Good day and welcome to the Philip Morris International First Quarter 2020 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.

Welcome. And thank you for joining us. Earlier today, we issued a press release containing detailed information on our 2020 first quarter results. You may access the release on www.pmi.com or the PMI Investor Relations app. A glossary of terms, including the definition for reduced-risk products, or RRPs, as well as adjustments, other calculations and reconciliations to the most directly comparable U.S. GAAP measures, additional heated tobacco unit market data and our business transformation metrics are at the end of today’s webcast slides, which are posted on our website. Unless otherwise stated, all references to IQOS are to our IQOS heat-not-burn products. Comparisons are presented on a like-for-like basis reflecting pro forma 2019 results, which have been adjusted for the deconsolidation of our Canadian subsidiary, Rothmans, Benson & Hedges, Inc., effective March 22, 2019. 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. Please note we now also include additional forward-looking and cautionary statements related to COVID-19. It’s now my pleasure to introduce André Calantzopoulos, our Chief Executive Officer and Martin King, our Chief Financial Officer, both of whom will be available for the question-and-answer session. André?

Thank you, Nick, and welcome, ladies and gentlemen. These are unprecedented times for all of us, and I hope everyone listening, and their families, are safe and well. I would also like to express our deep appreciation for the life-saving efforts of medical, social and other frontline workers during the COVID-19 pandemic. Our main focus at this time is on the health and wellbeing of our employees, their families and the communities in which we operate. We have implemented stringent policies and measures to minimize risks for those who continue to work in our facilities and offices. For all our employees, including those working from home, providing guidance and support is also essential. We recently announced a new set of guiding principles to reassure employees of the Company’s commitment to job security throughout the global pandemic period in three areas: Employment stability, financial stability, and special recognition. The strength and spirit shown in these challenging times by the people that make up our organization is a real inspiration to me and the Philip Morris International management team, and I’d like to thank them for their outstanding efforts. Indeed, our people continue to generate ideas on how they and PMI can contribute skills and resources to the wider societal effort. Ongoing and planned initiatives in more than 60 countries include providing protective equipment to our trade partners, support to care communities, procurement support to purchase items essential to fight against COVID-19, and financial support to institutions and non-government organizations working to end this crisis. In addition, our employees in many countries are volunteering to help elderly, low-income, and other at-risk populations, and some of our factories are producing hand sanitizer and masks for their local communities. Lastly, but importantly, we have also taken steps to ensure the continuity of supply to our customers and consumers, and to support our suppliers through these challenging times. Let me now comment on the overall impact of COVID-19 on our business and outlook before I hand over to Martin, who will cover this impact and the performance in the quarter in more detail. We started the year with a very strong first quarter, with minimal disruption to business performance and continued structural growth momentum. While we have had a number of temporary shutdowns at different manufacturing facilities and some additional complexities in our route-to-market, we have activated contingency plans, where required, to ensure sufficient inventories and consumer access to our products. Allied to a healthy balance sheet and liquidity position, our ability to generate cash will allow us to continue investing in our business, retire maturing debt and pay dividends. Turning to the outlook. The inherent uncertainty in the global economic picture makes forecasting much more challenging than usual. With social isolation measures placing day-to-day life on hold for much of the world’s population, this temporarily impacts our operating environment. The most direct effect is on Duty-Free sales due to reduced travel, along with additional impacts from delayed IQOS user acquisition and regulatory price enforcement in Indonesia. In total, this is likely to have a negative impact on our 2020 currency-neutral performance, with recent exchange rate movements acting as a further drag. As visibility on the duration and extent of lockdown measures across the world is extremely limited, we are withdrawing our annual forecast and replacing it with quarterly guidance, where visibility is relatively better. Martin will talk through the key moving parts and our EPS guidance for the second quarter when the most impact is likely to be felt. We are confident the strong momentum on IQOS user acquisition shown in recent quarters will start to resume as restrictions ease. In the meantime, our digital and commercial engine allows us to serve our existing adult consumers, maximize the conversion of adult smokers under the prevailing circumstances, and tailor our investments as required to optimize costs. There is also considerable uncertainty as to the magnitude of the economic consequences of the current situation and the speed and shape of the recovery, including the impacts on disposable incomes and unemployment. While it is too early to fully assess potential effects on market dynamics in terms of consumption and down-trading, we have to assume there will be some impact. We also sense, in certain developing countries, difficulties in ensuring business continuity for some smaller general trade players, which may lead to localized out-of-stocks. However, as in previous times of economic and social turbulence, we expect to show resilient performance through these challenges. Martin?

Thank you, André. I’ll start with a headline summary of our first quarter performance, which was very strong in terms of like-for-like ex-currency growth before any pandemic impact. We estimate COVID-19 effects, primarily distributor and trade inventory movements, accounted for 2 points of net revenue growth, 110 basis points of adjusted operating income margin and 6.8 points of adjusted diluted earnings per share growth. Heated tobacco unit shipment volume grew 45% to 16.7 billion units, reflecting continued broad-based share gains. Total combined shipment volume decreased by a modest 0.6% on a like-for-like basis, benefiting from inventory movements. Currency-neutral net revenues grew by 10%, reflecting the volume growth and positive geographic mix of HTUs, in addition to a strong combustible tobacco pricing variance of 7.7%. This robust revenue growth, combined with a positive margin mix, scale effects of higher HTU volumes, cost efficiencies and cost phasing drove a 510 basis-point increase in our adjusted currency-neutral operating income margin, and 30.1% growth in currency-neutral adjusted diluted EPS. This excellent start to the year, with encouraging progress in both our combustible and reduced-risk product businesses, is particularly important as we consider the impact of the COVID-19 pandemic. While we expect our core existing operations to continue performing well, there are three main areas of expected impact from temporary changes to our operating environment, in addition to the impact of currency movements, which I’ll come back to. The first, and likely longest in duration, is on Duty-Free sales, due to severely curtailed global travel. For context, PMI Duty-Free, with a market share of 37%, contributed almost 4% of our 2019 net revenues. It also enjoys higher unit margins relative to the global average, given the skew to premium brands such as Marlboro and HEETS. Consumer offtake trends exited March with declines of over 80%, and we expect similar trends to continue until travel starts to recover. Due to the premium skew of our Duty-Free sales, we assume that only a portion of the volume will be recovered by our own brand portfolio in local markets, usually at lower margins. The second impact is on the rate of IQOS user acquisition. Lockdown measures and other restrictions hamper our ability to engage adult smokers. Our IQOS retail touch-points are currently closed in a number of markets, and even where open, retail footfall is significantly down. Our investments in digital capabilities over recent quarters are now coming into their own, and we are reallocating further commercial spend to digital where required. Our commercial sales experts and coaches, although very limited in terms of physical consumer engagement, have a number of tools at their disposal to conduct virtual guided trials. However, based on trends since lockdown measures were introduced, we expect our rate of user acquisition to be on average around 50% lower than previously anticipated for as long as widespread restrictions continue. Variations by country also make the mix difficult to project. To be clear, we believe this is delayed rather than lost growth and we expect the strong underlying momentum witnessed in recent quarters to pick up as restrictions ease. Importantly, given our digital capabilities, we do not expect customer retention or conversion rates to be affected. For illustrative purposes, each 1 million users acquired have an annualized consumption of around 5 billion heated tobacco units and, using pre-COVID market mix including device sales and cannibalization effects, would generate on average over $350 million in net revenues and over $200 million in incremental contribution. We are also able to flex our commercial initiatives, and accordingly the timing of plans for IQOS VEEV, our improved e-vapor product, and the licensed KT&G products later this year could be delayed depending on how events unfold. The last main area of impact is in Indonesia. As explained previously, 2020 was already a year of catch-up on excise tax and pricing. A positive structural element of the new excise tax was a larger percentage increase at the mid-to-low segment of the market, with a new minimum retail selling price due to come into effect on April 1st. However, the government has now said the enforcement of the new minimum price is delayed until June due to COVID-19 restrictions. The prolonging of unfavorable price gaps is an added headwind for the risk of down-trading, the timing of price increases and for our market share. While the effects of pandemic-related measures on our operating environment, such as travel restrictions, are tangible, there is greater uncertainty as to the social and economic impact on consumer purchasing behavior during the crisis. In developed markets, like the EU region or Japan, which tend to have strong social support programs, we have so far observed only a limited impact. There have been instances of pantry-loading in certain markets around the introduction of restrictions. However, these have been generally short-lived in nature and had a minimal impact on Q1 performance, with distributor and trade inventory movements being the bigger influence. In certain developing markets, the high prevalence of daily wage workers, lower resources for social support and thus greater fragility of incomes create more vulnerability. We observe some initial signs of down-trading and reduced daily consumption in some countries. The most significant for us are Indonesia and the Philippines, the latter of which has the added dynamic of being a stick market. We have to assume these trends will temporarily continue while pandemic-driven restrictions last. Our own manufacturing and distribution operations continue to function well despite current challenges. This is made possible by the incredible efforts of our supply chain and market teams, who have implemented a number of contingency measures with regard to production and customer supply. On average, inventories of our products remain healthy, with over two months for heated tobacco units, over three months on IQOS devices and over one and a half months for cigarettes, including distributors. After the one week suspension of production at our Bologna HTU facility in late March, all our HTU factories are currently operating with sufficient capacity. Around 20% of our cigarette production capacity is currently affected by temporary shutdowns. However, we do not currently foresee any out-of-stocks in major operating income markets. One watch-out is Argentina, where we will be facing out-of-stocks if the factory does not reopen soon. Given investor focus on the liquidity of listed companies in the current environment, I want to highlight our robust position. We continue to have ample liquidity sources through the ongoing cash generation of our business, cash on hand, and access to commercial paper. Our $7.5 billion revolving credit facility remains undrawn. Our balance sheet remains strong with a well-laddered bond portfolio and net debt of 1.9 times adjusted EBITDA as of March 31, 2020. We repaid $3.6 billion of maturing bonds during the first quarter and distributed a total of $3.6 billion in dividends to shareholders in January and April. We also expect that strong cash flows will exceed cash requirements, including the funding of dividends, to which we remain fully committed. Our ability to invest appropriately in our business and retire debt is fully intact. However, further deleveraging of our balance sheet at prevailing exchange rates may be somewhat delayed versus our previous expectations. It’s also worth mentioning that our cost efficiency programs continue, and that we remain well on track to deliver over $1 billion in efficiencies by 2021. These programs are also flexible, and we are reprioritizing activities as events unfold. Related to this, we expect to reduce capital expenditures to approximately $0.8 billion for the year, with the reduction unrelated to RRP investments. We turn now to guidance. As covered in our earnings release, we have withdrawn our previous reported diluted full-year 2020 EPS forecast of at least $5.50, which absent COVID-19, our business was well on track to deliver. However, as we stand today, there is simply not enough visibility on the duration or extent of lockdown and social isolation measures, and their wider consequences, to provide a sufficiently reliable full-year earnings estimate. Given comparatively better short-term visibility, we are therefore introducing quarterly guidance, one quarter forward, in its place. As previously flagged, we already expected a weak second quarter, notably due to an unfavorable prior year comparison, market dynamics in Indonesia, and cost phasing. We also expect the biggest quarterly impact of the COVID-19 pandemic on our business to occur in this period, which we additionally factor in. Consequently, we expect Q2 2020 reported diluted EPS to be in a range of $1 to $1.10. This forecast assumes unfavorable impacts of $0.12 for currency at prevailing rates, reflecting the devaluation of many of our operating currencies vis-à-vis the U.S. dollar, notably including the Russian ruble, Indonesian rupiah, and Mexican peso; $0.10 for inventory movements, primarily reversals from the first quarter; $0.09 for lost Duty-Free sales, net of domestic sales recapture, assuming no recovery in global travel in the period; and $0.05 to $0.15 for the delay in Indonesia minimum price enforcement and other COVID-19 related factors, including temporary reductions in daily consumption and down-trading in certain developing markets. These assumptions also reflect ex-currency net revenue declines of approximately 8% to 12%, with the expected decline being wholly attributable to COVID-19 related impacts, including on device sales. Let me now run through some of the main elements of our first quarter performance. We estimate the total international industry declined 2.9% in the period. However, we recorded a total like-for-like shipment volume decline of only 0.6%, with cigarette declines of 3.8%, largely offset by the impressive 45.5% growth of heated tobacco units, with notable contributions from the EU region, Japan, and Russia. Excluding the net favorable impact of estimated distributor inventory movements, our total in-market sales volume declined by 3.7%. Inventory movements reflect two main factors: Firstly, the prior year comparison where shipment volumes in Q1 2019 were below in-market sales; and secondly, net distributor inventory buildup in Q1 2020 to mitigate the risk of COVID-19 related disruption. Importantly, our HTU in-market sales volume increased by 3.9% sequentially versus the fourth quarter, reaching over 17 billion units in what is typically the lowest volume quarter of the year. This strong performance means that heated tobacco units now make up nearly 10% of our total shipment volume, as compared to 8% in 2019, and almost nothing in 2015. We expect this proportion to grow further as our positive momentum on RRPs continues. Turning to our financial results. Net revenues increased by 10% excluding currency, driven by pricing in combustibles, a favorable comparison versus Q1 2019 and growth in heated tobacco units. We estimate the COVID-19 effect of higher trade inventories and, to a lesser extent, consumer pantry-loading contributed around one-fifth of the growth in net revenues, operating income, and EPS. We recorded a strong combustible tobacco pricing variance of 7.7%, with no significant impact of COVID-19 and notable contributions from the GCC, Germany, Mexico, the Philippines, Russia, and Turkey. Adjusted operating income increased by 25.5% ex-currency, while currency-neutral adjusted operating income margin grew by an excellent 510 basis points. This strong margin expansion was driven by RRP scale effects and favorable geographic mix for HTUs. Additional drivers include pricing in combustibles, cost phasing, and the underlying impact of cost initiatives. Adjusted diluted EPS increased strongly, growing by 30.1% excluding currency. With regard to currency, we should point out that the unfavorable impact of $0.13 in the first quarter includes $0.07 of transactional impact occurring in March, primarily from the revaluation of euro or dollar denominated payables in certain markets, such as Russia, where the local currency has seen a significant devaluation. Such effects would only recur in future quarters if further sharp devaluations took place. RRP net revenues reached $1.6 billion, or close to 22% of PMI’s total net revenues, with IQOS devices accounting for approximately 10% of RRP net revenues. Turning now to market share. Our total international share was slightly lower at 27.9%, with higher share for heated tobacco units, which reached 2.9%, offset by lower share for cigarettes. The share of our cigarette portfolio declined by 1.1 points reflecting continued adult smoker out-switching to IQOS and lower share notably in Argentina and Indonesia due to price gaps with tax-advantaged local competitors, trade inventory movements in Pakistan and an unfavorable prior year comparison in Turkey. Let’s turn to Indonesia, where industry volumes declined by only 0.6% in the first quarter due to trade loading effects, which are likely to reverse in the second quarter. Pricing was taken on all main premium and mid-price brands, with PMI price increases since October of 2019 representing approximately 85% of the weighted-average pass-on of the 2020 excise increase. Our share declined despite a recovery in premium A Mild due to smaller price gaps with directly competitive brands. These gains were outweighed by our mid and low-priced brands, which lost share to super-low price manufacturers who are tax-advantaged due to smaller scale. It follows that the delay in the enforcement of the minimum selling price extends this temporary share headwind. The prevalence of daily wage workers in Indonesia also introduces some uncertainty as to the effects of social restrictions on daily consumption. As such, we have to assume the total market decline will be higher than our previous estimate of 6% to 7%. Turning now to RRP performance. We estimate that there were 14.6 million total IQOS users as of March 31st, representing the addition of more than 4 million adult users since the same time last year. We further estimate that 73% of this total or 10.6 million IQOS users have stopped smoking and switched to IQOS, with the balance in various stages of conversion. This reflects widespread user growth momentum across all key IQOS geographies, including Japan, Russia, and the EU. The overall share performance of IQOS HTUs continues to see excellent progress. Indeed, in international markets where IQOS has been commercialized, IQOS HTUs were again the third-largest tobacco brand in the first quarter with 6.6% share, increasing from 5.5% in Q4 2019. This was achieved despite not having full national distribution in a number of markets. In the EU region, first-quarter share for HEETS reached 3.9% of total industry volume, with an estimated 0.2 points due to consumer pantry-loading. On a sequential basis, share growth was also very strong, increasing by 0.7 points, with in-market sales volume 13% higher compared to Q4 2019, despite a typically lower quarter. I also refer you to the appendix where we show shares by key EU market and global key cities. IQOS continued its strong performance in Russia, with HEETS share up by 3.5 points to reach 6.5%. On a sequential basis versus the fourth quarter of 2019, HEETS share increased by 1.5 points, while in-market sales increased by 3%. With limited social restrictions in Russia in the period, there was minimal estimated impact of pantry-loading. In Japan, our total reported share for heated tobacco units increased by 2.1 points to reach 19.1% in the first quarter, supported by the launch of IQOS 3 DUO and line extensions in our Marlboro HeatSticks and HEETS line-ups. On an adjusted total tobacco view including cigarillos and adjusted for trade inventory movements, the share of our HTU brands increased by 1.1 points versus the prior year quarter, and by 0.6 points sequentially, to 17.7%. Q1 2020 adjusted in-market sales volumes for our HTU brands grew 6.2% compared to an adjusted total tobacco market which declined by around 1%. This helped drive growth of the overall heated tobacco category to a first-quarter total tobacco share of over 24%. Lastly, following the 2019 launch of IQOS in the U.S. through our commercial arrangement with Altria, in March, we submitted a supplemental PMTA for the IQOS 3 device to the FDA to further support the efforts to convert U.S. adult consumers who would otherwise continue to smoke. FDA’s review of the Company’s Modified Risk Tobacco Product applications for the IQOS tobacco heating system, which is separate from this PMTA application, continues.

Thank you, Martin. In summary, the continued strong underlying momentum in our business, especially the impressive growth of reduced-risk products, is again evident in our first quarter results. The world has clearly now changed, with considerable uncertainty as to the development and duration of the pandemic and its economic and social consequences, including those which impact our operating environment and our consumers. Our business has historically proven remarkably resilient, and we believe we can deliver a solid performance under the current challenging circumstances. Importantly, we remain confident in our structural mid-term growth prospects and, when these headwinds have passed, expect to resume growth consistent with our 2019 to 2021 compound annual ex-currency growth targets of at least 5% net revenue growth and at least 8% adjusted earnings per share growth. Crucially, our organization, liquidity and balance sheet are strong. We will continue to protect and support our employees, serve our consumers and reward our shareholders, which clearly includes our strong commitment to our dividend. We remain resolute in our strategy for a smoke-free future and are convinced that we’ll emerge stronger from this crisis. Thank you. Martin and I are happy now to answer your questions.

Thank you. Our first question comes from the line of Pamela Kaufman of Morgan Stanley.

Hi. Thank you for the question, and I hope you are all doing well.

Hi, Pam.

Hi. I was hoping to get an update on where you’re seeing the most significant impact on new IQOS user growth in 2020. And is there any markets that are surprising you in terms of the resilience of IQOS performance in the current backdrop? And then, separately, are you seeing a negative impact on IQOS usage among existing users?

Okay. Let me take a minute to give some context here on what we’re going to discuss during the call. The first thing is that we do not see any structural business fundamentals problem. It’s more delays, slowdowns, as you mentioned, in the acquisition, and one-offs during the duration of the pandemic. The second thing, we have assumed that in this quarter, because that’s where we can see, we’ll have lockdowns continuing essentially through the end of April and the vast part of May with some gradual recovery during the month of June, and then it continues. So, that’s important to remember when we discuss the context. So, what we observe with a high degree of certainty is that Duty-Free impact because there’s no traveling essentially worldwide. The second thing we’ve seen to your point, Pam, is a slowdown in the acquisition of IQOS. That varies market to market obviously because some have stricter restrictions and others much less. So, we have big differences I would say between Japan, where we are almost operating with normality with some slowdown and Europe, where we have more slowdown as physically our coaches cannot engage with people and our stores are closed today. So, that’s why I’m saying on average we are around 50%, sometimes higher. So, I find this, given the circumstances, to be very resilient actually, especially since as I said, stores are closed and the coaches cannot physically interact with people, and that’s the right thing to do. We see a much bigger increase in high sales through our digital channels. And as Martin said, we’re gearing more and more resources from other channels obviously to those. That’s for acquisition. For retention, we don’t see any problem. Actually, in certain markets, we see people increasing average daily consumption and retention rate while some dual use is being reduced during this period. So, there is no issue from that perspective. And we don’t have also an issue regarding the sales of IQOS, heat to tobacco units in the market. So, I don’t know if I answered your question.

Yes. Thank you.

I’d just add to that. Pam, we’re also not seeing any drop-off in conversion rates. Conversion rates, in fact, they’re looking quite strong. So, the underlying business and retaining consumers and conversion of consumers is going great. Obviously, your ability to have face-to-face interaction has slowed down a little bit, but we’re switching as fast as we can to more digital channels.

Thanks. And then, how should we think about the balance between your planned cost savings realization for this year and the investments that you’re making in the business to drive IQOS adoption? Are there delays in your cost savings plans? And I guess, how are you thinking about changes in the timing of your investments and what you’re investing behind?

The first principle that we’ve undertaken is that our investments need to align in the new situation. In other words, we are, if anything, putting more money into those aspects which will help us recover momentum and get back to growth as soon as the lockdown ends. Hence the focus on where we can add some investment around digital and around the programs which will have a bigger impact later. But clearly, we’ve gone through our projects as well to see which ones are hampered by our inability to operate right now and need to be retimed and move some of the spending further later in the year or even into the next year. And we’ve also looked again at our list of projects to prioritize the ones that maybe had not as good a return to mitigate some of the impacts of what we’re seeing from the COVID-related. So, overall, our cost savings are on track. If anything, we will accelerate some as we can. And then, our investments part is also lining up to the new situation and giving us the biggest bang for our buck. So, we are looking long term and looking towards the growth momentum that we can attain as we come out of this.

Thank you.

Our next question comes from the line of Adam Spielman, Citi.

Hello. Thank you very much. So, I have three questions, if I may. The first one is about illicit and cross border. So, I am a little bit surprised or rephrase it. I would have expected the clampdown on borders and transport to result in much reduced illicit trade and also legal cross border. And I would have thought that would be quite a positive impact in Q2 and Q3. But, you haven’t mentioned it. So, I guess, am I wrong or is that a positive impact? How should we think about that? That’s the first question.

Okay. Again, Adam, some of these things we try to lay out are based on observations. And you’re right. Our markets report some reduction in illicit trade for the reasons you mentioned. Now, we cannot cautiously take the European Union has 10% illicit trade and say this is going to all disappear and appear in the domestic market. So, we may see some, but reasonably so. But, I’m not sure we have taken this all into the numbers because we are just three weeks essentially in the month of April. And I prefer to remain a bit cautious. But you are right. We are observing this and we should see some impact.

Okay. That's very helpful. The next question is about Indonesia. The minimum price was supposed to be enforced on April 1st, but now it's been postponed until June. However, you didn't provide a specific date. How likely do you think it is that there could be further delays, especially if Indonesia faces a severe recession?

Well, I’ll mention that the government has indicated they cannot send inspectors to physically check outlets due to COVID, leading to a delay that is expected in June. However, there isn't a specific date in June. If the restrictions are lifted sooner, I believe they will act accordingly. If not, it may take longer than anticipated. This is why there is uncertainty surrounding the situation. Martin, would you like to add anything?

It’s exactly right. It’s a matter of when they can get out there and start inspecting. It’s not a matter of not wanting to do it. It’s purely for their issue with their inspectors.

In Indonesia, we are seeing trends typical of developing markets. As mentioned by Martin and myself, a significant portion of the workforce is engaged in daily wage jobs. If these individuals are unable to work, their spending will understandably have to adjust accordingly. We anticipate that there will be some impact on consumption due to COVID-19. Other Southeast Asian markets and Africa may also experience similar effects. We recognize this trend and have incorporated our projections for its impact into our forecasts. It is important to note that this is quite challenging. Taking the Philippines as an example, the confinement has clearly affected daily consumption. The market is quite broad with many small players, and they sometimes run out of stock. In markets with stick sales, if the average consumption drops from nine sticks per day to eight, that's a temporary 10% to 11% impact on the market. I'm not exactly sure how precise this will be, which is why we provided a broad range for these areas. It's evident that people will feel the effects of the confinement, so we've incorporated some numbers into our forecasts. At this stage, it seems reasonable to make that assumption, and if things turn out better, that's a positive outcome.

Following up on that, I hear differing opinions. Some people believe that due to anxiety and boredom from being at home, individuals might smoke more. On the other hand, some think people will smoke less because of concerns about catching the disease. Do you have any insights on how individual consumption might change, particularly in developed markets during the lockdown?

In developed markets, we aren't seeing any impact on consumption. It's still early days, and we lack detailed consumer research. However, the points you've raised are accurate. People staying at home may find themselves with more opportunities compared to when they are in offices. That said, we should keep in mind that in certain countries, home life involves families and children, which requires a considerate approach, and these factors may offset each other. This is why we don't observe any changes in consumption patterns at this point. We must recognize that we have faced numerous crises, but the scenario of people being confined at home without going out is unprecedented. As a result, there could be some adjustments in daily consumption, but I don't anticipate any significant structural changes. We understand that markets tend to rebound after a crisis, but I cannot provide a precise assessment. However, everything you mentioned is accurate. In both developed and developing markets, we are observing increased use of IQOS at home, as people are more considerate of family and children. In some cultures, smoking in front of parents or women may be approached with caution, but this is compensated by increased opportunities elsewhere. Overall, this is our best estimate at this moment, and I aim to be as transparent as possible about our current understanding.

Thank you very much. Final question, just very quickly. In the spirit of transparency, I know you’re not giving EPS guidance for the full year, but can you maybe say what the FX impact would be? Should we expect the $0.13 in Q1 and the $0.12 you’ve guided to for Q2, followed by another two quarters of $0.12? Is that how we should consider the FX for the full year on EPS?

Adam, that’s pretty close to Q2 estimate of $0.12. It will be roughly that in Q3 and Q4 at prevailing exchange rates, $0.11 to $0.12, something like that.

Our next question comes from the line of Vivien Azer of Cowen.

Thank you for all the detailed commentary. I just wanted to double back to André some of your comments on down trading. Obviously, this is market by market commentary. But, I’m just curious, in any market where you’ve seen it pretty apparently. Has it happened faster than say like the last financial crisis or if it was an Asian market relative to a SARS or any other kind of market disruption that you’ve seen? Thanks.

Well, first of all, the only down-trading we can say we’ve seen is the continuation of what’s happening in Indonesia due to the price gaps. Here in my assumption that some may happen. Now, on one side, you say some people, if they have less disposable income for a period of time, and I’m still referring to developing countries, they may down trade for a period of time. On the other side, we know in periods of uncertainty, especially the current one, people go for trusted brands from safe sources and they tend to trust the known brands. So, that’s contradicting what I said previously and you need to find the right balance. That’s the same thing is about illicit trade. It’s not only availability of illicit trade, there is also no trust in the sources of illicit trade that may reduce it. Because there is this tendency to buy what is essential and what is trusted. So, I assume some down-trading. I’m not saying I’ve seen it.

That’s helpful. Thank you. And as you think about kind of the quarter-to-quarter guidance, Martin, that you’re going to be offering, implicit in there it seems like you guys are taking an appropriately conservative approach around volumes and changes in per capita consumption. Can you comment at all around the underlying assumptions around price elasticity embedded in your 2Q EPS guidance? Thanks.

Yes. I mean, when you look at the second quarter for example, we already had expected a pretty weak second quarter due to the dynamics out there on how we were wrapping pricing in Turkey for example, where you had big market gains before in the previous comparable periods against a 40% price increase that we’ve had since then. We were looking at Mexico with the different timing on the price increase and the way the trade inventory we were working being a pretty big headwind. So, we already had looked at Indonesia. We knew that the big impact was coming in Q2. So, the Q2 guidance we’re giving is actually if you unpick it, it’s actually what we had expected before it’s purely the COVID-related. We would have ended up without COVID after the first half being right on track with our full year numbers and hitting 9.5%, 10% EPS growth, right in with what we had thought we would end up for the full year. So, when you go forward and say what are we going to do for the rest of the year? We’re going to basically be giving you each quarter one quarter ahead, what the COVID-related impacts are and trying to adjust to new news around lockdown timings and recoveries from consumers and so forth. And that’s what we thought was more prudent, given that the underlying business is in fine shape or doing exactly what we thought. But it’s very difficult to predict how this COVID-related piece is coming out. So, we can’t really give you the full-year look right now, but we can give you each quarter ahead as best we predict what will happen given the latest news that we have.

Understood. And then, just a follow-up on that and then I’ll drop back into the queue. As you think about the COVID specific related impacts to 2Q, are you assuming a degradation in price elasticity just given some of the potential headwinds to the consumer, given the unemployment rate?

No, we have some concerns regarding average daily consumption and down-trading in certain markets, but it's not primarily about price elasticity. In terms of pricing, we need to be aware that during lockdowns and specific periods, it may not be wise to implement pricing changes according to our original plan. Therefore, we will need to reconsider the timing of pricing in some markets, and in certain instances, we may have to postpone planned pricing. Conversely, we will look ahead to find ways to compensate for those delays. It’s primarily about adjusting the timing of price increases and rescheduling them. Consequently, there may be lower overall pricing this year than we initially expected, as we have limited opportunities to make up for pricing adjustments due to the lockdowns.

I mean, all they are assumptions at this stage, but they’re not relating to price elasticity, in my view. It’s restating to do you go, and will governments allow that you take in one or two places a price increase in the middle of a crisis, I don’t think psychologically from a consumer point of view is the right thing. So, these are a couple of months or a month delay. But in the vast majority of places, we don’t see any price elasticity in the short-term. Now, in the long run, I don’t know what the impact of COVID is going to be on the world economy. But, if the world GDP comes down substantially for a longer period of time, you may need to revise elasticities. But as you know, in cigarettes, it is very rare that we need to revise elasticities, except in very big price increases.

Our next question comes from the line of Gaurav Jain of Barclays.

I have a couple of questions. One is about your supply chain and factory footprint inventory levels. Do you think the current crisis will change your long-term perspective on those issues?

That's a very good question, and it applies to more than just us. I’ve mentioned before that resilience often involves some redundancy in the system. Fortunately, we had inventory and action plans in place, so we were prepared when the crisis hit, ensuring we had the necessary materials. Not every business is in the same position, especially those relying on just-in-time delivery, which offers a lesson for everyone. In our case, we typically maintain large inventories of tobacco due to the nature of our business, and we have the ability and flexibility to build sufficient stock. At this point, I don't see anything that requires us to adjust our overall operations, especially considering that in the cigarette market, we face limitations from trade barriers and import duties. Thus, we believe our current strategy is optimal. But as a cautionary principle because I don’t think COVID will disappear in one afternoon, it will come back, we have to have the caution that this may be repeated at the scale it was repeated this time because we were absolutely not ready as humanity for that. But we have to take our own conclusions of how to build even more flexibility in the system. So far, I think we’ve done pretty well. And you don't see what is behind the scenes on keeping everything flowing. I think the guys in the Company have been miracles, given the circumstances.

Sure. My next question is just on IQOS device pricing. Do you think the upfront pricing will become an issue to acquire new consumers in a recessionary environment?

Well, I think we can adjust the pricing obviously when necessary. My view is, pricing plays a role in the IQOS acquisition. But as I said many times, it’s also a lot about convincing people to make the step. And sometimes pricing is the excuse. If you remember the remarks we made in February, the only place we can really see, they need both to have a tiered system in terms of device pricing. And at a certain stage in terms of consumables is Russia, where in certain cities we’re reaching really the limits of the premium consumer. And we are doing this with IQOS 2.4 plus being at the bottom end of our range, although more expensive than any other competitor. But as we always said, we maintain flexibility of this and we can adjust pretty rapidly once we recover business. Just now that’s not our issue. Our issue is more the limited ability to have the contact with the consumers and the point of sale.

Sure. If I could ask one last question, you've mentioned an estimated impact of $0.05 to $0.15 per share due to the delay in enforcing minimum prices in Indonesia and costs related to COVID, including down-trading. Should I interpret this as the $0.05 impact coming from the minimum price enforcement, which you have clarity on, while the additional $0.10 is related to down-trading and other COVID-related costs, for which you lack visibility?

Well, I think we should look at this as one piece rather than trying to cap it because I don’t have the super-exact science in dissecting this. So it’s an estimate. But, as I said, even if we look at the other numbers in there, even if I take inventories, we assumed in inventories that the buildup of safety stocks we’ve done in certain countries, invest in the course of the month of March, will be fully paid back. Now, it may not happen, and we also have a reduction in inventories that we’ve seen in certain countries and Duty-Free because retailers got a little bit worried about the situation, we will not recover them during the quarter. So, we’ll put probably the worst scenario in there to be on the safe side. But all these are flexible fixes. I can’t predict them in time. So, we’re trying, as I said, I repeat, to be as transparent as possible in this day, given the uncertainty. And I would stay there because me venturing any particular number, I can only be wrong.

Our next question comes from the line of Chris Growe of Stifel.

Guys, I hope you are well and glad to hear you’re safe and healthy. I just had a question if I could, first of all. You’ve seen some seasonality in your shipments between Q1 and 2Q and 3Q. And I’m just curious how social distancing and isolation, those kind of things would affect that sort of seasonal lift you normally see in the second quarter. I guess, you mentioned that you’re not seeing much of a change in daily consumption rates. Could that change going forward, if these social isolation moves are in place?

Well, I mean, notoriously, the first quarter of the year is the lowest consumption quarter in every tobacco product. Okay? So, even if we look at the in-market sales for IQOS, we have to put them in this context by definition.

Yes.

And that’s why in my view they’re even better than somehow the numbers are in absolute terms. Okay?

Sure.

Now, what is going to happen in the second quarter, other than what I explained, I can’t say. We don’t see in most of the markets any change in average daily consumption, except for the developing markets that have the specific things I mentioned. We have not measured it. And it’s very difficult, if I pick a market like Philippines. Okay? Yes, there is some sales decrease just now. It is possible that is part of the average daily consumption because it’s a stick sales market, and people have less money. It’s also possible that in some areas, we had some temporary out-of-stocks because it’s a cash economy with a lot of retailers going to wholesalers to buy. And until the whole system recombines and starts working properly, it takes some time. So, I wouldn’t attribute the lower sales, if you wish to, on the average daily consumption. But, I have to assume people that don’t have a job for a period of time and they cannot have the daily salary, they will buy less for a period of time. And in my example, I said, okay, if average daily consumption is nine cigarettes in stick sales and you go to eight, it’s a big difference for a month or for weeks.

I wanted to follow up to understand if your guidance for Q2 includes expectations for lower costs, such as reduced travel and potentially lower SG&A expenses. Additionally, with the changes you've made to your IQOS investment plans, are these factors reflected in your guidance? Can you elaborate on how these elements are contributing to the support of Q2 earnings despite the negative impacts you're facing?

Yes. I mean, the Q2 number range we gave you is all in and includes our best estimate for basing of the cost and spending, including the additional focus on digital and some of the other areas where we can invest now to help us retool and be able to recover more quickly. So that number is all in because it includes things like, yes, lower travel, other cost spending categories that just aren’t happening because people are working differently. It’s all in there.

Our next question comes from the line of Michael Lavery from Piper Sandler.

Hello? There were technical difficulties with IQOS, and you also mentioned digital demonstrations.

Can you just stop, because you broke at the beginning of the question?

Could you repeat your question, Michael? You were breaking up at the beginning of your question.

Yes. Sorry. You mentioned using more digital for IQOS. And I guess, I just would love to understand maybe how creative and flexible you can be there. Do you mean a case where you deliver or loan a device to the consumer to try it at home or is that just watching someone do it online, or how should we think about how robust your digital interaction can be?

Yes. We do loan devices, obviously with super accrued sanitary measures for the devices that are new. And then, we do the guided trial by digital means. The coaches or the sales experts are operating from home and teaching the consumers. Currently, the consumers may have a bit more time. So, it’s much easier to do it than in normal times as well. And that’s how we operate. And I think, I was surprised that we maintained such high level. It may be a blessing I would say because that helps everybody, consumers on one side and our organization to move more and more into digital and learn in this crisis that you can do a lot of things from remote as well learning by operating from home by the way. So, that’s a good thing. And maybe we can further increase the sales this way, which over time would allow us to optimize the infrastructure costs that we have. And we’ve just gotten a boost I would say in a direction we’re going in any case.

Okay, great. That’s helpful. And just one more on IQOS. You mentioned in Russia and EU that you already had lower device prices in the past quarter. Can you just describe what actions you’ve taken there and are those temporary or permanent price rests?

I’m sorry. I’m not sure we changed our device price, we had some promotion...

I think it’s more of a comparison year-over-year, just because we had some adjustments on device prices in the second half of last year. But, we’re now comparing and lapping to the first quarter of last year when those adjustments hadn’t occurred. When you come into the second half, I think you’ll find the device pricing much more stable versus the prior year.

Hello. Thank you for taking my questions. I have two questions. The first is about your revenue assumption for the second quarter of 2020. Can you clarify what the revenue assumption was previously? I believe you mentioned that the first half would have been 5% excluding COVID, which would suggest a 3% assumption for the second quarter. Is that correct? Thanks.

Yes. Q2, absent COVID impacts, net revenue would have been pretty much flat, a little bit. But the impacts of these other volume events that I mentioned, like Mexico comparison, Turkey comparison, impact of Indonesia, we’re already going to pull our combined volumes down, minus 5.5% or so, 6%. And therefore, the net revenues would have been just a little bit positive, not much, but a little bit positive, almost flat. So, what you’re seeing now with the COVID-related impacts layered in is it’s already built on a fairly weak quarter pace that we had flagged already going back to CAGNY and to year-end call as well. That’s the first quarter. So, you have to look at the two in the context and take them. That’s why I made the comment that if you average the first two quarters, absent the COVID impacts, we were right on track with our guidance, even frankly, a little bit ahead.

Got it. That’s very clear. And then, I guess, the longer term, I mean, think about 2021, 2022, should we start to expect excise tax increases and maybe government’s closing the tax gaps as they look to raise revenue?

Look, we haven’t seen any of those things today, obviously. I think governments will look for money, but they also know that regular tax increases are the best way to maximize revenue. And frankly speaking, if we look at the packages, the world is pledging to deploy, I don’t think cigarettes will cover even an infinite fraction of it. Now, it’s something to watch. This is pretty clear. But, we have no signs today of anything of this nature. That’s what I can see at this stage.

Thank you. Hi, everyone.

Hi, Bonnie.

Hi, Bonnie. Hope everything is okay.

Yes, everything’s okay with me, hope for you guys too. I just wanted to clarify something that you said a lot earlier in the call. You touched on this. But, I wanted to clarify in terms of recruiting new users for IQOS that if you’re able to touch consumers virtually and converse with them, you’re not seeing any reluctance from them to convert to IQOS in this environment. So, that’s the first clarification. And then, assuming your recruitment efforts for new users of IQOS remain pressured for the rest of Q2, as you discussed, just trying to understand how you see this impact in your core cigarette business.

Well, I think, to your first question, I haven’t heard of any difference in what we call the adoption funnel. Once a person is contacted, typically we have a very high purchase rates, because very often the people that come to the stores or the digital assets are people that are aware and frankly convinced. And obviously, the ones that come to our digital channels now are the most convinced. So, actually maybe we’re higher, I don’t have the numbers, we can come to you, than we used to be on average before, which is normal. Now, cigarettes is a bit more difficult to predict. Clearly, I see for IQOS, the momentum is there. And once we can resume the direct contacts also to people, we’ll get back on track. Because I don’t see any change in the momentum. I’m very impressed actually that during the period we are where we are in terms of new consumers switching to IQOS. If you look at cannibalization rates, obviously, it would be less cannibalization if there is less acquisition of IQOS. But if that lasts a couple of months, I don’t see that will dent any of the two. That rest is all the micro thing side discussed during the call, the temporary reductions in average daily consumption in some places.

Okay, that’s helpful. I may have missed this, but should we assume that your IQOS HTU volume target of 90 billion to 100 billion sticks is still reasonable by 2021? I know there's a lot of uncertainty, but are you still leaving that target out there?

If the restrictions last for the quarter, I think we’re still okay. If they last for a year, obviously, we need to delay the whole thing by a certain period of time. I think, the underlying trajectory is there. So, for the moment, I think that’s how I see it.

Okay. And then, just a final quick one for me. In terms of marketing spend, you mentioned on the call that you guys are adjusting and investing more dollars in areas where you think you’re going to get the biggest buck, if you will, probably digital. But, I’m curious about the total dollar spent in 2020. I think you had targeted incremental, was it $300 million to $350 million this year. And I’m just curious if that amount has changed at all, given everything?

Well, just now, this investment in quarterly basis is a bit slowed down, obviously, because we don’t have all the opportunities available. And obviously, we have flexibility because it is variable. Now, at this stage, we need to see when we come out of the crisis and if we need to double the Q1 resources for a period of time in order to catch up and if that makes sense from an investment point of view. So, we have flexibility there. If there is no opportunity, we will not spend all this money. And obviously, it will move to next year. That’s how I see. Just now, it is a slower spending, obviously. The difference is despite the incremental investment in digital that is reallocating money. Thank you so much.

I have one final comment, André, if you permit me to. I want to let everyone know this is Martin’s last earnings call as Chief Financial Officer. As I think most of you know, he will be taking on a new role as the CEO of PMI America. So, I think I speak for everyone at PMI, the organization, certainly the finance organization that works with him on a day-to-day basis to thank him for his service, his commitment, and his good sense of humor. We’ll miss that. But, we also look forward to welcoming Emmanuel Babeau as our new CFO as of May 1st and joining us on these calls in the future. So, congratulations, Martin, and best of luck to you.

Thank you very much, Nick.

So, that concludes our call for today. Thank you very much. If you have any follow-up questions, please reach out to the Investor Relations team. Thank you. Stay well, stay healthy.

Thank you. Ladies and gentlemen, this does conclude today’s conference call. You may now disconnect.