Good day, and welcome to the Philip Morris International First Quarter 2021 Year-End 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 2021 first quarter results. You may access the release on www.pmi.com or the PMI IR app. A glossary of terms, including the definition for Reduced Risk Products or RRPs, as well as adjustments and other calculations and reconciliations to the most directly comparable US GAAP measures, and additional heated tobacco unit market share data are at the end of today's webcast slides, which are posted to the website. Unless otherwise stated, all references to IQOS are to our IQOS heat-not-burn products. All references to smoke-free products are to our RRPs. Please also note that growth rates presented on an organic basis reflect currency-neutral underlying results. 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 is safe and well. Our business delivered a strong performance in the first quarter of 2021, well ahead of expectations, reaching a record high quarterly adjusted diluted EPS of $1.57, despite the continued challenges of the global pandemic. Most impressive was the continued strong growth of IQOS, which made up 13% of our volumes and 28% of our net revenues compared to 21.7% in the prior year quarter. We continued converting adult smokers at a very good pace and reached an estimated total of 19.1 million users, of which 14 million have switched to IQOS and stopped smoking. HTU shipment volumes grew plus 30% compared to the prior year quarter with record market shares in key IQOS geographies, including 12 markets with double-digit national share and a share of 7.6% overall in IQOS markets excluding the U.S. Our operating margins were also significantly above the prior year quarter, and while somewhat flattered by timing factors, the bulk of this improvement reflects strong underlying performance. The resulting combination of strong organic net revenue and adjusted diluted EPS growth leads us to raise our outlook for the year. From a product standpoint, we continue to broaden our smoke-free portfolio and saw encouraging progress from new device and consumable offerings across multiple markets. We expect to benefit from further innovation through the course of 2021. Turning to the headline numbers, our Q1 net revenues grew by plus 2.9% on an organic basis. This was an excellent performance in the context of an essentially pre-COVID prior year comparison and incorporates better than expected HTU, IMS, and shipment volumes, which drove plus 32% organic growth in RRP net revenue. We also saw some higher-than-expected pull-forward of shipments, predominantly cigarettes in the EU region, ahead of the Easter period and in Russia ahead of the April 1 discount ban. We saw strong organic growth of plus 6.9% in our net revenue per unit, driven by the increasing weight of IQOS in our sales mix and pricing on both combustible and RRPs. Combustible tobacco pricing was plus 2.7% of prior year combustible net revenues, reflecting solid pricing in many markets, partially offset by Indonesia. Excluding Indonesia, combustible pricing was over plus 4%. Our adjusted operating income margin increased by 580 basis points on an organic basis, reflecting the increasing weight and profitability of IQOS, the positive impact of pricing, productivity savings, including lower device costs, lower commercial spend due to the pandemic, and the favorable comparison in Eastern Europe and certain other timing factors. Combined with a lower effective tax rate, our resulting adjusted diluted EPS of $1.57 represents plus 21.5% organic growth, a very strong performance. We estimate that timing factors in the quarter, such as the earlier shipment mentioned and cost phasing had a positive impact of around plus $0.08. Although one-time factors accounted for an estimated further plus $0.02 increase. This brings me now to guidance for 2021. While the speed and shape of the global recovery from the pandemic remain uncertain, the strong business results and underlying momentum of the first quarter, notably from our IQOS business, lead us to raise our outlook. We continue to account for a range of outcomes in our outlook for organic growth in net revenue and EPS. This range assumes that even in the event of renewed or prolonged restrictions, we will not see a return to the depressed consumption level of Q2 2020. While we have not been affected thus far by the current global shortage of semiconductors, the guidance assumes a limited impact on the supply of electronic devices to consumers. This is a fluid situation which we are monitoring closely, and where any constraints may arise, we intend to manage our inventories accordingly and prioritize device sales to other smokers who are new to the category. Regarding duty-free, a rebound in global travel is likely to lag the improvement of in-country mobility. Our guidance continues to assume no meaningful recovery in duty-free this year. We now expect organic net revenue growth in the range of plus 5% to plus 7% versus plus 4% to plus 7% communicated previously, and organic adjusted diluted EPS growth of plus 11% to plus 13% or plus 15% to plus 17% in reported terms. The strength of IQOS is the main driver for this revision. We now expect to deliver HTU shipment volumes of between 95 billion and 100 billion units, representing the upper half of our previously targeted range for 2021. Given the continued strong momentum across our market, the need to maintain inventory duration and prepare for the rollout of IQOS ILUMA, which uses different consumables, we expect our full-year shipment to be slightly ahead of our IMS volumes. We also raised our assumption for organic adjusted OI margin expansion to around plus 200 basis points. This includes the expectation of greater investment in the second half as our innovation and commercial activities step up. As detailed in this morning's press release, our other main assumptions remain unchanged. This projected organic EPS growth, including an estimated favorable currency impact of approximately plus $0.20 at prevailing rates versus plus $0.25 assumed previously, translates into a raised adjusted diluted EPS range of $5.95 to $6.00. This guidance does not include any impact of share repurchases. However, we remain on track to resume repurchases in the second half of the year, subject to Board approval. Looking forward to the second quarter, we now expect adjusted diluted EPS of $1.50 to $1.55, reflecting strong top-line growth against a weak prior year comparison, continued margin improvement, and a partial reversal of certain Q1 timing benefits. For the second half, assuming that many of our key markets will have largely emerged from COVID restrictions, we expect continued robust top-line growth. This includes the contribution of higher expected device shipments, which will result in less gross margin expansion compared to the first half. New product launches, investments in distribution, and the phasing of productivity will also play a role. We will also step up our commercial investment in the future growth of RRP through portfolio and geographic expansion, including product launches such as IQOS ILUMA. We anticipate around plus $300 million to plus $400 million of incremental commercial investment compared to the first half, and consequently expect our organic OI margin expansion to be lower in H2, but overall, to deliver strong expansion of around plus 200 basis points for the year. Before discussing our results in more depth, I want to highlight a few of the positive regulatory developments in the quarter. Recognition of the harm reduction potential of smoke-free products continues to gain traction. Examples this year include the reversal of a long-standing import ban on heated tobacco products in Uruguay and the integration of the harm reduction principle in Lithuania's tobacco control agenda. We also noted the recent report from an all-party parliamentary group of MPs in the UK, calling for the WHO to return to the founding principle of the FCTC, which includes harm reduction rather than the current prohibitionist stance. In New Zealand, we are reviewing the content and detail of the consultation paper published last week. The policy recognizes the role of innovative products in harm reduction while ensuring strict control to prevent youth access. In the EU, we continue to be hopeful that the revision of the tobacco excise directive will lead to greater normalization in the effort to promote smoke-free products, taking into account the relevant good practices and experience gained by member states in this area. Here and around the world, we continue to support differentiated regulatory and fiscal frameworks based on the relative risk to health. While there will, on occasion, be actions or proposals that do not incorporate harm reduction objectives, we believe facts and science will guide policy over time, and we continue to see positive changes in many geographies. Turning back now to our results, Q1 shipment volumes declined by 3.7% for the total PMI business. This reflects continued strong growth from HTUs of plus 30% to reach 21.7 billion units, driven by the EU region, Japan, Russia, Ukraine, and an encouraging start from recently launched markets in the Middle East. HTU shipment and IMS volumes were broadly in line for the quarter. While pandemic-related restrictions persisted around the world, total industry volume declines of 0.7% were relatively benign, incorporating over plus 25% growth in the heated tobacco category where we continue to have a share of over 80%. Though less severe than in Q4 2020, our cigarette volume declines reflect specific share headwinds in certain markets. We expect better combustible share and volume trends in both the second quarter and second half of the year. The strong performance from IQOS led to heated tobacco units comprising 13% of our total shipment volume in Q1, compared to 9.6% in the prior year quarter, 11% in 2020, 8% in 2019, and 5% in 2018. We continue to expect this proportion to grow over time as positive momentum on IQOS continues, providing a powerful driver of revenue and margin growth. Our sales mix is changing rapidly, putting us on track to achieve our aim of becoming a majority smoke-free company by 2025. Smoke-free products made up 28% of our total net revenue in the quarter compared to 21.7% in Q1 2020. IQOS devices accounted for approximately 6% of the $2.1 billion of RRP net revenue, reflecting longer replacement times for existing users due to improving battery lives and reliability, and lower device prices in certain markets as we prepare for IQOS ILUMA. The plus 2.9% organic growth in Q1 net revenue on shipment volume decline of 3.7% reflects the twin engines driving our top line: first, pricing on combustibles and, in certain markets, on HTU net of the lower device pricing I just mentioned, and second, the increasing mix of HTUs in our business at higher net revenue per unit continue to deliver substantial growth. As explained at Investor Day, this is an increasingly powerful driver as our transformation accelerates. Let me now go into the drivers of our first-quarter margin expansion, starting with gross margin, which expanded by 390 basis points on an organic basis. This is driven by multiple levers, including the mixed effect of HTU within IQOS, the impact of our significant efforts on manufacturing and supply chain efficiency, which are bearing fruit, more than offsetting the effect of combustible volume declines, with around $150 million of gross productivity savings delivered in Q1. While somewhat front-loaded in the context of 2021, this represents a strong start on the journey towards our target of $1 billion over 2021-2023. As part of these savings, our gross profit increase was boosted by better absorption of manufacturing costs given a high level of production in the quarter and lower device costs, with a combined impact of around plus $60 million. Gross margin expansion was also accompanied by strong SG&A efficiencies with our adjusted marketing, administration, and research costs 200 basis points lower as a percentage of net revenue on an organic basis. This reflects the ongoing digitalization and simplification of our business processes, including our IQOS commercial engine and more efficient ways of working. We delivered around $60 million towards our '21-'23 target of $1 billion in gross SG&A savings before inflation and reinvestments. The pandemic also impacted SG&A costs in the quarter through the later timing of certain projects and reduced commercial and overhead costs due to ongoing restrictions. These latter factors accounted for around $100 million of the organic improvement. Focusing now on combustibles, we continue to hold the leading international portfolio by market share and brand strength. This gives us a formidable platform to accelerate the growth of IQOS via our commercial infrastructure, industry expertise, and ability to communicate with other smokers where permitted. It is therefore imperative to maintain our leadership through selective investment as we also drive returns through pricing and efficiency. Our cigarette share underperformance in Q1 can be attributed to a combination of several factors. This includes the COVID impact on social occasions, where Marlboro overindexes; border closures; reduced travel; and instances of downtrading and competition in the mid and low-price segments in certain markets such as the Philippines and part of the EU region. This performance does not reflect our objective to maintain our share of cigarettes, net of cannibalization. We expect a strong sequential cigarette share recovery through the remainder of the year, supported by portfolio initiatives and the enduring strength of Marlboro, especially as pandemic restrictions ease. Accordingly, we target cigarette share to be about stable on a year-over-year basis for the next nine months, despite the impact of cannibalization. Share gains from HTUs will come on top of this. I will now turn to the South and Southeast Asia Region. After a difficult 2020, notably in Indonesia, headwinds are now moderating. In Indonesia, volume trends are improving with double-digit growth in hand-rolled kreteks, where we are the market leader, supporting stable PMI share in the Tier 1 segment. Indeed, with industry volume recovering, we are targeting volume growth for our business here in 2021. Pricing remains the main headwind in Indonesia. New excise duty rates came into force on February 1, and while all major players have taken some pricing, progress nonetheless remains slow. Despite the negative consequences for government revenues, there has not yet been a significant move to level the playing field between the Tier 1 and below Tier 1 segment, which continues to grow. We remain hopeful that the government will address this issue over time. The Philippines has performed well in recent years. For this quarter, further industry pricing in H2 2020, a slow economic recovery, and pandemic-linked restrictions gave rise to a double-digit market decline. Our share loss reflects downtrading from the mid to low-price segment, with premium-priced Marlboro, which makes up over two-thirds of our volume, growing share. Notwithstanding these challenges, we have plans to address the share decline and are targeting close to stable organic net revenue in 2021, despite the total market weakness. I'm also pleased to say that IQOS is off to an encouraging start in Metro Manila, with an exit share of almost 1% for HEETS after full launch in Q3 2020. Overall, this region delivered strong growth pre-COVID. While it may not be a meaningful growth driver in 2021, we expect far less of a drag on group results compared to 2020. We target regional organic net revenue to be at least stable over the next nine months. Moving now to IQOS performance, we estimate there were 19.1 million IQOS users as of March 31. This represents the addition of around 1.5 million adult users since December, building on the step-up in the second half of 2020. Our accelerated pivot to digital and remote engagement during the pandemic, combined with strong momentum for the IQOS brand is paying off. We further estimate that 73% of this total, 14 million adult smokers have switched to IQOS and stopped smoking, with the balance in various stages of conversion. Strong conversion rates notably reflect the increased prevalence of IQOS 3 DUO, which offers a superior user experience to previous device versions. As we mentioned at Investor Day, we seek to achieve even higher conversion rates over time with the introduction of innovations such as IQOS ILUMA. This user growth reflects widespread momentum across all key IQOS geographies, including the EU region, Japan, and Russia. It also reflects the enrichment of our offer and the segmentation of the category with new products and more price points, both above and below our initial HTU offering. In the EU region, first quarter share for HEETS reached a record 5.7% of total cigarette and HTU industry volume. Adjusted for estimated trade inventory movements, this reflects a 46% year-over-year IMS growth and around 10% sequential IMS growth accounting for fewer selling days in the period. I would also remind you of the sequential quarterly share dynamic, which can be distorted by the seasonality of the combustible market in addition to pandemic-related situations such as border closures and other social restrictions. With the region likely to reopen somewhat in Q2 and increase the total market, we expect further strong underlying HTU growth, but for share to be broadly in line with Q1. This excellent performance includes strong growth in Italy, surpassing 10% share, with the large majority of user acquisition coming organically as the increasing awareness and prominence of the product builds its own momentum. Germany and Poland were also strong contributors. We added a further 700,000 EU region IQOS users in the quarter to reach 5.9 million, a continuation of recent strong performance. We continue to see phenomenal progress in key cities across the EU region, with a number of examples on this slide. HTU share in Rome is now approaching 20%. Warsaw and Lisbon reached 15%, Munich 8%, and London 5%. While a smaller city, the progress in Vilnius at 36% share is also a global standout. As covered at Investor Day, key cities are a good indicator of national share growth potential. strong performance continued in Russia, with our HTU share up by 1.2 points to reach a record 7.7%. Adjusted for estimated trade inventory movements, this reflects plus 35% year-over-year IMS growth and around plus 8%-10% sequentially once estimated consumer pantry loading effects are factored in. We continue to see sequential share growth for both our HEETS and Fiit lineup with good traction for the regular HEETS and super-premium HEETS creation variants. Moreover, LIL SOLID and Fiit consumables continue to supplement user acquisition. In both Russia and Ukraine, the majority of consumers purchasing a LIL device are smokers entering the smoke-free category for the first time, with a high level of conversion in line with IQOS. This bodes well for our ability to reach adult smokers in the medium and below price segments for whom purchasing power may be a barrier. Margins on midstream-priced HTUs such as Fiit remain attractive compared to cigarettes sold at the same price, and while the volume of Fiit remains small compared to our total HTU volume in this market, given our large IQOS user base, we expect LIL to grow further in 2021. With this success in Russia and Ukraine, we plan to offer LIL SOLID in additional markets later this year. In Japan, on a total tobacco basis, including cigarillos and adjusted for trade inventory movements, the share for our HTU brands increased by 3 points versus the prior year quarter and by 0.7 points sequentially to 20.8%. Both HEETS and Marlboro HeatSticks grew market share following the October price increase, highlighting the strength of our price-tiered portfolio. We expect to see further HTU volume growth in Japan over the remainder of the year underpinned by ongoing user acquisition. For the second quarter in particular, we expect robust sequential IMS growth. We also expect a recovery in the total tobacco market as the elasticity effect of the substantial October price increase fades, including on consumer pantry-loading. As such, while year-over-year share growth is still likely to be strong, Q2 share may not reflect this underlying sequential growth performance and may be broadly stable versus Q1 on an adjusted basis, including cigarillos. In Q1, the overall heated tobacco category made up over 28% of the adjusted total Japanese tobacco market, with IQOS maintaining a high share of the segment. IQOS HTUs also reached an off-take share of 26.1% in Tokyo, after surpassing the 25% milestone in December. In addition to strong growth in existing markets, the geographic expansion of our smoke-free product continues. This allows us to provide access to better alternatives to an ever-increasing number of adult smokers, and as communicated at Investor Day, we aim to be in 100 markets by 2025. After launching in 12 new markets with IQOS in 2020, we added Aruba in the first quarter and launched our new e-vapor product IQOS VEEV in Finland, which takes the total number of markets where PMI smoke-free products are available for sale to 66, of which over half are outside the OECD. We are continuing to commercialize IQOS VEEV with Q1 launches in Italy, and as I just mentioned, Finland. This follows the initial launch market New Zealand and the Czech Republic in H2 2020. One of our key priorities is guarding against youth access for all our products, and we are targeting for all our electronic smoke-free devices to be equipped with age verification technology by 2023. We will be testing this technology with IQOS VEEV in select markets this year. IQOS VEEV is a premium product, providing a superior experience, and as we explained previously, the commercial infrastructure of IQOS allows us to deploy efficiently and at scale through a bespoke route-to-market approach. Our other major innovation for 2021 is the launch of IQOS ILUMA, the next generation of IQOS, as announced at Investor Day. Building on the success of IQOS 3 DUO, we believe this simple and intuitive device will support easier switching and higher conversion for legal-age smokers using Smartcore internal induction heating technology. We continue to plan for the launch of ILUMA in the second half of the year. As we roll out both IQOS VEEV and IQOS ILUMA, we carefully plan our manufacturing and supply chain activities to manage expected demand and external factors such as the current tightness of global semiconductor supply. The ongoing success of IQOS 3 DUO more than two years after launch demonstrates that significant innovation can have a lasting positive impact on growth, and both our recently announced 2023 HTU shipment volume target and the upward revision of our HTU target for this year reflect this confidence. Our transformation is the bedrock for both business and sustainability performance. We do not have separate strategies; phasing out cigarettes by replacing them with better alternatives such as IQOS drives our growth and addresses our biggest impact on society. Our unique commitment to phasing out cigarettes is underlined by the new transformation targets announced at Investor Day, which are aligned with the 27 Business Transformation Metrics provided for stakeholders to measure and verify the pace and scale of our progress. This includes our ambition to become a majority smoke-free company by 2025, our aim to commercialize smoke-free products in 100 markets, and to generate at least $1 billion in net revenue from beyond nicotine products as we move into adjacent business areas with a net positive impact on society. Our best-in-class performance on ESG allows us to further our leadership in sustainability. I am proud to see increasing external recognition, for example, for our efforts to develop a fully sustainable supply chain and our commitment to address gender inequality. Further, we recently announced a zero deforestation manifesto, strengthening our ambition to conserve forests across our entire value chain. We remain strongly committed to providing the highest level of disclosure on the key ESG and product impact areas of our company via integrated reporting, and we released our 2020 disclosure on May 18. We recognize that ESG analysis can provide valuable insights about factors with a significant potential impact on financial performance and thus better inform investment decisions. To further maximize the value of investor engagement and aid understanding of the significant positive impact PMI's transformation can have on society, we plan to hold a sustainability webcast in early June, building on our recent Investor Day. Please do mark your calendars. To conclude, we've had a strong start to the year and look forward with confidence despite the continued uncertainty in the operating environment due to COVID. This is the same concluding slide I presented at Investor Day in February, as I believe our start to 2021 demonstrates all of the key elements of our longer-term trajectory. Through IQOS, we are building a business with multiple levers to deliver superior and sustainable growth over the coming year through improved volume dynamics, excellent top-line growth, strong margin expansion, and fast-growing earnings. Moreover, while every adult smoker who switches to IQOS is good for our business, it is also a clear positive for our impact on society and public health. We manage our transformation with care and responsibility for our stakeholders, guided by our sustainability materiality framework to maximize our positive impact across our Tier 1 ESG and product areas. This is essential for the sustainability of our business and for delivering superior returns for shareholders over the long term. The increase in our organic growth outlook for 2021 is another step on this journey, also putting us nicely on track to achieve our 2023 financial and HTU shipment targets. Thank you. I am now more than happy to answer your questions.

Thank you. We will now conduct the question-and-answer portion of the conference. Our first question comes from Vivien Azer of Cowen.

Good morning.

Good morning, Vivien.

So given some of the headlines coming out of the U.S. yesterday, it might be helpful, please, for my first question, if you could just level-set on IQOS' designation in your international markets in terms of the type of tobacco product from the tax perspective? Thanks.

So, I guess, Vivien, if I understand correctly, your question is: how is our heat-not-burn offer and product classified versus combustible cigarettes in our non-U.S. geographies? Correct?

That's correct. Yes, please.

Right. So I'm not sure that I'm going to be able to give one general answer because the classification can be different from one country to another. I would say today, probably the fact that the excise duty applied to our IQOS product is differentiated in the vast majority of the markets shows that the treatment is differentiated, so the product is already being addressed in a distinct manner on that particular element, recognizing that it's a different product with different features than combustible cigarettes. So we are, of course, going to see some situations that can be different from one market to another. We are certainly welcoming regulations that will further clarify the fact that these heat-not-burn products are clearly different and a better alternative to combustibles in the future, and as I think I mentioned, we see the regulation progressing nicely country after country, and we expect that to continue. So we expect more and more governments to regulate and further clarify the distinction between heat-not-burn and other reduced risk products and combustible cigarettes, and come with different regulations. And as you know, we call for a differentiated approach on two items: certainly, on the way we can communicate these better alternatives, and also, of course, on taxation to ensure that we have an incentive to push smokers to this better alternative for their health.

Certainly. That's helpful. Thank you very much. And then my follow-up, if you could just provide your assessment of the risk of other countries potentially implementing a nicotine cap on combustible cigarettes. Thank you.

Well, I think that is something that, as you rightly say, Vivien, is not implemented anywhere today. And I think it's an idea that certainly would have to be investigated in all its dimensions. I think that could have a number of impacts in terms of illicit trade, in terms of people smoking actually more combustible products to get to the same kind of nicotine dose, and of course, therefore with negative impacts. So I think at that stage, frankly, it's too early to say whether this is something that could have the right intent. In any case, that would have to be coupled with a very strong awareness, availability of better alternatives, and certainly starting with heat-not-burn if we were to work, and that should be perceived as an incentive for people to quit smoking or to switch to this better alternative, and certainly heat-not-burn being the first one that could be perceived as a nice and satisfying alternative for smokers wanting to go for better products. So, I think that the idea is not new because I think the FDA proposed the idea already in 2017. I don't think that much work has been done so far on all the potential consequences. We believe that a lot of work would have to be done on the impact, and the scientific evidence would have to be gathered and studied on that. In any case, for us, that would have to be coupled with very strong awareness, availability, and presentation as an alternative for people who don't want to quit but want to keep consuming nicotine.

Understood. Thank you very much.

You're welcome.

Our next question comes from the line of Owen Bennett of Jefferies.

Good morning, Emmanuel. Hope you are well?

How are you?

Yes, good. Thank you. And I just wanted to focus on the incremental commercial spend in the second half. Could you maybe give some more specifics around what this will be behind? Will it largely be focused on the rollout of VEEV and ILUMA? And then linked to this, I was just wondering how many markets realistically are you targeting for VEEV and ILUMA to be in by the back end of the year? Thank you.

Yes. Sure, Owen. So on the commercial spending, of course, here it's expecting, we believe realistically, that in many markets, the situation on COVID will gradually improve. So everybody believes that in many markets with the vaccination and positive evolution starting in the summer, we're going to see a switch to a gradual improvement. So, as you know, during a significant period of time, because of COVID, we've been somewhat limited and restricted in commercial actions across the portfolio, but of course, starting with our IQOS business. So as we see the market opening up, it will, in general, be time to be back on communication, on making our IQOS product known, and building awareness again around IQOS is absolutely key in building our IQOS business and obviously, that will trigger more commercial and marketing activity. On top of that, you're absolutely right, that will be a period of very important launches with ILUMA and VEEV. Although VEEV has started to be launched, we expect a number of markets in the second half of the year. We see exactly what the final number is. We want to make sure that we do that well with the right focus. On ILUMA, you can expect key markets to be first on the priority list for launch. So I'm not going to disclose at this stage the names, but you shouldn't expect key markets for us on IQOS to be coming very first on the list. And of course, that will require specific investment to make sure that smokers or other RRP users understand what the benefit of ILUMA is, why it is an even greater product than the IQOS 3 DUO, and generating more conversion and more loyalty to our product. So that requires nice investment in the second half of the year. So that is really what is behind this $300 million to $400 million that we are mentioning here.

Thanks very much. Very helpful.

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

Hi. I wanted to ask maybe...

Hi, Bonnie.

I would like to follow up on ILUMA. As you roll this out, what are your expectations for its incremental impact? Are you anticipating a significant number of current or dedicated IQOS users to upgrade to this device? Do you expect many new users to adopt IQOS? Additionally, with the introduction of a wide range of consumables for ILUMA, should we consider that there will be some incremental costs associated with this, potentially affecting margins, or is it not necessarily the case? I'm trying to understand how beneficial this could be for you.

Yes, sure, Bonnie, I'm happy to answer on these two points. So on the impact of ILUMA, we broadly expect ILUMA to be positive. Well, first of all, of course, it’s about acquiring new smokers and converting new smokers, because you're going to find a more intuitive, easier to use product, and we make sure to convince, with ILUMA, smokers that we did not manage to convince so far. So that's the first element. Second, of course, we're going to have a number of IQOS users or other heated tobacco product users switching to ILUMA because it's really a superior product with a lot of benefits for the consumer. And lastly, because we believe that in terms of loyalty and people fully adopting the heat-not-burn practices and not moving back to cigarettes, the fact that it's a better product is also going to play a very nice role. So we expect to have people abandoning and switching back to cigarettes to be considerably lower once again because it's much easier to use; it's an overall better experience, and we think it's going to have a nice impact on that one. So, as you can see, we expect several drivers behind this ILUMA innovation to further boost our performance on IQOS globally. Regarding consumables and globally as a launch, I would say you should expect, like always when you launch a new product, you are coming with a product not fully optimized in terms of manufacturing productivity. It's a new product; at the beginning, the volumes are low; you've made some investments; it takes some time to be fully optimized. So there will be, beyond the cost of launching the product for marketing and commercial reasons, there will be some impact at the gross margin level at the beginning because it's a new product and there will be a ramp-up on the profitability and consumable margin on this new product. And that is, of course, taken into account in our guidance.

Okay, that's very helpful. Thank you. And then, I wanted to circle back to some of the news that came out yesterday regarding a potential cap on nicotine levels on cigarettes in the US. So I guess my question is wondering if there is anything you can do to accelerate the rollout of IQOS in the US, since I imagine if a nicotine cap would ever be implemented, as I see it, IQOS would have a distinct advantage. So I'd love it if you could touch on that. And then, maybe your latest thoughts on potentially entering the US market with VEEV. Wondering if that might now become more of a possibility. And if so, will you or have you submitted a PMTA? Thanks.

So just on the second one, on VEEV, it is certainly our intention at a certain point in time to submit a PMTA. We have not done it yet, and I don't have the timeline yet on when we do that, but yes, it is certainly our intention to do that at a certain point in time. Now on growing the IQOS business, of course, we will work with our partner, Altria there. Remember, we are not commercializing IQOS in the US. We have licensed the IQOS commercialization to Altria. Let's not overreact to what is a press article yesterday, and therefore we should not run too fast to a conclusion or believe that the world is going to change overnight. I think it's just a press article. But now, we are convinced that the FDA has one clear objective, which is to promote a policy for harm reduction that will go through innovation and based on scientific evidence, and they want to supervise that. The MRTP that we received on IQOS 2.4 signals that they see IQOS as a positive contribution and according to their own words, that it's appropriate to promote public health. So that means that we have with IQOS a role to play that we believe that this vision of the FDA is something that we can accompany and that we can foster and help to develop with our innovation and with IQOS, and of course, we'll make sure that with Altria, we try to maximize what we can do there.

All right. Thank you, again.

Thank you.

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

Hi, good afternoon. I have two questions. First one is on IQOS market share. Now in the first couple of years, you've seen very good growth in Q4 versus Q3 and Q1 versus Q4. And then market share has been stable. You can see that for example in Slide 19 and Slide 21, that sort of Q2 and Q3, there's been no growth in Japan or a little growth in the EU and in Russia. And I guess the question is should we expect the same sort of pattern in 2021? In other words, great growth in Q4, you just have a great growth in Q1. But then the market share will be pretty stable for the next couple of quarters in your key markets.

Hi Adam. I think it's important to consider that there is some underlying seasonality in many markets impacting the volume on CC, which affects the denominator. Even if IQOS and heat-not-burn products continue to grow globally, this influences the overall market share. Additionally, the impact of COVID, such as border closures and the emergence of illicit markets, particularly in the CC business, has been affecting market share. We anticipate that in 2021, growth will still face challenges from COVID, normal seasonality, and specific COVID-related impacts. While we aim for overall progressive growth, it’s possible that after strong acceleration in one quarter, subsequent quarters may experience lower growth or even stability due to these factors. Year-on-year, growth remains strong, but sequentially, market share might not grow at the same rate. This doesn’t imply that volumes aren’t also growing; market share needs to be viewed over a longer period for meaningful insights.

Thank you for your insights. My second question pertains to your quarterly EPS guidance. I am concerned that people may be starting to overlook it, and the market's perception of your company seems to be shifting beyond your control. To elaborate, over the past couple of years, you have consistently exceeded your quarterly guidance. Are you still closely monitoring the situation? If you provide guidance for a certain EPS, I would expect it to exceed that by 10% or 12%. However, this quarter it appears that your stock remains relatively flat despite that expectation. There may be various factors at play, but it seems the market is not giving much weight to your EPS guidance this time around, which could be a risky scenario for you. I'm curious if you share this concern, why there hasn't been more communication about future developments, and how you anticipate this situation evolving moving forward.

Yes, Adam. In response to your question about our guidance and performance, I want to highlight two key factors that have contributed to our exceeding expectations. First, we are often pleasantly surprised by the strong performance of the IQOS business. We set certain expectations, and many times the results surpass them, as has been the case in Q1. We strive to make reasonable predictions, and when our outcomes exceed these, we view it positively. However, I admit we have been somewhat conservative in our forecasts. The second factor is the current environment, which makes predictions more challenging due to significant volatility. We have encountered unexpected developments that we did not foresee, such as planned spending in March that did not materialize, with some investments pushed to later in the year and movements in the market that caught us off guard. The impact of COVID has created a lot of uncertainty and fluctuations in the market behavior, including changes in customer purchasing patterns. These factors are the main reasons we have occasionally surpassed our guidance. When we become aware early in the quarter that we will exceed expectations, we communicate that information and clarify it when the quarter concludes. Regarding your concern about whether the market has lost confidence in us, I don't believe that is the case. Everyone recognizes the unique aspects of the COVID situation and understands the potential for volatility and unpredictability. As for the strength of IQOS, I think it is clear to everyone what we can achieve. We are now revising our guidance for HeatSticks this year to a range of 95 billion to 100 billion, based on the performance in Q1. This reflects our best estimate and vision at this time and is something we want to communicate to all our investors, shareholders, and analysts.

Okay, thank you. It was a tough question. Thanks.

Thank you.

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

Good morning. Thank you.

Hi, Michael.

I just wanted to come back to your comment about pricing on HeatSticks and how you've begun to differentiate a little bit more there. And I assume if I heard you right, you said you're now doing both above and below the original price points you’d had. Obviously, in Japan, we saw the HEETS launch lower price point introduced, but could you give a little more color on how you're doing above where you have been price point? And is there additional new brands you have or a second or a third one? And just how that's positioned and if it's not too early what you're seeing so far with that?

Sure, Mike. Happy to do that. What is happening on our IQOS business and consumable is typically what you would expect in a consumer goods market where things start to mature a little bit. And I'm using this word with a lot of caution, of course, because it's a very young market still, but in a few markets like Japan, for instance, a few other markets where we are not yet at double-digit market share, it's maturing a little bit. So typically, the consumer will expect, based on his purchasing power, based on his personal lifestyle and what he wants to enjoy or what he wants to say about his life or her life around him, will want to have different positioning on what he is consuming. So when you go for innovation, what we did with the HEETS consumable, you have one single reference at the beginning. And then rapidly, you see the need for segmenting the market. There is a category of the consumer that will be very keen to have an even more severe experience. So to get to an even better consumable and ready to pay more for that, so to have higher expenses, that's what we have with whether the Marlboro HeatSticks in Japan or HEETS creation in Russia. You keep the premium below the hyper-premium if you want. Then at a certain point in time, there is also a need for a medium positioning because other consumers will be keen to have an inferior overall experience but still great rewarding versus what they used to have with the same category of combustibles, and of course, at a lower price point. So I think we're just doing the right commercial marketing job to make sure that we give satisfaction to all the expectation of our customers. It happens gradually; it's not relevant yet in every country. But as more and more countries become a bit mature, that will become increasingly relevant in more and more markets in the future.

Okay. That's a really helpful color. And on your sort of quote mature Japan market where you grew three or four share points year-over-year, I just want to make sure I understand some of the dynamics there. You gave the adjusted share which, of course, excludes some trade moves but also cigarillos and then the other share. The gap between those has widened a little bit over the five quarters you show; it's like 1.3, 1.5, 1.6, 1.9, and then 2.6. Unfortunately, we don't have great visibility on cigarillos. Is it just growth in that segment that’s the key driver there, or is there also a little bit of an inventory build we should have in mind as we think about modeling Q2 and beyond?

No, Michael, there is no concern of inventory build whatsoever. That certainly the level of cigarillos remember that is a specific category. The tax advantage will fully disappear next October, but there is still, until now, a very dynamic category in Japan. So what we are, as I said, seeing in Japan has been following the October excise duty increase and price increase, a very, very nice reaction from our IQOS business altogether, both Marlboro HeatSticks and HEETS; we've been gaining very nice market share at the end of the year 2020 in Q4. It continued in Q1, and therefore we are disclosing very positive and genuine market share growth during the last two quarters, and we are very happy with it.

Okay, great. Thanks so much.

Thank you.

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

Hi, good morning.

Hi, Chris.

Questions were asked. I have just two quick ones for you. I was just curious in relation to IQOS. You've had really strong development of market share in Russia and the EU. Those were also markets where you continued to build your availability of the product. Do you have a rough approximation of how widely available IQOS is, say in the EU and Russia? Is there still more distribution potential in those markets to get it in front of more consumers?

We have not yet achieved full coverage in Russia, and in the EU, we only have a presence in major cities without significant overall coverage. Yatsik mentioned during the Investor Day that our market share in key cities indicates potential for future growth. Historically, strong market shares in large cities suggest we can capture a greater overall market share in the future. This is a positive sign that if we continue to perform well, we could achieve similar market shares across the country. However, this is an ongoing process as we are still expanding our share in these urban areas. That’s how we should approach our progress.

Okay, that's helpful. Thank you. And just one other question in relation to combustibles in an area where you've had a little bit of share pressure again this quarter, and there's some reasons for that. But I just was curious when I think about commercial investments in the second half of the year, I was thinking that in relation to IQOS and reduced risk products, do you need to apply more money, more attention, whatever the right word is towards combustible cigarettes to try to shore up some of that market share decline? I know some of this is being generated by the success of IQOS, but just curious how you're looking at that and is there any kind of change in the competitive dynamic you're seeing in combustibles.

I mean we are certainly seeing competition quite active on combustibles because for many of them, they have only little presence in RRP. So they are trying to protect and build their business there, and especially sometimes they are under pressure because of the growth in the heat-not-burn category. Chris, we are just reminding everybody that maintaining our leadership in CC is an absolute priority. We need this leadership in order to make sure that we keep the link with the smoker that we want to convert in order to keep the impact with the trade to bring our RRP offering to customers. And of course, for the financial resources that it provides in order to invest behind RRP, so you should expect us to continue to invest on CC to maintain this market share. It is clear that, although it's not going to be the majority, there will be some investment in the second half on the CC business as we defend our business. And as we see some of the markets where we've been sometimes hit hard by the COVID, and we talk about the social consumption that has been affecting Marlboro. Well, as we think the world is back to more social life in the second half, that will probably be a time to be back on making sure that we maintain and further strengthen the leadership on Marlboro as an example.

Okay. That's very helpful. Thank you for the color.

Thank you.

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

So I just wanted to come back to understanding your guidance and the cadence for this year. Given the strength in the first quarter and outlook for Q2, your guidance for EPS implies a moderation from about mid 20% growth in the first half to high-single-digit growth in the second half, and obviously, you pointed to added incremental investments. But are there any other factors impacting the second-half outlook? Because even when adjusting for the added incremental spend, it implies a notable moderation in growth. So just trying to understand what's considering factor.

So, Pamela, I'm happy to address that. We've noted that the Q1 margin was positively influenced by some deferred investments in SG&A. We also indicated that we will be significantly more active in the second half, with an additional $300 million to $400 million in investments compared to the first half. The gross margin performance in Q1 was truly impressive, and we expect to achieve strong improvements in gross margin rates throughout the year. However, we pointed out that Q1's performance was also enhanced by non-recurring factors related to manufacturing productivity, which we believe will not be replicated, leading to moderation. Additionally, as Bonnie previously inquired, we anticipate some pressure on our gross margins due to the launch of ILUMA and its consumables, as there will be a ramp-up period for manufacturing productivity. We will also be making various investments in distribution that will affect gross margins in the second half. Therefore, when we consider that Q1 was exceptional for several reasons and recognize the boosts in gross margins for Q2, along with elements that will have a negative impact, plus the increased investments driving the outlook, we still expect a pleasant margin improvement, which I’m sure you’ve already noticed.

Thank you. Also, I just wanted to ask about IQOS VEEV learnings and performance in your initial launch market. I understand you're leveraging your existing IQOS platform to commercialize VEEV. So how are you steering consumers across the various products?

Yes. So at this stage, Pamela, it's very early stage, few markets, very preliminary. We have very good feedback from customers reflecting the fact that it's a superior experience versus most traditional vaping experiences. So we are collecting data; we are reviewing the first information coming from these markets. And when we have a bit more elements to share, we'll do that. I would say for the time being on the limited number of markets and with very small volume, we are happy with the qualitative feedback that we are getting from these markets.

Great. Thank you.

And ladies and gentlemen, we have time for one more question. Our final question will come from the line of Gaurav Jain of Barclays.

Hi, thank you. Good morning, Emmanuel.

Hi, Gaurav.

Coming back to the questions that have been asked on repeated earnings beats and earnings coming ahead of guidance, how does this impact your thought process around the magnitude and timing of share repurchases?

I don't think that this is having a meaningful impact, Gaurav. I think we've signaled previously that we are absolutely on track, provided of course that we receive board approval to start share buyback in the second half of the year as announced at the time of the Investor Day. I'm not sure that at that stage, we are building a strategy based on that. As I said, I am hopeful that with the COVID headwinds abating, we're going to be better forecasters in the future for our quarterly guidance. So I don't take that as a kind of element that would be here to stay.

Thank you. My second question is, as I understand it, part of IQOS contains about 6 grams of tobacco, while a pack of cigarettes has 16 grams. Does this mean that a pack of IQOS has lower nicotine compared to a pack of cigarettes, which could be relevant in the discussion about nicotine caps?

No, Gaurav, not necessarily. It has an impact on some time in some country, not everywhere, on the excise duty because excise duty is on the weight of tobacco in several countries in the world, but the weight of tobacco is not directly going to guide the nicotine content that you're going to inhale through IQOS consumption versus combustible consumption.

Okay. Brilliant. And thanks a lot.

Thank you. Thank you very much.

That was our final question. I'd like to turn the floor back over to management for any additional or closing remarks.

Well, thank you very much.

Thank you.

That concludes our call today. Sorry, Emmanuel, unless you had a comment.

No, no, I was just to thank everybody for attending the call today, and we look forward to talking to you soon.

Thank you. If you have any follow-up questions, please contact the Investor Relations team. Thank you, again, and have a great day.

Bye-bye. Bye, everybody.

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