Good day, and welcome to the Philip Morris International Third 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 third quarter results. You may access the release on www.pmi.com or the PMI Investor Relations app. The 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 US GAAP measures, and additional heated tobacco unit market data are at the end of today's webcast slides, which are also posted on the website. Unless otherwise stated, all references to IQOS refer to our IQOS heat-not-burn products. Comparisons presented on a like-for-like basis reflect pro forma 2019 results, which have been adjusted for the deconsolidation of our Canadian subsidiary, Rothmans, Benson & Hedges Inc., effective March 22nd, 2019. Please also note that growth rates presented on an organic basis for consolidated financial results reflect currency neutral, underlying results and like-for-like comparisons where applicable. 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 also note the additional forward-looking and cautionary statements related to COVID-19. It's now my pleasure to introduce Emmanuel Babeau, our Chief Financial Officer. Emmanuel?

Thank you, Nick, and welcome, ladies and gentlemen. I hope everyone listening to the call and those close to you are safe and well. Our business delivered an even better than expected performance in the third quarter despite the ongoing circumstances of the pandemic. Most importantly, the excellent momentum of IQOS continues. HTU volumes have grown 28% year-to-date with a positive mix effect on our net revenues, where RRPs again made up almost one-quarter of our business in Q3. IQOS user acquisition outpaced the prior year quarter to reach an estimated total of 16.4 million users at the end of September. While still below pre-pandemic levels in most places, our combustible business recorded an improved sequential performance. Underlying industry volumes were better across both developed and emerging markets, reflecting increased consumption occasions. This was notably the case in markets with a significant proportion of daily wage workers like Indonesia, Mexico, and the Philippines. Despite these better industry volumes, Indonesia remains challenging, together with Duty Free. We must also retain a degree of caution around a second wave of the pandemic and its overall economic consequences across all of our markets. Our operating margins were again significantly ahead in the quarter and on a year-to-date basis, despite the challenges in our duty-free business. This reflects the increasing weight and profitability of RRPs and cost efficiencies. Our cash generation was also strong with $3.6 billion of operating cash flow in the quarter, putting us on track to reach our target of at least $9 billion this year. Turning to the headline numbers, our Q3 net revenue declined by 1.5% on an organic basis, marking a significant improvement from the decline of almost 10% in Q2. While this was somewhat aided by certain timing factors, including the revaluation of distributor inventory in Japan ahead of the October price increase, it nonetheless reflects the continued strength of IQOS combined with a sequential improvement in our combustible business. Indeed, the positive effect of the shift in our sales mix towards RRPs can be seen in the 6.5% organic increase in net revenue per unit. Combustible tobacco pricing was 2.1% up, reflecting solid pricing in a number of markets, partially offset by timing differences with the prior year, a strong prior year comparison in Turkey, and headwinds in Indonesia. These timing differences included the effect of delayed pricing in some instances, such as the Philippines, where we took a price increase this month rather than in August in 2019. Given this net revenue decline, we were pleased to deliver such a strong adjusted operating income margin expansion of over 300 basis points on an organic basis. I will cover this in more detail shortly, noting that we saw a further benefit versus our prior expectation from additional cost efficiencies and some delayed spending in the last month of the quarter. Adjusted diluted EPS of $1.42 increased by 5.6% excluding currency; better than our prior expectation of a flat organic development. The primary driver was the above cost benefit as well as better industry volumes in Indonesia and the EU region, where increased mobility coincided with the reopening of hospitality settings and warm weather. I also want to reflect on our strong performance over the first nine months of the year. This was clearly a challenging period with disruption to many aspects of our operations, including our supply chain and route-to-market. Our net revenue declined by only 0.9% on an organic basis, an exceptionally resilient performance given these unprecedented headwinds. We estimate that Duty Free and Indonesia alone were a mid-single-digit drag on our top line growth. Despite these factors, we saw very good organic progression in our net revenue per unit from the increasing weight of RRPs and solid pricing in combustibles. Our adjusted operating income margin increased by 260 basis points to deliver 7.4% adjusted diluted EPS growth, all on an organic basis. Let me now go into the driver of our Q3 margin expansion in more detail, starting with gross margin, which expanded by 180 basis points on an organic basis. This is driven by multiple levers. First, our ongoing transformation is delivering an increasing mix of RRPs in our business. Second is pricing on combustible. Third is our focus on overall manufacturing productivity, where our focus on efficiency, quality, and footprint more than offset the impact of lower combustible volumes. The positive gross margin development was augmented by our focus on SG&A efficiency with our total marketing administration and research costs, 140 basis points lower as a percentage of net revenues on an organic basis. This reflects the ongoing digitalization and simplification of our business processes, including our RRP commercial engine and more efficient ways of working. There was also a benefit from the timing of certain costs, as I already mentioned. Despite the challenges of 2020, we are today raising our expected full-year adjusted diluted EPS range to between $5.05 and $5.10, reflecting around 5% to 6% organic growth. This excludes an assumed unfavorable currency impact at prevailing exchange rate of $0.32. As stated in our earnings release, we have also updated certain guidance assumptions. We now expect a total industry decline of 7% to 8% and a like-for-like decline in total PMI shipment volume of 8% to 9%, both of which factor in the better Q3 development in the EU and a smaller expected market decline in Indonesia. We assume an organic expansion in our adjusted OI margin of around 200 basis points, also reflecting the above factors and ongoing cost efficiencies. We expect capital expenditure of approximately $0.6 billion and an effective tax rate excluding discrete item of 22% to 23%. We also assume no recurrence of national lockdowns in our key international market in the fourth quarter and remain vigilant with regard to the pandemic as economic uncertainty remains and localized social restrictions are being tightened in some geographies. Focusing now on the fourth quarter, we assume underlying consumption trends should be broadly stable versus a robust Q3. In many markets, including the EU region and Russia, increased consumer mobility, the opening of hospitality settings, and summer conditions provided a helpful backdrop to our performance. However, there remains continued pandemic-related uncertainty as we now see localized restriction tightening in certain countries with potential impacts on both mobility and economic vitality. The delay of certain SG&A costs from Q3 will also have an impact on our fourth quarter results. In addition, it's worth noting that while the price increase in Japan took effect on the 1st of October, the majority of the impact this year was realized in the third quarter through the revaluation of distributor inventories. I should remind you that Q4 2019 presents a strong base of comparison. This is notably due to pricing in Indonesia ahead of the January 2020 excise tax increase and an exceptional share gain in Saudi Arabia due to market disruption ahead of new plant packaging requirements. As such, while we expect around 5% to 6% organic EPS growth for the year, we expect the organic progression to be flat to modestly negative in the fourth quarter, excluding $0.04 of estimated unfavorable currency. I will now cover our third quarter performance in more detail. As with net revenues, our combustible shipment volumes sequentially improved, albeit the year-over-year decline remains greater than historic average. This was supported by better industry trends in all regions. Conversely, our HTU shipment volume continued to grow strongly to reach a record 19 billion units driven by the EU region, Japan, and Russia. I also want to touch on the year-on-year inventory movements in the quarter, which negatively impacted our shipments on both cigarettes and HTUs vis-à-vis consumer offtake. The reversal of trade build-ups in H1 in markets like Germany and Russia was one contributing factor. Specifically for Japan, there were reductions in distributor inventories in Q3, following increases in both Q1 and Q2 of this year in anticipation of retail and consumer loading before the October tax-driven price increase. As such, our shipments in the quarter were less than our in-market sales volume. Importantly, inventories for cigarettes and HTUs in Japan are now aligned to the expected market size following the price increase. The main positive impact of the price increase on our Q3 results was the revaluation of distributor inventory. This strong performance from IQOS means that heated tobacco unit made up over 10% of our total shipment volume in the first nine months of the year, as compared to approximately 8% in 2019 and 5% in 2018. We continue to expect this proportion to grow over time as the positive momentum on RRPs continues, and we remain well on track to achieve our target of 90 billion to 100 billion units in 2021. Our mission is to grow the RRP category globally and transform the mix of our business. With $4.9 billion in sales year-to-date, RRPs are now approaching one quarter of our total net revenues. Indeed, while this percentage was just over 23% in the quarter, if we were to adjust for inventory movements, Q3 would have almost reached 25%. IQOS devices accounted for approximately 8% of RRP net revenue year-to-date, mainly due to a naturally lower ratio of new users to existing users, longer replacement cycle, and geographic mix, particularly in the third quarter. In some geographies, we still sell a substantial amount of the lower priced original IQOS 2.4+ device, and we have now introduced lil SOLID in Eastern Europe. The East Asia and Australia region provides an illustration of RRPs operating at scale and is on track to deliver over half its revenue from RRP this year. While the investment phase of building commercial infrastructure can weigh on margin as scale is built, the strong margin expansion over recent years shows how powerful scale and experience in RRP can be as investments start to pay back and the commercial approach is optimized. Focusing now on our total international market share, the developments were very positive for the bulk of our business. Before the impact of Duty Free cigarettes and Indonesia, our share increased by 0.4 points. This was driven by higher share for heated tobacco units, which increased by 0.8 points to reach 3.1%, only partly offset by lower share for cigarettes. In markets where IQOS has a meaningful presence, our share increased with few exceptions. It follows that our combined market shares increased in the EU region, Japan, and Russia. However, our total international market share was negatively impacted by Duty Free, where our share is higher than the PMI average, resulting in only partial recapture of volume in other markets, and by Indonesia, which I will come back to separately. It is also true that in many markets, Marlboro over-indexes to social consumption occasions, which are naturally lower during COVID-related restrictions. While the easing of measures is uneven across the market, we saw aggregate Marlboro share start to recover sequentially in the quarter. I turn now to Indonesia. While the challenges related to the excise tax structure remain, underlying consumer trends improved in the quarter. Industry volumes declined by 6% excluding trade inventory movements, a notable improvement from the 22% decline in Q2. This primarily reflects a recovery in daily consumption from depressed levels as confinements eased. Given the continued rise in COVID cases and the possibility of more localized restrictions, such as those temporarily introduced in Jakarta last month, we do not assume significant further improvement in the fourth quarter. However, reflecting the better third-quarter industry volume and exit rate, we now expect the total industry decline on a shipment basis to be around 11% for the full year versus 15% previously. While a smaller industry decline has a commensurate effect on our volumes, our market share remains under pressure, despite improved performance from the higher margin A Mild, Dji Sam Soe Magnum, and SKT brands. This is due to the same dynamic mentioned last quarter. Most notably, the growth of tax-advantaged below-tier-one brands continues as tax-driven pricing and the pandemic have increased downtrading. To illustrate this issue, the tax per stick on our tier-one A Mild brand is more than 60% higher than on a comparable tier-two kretek brand, with a similar resulting difference in the retail selling price. With the segment now at 26% of the market, this represents a serious and growing threat to state excise revenue and a diminishing return on this year's tax increase. The correction of volume-based tax tiers remains urgent. We are hopeful that the government will take steps over time to ensure more predictability in tax revenue and a level playing field by reforming the multi-tier excise structure. The process of minimum selling price implementation also continues to progress slowly, hampered by the pandemic. Full enforcement may not be complete until the end of the year at the earliest. I move now to our RRP performance. We estimate that there were 16.4 million total IQOS users as of September 30. This represents the addition of around 1.1 million adult users since the end of the second quarter and over 4 million since the same time last year, with more users added in both Q3 and year-to-date than the corresponding period in 2019. This is an exceptional achievement given the circumstances, where our accelerated pivot to digital and remote engagement is paying dividends. We further estimate that 72% of this total, or 11.7 million adult smokers, have stopped smoking and switched to IQOS, with the balance in various stages of conversion. This again reflects widespread user growth momentum across all key IQOS geographies, including Japan, the EU region, and Russia. As our user base expands in markets like Japan and Russia, we are increasingly enriching our offer and segmenting the market with new products and more price points. We plan to bring more exciting innovation from IQOS in the coming quarters. We are also optimistic that the FDA's granting of Modified Risk Tobacco Product reduced exposure orders for a version of IQOS will contribute over time to better understanding of the heated tobacco category and the benefit of switching to IQOS compared to continued smoking. The success of IQOS in global key cities, where our commercial strategy typically has a strong initial focus, serves as a useful indicator for national share growth potential. In many such cities across a wide range of markets, our share is now well into double-digits and still growing. This provides an excellent base from which to further grow our RRP business as we innovate and broaden the IQOS offer. In the EU region, we added a further 0.4 million IQOS users in the third quarter to reach 4.7 million, a continuation of recent strong performance. While most adult menthol smokers have switched to non-menthol cigarettes since the ban in May, we have seen some incremental switching to RRP over the May-September period and continue to see further opportunity to convert these consumers. Third quarter share for HEETS reached 3.9% of total cigarette and HTU industry volume. This was in line with Q2 2020 but sequentially increased by 0.1 point when adjusted for estimated retailer inventory movements and consumer pantry loading effect. Sequential IMS growth, also on an adjusted basis was plus 16%. This reflects strong absolute growth in Italy and Poland. It also includes further progress in Spain and in the UK, where both national and London offtake share continue to grow, with the latter exceeding 3% in September. I also refer you to the appendix where we show shares for key EU markets. IQOS continued its strong performance in Russia with our HTU share up by 1.8 points to reach 5.8%. On a sequential basis versus the second quarter of 2020, share decreased by 0.2 points reflecting a cigarette market, which grew 6% on the same basis, aided by seasonality of consumption and lower illicit prevalence. Sequential HTU in-market sales, adjusted for trade inventory movements, increased by more than 9%. With the introduction of HEETS Creations in Q1 2020 and Fiit consumables for lil SOLID this quarter, we now have a price-tiered portfolio to cater to a broader range of adult smokers across the socio-economic spectrum. In Japan, our total reported share for heated tobacco units reached 20.5% in the third quarter, supported by line extensions for both Marlboro HeatSticks and HEETS, such as the recent launch of Marlboro Black Menthol. IQOS users grew to an estimated total of 6 million, of which an estimated 4.4 million have stopped smoking and switched to IQOS. On a total tobacco basis, including cigarillos and adjusted for trade inventory movement, the share for our HTU brands increased by 2.6 points versus the prior year quarter and by 0.2 points sequentially to 18.9%. Q3 2020 adjusted in-market sales volume for our HTU brands grew 7.3% sequentially. The overall heated tobacco category continues to grow, with the large majority of this growth driven by IQOS, and now makes up almost 26% of the total tobacco market. In addition to strong growth in existing markets, the geographic expansion of IQOS continues. We leveraged our digital capabilities to launch in four new emerging markets: Costa Rica, Georgia, Jordan, and the Philippines. This takes the total number of markets where IQOS is available for sale to 61, of which over half are outside the OECD. The launch in the Philippines was initiated digitally before adding retail touchpoints and is focused on Metro Manila, where consumer purchasing power is higher. While the geographic scope is limited, we are encouraged by progress so far. We have also now started the commercialization of IQOS VEEV, our new vapor product, which was launched in New Zealand during the quarter. Initial adult consumer feedback is positive, and we plan to roll out to further markets in Q4 and 2021. The commercial infrastructure of IQOS will allow us to deploy efficiently and at scale. We place great importance on guarding against youth access for all our products. In this category in particular, we will be testing age verification technology in select markets. As part of our mission to build and accelerate the global RRP category, we aim to offer a choice of experiences, formats, and price points to adult smokers and consumers of other nicotine products. Our collaboration with KT&G is consistent with this goal, as demonstrated by the first launches of lil products through our IQOS infrastructure. We introduced the lil SOLID heat-not-burn device and Fiit HTUs in both Russia and Ukraine during the quarter. As we reach shares approaching 15% to 20% with IQOS in key cities such as Moscow and Kiev and we expand to areas with lower purchasing power, a simple, affordable proposition can play an important complementary role in reaching more adult consumers and maintaining a strong rate of user acquisition. Early results are encouraging with positive feedback from adult users. This means that in both these markets we now have HTU brands at three price points within the heat-not-burn category: Super-premium HEETS Creations/Dimensions, premium HEETS, and mid-priced Fiit, all of which present attractive margins. We will also shortly be launching the lil HYBRID device, Mix consumables, and nicotine-free liquid cartridge in two Japanese prefectures, offering adult consumers a differentiated premium experience, which combines the satisfaction and rich flavor of heated tobacco with added sensorial elements. There is a consumer segment in Japan looking for such an experience, and we believe this will be the best hybrid product available in the market. I want now to emphasize the deep alignment of our business with sustainability and ESG objectives, which sit at the core of our mission and strategy. Our most important ESG issue is the health impact of our products. By innovating with significantly better alternatives, such as IQOS, we have a historic opportunity to substantially reduce this impact by switching adult smokers who would otherwise continue to smoke to reduced risk products. Through deploying RRPs at scale, we can improve public health and contribute to the Sustainable Development Goals, especially Goal 3: Good Health & Well-Being. We also have best-in-class practices across a range of central ESG issues, where the other three of our four sustainability pillars are focused. We believe this provides a unique combination, whereby sustainability is a true driver of innovation and growth. By embedding sustainability into the core of our business, we can create value for our shareholders and society at large. To conclude, our Q3 results were stronger than expected, and we have raised our full-year guidance to reflect around plus 5% to plus 6% organic EPS growth. We are building a business through RRPs to deliver superior and sustainable growth over the coming years. The continued momentum of IQOS through the challenges of the pandemic demonstrates these structural growth characteristics. We are also committed to maintaining the competitiveness of our combustible business. We have a number of levers for growth in our top and bottom lines. First, the powerful mix effect of RRPs. Second, pricing, which will remain important for combustibles and, where appropriate, for RRPs. Additionally, efficiencies in our manufacturing and SG&A costs are further levers as we continue to hone our business model. Moreover, with the launches of the IQOS VEEV and lil products, we are broadening and stepping up our product offer and innovation in 2021. You can also expect us to bring further exciting innovation to our IQOS heat-not-burn platform. As I just mentioned, sustainability and ESG are at the heart of our smoke-free strategy, and we continue to work tirelessly to further our mission. As we all know, there remains continued uncertainty regarding the pandemic, the impact of social restrictions, and their economic aftermath. However, when COVID-related headwinds abate, we expect to resume growth consistent with the currency-neutral compound annual growth rates in our 2019-2021 algorithm of at least 5% net revenue growth and at least 8% adjusted diluted EPS growth on an organic basis. In short, we look forward with confidence, and we will expand on these topics further at our next Investor Day, which we plan to hold in early 2021. Thank you. I am now more than happy to answer your questions.

Thank you. We will now conduct a question-and-answer portion of the conference. Our first question comes from Adam Spielman of Citi.

Hi. Thank you very much. So, my first question. You've reiterated that you're very, very comfortable with the 90 billion to 100 billion target for 2021 for RRPs. Are you still comfortable that you will exceed 250 billion in 2025, which is your other longer-term target? That's my first question. Thank you.

Thanks, Adam. We definitely are reiterating our ambition to reach next year 200 billion sticks in the heat-not-burn category, and I think that the growth that we are delivering quarter-after-quarter is clearly pointing in that direction. Then you are alluding to the 2025 objective of 250 billion plus, which is, I think, here aligned with what I've started to detail in the presentation, which is really the fact that we are broadening the portfolio when it comes to RRPs products, and we are going to, of course, come with more enrichment, more segmentation, and more offering when it comes to heat-not-burn. We are entering the vaping category, and all that is going to put us on track to deliver that ambition. And I think everything I've been seeing in terms of segmentation of the devices, now that we are coming with the lil offering, what we have started to do now in Japan, in Russia, when it comes to the consumables, it shows that clearly now the market is getting a bit more mature. Of course, it's still at an early stage in most places, but in a few places we have some first elements of a bigger market. It is time now to enrich the offering and broaden the spectrum of what we can offer to, I would say, concur and convince more smokers to switch to our product, and therefore that is what is going to put us on the right track for this ambition for 2025.

Excellent. Thank you very much. And then I don’t want to remind you, I want to put words in your mouth, but your market shares in Russia and Japan, they grew in Q3, but sequentially less than in Q2. And I'm wondering why that was, do you think, and whether it really is significant or if it's just sort of random quarterly fluctuations and we should just ignore that one?

Yes, I don't think that there is anything to be read there. I think that we are very happy with the performance in the key market. Of course, you know what has been and depending on the season and consumption patterns and what has been happening on the borders, we know that some borders were closed. We talked about illicit trade being stopped; I mean, that can be disruptors to the evolution if you take a kind of flash or split quarter view. But I would say the trend that we are seeing in Q3 is very much in line with a nice strong trend that we've been observing over the first part of the year over H1. So, I don't think that there is anything in Q3 that would be signaling a slowdown in the way we are gaining share in an underlying manner.

Thank you. Very clear, very helpful. Thank you.

Our next question comes from the line of Pamela Kaufman of Morgan Stanley.

Hi. Good morning. So, there is obviously a lot of ongoing uncertainty, but as you just reiterated, you are on track for your heated tobacco target for 2021. I guess broadly how are you thinking about how you're positioned for growth next year, and do you anticipate accelerating growth as you lapped the performance this year and see benefits from the enforcement of minimum price increases in Indonesia?

Well, thanks for the question. Obviously, it's very early stage to start talking about next year. I think you very rightly said it, 2021 is full of uncertainty and we even recognize that the last months of 2020 have a fair share of uncertainty as well. So, difficult to, of course, start to elaborate on 2021. The only thing I can say at this stage is that we are going to enter 2021 with the strength of our RRP business; that is clear from this first nine months performance. There will be certainly a number of low comps in the basis of 2020, but as we don't know how the markets are going to be in 2021, and if I take the example of duty-free, which of course, you could say we're going to have nine months with very, very low business in duty-free in 2020. So one could argue well that's an easy basis of comparison, but nobody is able to say today what's going to be the rebound next year of duty-free. So, it's just difficult to say which kind of growth trajectory at that stage it designs, if you want. I hope we'll know more at the beginning of 2021, when we will comment on our full-year 2020, and at that stage we can share more details with you, but I think that for us, the main element today that I would say is a kind of for sure whatever is the environment, it is a very, very strong performance of our heat-not-burn business.

Thank you. And also obviously very strong margin performance in the quarter. Can you elaborate on the factors that contributed to that in terms of lower marketing and administrative costs? You pointed out manufacturing efficiencies. How are your IQOS customer acquisition costs trending, and how much of the lower cost is temporary versus sustainable going forward?

Sure, I'm happy to do that. The margin improvement is a result of multiple factors rather than just one. It's a combination of elements that contribute to our top-line growth and positive margin evolution. First, we see growth in RRPs, which has positively impacted our gross margin, especially with the mix of consumables in heat-not-burn products. As we expand our business, this mix helps enhance our margin. Additionally, we are actively working on pricing strategies to improve the pricing on combustibles. I'd be glad to provide more details if needed. Furthermore, there are significant enhancements in our manufacturing productivity, which are strong contributors. You're correct that we also have experienced favorable changes in our SG&A, where we managed to reduce costs organically by about 7%, even while the topline declined by only 1.5%. This indicates a solid leverage between the two. We are focusing on improving efficiency across all functions, streamlining processes, standardizing, automating, and utilizing digital tools to enhance productivity. This has led to tangible savings. Moreover, our transition toward a more digital commercial model for RRPs has increased efficiency. We originally built the IQOS business on a model that relied heavily on physical retail locations, which was effective at the beginning. However, as we grow and gain insights into the market, we are enhancing our digital skills and developing tools that improve both the digital customer experience and trade interactions. This allows us to connect with smokers more effectively, guiding them in their transition to IQOS and addressing their questions through a digital platform. We have also been building communities for those switching to IQOS, facilitating exchanges of experiences and tips. After the initial switch, our work continues as we focus on retention and creating deeper connections with our IQOS customers by analyzing data to provide the best overall experience and maintain their loyalty to our heat-not-burn products. This approach is leading to lower acquisition and retention costs. While we are still on this path of improvement, the efforts are positively impacting our performance in 2020.

Thank you.

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

Good morning. Thank you. You've launched in some markets this year, and certainly, it doesn't seem like the easiest of circumstances to really get those going with pandemic closures and restrictions, but you've got some like Saudi Arabia already at 40 basis points of share, obviously small, but France took several years to get to that. Mexico also 20 basis points. It's early, but these look like they're a pretty good start. Can you touch on some of what's driving that? I know you just mentioned some of the digital things. Is that really the key? Are there other factors? What's just getting some of these markets going a little bit more quickly than we've seen in the past?

Well, I think each market, Michael, is different. So the answer probably could require a long explanation and entering the various types of dynamics. And starting with the regulation, of course, the capacity that we have to speak about IQOS and explain how it works. In some markets, we have this capacity to explain to smokers that a better alternative does exist; in other countries, we are much more limited. So that is clearly having an impact. Then certainly there is an impact as you grow the visibility of IQOS; as people start to see friends, family around them using IQOS, you may have a kind of snowball effect, maybe it's a little bit of a caricature, but I think to some extent it can play like that and that can accelerate the evolution of the market. You have also the cultural dimension, which is quite important; in some countries, people will be proud of having discovered IQOS, and they will want to share that with their friends, and they will become our best salespeople, I would say, about IQOS and taking themselves the time to explain and convince friends and relatives. In other cultures, it would be very different, and that won't happen because they will believe that it's a personal choice and they don't want to interfere in that. So, all that to explain the very different patterns that we are seeing in terms of development of the business. Having said that, you're absolutely right. The more we're going to be able to go digital and have great digital tools to contact smokers, talk about IQOS, and be able to engage them in what is the IQOS experience, the more we are going to be able to grow the market. And clearly developing the digital customer experience is going to be key, hopefully in accelerating the growth in several markets. But let's not underestimate the fact that regulation can be a pretty significant restriction. Nevertheless, even when it comes to using digital tools. So again that explains why I think there is certainly no market where we are not seeing that we have the ambition to make them RRP markets, but certainly in some markets it's going to take a bit more time.

Okay, that's helpful. And then we're about five months into the menthol ban in the EU for cigarettes. You mentioned a little bit of incremental momentum on IQOS menthol, especially in a market like Poland. There's been a big share jump there. How much is that related to menthol's success getting cigarette smokers to switch, and how much more runway is there for that to go?

Sure, Michael. What I can share with you is that, so you remember that menthol was roughly speaking 10% of the EU market altogether. I think the vast majority of the menthol smokers have been switching to other types of combustible cigarettes. And so I don't think that there has been, certainly not maybe what was all in terms of people stopping to smoke. It's probably a few percent, but no more than that. And when it comes to switching to other alternatives like heat-not-burn and IQOS in particular, maybe around 5% of the people have done that so far. It doesn't mean that we are giving up. We think that we can certainly convince more people, but I think the impact has been relatively limited. You're right; probably helping a little bit in Poland, maybe in the UK as well, which are two big markets for menthol. But I would not say that it has been having a big, big positive impact so far on our IQOS business.

Okay, thank you very much.

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

Hi, good morning. I appreciate all the detail around digitization and IQOS user engagement; seemingly a lot of the hard investments you guys made early and then the incremental investments are paying off. I was wondering if we could kind of pull that all together and perhaps quantify the evolution that your IQOS user acquisition costs in particular over the course of 2020 given COVID? Thanks.

Well, I understand the question, but at that stage you know I think we are not going to enter into more granularity. I think we are giving through this set of numbers and presentation more detail on the drivers for profitability. So I'm sure that you are able to capture through the gross margin evolution and other elements that we are giving some elements. But it's obviously, as you can imagine, a relatively strategic information sensitive and therefore it's not something that we can share. But I'm certainly happy to confirm that we are seeing a significant decrease and that we have ambition for more significant decrease in the future. So I'm just reiterating my comment that you should expect more improvement on the ramping up of the profitability of our RRP business in the future, which is really great because we are combining a big, big driver for the top-line growth quite obviously and in addition, a nice driver for profitability improvement.

Okay, that's fair. Thank you very much. My second question is just on price gaps in the heat-not-burn category. It makes a lot of sense to me that you would want to introduce a tiered portfolio as your penetration continues to mature, if you will. How are you thinking about those price gaps relative to combustibles though? I mean you've used the same kind of descriptive language in terms of the price segmentation in Russia. Are we meant to take that to understand that you're going to match price gaps against combustibles with a tiered heat-not-burn consumable portfolio, or is there a reason to think it might vary? Thank you.

Well, as you know, globally we have a position because it deserves it. Our RRP business is a premium business. It's a unique consumer experience, and that fully justifies a premium price positioning. Now, of course, as you know, in some countries as well, the excise duty level is lower, sometimes materially lower on RRPs and heat-not-burn than on combustible cigarettes. And therefore, that is also justifying a lower price point. So I would say, as a rule, we have our combustibles that are priced at the price on Marlboro or sometimes even a bit below Marlboro, and I think it's a good positioning. The sweet spot is really to reflect the overall experience and the value for the consumer, but also the specificity of the heat-not-burn category and heat-not-burn products. And in segmentation, we are going to do the same. It's of course related to the customer experience as well, and all three consumables are under the same and not deliver the same experience. And exactly like we have been doing for decades on consumables, depending on the level of, I would say, benefit value for the consumer. We'll have different price positioning that will be aligned with that. I don't think we should expect anything really materially different there.

Understood. Thank you very much.

Our next question comes from the line of Bonnie Herzog of Goldman Sachs.

All right. Thank you. Hello, Emmanuel.

Hi, Bonnie.

Hi. Your quarter was stronger than expected, and you're seeing a better demand environment, and then you also took up guidance again. So I guess I'd like to get your thoughts on resuming your share buyback program, and if this might be realistic next year? It seems like you have flexibility, and I guess I think of it as an important positive signal for the market that probably would be viewed favorably. So, I'd love to hear what your current thinking is on this?

Thanks for the question, Bonnie. We haven't changed our mind at that stage on the buyback and we've announced, as you know, a 2.6% increase in the dividend to $4.80 a year. So we continue to reward the shareholders. And I think we stated in the past and we are very much on that line that we would not start to share buybacks that could potentially endanger the rating. And I'm not sure that today we have a huge flexibility on that rating with the balance sheet that we have today. So we have a very strong balance sheet, and we want to keep that. I don't think that we would love to be losing some nudging the rating because of buybacks. So I'm not closing the door on the long term, of course. It's a moving situation. And as we keep generating cash and strengthening the balance sheet, we may together with the Board decide to change that, but for the time being, this is not on the agenda.

Okay, that's helpful. And then I know it's early, but I was hoping to get maybe your thoughts on what you see as the key tailwinds or maybe headwinds as we look out into '21? I guess as I'm thinking about your business and what you've accomplished during this pandemic? It seems like the setup is quite positive, especially as I think through a few tailwinds, such as, for instance, the one you have in Japan. I'm not asking for guidance for next year, but is there a way that you could just kind of lay out a few of these tailwinds as you see them for your business and/or possibly headwinds? Thank you.

Thanks, Bonnie, for not asking for guidance because we will not give you anyway. Trying to elaborate on tailwinds and headwinds, I think the tailwinds are quite obvious. We have this RRP business that is, you know, almost one-fourth of the business. So it's very material in terms of share of revenue, that is going very strongly. We talked about growth of about 28%, 29% year-to-date. We see a number of markets that are actually contributing to the dynamism. We are, as we said, enriching the offers. So we see that we start to enter into a new phase of this ambition of creating this category that we think one day will be, I would say, putting an end to a smoking world by this segmentation enrichment of the offer. So we have here a very powerful tailwind that is going to help us as we enter into 2021. And as you have seen, it's not only, as I said, positive for the top line, but it also nicely positive for the bottom line because we are ramping up the profitability on that business, and that is a business that has the potential to be super nicely profitable. Then, of course, you know I said it, you have all these very low comps that we're going to have in few markets. We have this Q2 that has been very difficult. You have the duty-free business that is extremely depressed. So one could argue that if things were to start gradually in 2021 to be back to normal, but that could provide easy comp for growth. Now that unfortunately segues for headwinds, because we don't know what's going to be the environment. More and more people are saying that we're not going to be back to normal maybe until the summer of 2021. Nobody knows what exactly it means, by the way, but people are saying when the vaccine will be available, which could be summer 2021. That's a condition to be back to some more normality and therefore we don't know how it's going to play out globally on the business. But I think we are taking comfort and confidence from the fact that I mean the 2020 will not have been a walk in the park, that for sure, and despite that, we are delivering what I consider to be a robust performance and targeting our nice organic growth for the adjusted EPS. So it shows that even in a difficult environment, we managed to deliver a nice performance.

All right, very helpful. Thank you.

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

Hi, good morning, Emmanuel. So a couple of questions. One is on the CapEx. So CapEx was again reduced to $600 million, and now it is meaningfully below depreciation, which runs at about $950 million for your company. So is this the new run rate of CapEx, and can you depreciate a step down in the future?

Sure, Gaurav. So, no, this is not the new normal for the company. We are obviously going through stormy waters. So it's an adjustment, and there are a number of projects, by the way, that given the environment we prefer to postpone, so that explains why we are now targeting $0.6 billion for the year. I think you can expect us when we are back to a more normal environment to be back to a more normal CapEx amount that I would say probably to be around $0.8 billion. So that could stay below the level. You're right of amortization and depreciation that is north of $900 million today. And of course, overtime if it continues like that, that will mean that this amount will decrease as well. You're absolutely right. I'm not able to give you a phasing for that, but that should be over time a natural evolution, though of course with the carryover effect it will take some time.

Sure. And my second question is on your travel retail business, where you have booked zero revenues on high cost in the Middle East and Africa line. And clearly, the market is not down 100%. So you are supplying out of inventory. So is there any risk of inventory write-down in travel retail?

I think at the end of September, we have been taking care of the potential impact of that. So I would not expect anything major for the rest of the year.

Okay, brilliant. Thanks a lot.

Thank you.

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

Hi, good morning, Emmanuel.

Hi, Chris.

I just had a question for you, if I could on some of the inventory adjustments that occurred in the quarter. And just to understand, so IQOS had an inventory drag that weighed on its volume in the quarter that you reported an even stronger performance for that brand excluding the inventory changes. Our inventory, say for IQOS, I guess I'd be curious for your business overall. Are they at the right level, or are there expected changes to occur in the fourth quarter on inventory perhaps to building inventory?

No, Chris. I think that you're right. And I think we flagged in H1 that there were a number of countries with some anticipation on inventory. We got the reversal of that in Q3. You're right. If you retreat the shipment against that, we have a record around 20.5 billion sticks of in-market sales, which is quite a symbolic threshold, but to be above $20 billion is quite nice, and we believe that we are globally at the right level at the end of September. So, we're not expecting today in Q4 any material impact on inventory for heat-not-burn.

Okay, thank you. And then, just a second question on VEEV and kind of just to understand the degree to which you can undertake a wider scale launch in more markets in the fourth quarter. Are there production limitations? There obviously I'm sure there are at this point, but just to understand how you think about the progression of that launch in more markets starting in the fourth quarter?

So there could be very limited number of market launches in Q4. I think we're taking the time to have all the lessons learned from what we've seen in New Zealand to make sure that when we launch, we are super ready and very successful. There are certainly things around age verification on which we are still working and which are very important for us, as you know. So we are still working on these various dimensions. So don't expect too much in Q4. I think the big new launches will be more for 2021.

Okay, thank you for your time.

Thank you.

Our next question comes from Owen Bennett of Jefferies.

Afternoon, Emmanuel. Hope you're well.

Owen, hi.

First question, please. I just wanted to come back to Adam's in the $250 billion target by 2025. So you mentioned the role, the expansion of the portfolio into vapor will here; and obviously, very different economics between heated and vapor. So how do you see that $250 billion being split between the two categories? I know it’s very early days, but I would like a rough idea internally of how you see that evolving?

Sure. We haven't been breaking down the $250 billion target, so I won't do that now. It's clear that each RRP category plays a role in reaching this target, but we firmly believe that the heat-not-burn category will account for the majority of that $250 billion. We definitely plan to develop e-vaping, IQOS VEEV, and other products that we could launch between now and 2025. However, you should still anticipate that a significant portion of the $250 billion will come from heat-not-burn products. Remember, this is an aspiration we've been communicating. As we move forward, we will provide more details on this. Please be patient with us as we continue to share more insights and clarity. At this point, I can't provide a further breakdown of the $250 billion, and it's important to note that we want to develop these offerings in a profitable way, which also influences our decisions regarding the final distribution of the $250 billion.

Okay, thank you. And the second one; I was hoping you could give me the ex-inventory heated volumes in Eastern Europe that Q1, Q2, and Q3; you just see how that kind of progressing shipping the inventory impacts out?

Well, I don't have that with me, but I can see with the team maybe as to whether there is something that we can find for you.

Okay, great. Thanks very much. I appreciate it.

And thank you; we have reached the allotted time for questions. I would now like to turn the call back over to management for any additional or closing remarks.

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

Thank you all. Talk to you soon. Bye.

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