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

Welcome, and thank you for joining us. I'm James Bushnell, Director of Investor Relations. Today's webcast is focused on our sustainability strategy and addressing the impact of our business in our next growth phase. We will hear today from our Chief Executive Officer, Jacek Olczak; our Chief Financial Officer, Emmanuel Babeau; and our Chief Sustainability Officer, Jennifer Motles. Our Vice President of Strategic and Scientific Communications, Dr. Moira Gilchrist, will also join for the Q&A session. The materials we will share today are predominantly based on our 2020 integrated report published on May 18, where you will find comprehensive and in-depth coverage of all the topics we'll touch on. 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 forward-looking projections or statements. Please also note the additional forward-looking and cautionary statements related to COVID-19. A glossary of terms is posted on our website. As shown on this next slide, responsibilities and ownership for key sustainability topics are assigned across our senior management team. There is a similar assignment of responsibilities and ownership at the Board level as outlined in our proxy statement and the integrated report. Sustainability performance is also reflected in our management incentives, and Emmanuel will touch more on this later. It's now my pleasure to introduce Jacek Olczak, our Chief Executive Officer. Jacek?

Thank you, James, and good morning, good afternoon or good evening. This is our first sustainability-related webcast and is designed to increase our engagement with investors and other stakeholders on this important topic. It is obviously critical as investors, in particular, have the power to drive positive change by encouraging companies to improve. We talked about the next growth phase for our company at our Investor Day in February and believe many of you also had joined us at that time. And today, we want to give you a more depth on how sustainability and our impact on society are the core of our growth strategy. And this is, as James indicated, following the publication of our most recent integrated report on May 18. We'll start with the transformation. And obviously, it's about driving the growth and a positive impact and financial performance through a unique sustainability mission, which we have articulated for some years, very clearly, which is about phasing out cigarettes and unsmoking the world. Our strategic priorities are derived or being driven by the sustainability materiality assessment. And then they reflect our business -- and they are being reflected in our business and executive compensation targets. Materiality takes into account what our stakeholders expect from us, and Jenny later on will talk more about the materiality assessments, how we adopt it, how we approach it and how we use it to guide our strategies. We have a very statement -- a very clear Statement of Purpose, which I will talk about later, which underpins our strategy. And again, materiality informs our purpose. So the things which we are addressing, the area of the most of the importance to a broader group of our stakeholders. James presented that there is sustainability essentially penetrates all ranks of our management team and below. We were clearly assigned roles and the contributions to the specific sustainability agenda points. The sustainability strategy for us essentially equals to the business strategy, and obviously, it's being driven by our transformation strategy. We are differentiated from the industry by the fact of -- by our purpose, by the level and the commitment to transformations, by the way we allocate the magnitude of our resource allocation and obviously -- and also by the level of disclosure and impact especially for the ESG and the product, the KPIs and the progress. We are the only company today who work purposefully to phase out cigarettes and engaged with stakeholders to do so. We're not offering our smoke-free product as another alternative or part of our portfolio. Our objective, our purpose is very clear. This product should fully replace the cigarettes as they are a much better option for the consumers than a continuing smoking. We also have, during our Investors Day, for the first time talked that we're working on the strategy, which will deliver the long-term growth opportunity for Philip Morris International coming from Beyond Nicotine product, and I will also talk about it later on. We can go to the next slide. Obviously, as the outcome of our materiality assessment is difficult for us to envisage that Philip Morris International can be a sustainable business, if we don't address the problem of our product, i.e., the combustible cigarettes, therefore, our -- by far, the most important and a prime priority is to address the problem of smoking by replacing cigarettes with much better alternatives. This is not only about developing the scientific substantiation of these products, so both the consumers and the regulators and all other stakeholders have a comfort building with this product, but it's also ensuring that these products will have a broad -- the consumers/smokers will have a broad access to this product. So obviously, it informs the way we design. So there is the accessibility to the product from an affordability perspective, but also the way we engage with the regulators when we believe the consumers should have an access to the very clear and transparent information about the products, what these products can do and what they don't, and can make the informed decisions but also have an access in terms of a trial of the product, et cetera, which would facilitate or accelerate the switching to this proposition. We are working purposefully to phase out cigarettes. And again, I repeat, our strategy is not that this is another line of the products which we offer to the customer. Our desire, our objective, our mission is that this product should fully replace cigarettes. And this is very well reflected in the magnitude of the resource allocations, where essentially 100% of our research and development budgets are devoted only to the reduced risk products, and 3/4 of our commercial spend is being devoted or being invested behind this product. So as you know, it's complete disproportion to how much these products contribute today to our top line, to our revenue. When last year, we have generated close to 25% of revenue coming from a noncombustible product, again, 75% of the resources are behind -- further development and commercialization of this product. And obviously, as we've been developing and substantiating these products, we have developed, I believe, quite a unique capability in PMI, which allows us to, in a more realistic terms, think about the products that should go Beyond Nicotine. They have nothing to do with the tobacco and nicotine, and we'll talk about this also later. I think the very critical -- if we can move to the next slide. The very critical for us is to ensure that there was a perfect alignment between the external and internal stakeholders, including, obviously, our Board of Directors. You presumably know already, I mean, last year, we have adopted -- the Board of Directors of Philip Morris International has adopted Statement of Purpose. It was published in our proxy in 2020. And I just wanted to highlight the 4 critical pillars which are included, which are covered by this Statement of Purpose. First is we believe that with the right regulatory encouragement and support from civil society, we believe cigarette sales can end within 10 to 15 years in many countries. In a country like Japan, when penetration of this product today is at the level of about 30%, is a great example of how fast we can really put the cigarette smoking well behind us. We are actively accelerating the decline of cigarette smoking beyond what can be achieved by traditional tobacco control measures. And we have a number of examples which we also published, disclosed the case studies, which we published, disclosed in our integrated report. We understand that there is the need to continue to build legitimacy and trust by being honest, respectful, fair and transparent and by aligning our actions with words across all areas of our business. And I believe this event, the sustainability conference, is also one of the many examples what we as Philip Morris International are doing to be an accessible, transparent company, one we can obviously -- one we can very openly talk about our missions, our objectives and the progress to date. And hopefully, for the exchange of the opinions, we can improve on our strategy, if needed. Our key stakeholder constituencies, which are fundamental to both the achieving of our purpose and how fast we get there, will be affected in different ways by Philip Morris transformation. And I put it on that way. The massive change Philip Morris International is undergoing also requires change on our side. And very often, we are still today confronted with a more dogmatic approach and conversations, which are more focused about the tobacco without giving right recognition or at least attention to the effort which Philip Morris International is taking to completely reshape and transform the entire tobacco industry. I go to the next slide. Okay. The way we look at our transformations, we have 3 very important axes. One is obviously the product transformation. Without the product transformations, as I said earlier, it would be difficult to think about the Philip Morris in the long term as a sustainable business. There is the internal transformations, which we need to recognize that new culture is required in a company. New ways of working are very important. New operating model as we transform to a more consumer-centric business from this classical business-to-business setup is very required. Developing and upskilling of our people is very important, and many new skills have been already acquired or hired from other industries to complement our current talent and competencies with almost now half of our senior management, people who directly reporting to me, which has the -- they have less than 3 years seniority with Philip Morris and they came from all other industry, technology, life science, digital industry. They have essentially no legacy from a tobacco or cigarette business. And the third very important component of our transformation is the external transformation. And as I said, we have a mission to phase out cigarettes, and we can't achieve this alone. We can do the product or can invest in a science. We can continuously improve the product. We can understand what are the best ways of communicating with the consumers of facilitating the conversion to these products, but we also require some sort of regulatory frameworks, which at least allows consumers to have access to the information about the product. So we seek to actively engage with our key stakeholders and foster the debate, and we truly understand that not everyone is well informed about the science and the evidence behind these products. There was a lot of misunderstanding, but it's our job to continue to have this debate, to foster this debate. And I think Emmanuel also will touch upon more about what is the role of the investors in this external transformation. And obviously, all this 3 axes require significant investment over a number of years. And we didn't stay shy from putting significant amount of the resources, both human and capital and dollar resources, behind our transformation well before we have started commercializing IQOS. And you will know also from our integrated report that year-to-date, from the very, very beginning when we started investing behind the product, I mean, the total investment build is north of the $8 billion. But we're very happy that we started so early and we spent the resources and we are where we are today. So let me now turn into the product, right? And the biggest question or the most fundamental question is does product like IQOS, which is our heat-not-burn proposition, impacts the total sales of combustible product in the market? So on this chart, I look on the -- over the last 5 years period. 2016 is essentially a year when we started with IQOS. We almost had -- almost 0 revenue at that time. And we start looking at the acceptance and the penetration of IQOS in the different markets, how did we impacted the sales of cigarettes of the total industry. And you could see here, the blue line, represents the cigarette industry in total, the trend line over -- decline rate over this period of time. And in the red, you could see cigarette industry trend in the markets when IQOS was present. And you could see that from the very beginning, IQOS had a positive impact on the acceleration in the decline rates of the combustible industry. Based on this, we have -- if I can move to the next slide, please. Total build on this in the integrated report, we have included a number of case studies looking at the impact of introduction of smoke-free products like IQOS, which are replacing cigarettes and thus, accelerating smoking declines as measured by cigarette sales. So here, I brought the examples of Japan, Italy and Lithuania. And you could see that massive impact, frankly speaking, massive impact of heated tobacco product, the impact on the sales of the combustible business. And you also could see that product really works, heat-not-burn products, our product works really very well as the pure substitution to cigarette. Confirmation -- the first confirmation of that is coming that total of the combustibles and the heated tobacco units continue its sort of a historical trend. Obviously, this is the data. There is limitations in the data. Obviously, we only have a visibility of the legitimate sales tax paid products on occasions like you observe in Lithuania. You might have some sort of deviations, depends on the level of the illicit product penetrations in a given period in the market. However, I think in all countries in which we operate, we could very quickly see that we accelerate the decline of the cigarettes. So that's the one question, obviously, the first fundamental question, what the products like IQOS do to the sales of cigarettes, sales of combustible products in the market. Let's go to the next slide. It's obviously -- we know that investors and many other stakeholders are very interested in the tangible health impact or, in other words, real-world evidence whether such fast declines in cigarette consumptions what do they do actually to the health. Do we have any other observations? And obviously, we have 5 years on the journey of very heavily promoting the noncombustible products. And so it's difficult to expect from that time series, a long-term sort of epidemiological evidence. However, the first indications from the time trend analysis on COPD exacerbations is nothing else than flare-ups of certain conditions in Japan are consistent with what we would expect from a large amount of smokers moving to less harmful alternatives. A clear visible trend, you could see here that the trend line has started to change since 2016, and it demonstrates the strong correlation with introduction of heated tobacco products. So we also continue looking in this -- on this real-world data. And we'll go to the next slide. We're looking for further indications of the health impact of smoke-free products. And today, I also shared the review of this new study also coming from Japan, in addition to the study I just told a second before. And in a similar way to the COPD exacerbations, we see here an encouraging trend in the decline of admissions for ischemic heart disease, also coinciding with the introduction of heated tobacco products like IQOS. So this is also a time trend analysis in the absence of long-term epidemiology but is consistent with what we would expect from a large amount of smokers moving to less harmful products. So we start observing here in these 3 examples, the positive impacts that switching by smokers to these products have when it comes to some outcomes. And here, we talk about the ischemic heart disease and the COPD as measured by the hospital admissions. And I believe more and more of this data will be made available. We're engaging in a number of studies in order to answer that important question. I have to say one thing, that the results of these studies -- and again, I mentioned this, the results of these studies cannot be taken as the causation. Nevertheless, again, it is a very strong correlation, where the only material interventions which happened at that time which is the launch and commercialization of a heated tobacco product. And obviously, these studies and many other studies warrants the further investigation, and I believe, as I said, we will continue other efforts in this domain. Let's now move to the next subject, which is the question which is very often asked by many stakeholders, what is about the impact -- which is about the impact of nicotine. Nicotine is the most well-known molecule in tobacco. It naturally occurs in the tobacco leaf. Because it is so well-known and because smoking is also the most common source of nicotine uptake, people tend to wrongly associate all the dangers of smoking with nicotine. But we need to understand that for many, many years until recently, essentially, the only form of consumption of the nicotine has been through the combustion of the tobacco leaves in a form of cigarettes or other products. As the FDA says, nicotine is not directly responsible for tobacco-caused cancer, lung disease and heart disease. And I know that very often we are confronted with a high level of skepticism when Philip Morris will make statements of this nature that are further referred to FDA, which, on a numerous occasion, has -- is trying to properly assess or properly explain what exactly is the problem of smoking. So again, nicotine is not directly responsible for tobacco-caused cancer, lung disease and heart disease. It's also confirmed by many other institutes. Here, I gave -- I present the quote from the Royal College of Physicians, which also clearly state that nicotine is not in itself a highly hazardous drug. And the combustion and the harmful chemical, which are produced during the process of combustion, are the prime cause of smoking-related disease. So products like IQOS, with the 90%, 95% reduction in exposure to harmful and potentially harmful chemicals, will result or should result in a better public health outcomes. And again, this has been confirmed by the FDA after a very thorough assessment of all the scientific evidence, not only submitted by Philip Morris but any evidence, which existed by the time by FDA when FDA was concluding in its MRTPA, modified risk tobacco product assessment, that the measurable and a substantial reduction in morbidity and mortality among individual tobacco users is reasonably likely in subsequent studies. So long-term epidemiology needed to fully quantify the benefit of switching to smoke-free products by all indications, by all indications today, clearly reporting what we could or we should expect from this product in the longer run. It's very important, obviously, that even if you have a great product and a great product offers such a significant reductions in exposure, that these products are being adopted by the consumers, by the smokers who otherwise would continue smoking. So it's very important in the design of the product to mimic the sensor and ritual experience to maximize the full switching of those who wouldn't quit -- who don't quit. And that's exactly the role of the nicotine of this product, and very often, we have conversations and confronted with the question why these products cannot offer the nicotine. Well, at this stage, if we offer the product without nicotine, there will be essentially very limited -- 0 adoptions. And remember that IQOS, in all the 66 markets in which we are -- we're present with IQOS today, IQOS offers an unprecedented high level of conversion, in excess of 70%, which means that from the 100 people who will buy IQOS, 70% will fully stop smoking. So essentially, they start interacting with combustible cigarette. It is not the partial adoption. It's not the temporary use. It's not the complementary type of use to the regular cigarettes. They fully stop smoking cigarettes. And that's the power of a product like IQOS in the harm reduction equation. And obviously, it's very important to have a very razor-focused -- sharp focus on the unintended use of a smoke-free products, and we also clearly see this as a fundamental block in building a sustainable business. And I'm very pleased, and we had a number of confirmations that these products have not -- that our product have not triggered any worrisome levels of unintended consequences measured by uptake of underaged people or those smokers who have successfully stopped, quit smoking before. And that confirms that the way we designed and the way how we're responsibly marketing this product is actually perfectly addressing the problem which we're trying to address. So we are very clear -- we are crystal clear in our approach. People should not start smoking. And you have heard from Philip Morris this a number of occasions. And for those who smoke, the best option is obviously to quit altogether. However, there is more than 1 billion people in the total globe who continue smoking, and there are much better choices for them than a continued smoking -- than a continued smoke. This alternative product needs nicotine to maximize full switching away from cigarettes as quickly as possible. And the key is, however, in this whole product is how this nicotine is delivered. And as I referred in the slide before, the methods of delivery for the combustion is the worst-ever known to humanity method of delivering nicotine. And obviously, a result from the combustion, you release all of this toxic substances, et cetera. By avoiding the consumptions, by eliminating fully the combustion, you really can talk about the products, which has this tremendous -- offering this tremendous health benefit of the people who otherwise would just continue to smoke. Commercialization of the products I talked about is very important and responsible commercializations. We're also testing, as we speak, one of our versions of our electronic products with the age log, with age verification, essentially solutions as all of us know from a smartphone, that is not enough to purchase the product. You will need to activate the device. We can do it remotely only following the positive age verifications if the tests are coming positive. And we also have support from tech companies in allowing the solutions to be accessible to all smokers. I mean that's another important achievement, which we can make in order to really make sure that these products will land in the right hands and definitely underaged people will not have access to this product. Let me go to the next slide. And I mentioned this at the beginning. So the whole journey of building, developing, designing and scientifically substantiated product like IQOS requires from Philip Morris very substantial resources. And these resources obviously -- majority of these resources is nothing else than the group of 400-plus fabulous scientists who decided to embark on the journey with us located mainly in Neuchâtel in Switzerland. Now they have capability. We have built the capability in the company, which allows us to thinking about other products, not the products like IQOS, not the products which are replacements to cigarette, but what the hell is Philip Morris International can do as a contribution to the society while improving the better, by improving the health and wellbeing of many people in the world and also creating another great opportunity for our shareholders. So we're talking about the products which will go completely Beyond Nicotine. I know that very often, over the last few months is Investors Day when we start talking about this product where people don't pay attention at this stage today, so it's very difficult to envisage how come Philip Morris cigarette company is going essentially almost into something, which looks like a pharma route. But we're very serious about this whole thing. And again, this is not trying to create a holding type of companies, which have very lose associations with each other. We're essentially leveraging the capability and the investment which we have made so far, and we think that investments, we can leverage for different purposes. We have made the commitment, and our ambition is that 5 years from now, by 2025, actually 4.5 years from now, we should be in a position to generate the first $1 billion from the products, again, which has nothing to do with the nicotine or tobacco. So we'll move to the next slide, please. Okay. So to capture the significant growth opportunities beyond nicotine, we're essentially leveraging our scientific and engineering knowledge around inhalation and aerosol delivery. We have learned a lot in the territory, which I have to admit is left behind by many pharma companies, which is the respiratory drug delivery. We will be making use of our scientific assessment capabilities to support product testing, and you could imagine how much of the capability we have built around developing of the products like IQOS on our smokeless inhalable alternatives. We're also in a position of repurposing our technology on devices to serve therapeutic purposes, and we'll be able to deliver other substances, I mentioned Beyond Nicotine. And we're also looking in how we can repurpose -- maybe repurpose is the wrong word, but repurposing the tobacco plant. We're looking into alternative usage of various compounds which are contained in a tobacco plant to serve other community needs that again go beyond just the pure nicotine extraction. So our focus corridors are the respiratory drug delivery, botanicals, and obviously, here, we will -- we have capabilities. We have the significant capabilities built in the company, but obviously, we don't have end-to-end capabilities needed from a pure development of the product, regulatory part of the process and the commercialization of the process. So we will be working with our partners, and we also don't rule out that there will be a room for the potential bolt-on acquisitions. So you can expect to hear more from us on this front in the near future. So let's move to the next slide. So just to summarize my part, I think to characterize the progress against our purpose is to unsmoke the world, I mean, today, we have 19 million IQOS users, which -- of which 70% have fully stopped smoking. Those of you who follow the evolution of the cigarette market and the various regulatory and other interventions, never, never in the history of public health you have such an intervention of this magnitude that in such a short period of time that many smokers will stop smoking and in this case, switch to the better alternatives. We have set the very clear targets to mark where we want to be 5 years from now. So our starting point today is already 66 markets. We have smoke-free products. We aspire to go to the 100 markets by 2025. Today, as I said, about 1/4 of our revenues is coming from a smoke-free products. By 2025, we want to reach the 50% of the revenues, minimum 50%. And I mentioned about the first $1 billion of revenues, which, by that time, should be generated from the Beyond Nicotine products. So this is where we are 6 years ago. We had nothing other than aspirations and ideas and the concepts and some development, and we've been at the very early stages. Many people thought that we're just doing a sort of the window dressing, that we're not serious, that this is a smokescreen. Many of you are familiar with the classical languages against the companies like ours. But I believe during the 6 years of hard work, dedications and commitment, we have demonstrated that we're serious about our mission of unsmoking in the world. So I spent a lot of time on talking about the product, but we all agree that without addressing the product, it's difficult to talk about the sustainable business in Philip Morris International, which doesn't mean that my company, that this company doesn't pay very, very high attentions to other important aspects coming from environment, society or the governance. And I am pleased now to hand over to Emmanuel and Jenny later on and will come back to you during the Q&A session. Thank you for your attention.

Thank you, Jacek. Good morning, good afternoon, good evening, everybody, wherever you are in the world. Thank you for being with us. I must say I'm absolutely thrilled to be detailing now how we are putting our ambition to become a best-in-class company when it comes to sustainability and ESG matters at the very heart of our journey and transformation to become a smoke-free company. But moving to the next slide. I guess I should start explaining why we've been putting together finance and sustainability team in 1 single integrated team. First of all, I have to admit that I'm just super excited and pleased to be adding these 2 teams in 1 gather team and to have responsibility on the 2 fronts. But the reality is that I deeply believe that this combination is a natural one. Today, my belief is that the Chief Financial Performance would actually be called the Chief Performance Officer. And there is no performance -- overall performance today if you don't put together, of course, still very strong financial results, but at the same time, strong delivery on a very, very ambitious sustainability agenda. And for me, the 2 are totally entangled. Of course, you need to deliver the great financial profit in order to have the resources to invest on innovation, on all the investments that are going to be needed to drive the sustainability agenda. And the other way around, there is no doubt that if you're not good on delivering very, very strongly and with a very high level of expectation on sustainability and ESG matter, you're not going to be able to deliver a strong financial return and performance for shareholder on the long term. So the 2 will be, in the future, absolutely play together. And we do that in a very holistic manner. So internally, as you can expect, of course, any strategic decision, any decision-making that is really of important for the group today is taking sustainability and ESG as a key element, a key criteria to make the decision. Externally, you have seen that. We're going to elaborate on that. We are in a very transparent, granular, detailed manner, sharing a lot of information with all stakeholders to make sure that they understand the journey we are following, where we are in the journey. And of course, we hope that they will, therefore, be more in a position to onboard with us on that journey, to support the journey and make it even faster and more successful. I'll detail that a bit later, but we are also calling for a frame, I would say, environment to report on this sustainability matters. I would say more or less the same way that we are today reporting on financial matters. We need a frame. We need something that would be homogenous, that would be measurable, auditable and that will allow the benchmark between the various players of the category. If we now go to the next slide. I think that is a very good illustration when we say that we are 1 integrated now, a team between finance and sustainability. And when we have here, what are the key transformation metrics for us. And as you can see, it's really gathering the 2 components. Of course, you still have finance dimension. Are we focused on the right matters for R&D and commercial spending? Are we focusing on reduced risk product? Are we growing net revenue coming from RRP on the total of net revenue? So these are, of course, still financial matter that you're going to be able to find in the P&L or in the balance sheet. But as you can see, we are also coming with other metrics that are nonfinancial or, I would say, not exactly totally financial when we look at our shipment ratio for smoke-free product, the number of IQOS user or fully converted IQOS user, the proportion of market non-OECD where we now are distributing IQOS or the number of markets where IQOS is already more than 50% of the sales. My message at the end of the day that you see the lines are getting blurry between finance and nonfinance. It is 1 set of integrated number that is, I think, in a very, very, I would say, reliable and clear manner reflecting our transformation journey. If we go to the next slide, so we have the dashboard, I would say, how are we doing on our transformation, what are the key elements that we are tracking and how we are doing on this element. We are also very clear on the course. So we are setting in a very clear manner what are the objectives that we are pursuing, what are the aspiration, and we have this 2025 agenda that is a very nicely ambitious agenda. For me, there is, of course, 1-year landmark, which is to get above 50% of our global revenue on smoke-free product by 2025. And quite obviously, to get there, it means that we need to grow very rapidly our IQOS and globally reduced-risk product business. It starts by being above 250 billion stick or equivalent by 2025. More than 30% of our volume will have to be smoke-free by 2025. And we will have to have converted more than 40 million smokers to our reduced-risk product. At the same time, of course, we want to decrease, in a pronounced manner, our volume on combustible. And of course, we want to make our reduced-risk product widely available, and that's why we are targeting to be present in 100 market. And then on top of that, Jacek said it, we have this Beyond Nicotine ambition where we intend to capitalize on all the assets, all the goodwill, all the IP that we have been creating through our journey on IQOS and on RRP. Moving to the next slide. We are, of course, super consistent on the way we are dealing with governance on this sustainability and ESG matter. They are the core of our journey, and we have put in place a very robust governance on this matter. First of all, I said it, we have been gathering to strengthen them the finance and sustainability team in 1 gather team and that make it very, very efficient and powerful. All the work that we are doing on sustainability is reported to the Board through the Nomination and Governance Committee at least once a year. And we've set up a Sustainability Committee that is taking place every quarter. Jacek is, of course, part of that committee, and that's when we are reviewing our sustainability agenda and the progress that we are making. We are, of course, being fully consistent again and putting a very significant part of the -- variable part of the remuneration for the executive based on this element of the ESG and sustainability journey and whether we are progressing in line with our expectation. I don't want to elaborate on all of them. I will elaborate on a few of them in a second, but as you can see, we are covering all the ground. So very clear element on product, very clear element on social and on environment. With strategic initiative, we are also covering the governance. So it is a full spectrum of the ESG+P ambition that we are covering. And it is also the short term, so incentive part for the year; but also the long term or the performance shares that are being impacted by our performance on all these metrics. If we go to the next slide, there is 1 element on which I really want to insist and elaborate because on the social ambition, it's a key one, and it's diversity and inclusion at PMI. First, as you can imagine, gender balance, gender equality is certainly the first element on which we are focusing our attention. We are very pleased to be equal pay certified. We are very proud to have been integrated to the Bloomberg Gender Equality Index. We are doing a huge work to promote female talent within the company and really have a diverse environment at the level of leadership. Look at these 2 targets, management position to be at 40% by 2022, so that's next year; and senior roles at an even more senior level, if you want, to be at 32% by 2023. But that's not the only element on which we are working. And that's why in 2020, a Chief Diversity Officer, Silke Muenster, has been appointed, and she's directly reporting to Jacek, to our CEO. And I can tell you she has a pretty busy and loaded agenda. And of course, we want to take the full benefit and feel the full power of diversity and inclusion in other dimension and beyond gender balance. There is the LGBTQ+ group and community from which we certainly want to increase diversity and inclusion. There is all the diversity on race, ethnicity, culture that we want to foster. And there is certainly more inclusion for the disabled that we also want to develop in the coming years. We have a very progressive parental leave policy that I think is really cutting-edge with new gender inclusive policy that we've been issuing. We are working a lot on developing local talent. So we want to source, develop, groom talent everywhere in the world as we are a truly global company, and we have more than 18 nationalities today at PMI. And we are working on making sure that some of the illnesses and health issues are taken into account, and we create an inclusive environment for these people. Going to the next slide. Another element that I want to elaborate, maybe in the Q&A will detail that. It's about carbon neutrality, and I am very proud to announce today that we are raising the bar when it comes to our ambition to become carbon neutral on Scope 1 and 2. Initially, we were targeting to be carbon neutral by 2030. We are now targeting to be carbon neutral by 2025, 5-year gain over time on this fight against climate change. And we're going to generate that by, of course, working on our sourcing of energy to be greener, more renewable. We are working on waste reduction. We are also working on our fleet and logistics. And for what is missing to make the last mile, I would say, to get to carbon neutrality, we will generate the compensation. I think it's a very good illustration of the fact that despite the fact that we have already a very ambitious agenda on sustainability and ESG, we're going to keep raising the bar, leveling up to make sure that we generate further improvement in the future. But Jenny will talk about that in a moment. Moving to the next slide. I certainly want to say a word about all these very granular detailed information and the fact that we called for the framework. So we are producing all this information. I think we're second to none in the detail that we are providing, the transparency. And sometimes, we have to show that we are not always fulfilling our ambition, but at least people know, understand, I think they can trust us in what we are doing. And we're having exactly the same quality of dialogue with all the rating agency, exchanging with them on a very consistent basis. We believe that they are doing a very important job in making analysis, comparison possible, when it's possible. We think that certainly, there is a role for them, which is based on fact, an element, and they should not exit this role, and they should not go on bias or non, I would say, members or science-based elements. But we are very pleased with what we've been reaching with all these rating agencies. I've been commenting the fact that we are now part of the Bloomberg Gender Equality Index. We've been very pleased to see that we got, again, a AAA rating from CDP. We've been joining the Dow Jones Sustainability Indices. Once again, we're very pleased with that. And when we are assessed and benchmarked versus peers, we are most of the time as #1 or among the very best of our industry, and it's, of course, a matter of great satisfaction. It doesn't mean that we need to stop working, but it's a matter of satisfaction. And I would even say when you look at the last S&P rating on our profile, if you exclude the tobacco industry dimension that we compare very well with best-in-class company in FMCG. So we are very pleased with that. Now at the same time, we acknowledge some limitations that have come from this work from the rating agencies. Most of the time, they are backward-looking. Sometimes, we're not too sure of the homogeneity and the comparability of the data, and that can give way to inconsistent rating. And for all these reasons, that's why we are calling for regulators in a very -- once again, similar manner to what exists for finance, that there should be a frame for reporting once again with data that are measurable, auditable, comparable and homogeneous. And once we have that, I think we'll be certainly able to make, in a more clear way, apparent that we are making a big difference versus other companies. Next slide. And actually, that will be my last slide, but that one is really super important. I want to insist once again on the key role that investors in general and, of course, ESG investors in particular, have to push the sustainability and ESG agenda through their choices. And at PMI, we have a very strong conviction is that these investors have actually 2 angles or 2 ways to invest, to push and accelerate the good development on sustainability matters. The first one is probably what everybody had in mind at the beginning, which is I'm going to invest in companies that are doing already the right thing, ticking all the boxes, showing that they are doing well and with a nice impact. And of course, that will continue to be the case. But for us, the other one is as important, and I'm here talking about the companies that are improving things, that are coming with this mindset of I'm going to get the things better through my works, through the investment that I make, through the product that I'm going to create. We don't believe for 1 second that ban or exclusion for companies that are not doing everything perfect or when there is a problem, because there is an impact of what they are doing on climate or with some consumer impact, we don't believe that a ban or an exclusion is going to improve things. Because the impact on planet will continue if they are not addressed, and the issue with the consumer will continue as well if they are not addressed. On the contrary, if ESG investors accompany these companies that are coming with the right mindset to change for the better and improve things, they're going to have a huge impact. First of all, because they're going to foster the ambition of these companies that are willing to improve things. Second, because once they are a shareholder, they're going to make sure that the company is delivering on its agenda to improve things. And third, because there will be, of course, the advocate of what their investment is doing, they will be able to explain that to other people, public opinion, regulators, government, and they will certainly make the journey faster and more successful. So big responsibility, and we certainly count on investor support in that respect. That's it for my presentation. Thank you very much for your attention. I'm now going to hand over to our Chief Sustainability Officer, Jennifer Motles, who is going to share more about how we intend to deliver even more impact on our sustainability journey in the future. Thank you.

Thank you, Emmanuel, and hello to everyone. Thank you so much for joining us today. If we can start with my next slide. We have spoken a lot today about sustainability, but let me speak about what the sustainability means at PMI. For us, of course, it's about mitigating risk and compliance and really improving our operational and resource efficiency. However, that's not our end goal. We really see sustainability as an opportunity for technology and growth, an opportunity for expanding and growing the way that we understand success and the way that we do our business, following our purpose and focusing on creating value, not just for shareholders but to all stakeholders. So we can go to the next slide. Everything starts with materiality. This is how we define our strategy. If you're familiar with sustainability and how is it that you define our sustainability strategy, I'm sure you've seen this before. A materiality process is not something that is unique to PMI, but it's certainly something that we take very seriously. We follow a very structured approach where we identify several sustainability topics. We gather the perspectives of different stakeholders, internal and external. We assess the impact that our company has on these different topics. And then we build and validate a materiality metrics. So what you can see here is this materiality metrics per se. So something that is quite evident, as you can see on the top right of the screen, is that there's one issue that really departs from the rest, and that pertains to product health impact. And of course, we know and we are aware that this is where we can have the greatest impact. And that's why, not by coincidence, most of this presentation has focused on the impact of the product. First and foremost, that is the core of our strategy. Now of course, we are big multinational that has a big environmental and social impact, and there are other sustainability issues that we need to address. So let me show you how these materiality metrics translate into. Next slide. So this is the result of our materiality metrics, our strategic framework of where and how is it that we are looking resources to create impact. So as I was sharing with you before, first and foremost, for us, sustainability is about transforming our company to achieve a sustainable smoke-free future. And we do that by innovating for better products, operating with excellence, caring for the people that we work with and protecting the environment. These are 4 pillars of action. And each pillar of action has 2 different tier topics. It's not that some tiers are less important than others, but we understand that on certain ESG issues, we can have a greater impact. So what we do is that we have classified them and qualified them, understanding that, first and foremost, there are certain issues that we need to prioritize and address well in order to really tailor our strategy to have a better and more positive impact on society and the environment. Next. So something that we did for the first time last year is that for all Tier 1 topics of our 4 pillars of actions is that we introduced forward-looking targets. We believe that even though reporting, disclosure and transparency is very important, it is equally important to bring clarity of what is it that we want to achieve. Sustainability is about the long-term, creating impact and giving direction to all our stakeholders, shareholders and our own employees about what is it that we want to achieve. And for that, it's very important that we report progress and that we can be clear and transparent about our impact. But at the same time, it's very important to show where is it that we're going. So this set of forward-looking targets mostly focus on an end goal of 2025, we call our 2025 Roadmap. So allow me to elaborate on a few of them. For the first time this year, in our 2020 integrated report, we actually communicated progress. So on our 2019 integrated report, you would have seen our 2025 Roadmap with our forward-looking goals. This year, you can see exactly how is it that we're progressing, are we moving fast enough, where is it that perhaps we're not doing enough or fast enough. So some of these issues pertain to, for example, human rights. We're very proud about the work that we're doing to advance our understanding on the impact that we have on our value chain and on those who work for PMI. And for that, we have a forward-looking goal of conducting 10 human rights impact assessments in those countries that we ranked as highest risk. So we have so far conducted 4. And last year, we conducted 2: one in Mozambique that was focused on our tobacco supply chain; and one in Russia. And something that is very special about the human rights impact assessment that we conducted in Russia is that despite all the challenges brought on by COVID, we actually successfully were able to complete it in a virtual mode. And that shows the ability the organization has to be nimble and agile and really adapt to difficult times. Another issue that is important for us is the socioeconomic well-being of our tobacco farming communities. And we have been working on this for over 10 years. Because of that, we have a better understanding and granular data knowledge about what are the core good causes that create the main problems in our tobacco farming communities. And in that regard, we have adopted an ambitious goal of bringing -- making sure that 100% of the farmers that supply tobacco to PMI are actually making a living income by 2025. We're making good progress on this as well, and you can find more information about it in our integrated report. Next. So as we develop our sustainability strategy, we continue to build a base for embedding sustainability into everything that we do. We have identified a corporate purpose and build a culture around it. We have implemented strategic ESG practices and created accountability structures for ESG integration. We've made operational changes to ensure that our sustainability strategy is successfully executed, and we have and remain committed to transparency reporting on progress and building relationships with our investors. I hope that this is clear that this is a journey in which we are becoming more sophisticated and mature and that your engagement and engaging with different parts of the society can only help us get better and improve. Next. So last but not least, I couldn't finish my presentation today without sharing with you and reminding you all that if you want to learn more about our sustainability strategy, you can check out our integrated report that was published last week. We also have a dedicated sustainability materiality report that describes in detail and in a very transparent way how is it that we define our strategy. And in addition to that, you can download our performance metrics separately. Last but not least, our integrated report follows the integrated reporting framework. It aligns with GRI, with the UNGC, the sustainable development goals and its corresponding targets. Something that is unique for this year is that in seeking to align with SASB, not only for the tobacco sector, but as a result of our transformation, we also referenced the technology standard more completely on hardware, and we also referenced the health care industry standard more concretely on medical equipment. And last but not least, we're also reporting following the World Economic Forum Index on measuring stakeholder capitalism. And this is just one more way to showcase how we said that we are making progress against our purpose. I thank you again for being with us today, and I look forward for your questions. Thank you.

Thank you, Jennifer. It's now time for the Q&A session for which we have allocated around 20 to 30 minutes. Joining Jacek, Emmanuel and Jennifer will be Dr. Moira Gilchrist, Vice President of Strategic and Scientific Communications. [Operator Instructions]

Maybe I'll take it. Absolutely. I mean the whole aspect of this transformation is to make it in a way that all the parties, which are -- some have involved in our combustible business model. I mean what we can do that we altogether go through these transformations with possibly a limited impact. I mean we're working, for example, of the number of alternative crops to the tobacco, but we also have to take into consideration the income, obviously, which the tobacco generates for the farmer. So the farmer would have to be -- the crop of the tobacco for the farmer would have to be replaced with a crop, which sort of offers the similar sort of economics. I mean the attractiveness of a tobacco to many farmers arises with the fact that, as you know, tobacco is not a commodity. It's not a traded commodity, right? So for the farmer is well somehow insulated or protected from speculations and all of the ups and downs of the classical commodity market. Has a very good visibility to demand and that visibility actually helps into making sure that year-on-year, you have the right number of the farmers and so on with the right expected yields -- tobacco yields. So there is not much of surprises oversupply your farmer is left with unsaleable stock. But I do believe that more efforts we have started quite a few programs with the alternative crops, also the crops, which I believe could benefit the general public, right? I mean there are some great nutrients -- nutritionally rich crops, which could offer a similar sort of profitability to the farmer. And so I think it will be a mix of all of the interventions with somehow we'll also help the farmers community to navigate through that transformation. I mentioned also that we're spending quite a significant effort on finding the -- and I call it the repurposing of tobacco leaf, but I do believe there's another factor, which in the long run, at least to some extent, may contribute to how do we take care about the farmers community. It's very important for us. I mean these are the hard-working people, and we have spent so many years on upgrading the agronomic practices. They are actually very skilled farmers, and it's very close to our hearts to make sure that they land at the end of this transformation on the -- with the minimum impact, if possible.

Okay. Thanks. We have a few questions here, which have been submitted by the written box. Let me read this one out from an analyst. The transformation of the company is happening quickly, and it's clear that PMI seems to be focused intently on accelerating this transformation and is doing it with a continued shift in investments away from combustibles and 2 smoke group products. The question is trying to understand if there's more PMI can do to influence this transformation, e.g., by spending more to expand RRPs? Or is it a matter of consumers and competitors catching up to PMI's vision?

Well, maybe I'll take this. Yes, obviously, every organization always can do more and better and faster. It's the classical impact of a learning curve, and I wouldn't be honest admitting that PMI internally still has the reservoir of agility, an unleashed agility. And me and my colleagues at SMT are working on it. But to really look at the fast acceleration of the trend of going to smoke-free, frankly speaking, you need the 2 things, which are desperately needed as we speak. One is to obtain the absolute clarity and stop confusing the smokers what is really the problem of smoking. And I have seen it on a number of occasions when the smokers will tell you, you like also e-cigarette product rather than combustible product. They contain nicotine. That's the problem. And I thought I was very crystal clear today in my presentations. Nicotine is not the prime problem. And we essentially, everyone who claims or is confusing smokers and smokers are using this as another excuse not to do anything about the smoking. They continue smoking. Every time when I hear any responsible claims about the nicotine and its negative impact, the net result is people are going back to what they used to do, which is smoking cigarettes. This is -- that is seriously highly irresponsible. And second thing is the regulatory environment, which in many markets, either completely ban access to the product. And unfortunately, this continues to be celebrated by anti-tobacco organizations or NGOs. And me, I'm looking at these celebrations that the markets are not accessible or made not accessible, but don't have an access -- don't offer access to this product. And those organizations, who are supposed to work on addressing the problem of smoking, since they are not interested in the solving a problem of smoking, they're interested in perpetuating the problem of smoking. And this is, at this stage, when we stand today, 2021, science, technology, everything exist, and these claims are becoming highly responsible. So my dream or ask or whatever you want to call it, is can we get together and make sure that within -- as I said, within 10, 15 years in most of the markets, if everyone acts together, we can put the smoking behind. And we never -- also to be very clear, we never have said that the products like IQOS are risk-free. And these products are not for the general public. This product are developed, designed for a very specific audience, which are smokers, which will continue to smoke. And can we be serious and responsible that these products today is the second best choice smokers can do, other than continuing smoking. And obviously, quitting smoking is the best one. So the 2 accelerations would come from regulations, but we have countries, we have countries like New Zealand recently. And you remember, New Zealand was always under very aggressive quite rightly, tobacco regulations, combustible regulations. They realized without the help of innovations and technology, they will perpetuate the problem of smoking.

Thank you. Okay. We have another question here, which has been sent in. The question is keen to know about plans to develop harm reduction products at a price point and level of acceptance that will work in low- and middle-income countries.

Absolutely. I mean the -- our desire -- when we have said and we said it'd be very responsible, our desire is to unsmoke the 1 billion people who would continue smoking. Therefore, I need to think when we're thinking and we're designing the products when the economic barriers will not constitute the problem for those people to have access to this product. So obviously, we're working on having the access by consumers in these places to the information about the product. And obviously, the affordability barriers would have to be addressed. As you well known in majority -- actually, majority of the countries, these products quite rightly are being taxed at the level lower than a cigarette. And sometimes we're being criticized for the thing, but this is actually an incentive which we're passing to the consumers to create another economic incentive that rather than a continuous smoking cigarettes, they switch to these products. I believe the mix of the regulatory interventions and obviously, on our side, make the product, which is intuitive, which is low on the cost, so therefore, we lower the barriers to entry, et cetera, will go for the so-called low- and middle-income consumers or countries. But the true is also, and we have talked about this number of occasions, I mean, we also, on our side, as much as we can, lowering the barrier -- economic barrier to entry for these products by, for example, subsidizing the devices, okay? So we're taking a lot of efforts that the customer -- for consumer to change the behavior, to change the habit from smoking, it requires a multi-front type of strategy and approach. And you need to have -- explain the benefit, why this is better than continuing smoking, remove if possible, the economic barriers, the affordability barriers and so on.

Thank you, Jacek. We have another question here potentially for Moira. How do you deal with those externally, for example, around World No Tobacco Day recently who question the science that PMI carries out or even questions the FDA's MRTP authorization?

So thank you, James, and hello, everybody. Yes, I've personally seen a lot of these statements, both in the scientific literature but then also in media. And I think oftentimes, I would characterize them as opinions of individuals and organizations who are not necessarily scientists or who are simply opposed to either all products or companies in this space. And I think -- from my perspective, I think what's important is not to focus on what we think or feel about tobacco products or companies, but really to focus on the scientific evidence and also focus on what's the best approach, what's in the best interest for men and women who would otherwise continue to smoke. And really, that's exactly what the FDA did, and that's what we have to do according to the statute under U.S. law. And they granted authorization after a very serious and long-term multiyear scientific review by their experts. They came to the conclusion that the product with its authorized messages meets the standard, as they call it, as being appropriate to promote the public health. And I think this is what we should be focusing on. Jacek mentioned in his remarks, the words of FDA, the available evidence without conducting long-term epidemiological studies demonstrates that a measurable and substantial reduction in morbidity and mortality among tobacco users is reasonably likely to be seen in subsequent studies. So reduced exposure messages is one important step forward, and we're continuing to build the scientific evidence. And again, Jacek showed you some interesting time use analysis that gives us real hope for the future of what epidemiological studies will show. So all I ask is people to really focus on the scientific evidence and focus on men and women who would otherwise continue to smoke. And let's have a serious discussion about what the next step should be.

Okay. Thank you, Moira. Another question submitted here, perhaps for Emmanuel. A competitor announced recently it was making its vaping products, carbon neutral. Is PMI considering doing the same for IQOS?

Thanks, James. As I've been clarifying, we are actually raising the bar to become carbon neutral globally for Scope 1 and Scope 2. So we're not too sure that to take 1 part of the business is really meaningful because that will rely on a lot of allocation and how you are looking at things. So we prefer to work on what is really making an impact, which is a full company. And as you have seen today, we are coming with this 5-year acceleration. So it's a significant effort that we are making to further improve our road map on becoming carbon-free. And for us, that's what is really important and what matter rather than looking at the small piece of the company that is probably not meaningful.

Thank you, Emmanuel. We've got quite a few questions coming in here, so I'll keep going. Another one here, perhaps also for Emmanuel. What is your view on linking some of the same sustainability/ESG KPIs that are part of the compensation structure to those in financing sources? Could this be another way to further solidify your commitments to the investment community?