing. We're not saying we can offset any kind, of course, of ForEx environment. But I think our Q1 numbers and the outlook for the year is showing that we have some good capacity to mitigate to a very significant extent the ForEx impact.

Okay. That is helpful. And then I just had a quick question, if I may, on ZYN. We're actually hearing about some out of stocks in the U.S. from some of our industry trade contacts. So, maybe hoping for a little more color on this and how much it might have impacted volumes in the quarter. Also, curious if these issues are related to maybe specific production issues or more related to the strong demand and ultimately when you expect them to be resolved. Thank you.

Thank you, Bonnie. This is very much the latter. I mean, you can imagine when a business is growing 80% and we are growing 80%. That is indeed creating some tensions on the supply chain without any doubt. I'm not sure that out of stock is still the proper word, given where we are today. I think that, maybe sometime a reference is not going to be available. Not everything is going to be is going to be is going to be fully available in the range at a certain point in time. But look at what, the Nielsen are telling us on Q1 and our volume. I mean, we seem to be growing fast and it's difficult to see any kind of impact coming from restriction on availability. As we said, we are working very hard to maximize our capacity in this fast-growing environment for ZYN. We are comfortable, of course, with our capacity to deliver around our 560 million can. That is not the limit that we are putting, of course, in terms of production capacity. But we are in this phase of adaptation to this strong growth and fast-raising demand. I think so far, maybe with some tension, but with limited impact on volumes.

Our next question comes from Owen Bennett with Jefferies. Your line is now open.

First question on heated. Can you maybe talk a bit more about the contribution from newer markets? Is this trending in line with expectations or do you see potential for upside here? Because some of the trends you called out sound very encouraging. I'd also love an update on bonds in the latest with this, if possible. Thank you.

Yes, with pleasure, Owen. So I think we see and you said it, I've been elaborating on the number of markets where we see very interesting trajectory for new market. We've been speaking about Indonesia. We could have been speaking in addition to all the markets I've been covering. I could have been speaking about Mexico, where we have also a nice acceleration and we are just launching ILUMA. So the good thing is that we're not relying on one or two names, but we start to have a growing team of new markets where we see clearly, IQOS getting traction and increasing its stake. First, as always, in the big cities. That's where in many of these countries we have the biggest potential. But that's, I would say, happening in line with expectation. And as I said, we expect even a further acceleration in the second part of the year. We believe that then Taiwan will also start adding to the flow of this new market. So it's in line with expectation and clearly coming with a great potential. And as always, IQOS being perceived as, in many big cities rapidly as an aspirational product, which is extremely positive for the future and the brand franchise that we're going to be able to build there. Then on top of this new market and the IQOS trajectory in this new market, we have indeed bonds that we plan to develop in the future. We've been making the test, as we explained, in the Philippines and Colombia. We are working on the result. We are making a number of adjustments and will come with a detailed plan in the coming quarters. To make sure that we come with a product that has all the ingredients, all the features to be a great success. And we're working on it. That's going to be really important in all this market, because we know that the affordability here is different. To come with a portfolio that is segmented and where IQOS will have a role to play. But we need to also come with the rest of the portfolio bonds in order to cover this market.

Thank you. Very helpful. And I just add one more. I want to talk a bit more about Vape. And what sort of volumes do you think you can do here for the year? And if I heard you right, you said you'll be profitable already in H2, which would suggest volumes have been really healthy already. And just any kind of commentary on which markets you're seeing the strongest traction so far?

Sure, Owen. Of course, there is modest versus IQOS and ZYN in terms of impact at the group level. And we stick to our strategy, which is we don't want to be big in vaping if it's to lose money. We want to be really going with VEEV in markets where we are having the right commercial impact where VEEV can make a difference and in a profitable manner. Indeed, the year started well in terms of volumes. We have this outlook of moving into positive bottom line for VEEV in the second part of the year, which would be very good news. And we are prioritizing markets where we have the critical mass, where I would say the nature of the vaping market is interesting. And we are developing today very nicely, I would say, in markets such as Italy, Czech Republic, France, UK, developing in Canada. These are markets where we can reach, if you want, the size, the mass and where we have the impact to make our vaping business successful and profitable.

Our next question comes from Faham Baig with UBS. Your line is open.

I have a couple as well, both on heated tobacco. Firstly, could I get your view on any implications that you see from the recent EU court ruling on the supplementary excise tax in Germany to any other of the European countries? And when are you expecting a decision from the finance court in Dusseldorf? And the second question, please, is again on heated tobacco. Clearly, pricing has stepped up over the last couple of quarters. How are you thinking about balance between price and volume growth? And could pricing be higher than the original guidance of low single digits?

Thank you for the question. So, first of all, on the German situation, I mean, yes, they've been asking for the view from the European Court of Justice. But it's a purely German question whether the way they've been implementing their extra tax was according to EU law or not. So there is no consequences for other countries. It's really a German question due to how they implemented this increase in the tax. So that's what it is. On the final decision, because as of today, that would be the decision from the German court. I have to say, I don't know when we will know more, I guess in the coming months, obviously. But I'm not going to be able to be more specific on the timing of the Dusseldorf court to make the decision. There are a number of steps still needs to be taken before they get there. So that will be for the coming months. But given where we are today, I'm not able to tell you when they will make the decision. Regarding your second question on price versus volume. So we said, and I'm going to stick to that. Yes, we believe that we can increase price more low single digits or not at the level of combustible on is not burn. Again, I think we are very clear on the very positive impact coming from the growth in volume from heat-not-burn our business. They're coming with a much higher per stick revenue. They're coming now with a higher gross margin rate, even at the level of just the consumable. It's significantly higher than for combustible as an average for the group. So that means that's really growing volumes is the name of the game for us. That's where it makes sense. Now, on top of it, given the very strong franchise of IQOS and the attractiveness of the brand, we are able to increase price without putting in danger the volume. But that's really the way you should be looking at it for us today. It's very much a play on maximizing the volumes.

Our next question comes from Gaurav Jain with Barclays. Your line is now open.

So two questions from me. So one is, just conceptually. So, let's take a city like Tokyo where the heated tobacco category share is now 50% plus. So one can argue that by increasing the premium cigarette prices, which haven't increased now in two years, you can accelerate the down trading to IQOS. This will accelerate IQOS volume growth. This will also accelerate your dollar EPS growth out of Japan. So why wouldn't you do something like this in cities and countries where heated tobacco and IQOS becomes the dominant form factor?

Thank you for your question, Gaurav. Look, I'm always very cautious, of course, as you can imagine, on commenting any kind of price strategy. So don't expect me to enter into any kind of detail. But conceptually, it is clear that as we build leadership in the category, as there is a growing adhesion from the nicotine user to heat-not-burn, there is a capacity for ongoing premiumization and more price increase without any doubt. But as I said, and as I explained, with the previous question, we believe that today still it's very much about maximizing the volumes. And that's what for us is important, of course, coming with great gross profit per stick and great contribution. So I'm certainly not closing the door to more price in the future. But I think I've been clear on what our priorities are. Having said that, as you know, in Japan, we need to have an agreement from the authority to increase the price. So I think it's something that is also sometimes regulated. So it doesn't mean that we have all the latitude that we would like to enjoy on the topic. So that's on the long-term. It is clear that today, as we've been discussing that already, you have the IQOS consumable that are positioned, even at some discount versus Marlboro. That gives an idea of the kind of increase that we'll be able to reach in the future, probably without too much, I would say, issues over time. Once again, it doesn't happen in one go. But as I explained for the time being, maximizing volume is the name of the game. And it's coming with, I think, what the Q1 is illustrating in a very bright manner, a very, very powerful mixed impact on our financial performance.

Sure. And my second question is on Russia. So, IQOS volumes in Russia grew, which is surprising, given that you do not invest in IQOS there anymore. So how should we -- so first of all, can you just remind us the contribution of Russia on your EPS? And how should we think of Russia IQOS shipments for this year?

Look, on Russia, you have to be a bit cautious on the shipment that you see. And that does not necessarily fully reflect the consumer offtake. You can have some movement from the surrounding countries. So I think we have to be cautious. So Russia is a market that has not been -- if I look at the past, I'm not sure that one quarter is enabling us to conclude anything. Since the beginning of the war in Ukraine, Russia has been a market that has not shown, unfortunately, any kind of meaningful growth. Today, we have no reason to believe that suddenly Russia is going to become a growth market, because nothing has changed fundamentally. And that's a country that has been impacted, of course, by currency depreciation that has been impacting the weight in the EPS. So I think that we were referring to 7% to 8%. I think we'll have to revise. And I don't have the number top of mind for 24 on the outlook, but that was the kind -- it was around 9, 10. And I think with the currency, it has been losing a bit of weight in the overall performance of the company.

Thank you. Our final question comes from Callum Elliott with Barclays (sic) [Bernstein]. Your line is now open.

So my question is actually following up on Bonnie's question on dollar growth. In 2013, I think your dollar EPS, Emmanuel, was $5.40 per share. So you've compounded dollar EPS growth at about 1.5% percent over the subsequent 10, 11 years. So best-in-class organic growth and probably worst-in-class dollar EPS growth over that 10-year period, which is really striking given that 10 years captures the whole of the creation of this IQOS business that has been quite remarkable. So my question is, you obviously outlined a number of initiatives in answer to Bonnie's question of how you hope to drive dollar growth. But maybe you could sort of double back on those explanations. Which of those are actually new and haven't been present over that sort of past 10-year period that could have been helping you over that past 10 years? Because it struck me in those explanations that it sounded like things like pricing, et cetera. Those have all been around for the past 10 years and haven't helped you offset the FX. So is there anything you can tell us that's new that should give investors confidence that if FX headwinds persist, you are able to drive dollar growth for your business?

Thank you for your question. Well, first of all, I guess you are assuming that the ForEx headwind will persist in the coming years, which I think nobody can really say. We know that currency can be facing cycles and that it's true that the last 10 years have been about a strengthening of the dollar. We've been knowing other cycles where the dollar was more weakening versus at least other hard currency. So nobody knows what's going to happen. I think what we are saying and thank you for giving me the opportunity to maybe repeat and clarify that we are today in a position to put together very strong growth before ForEx. And I think you are seeing with the guidance for '24 that we are obviously coming still with a very dynamic top line, very much accelerating operating income growth. We are targeting a double-digit before currency impact now in 2024. And on top of that, we are going to price and in an environment that today we see positive for pricing, certainly with the fact that pricing on combustible is something that we can use now very tactically. We know that CC is not our future, so we can certainly use pricing very tactically in order to boost performance. We also are coming with some price increase at the level of HTU. We have some price increase on ZYN as well. So we have globally a pricing environment that looks attractive to us in the future. And then, when it comes to our cost, it is true that we've been investing a lot in the past years, and we've been reporting on all the action that we were having on investment across the board, in terms of innovation, in terms of science, in terms of R&D, in terms of manufacturing. Now is the time where, of course, we are reaching critical mass on smoke-free products. There are a number of things that we are doing that we can do more efficiently, a number of things that we've been learning and that we're going to implement in the continuation of our journey. So all that we believe is also giving us some very good ammunition and capacity to generate efficiency at a very high level in the future. So that's all the -- and they are quite important, quite numerous, all the levers that we own to deliver performance in dollar terms in the future.

Thanks Emmanuel, that's helpful. Maybe I can just ask a follow-up. So we have a number of U.S. consumer staples companies reporting this morning, and many of them face similar FX headwinds, sort of incremental FX headwinds over the past two, three months, as PMI does. And it's striking to me that amongst some of those companies, even a commoditized U.S. toilet paper company has done a better job this quarter of offsetting these incremental emerging market FX headwinds with sort of rapidly responding with incremental price increases to offset those headwinds. So I guess my question here is, you know, is there something structural in your business that's making it less agile in responding to these changes in FX relative to some of your other consumer staples peers outside of the tobacco space?

Well, can I answer you that your question is highly speculative because you asked me to compare with other businesses that are obviously very different in, I guess, the way they invest, their outlook, what they have to do. We are building here a business that has a tremendous growth potential, so we're not going to, of course, limit all the initiative, all the investment that we must do in order to keep growing the business and extract the full potential that we have with our smoke-free portfolio. Maybe that's different versus the paper business you were mentioning. I frankly have no clue because I don't know what you are referring to and the specific situation. But I think it's difficult to probably compare businesses that are facing different potential, different trajectories. That would be my answer.

Thank you. This concludes the question-and-answer session. I would now like to turn it back to management for closing remarks.

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

Bye-bye. Speak to you soon.

This concludes today's conference call. Thank you for participating. You may now disconnect.