Philip Morris International Inc. (PM) Earnings Call Transcript & Summary

Hi. Please join me in welcoming Philip Morris International back to CAGNY, and thanking them for generously sponsoring tonight's dinner. PMI has invested more than $6 billion in its reduced risk portfolio, IQOS, and continues to be committed in its journey to a smoke-free future as it transitions consumers from cigarettes to reduced-risk products. This strategy is working. There are approximately 14 million IQOS users around the world, of which nearly 10 million have quit smoking cigarettes and IQOS now accounts for about 1/5 of the company's revenues. Furthermore, PMI is the first company to have received authorization by the FDA to launch a heat-not-burn product in the U.S. under the premarket tobacco application pathway, and we look forward to further developments in the future. We have the whole team with us on stage today, including: CEO, André Calantzopoulos;COO, Jacek Olczak; CFO, Martin King; Chief Strategy Officer, Deepak Mishra; and IR, Nick Rolli. Now to walk us through the company's strategy and vision, please welcome André Calantzopoulos.

Thank you, Janet, and it is my great pleasure to be back at CAGNY. And let me extend a warm welcome to those joining us on the webcast. I would like to introduce, again, our team here today, who will join me for the Q&A session is Jacek Olczak, our Chief Operating Officer; Martin King, Chief Financial Officer; Deepak Mishra, Chief Strategy Officer; and Nick, whom we all know, Vice President, Investor Relations. And for those here in Boca Raton, we also look forward to talking with you at dinner this evening. Our remarks contain forward-looking statements, and accordingly, I direct your attention to the forward-looking and cautionary statements section of today's presentation. Reduced-risk products or RRPs is the term we use to refer to products that present, are likely to present or have the potential to present, less risk of harm to smokers, who switch to these products versus continued smoking. Comparisons are presented on a like-for-like basis, reflecting pro forma 2018 results, which have been adjusted for the deconsolidation of our Canadian subsidiary, Rothmans, Benson & Hedges, effective March 22, 2019. So let me first outline the agenda for today. I will begin the presentation with a quick recap of our 2019 performance and the outlook over the near to midterm. Next, I will cover our view of the evolving industry landscape and the profit enhancing trend towards RRPs, driven by consumer needs. I will then turn to our RRP portfolio strategy and some of our key competitive strengths. Subsequently, I will cover our strong combustible portfolio before turning to our efforts to create a sustainable and responsible operating environment. Let me reiterate a few key metrics that highlight the strong underlying performance of our business in 2019. Our heated tobacco unit shipment volume increased by 44%, reflecting broad-based growth across a wide range of geographies. Net revenues increased by 6.4%, excluding currency, driven by heated tobacco unit sales growth and strong combustible pricing of 6.5%. Our adjusted operating income margin increased by 170 basis points ex currency, also helped by a favorable geographic mix of heated tobacco units, RRP scale benefits and cost efficiencies. Consistent with the growth in revenues and margins, adjusted diluted earnings per share increased by almost 10% ex currency. In summary, 2019 was an excellent year, where we demonstrated the success of our strategy and delivered across all of our financial objectives. Turning to this year, as we explained in our earnings release on February 6, we anticipate another robust performance despite the temporary headwind in Indonesia from a year of catch-up on excise tax and pricing. We assume net revenue growth, excluding currency, of approximately 5%, reflecting expected strong shipment growth in heated tobacco unit volumes, putting us well on track for our target of 90 billion to 100 billion units by 2021. We also forecast continued strong growth in adjusted currency-neutral operating income margin of at least 150 basis points as our expected acquisition cost per new IQOS user improves by around 25%, and our cost efficiency programs fully offset incremental RRP investments. Accordingly, we forecast adjusted diluted earnings per share growth of at least 8% in 2020 ex currency. As outlined during our Investor Day in September 2018, we are targeting currency-neutral compound annual growth for net revenues and adjusted diluted earnings per share of at least 5% and 8%, respectively, for the 2019 to 2021 period. The implicit margin growth is supported by over $1 billion in targeted cost efficiencies over the same period, which we're well on track to deliver as we start 2020. In our press release today, we reaffirmed our 2020 reported diluted EPS guidance provided on February 6. On a currency-neutral and like-for-like basis, our guidance represents an adjusted diluted EPS increase of at least 8%. As we highlighted in our recent earnings call, we expect particularly strong growth in the first quarter and a notably softer Q2. The first quarter will benefit from favorable year-over-year pricing comparisons in the Philippines and Turkey. We anticipate double-digit currency-neutral adjusted EPS growth in the first quarter on a like-for-like basis. Conversely, performance in the second quarter will likely be impacted by both the comparison to a strong Q2 last year and the most pronounced effect of the tax-driven pricing in Indonesia as the new minimum retail price takes effect. Finally, there are natural questions to all companies on the potential impact of the coronavirus situation. As of now, there is no impact on our IQOS device supply. We observe, however, a modest impact on our duty-free sales for both RRPs and combustible cigarettes due to currently reduced global travel. We will continue to monitor the developments closely. Now we turn to consider the evolving outlook for the industry. There have been questions in some parts of the investment community over disruption from the advent of RRPs. While a changing environment comes with new challenges and opportunities, by far the biggest disruption to both our company and our industry to date has come from our own deliberate efforts. We've spoken previously of the RRP category being at its very beginning. And we stand today is that on one hand, the category is gaining credibility amongst consumers, but on the other hand, consensus amongst regulators, policymakers and public health advocates is still lagging. We now have a much better understanding of category dynamics. The main RRP product categories are now established, the profitability of both heated tobacco and closed system in e-vapor is favorable and an increasing number of adult smokers seek better alternatives to cigarettes. As with any new category, RRPs will experience periods of faster and slower growth. Over the midterm, we expect these factors to drive sustainable, enhanced revenue and profit growth for PMI and those industry participants who invest in the technology, science, consumer experience and the commercial and digital muscle to deploy at scale. Let us now consider the vast opportunity in more detail. There are over 1 billion adult smokers worldwide. As of September (sic) [ December ] 2019, we estimate IQOS had acquired close to 14 million legal-age smokers with close to 10 million of those having stopped smoking and switched completely to IQOS, and another 4 million are in various stages of conversion. For e-cigarettes, there are around 40 million global users, of which we estimate around 10 million are converted. While the approximate total of 20 million converted users is a great achievement for harm reduction, it represents only 2% of the world's smokers. It's clear we have only scratched the surface of the smoke-free category's potential. Indeed, as shown on this chart, IQOS is currently commercially available in markets, representing around 1.2 trillion units or 44% of the total international industry ex China and the U.S. Due to focused distribution, our effective geographic reach is approximately 700 billion units. It follows that while our 2019 heated tobacco unit shipments of 60 billion units make up only 2% of the total industry, this represents around 8% of volume where IQOS is available. Nevertheless, our IQOS RRP business already accounted for close to 1/5 of our net revenues last year. This offer us great encouragement as to the future potential to accelerate our successful business transformation. Another way to illustrate this is to consider the weight of RRPs in the total international nicotine market, which we estimate grew by around 4% in retail value since 2018. While disproportionately driving retail value growth, we estimate RRPs, including snus are just over 5% of the total. RRPs 2 principal categories are heated tobacco, which makes up around 70% of the total international retail value of $23 billion; and e-vapor at 30%, reflecting the prevalence of open systems and low rates of conversions, all based on our latest estimates. While emerging categories such as nicotine pouches are showing promising growth in a few markets, they remain small in the overall picture, and snus is concentrated in Scandinavia. We also note that heated tobacco is growing faster than an e-vapor, helped by the quality of consumer experience and a consequent better rates of conversion. IQOS heated tobacco units have better unit margins relative to cigarettes. There are regional variations in this differential due to different excise tax regimes, making geographic mix an important factor for our overall margin progression. While certain closed system e-vapor products already enjoy attractive unit profitability compared to cigarettes, there is an opportunity to optimize trade margins over time and to reduce manufacturing costs with scale and automation, which could help offset future excise tax introductions or increases for the category. However, better unit margins for all our RRPs should not be viewed in isolation. The development, scientific substantiation, manufacturing, commercialization and continuous innovation for these products require significant upfront infrastructure costs and capital expenditures for any serious long-term participant. For PMI, the cumulative amount invested for the period 2008 to 2019 is $7.2 billion. In addition, there are variable costs related to consumer acquisition and retention. Consequently, only when significant sales volumes are achieved do the revenues become accretive to the bottom line. For a category in its early stages, this entails significant segment volume share, which PMI has achieved in the heated tobacco segment with IQOS. We can now leverage this infrastructure and IQOS brand equity to also achieve critical mass in the e-vapor segment. Indeed, while not the only driver, this is reflected in our margin progression over the past few years, where the investment phase has been followed by the strong margin expansion seen in 2019 and expected this year as RRPs continue to make a positive contribution to our operating profit. Our long-standing focus and investment in reduced-risk products have allowed us to lead the category. Even without the meaningful presence in e-vapor, our 2019 share of the international RRP category in retail sales value terms was around 55%. This compares favorably with an approximate 30% retail value share of cigarettes. It follows that as the structural trend towards better alternatives continues, share gains can further accelerate growth. I am sometimes asked how confident we are about the long-term growth of RRPs. While switching to a less harmful alternative makes intuitive sense for smokers who would otherwise continue to smoke, we also know this is a significant change of behavior to them. Taste satisfaction, credibility of the proposition and understanding of the comparative health benefits are all important factors in the decision to switch and unfortunately, there is confusion on the health benefits exacerbated by recent events in the e-vapor category. Despite all this, our consumer insights research from IQOS market indicates that 80% of legal aged smokers say they are looking for better alternatives. We also know that the consumers have a wide range of attributes, needs and preferences. We highlight here are some of our high-level consumer segmentation based on research across the IQOS market. We find the needs of around 1/3 of legal aged smokers have a strong fit with heated tobacco. A slightly larger group are likely to be served predominantly adopting either heated tobacco or e-vapor. A smaller third group are more likely to regularly combine different RRP products. Having discussed the consumer and industry landscape, we now turn to PMI's approach and competitive strength within this environment. Consumer segments, preferences and usage occasions are diverse, and it follows that growing the smoke-free category to its full potential will require different product formats, technologies and taste experiences. We started with heated tobacco products, which we believed would be most effective at converting adult smokers, as has proven to be the case. This gave us much faster scale and established IQOS as the most credible brand in the category. In addition to this brand's strength, we have the technology and capabilities to expand to e-vapor. Our competitive advantages in RRPs are built on 3 key pillars: the first is product superiority, backed by science, technology and consumer insights. The second is our commercial deployment engine, which allows us to launch and grow at scale. The third is a strong brand equity and awareness we continue to build with IQOS. I will now explain these interrelated strengths in more detail. Building the category requires regular innovation of our devices and consumables. The first major commercial launches in 2015 and '16, used the IQOS 2.4 device with repeated innovations culminating in 2019 with the launch of IQOS 3 DUO. We should not forget that the product consists of both the device and the consumables, and it's equally important to innovate a heated tobacco unit portfolio. We continue to expand our flavor range around the real tobacco taste of HEETS to offer consumers a wide choice of experiences and deploy this according to local market dynamics. A wide assortment of consumables also allows us to serve a broader range of legal-age smokers at different price points in more advanced IQOS markets. A key example is the loss of the HEETS brand in Japan at the mainstream price point below Marlboro HeatSticks. As shown on the chart, this was notably successful with Marlboro HeatSticks proving very resilient and the overall share of our heated tobacco units continuing to grow. As another example, we recently launched HEETS Creations in Russia, an above-premium line of consumable variants priced at RUB 170 per pack compared to existing HEETS variants at RUB 150. To conclude, we are a clear leader with strong segment shares and our focus on further improving our best-in-class products remains relentless. We continue to nurture a strong pipeline of improvements and innovations across all our platforms. A second key competitive advantage is our RRP commercial engine and the physical and digital infrastructure which supports it. Following significant investments across our IQOS markets, we now have a footprint of almost 200 stores, over 3,000 exclusive IQOS retail touch points, a commercial sales force of some 11,000 people and 23 call centers all working to convert legal-age smokers to our reduced-risk products. We also collected 1.6 million of consumer feedback and generated 46 million unique visits to our digital assets last year. Our commercial engine has a number of key pillars. These include an organization and infrastructure aligned to the IQOS consumer journey, an omnichannel, providing consistent brand experience to consumers, a digitally driven customer relationship management approach for tailored communication and systems and processes to generate consumer feedback. Why is this so important? While the cigarette business is mostly transactional at point of sale, we are now interacting directly with consumers on a daily basis. The required capabilities take time and investment to design, implement and leverage. This is coupled with a relentless focus on executional excellence and minimizing unintended consequences, such as underage use through the application of good conversion practices. With regard to our focus on minimizing unintended consequences, we're encouraged by the results of a recent study conducted under a Japanese Ministry of Health research grant, which showed that only 0.1% of high school students were daily users of heated tobacco products. Let me now explain how a commercial approach aligns to the IQOS consumer journey. The first part of the journey relates to awareness, trial and acquisition. For the latter parts, concern full conversion, retention and advocacy. We allocate resources accordingly on a market-by-market basis with increasing digital capabilities, enabling us to scale faster and become more efficient in servicing consumers. One example of how a digital approach increases scale and cost efficiency is the guided trial that legal-age smokers who express an interest in IQOS are offered. In the analog version, this is a face-to-face interaction, which is time-consuming and expensive. We're now able to offer this remotely, which is more convenient for the consumer and stable for us at a cost, which can be up to 5x less expensive. The same principle applies for other stages of the consumer journey. We also put significant focus in establishing an omnichannel model to ensure consumers receive a consistent brand experience and service across all touch points, whether that be via our CRM, website, social media, retail touch points or consumer care centers. CRM is a core element of our commercial engine. It allows us to proactively offer tailored promotions and communications to consumers through digital means, according to their specific interest and stage of the consumer journey. We're able to process, analyze and respond swiftly to consumer feedback across all touch points. It also constitutes a growing platform to offer other revenue-generating products and services in the years to come. All this is important because execution matters. Great products are a necessary but not sufficient condition for competitive success. It is especially crucial to the RRP category as we are not just selling RRP devices, but convincing consumers to change their behavior by switching to less harmful alternatives. This requires substantial upfront and ongoing investment and time to continuously learn, making it hard for others to replicate. As highlighted earlier, when we showed the recent margin progression, even for a company as large as ours, this is a significant and lengthy undertaking. Mastering the commercial engine makes a difference for our results. In markets where we have launched more recently, which we have the benefit of our engine development and learnings, we have achieved faster growth. We demonstrate this by first showing the market share progression of IQOS heated tobacco units from time of launch in some of our early markets. With a notable exception of Japan where IQOS uptake was a consumer-led phenomenon, our progress was relatively slow in the first 2 years. In contrast, in markets where we have launched more recently, we see much faster growth in user acquisition and market share. While growing global awareness of IQOS also helps, this is a clear testament to superior execution. Turning back to the same early launch markets, our commercial learnings have also allowed us to accelerate growth momentum and give us confidence for geographic expansion. Notably in Japan, where early success came before our commercial machine was ready, we were able to resume growth during 2019, despite an intensified competitive environment. I will now turn to how we can leverage this going forward, starting with our core IQOS heat-not-burn offering. First, I would reiterate our expectation of accelerated user acquisition in 2020, reflecting strong momentum across IQOS markets. This follows the net addition of 4 million new users last year. We expect to achieve this at a lower cost per user, aided by scale leverage effects and digital efficiencies. On this chart, we see the improving trend in the markets of Italy, Russia and Germany up to 2019. These markets have taken learnings from Japan, building the agility to adapt and respond to changing consumer trends. We expect our worldwide acquisition cost per user to decrease by around 25% this year. A potent illustration of our commercial approach comes from comparing the market share in key cities, where we first established our commercial engine and the national shares in these markets. Coupled with the fact that key city shares continue to grow across the vast majority of our geographies, this is a clear indicator of the large remaining potential in existing IQOS markets. I would also like to highlight trends in some of the markets, which have been more challenging, mainly due to either severe regulatory restrictions on communicating with consumers or a small initial PMI presence. Despite these challenges, we persevere in seeking the optimum approach to grow awareness and trial for IQOS, and we are seeing encouraging progress in a number of key cities. Like our IQOS product, our commercial RRP platform is present in other 50 markets. This broad geographic reach has been built over a number of years. We started our full -- the first full commercial launches in 2015 with the first 7 markets with expansion to a further 13 in 2016, 18 in '17, 6 in 2018 and 8 last year to reach a total of 52. We intend to expand further, both in the countries where IQOS is already present and to new markets. The timing of any expansion is based on appropriate fiscal and regulatory frameworks, consumer and organizational readiness and a suitable product offering. Our international expansion has been augmented by the launch of IQOS in the U.S. under our license agreement with Altria. This was a significant milestone in both the commercial launch itself and the PMTA authorization from the Food and Drug Administration, which made it possible. As we mentioned previously, we intend to seek an additional marketing order for the IQOS 3 device in the coming months. As a reminder, our application to commercialize IQOS in the U.S. as modified the risk tobacco products remain pending. I will now turn to our plans for our new e-vapor product, which will be launched under the brand name of IQOS VEEV. We will leverage our commercial engine and the IQOS brand name to deploy IQOS VEEV at scale, applying the same responsible marketing and conversion practices across our portfolio. We have designed IQOS VEEV to deliver a superior user experience, utilizing the differentiated MESH technology, which is worthy of the IQOS brand and can perform well for e-vapor users, adult smokers considering the e-vapor category and dual users of e-vapor and heated tobacco products. As a reminder, the MESH technology is significantly more efficient than coil and wick systems at the same battery power level. We estimate that approximately 25 million adult e-vapor users, excluding China and the U.S., of which around 70% are in 10 markets. About 3/4 of these users currently use open systems, with many closed systems low on satisfaction in the nicotine-capped markets. Importantly, we have infrastructure and capabilities in all of these markets, so the cost of commercial deployment will be primarily variable in nature. Our buildup of manufacturing capacity is ongoing, and we'll be in a position to launch at scale, including in Europe starting in Q3 this year. A further opportunity to leverage our technology and commercial engine and accelerate growth of the smoke-free category comes from a global collaboration agreement with KT&G. As shown by the segment shares in Korea, KT&G's smoke-free lil portfolio has been the most innovative and successful rival offering to IQOS. As KT&G is not present with these products outside Korea, we have the opportunity to broaden our portfolio and offer consumers in international markets a wider range of taste, price and technology choices. The KT&G portfolio includes the lil Hybrid, lil Plus, lil Mini and lil Vapor products. I would highlight the lil Hybrid, in particular, as an innovative product with the potential to accelerate category growth. We may also use our product and technological expertise to enhance some of these products for international sales. I will now cover the strength of our combustible portfolio, which plays a critical role in our ability to grow the RRP category and reward shareholders. The combustible business principal driver remains robust pricing. The average pricing variance over the 2008 to 2018 period of 6.5% reflects a variance between the minimum of 5.2% in 2008 and a maximum of 7.7% in the following year. Our outlook for 2020 reflects an expected pricing variance of around 5%, with a one-off drag from the excise tax catch-up in Indonesia. However, the international environment for pricing remains robust and excise tax increases are broadly rational. The international share of Marlboro reached an all-time high of 10% in 2019, demonstrating the enduring strength of the brand. This also represents positive portfolio mix in the context of a total international volume share decline last year, which was impacted by temporary unfavorable price gaps in Turkey and Indonesia. I will now turn to our 2019 market share performance. While the 60 basis point increase in the international share of heated tobacco units was partly offset by a decrease of 50 basis points from our cigarette portfolio, this does not reflect an excessive level of cannibalization. As shown on the right chart of this slide, IQOS drove significant share gains in the markets where it is present, gaining double the share lost in combustibles. Looking at combustibles in isolation, a degree of share pressure in IQOS markets is to be expected as heated tobacco units initially sourced disproportionately from the premium segment, which is also more pronounced in the key cities where we are present. This modest level of share erosion is consistent with the non-IQOS markets where geographic mix and the temporary factors mentioned in Turkey and Indonesia were the key drivers. Lastly, but very importantly, I will cover our drive for a sustainable operating environment and positive impact on society. There is increasing focus on ESG for public companies, and we place great importance on the areas where we have the largest impact. Although at its beginning, we believe the way ESG investing is currently applied is not yet capturing the power of the process to make true change happen, as it mostly uses negative screening, which tends to exclude controversial industries such as tobacco. This does little to incentivize companies and industry to effect positive change, or more importantly, to encourage change in consumer behavior. ESG should not only consider operational aspects of the business, but also the societal benefit of true product change. What the company makes is at least as important as how it makes it, and not all companies within an industry are the same. By far, the biggest positive impact PMI can have on society is by replacing cigarettes with lower-risk alternatives. This is at the very core of our corporate strategy and sits atop our sustainability priorities, which are shown here. Our most important achievement is our close to 10 million people have already stopped smoking and switched to IQOS, and our aspirational target is to switch more than 40 million smokers by 2025. Of course, we will not stop there. We show here some of our ESG targets, which include measures to help eliminate child labor in our supply chain and to achieve manufacturing carbon neutrality by 2030. We have made significant progress in a number of social and environmental sustainability areas, including human rights, responsible sourcing, women empowerment and best-in-class agricultural labor practices. Indeed, in 2019, PMI ranked for the sixth consecutive year on CDP's A-list for climate, featuring the A-List for water and supplier engagement and received an A- for forest. For those who like more ESG information at PMI, please refer to our sustainability report available on our website and business transformation metrics in the appendix of this presentation. I will also be speaking at the Chief Executives for Corporate Purpose 2020 CEO Investor Forum on Monday, February 24, which will be webcast on our website. I would like now to leave you with some key messages from today's presentation. As we've laid out, the structural shift to RRPs is favorable for smokers, society and the industry from a revenue and profit growth perspective. In this next phase of category development and beyond, we have significant competitive strengths, which will enable us to deliver sustainable and superior growth for our shareholders. A key element of this strength is our commercial engine, which in tandem with our cost efficiency focus, supports ongoing margin expansion and strong cash flow. We continue to maintain the leadership of our strong combustible portfolio, which provides the financial resources to further invest in RRPs. Finally, we remain confident in our 2019 to 2021 targets, and we will continue to generously reward shareholders. Thank you. Jacek, Martin, Deepak and I, are now happy to take your questions.

We start with Michael Lavery. If we get Michael here.

Just 2 quick ones. One on Russia, there's the superpremium launch for HEETS that you mentioned. Have you also looked at a more value or discount brand or launch like you did in Japan? And is that something that would fit that market well? And then second, in India, you've got the 25% stake in Godfrey Phillips. The family has indicated they might be -- won't looking or willing to sell. Do you have any ability to increase that stake? And what are some of the restrictions or options you might have there?

Okay. I'll start on Russia and Jacek, and others contribute. Look, we -- as I said also in the call, at a certain stage in certain areas of Russia, we will need a second leg in the portfolio because we're reaching rapidly the limits of the premium in some of the top of the mid-price segment. Don't know if it's this year or it's over the next year, but as we say in Japan, that's something to be envisaged. Here is a different also offering because in Russia, we also have people that can afford. Superpremium products, and we cater to this part of the segment as well. So Creations is a superpremium line, and we will do both. Now India is much more complicated, as you know, because of limitations on foreign direct investment. I mean we know what is going on with our partners there, and we'll see what the best solution for the family and for us is.

We go to Chris Growe.

I had a question, if I could ask about the -- I guess, I'll call the priorities of your incremental investment in 2020 around RRPs was $300 million to $350 million. We saw the cost of acquiring consumers coming down, the cost of retaining consumers coming down. And then I look and see it -- if you look at like the 52 markets you're in, on average, like 60% of those markets. So you've got -- you're launching VEEV this year. I guess I'm trying to understand, are you broadening distribution in the markets which you're in? Are you looking to be in more markets this year? I'm just trying to understand the priorities of that investment that you're making in 2020.

I guess it's all of that, but I think with the exception of Japan and Italy, frankly speaking, we are in -- we are not in a full national support of IQOS in the rest of the market. So what you have -- so those are ongoing expansions city-by-city, territory-by-territory in other markets. Yes, there will be some variable investment behind the VEEV. It's mainly in the second part of the year. Plus, we still continue innovating on the existing IQOS 3.0, right, or the 3.1 actually. So there is the mix of these things, which goes into the back of -- most importantly, is that we have now the infrastructure starts paying off, right? I mean we are more looking into the debt component of the infrastructure, which over a period of time also with the model who have variable than fixed. I mean the 200 to 199 stores. That's a longer-term type of annual commitment, the boutiques, flagship stores, et cetera. The 3,000-plus exclusive IQOS retail touch points where the consumers can experience the brand more deeper than judging a point of distribution. I mean and then when we have a high degree of variability, right? So we've not committed the funds for the long period of time. And we can be more tactical in penetrating given market.

Yes. I would say the way to look at it also to Jacek's point is it's cheaper to enter a new market now because we have the engine in place, more digitalization, but there will be new markets. And as well as more consumers coming in, there is some variable cost even at a lower base. And thirdly, for the e-vapor, as we said, we have the infrastructure. We don't need to create the category understanding because it's there. We just need product differentiation, brand differentiation, which is an easier job than creating the category.

We'll go to Vivien.

So as we think about your 2021 volume target for IQOS of 90 billion to 100 billion sticks, can you just remind us how many new incremental markets that might assume versus national penetration as Jacek, you just mentioned? And then as a follow-up to that, longer-term question on EPS growth. The narrative used to be that with IQOS at scale, it should be accretive to your long-term EPS. So algorithms, so how are you thinking about that?

Well, I would say I think the growth is going to come more for existing markets, but new markets for sure. I mean there will be new markets this year, and in '21, but the bulk will come from existing markets, okay? So the first -- the second question you want to ask?

On EPS growth, and then it would step up on the IQOS.

So they're definite benefits from IQOS is higher margins. And over time, as that volume gets to be more of the critical mass, and as the geographies with the particularly high margins, for example, EU, become a bigger chunk, we expect to continue to see improved margin expansion, which should lead, of course, eventually to higher EPS growth. Exactly how fast that will come, we'll see. We've given the targets through 2021, our midterm growth targets, and we'll have an Investor Day at the end of this year, we'll take another look at it and give another 3-year look going forward at that point as far as growth rates.

Gaurav?

Sir, 2 questions, and that is on your share buybacks. So your leverage by the end of this year, assuming dollar remains where it is, will be around 1.66, which is going to be in a very comfortable range for you. Your free cash flow is now also running at very healthy levels. Dividend coverage is also around 80%. So how should we think about share repurchases? That's one. And the related question is around the ESG pressures that you mentioned. So as we look over the next 10, 20 years, would you want to pivot your shareholder returns or maybe the incremental shareholder returns to share repurchases over dividends?

So I'll take the first half of the share repurchases. You're correct that by 2021, we should be in a position to be able to make share buybacks. If the Board decides, that's the best way to reward shareholders, on Board decisions. We've been very focused on bringing our leverage ratios back into the ranges that go with our mid-single A rating, we'd be making good progress. We take another step in the first months of this year as some bonds mature. Our cash flow growth was very strong and gives us some good room. If you do the math, with $10.5 billion cash flow expected this year and about $1 billion of CapEx, you take out dividends and you're still with over $2 billion of headroom. So we've made very good progress on both deleveraging and on cash flow growth. And that should give us, by the end of this year, the ability to go to the Board and say, what's the best way to reward shareholders with our very strong dividends? Should we add in share buybacks. And if the Board decides, we could be in a position to restart share buybacks in 2021.