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

Good afternoon or good morning, good evening, depending on where you happen to be around the globe. My name is Gerry Gallagher, I'm part of Deutsche Bank's Consumer Staples team operating out of London. It's very -- my very great pleasure today to introduce to you, Emmanuel Babeau, the Chief Financial Officer of Philip Morris International. Emmanuel, welcome to Deutsche Bank's 18th Annual Global Consumer Conference.

Thank you, Gerry. Thank you for hosting us. Very pleased to be with you all to exchange about PMI today. I would like to start with a few opening comments, if you allow me, Gerry. Before that, certainly, I want to draw everybody's attention on our forward-looking and cautionary statement, which is on the slide that we've been providing. I'm sure you will all read them very carefully. So a few thoughts I wanted to share with you before we start and certainly, it's going to launch our discussion. First thing certainly is the fact that we are confirming that we are on track to deliver a very strong performance in 2021. And we are actually confirming our forecast of an adjusted EPS for the full year of $5.95. The outlook for the Q2 2021 with an adjusted EPS targeted of $150 million to $155 million and therefore, confirming the momentum that we have seen in Q1. This full year outlook is not including anything related to the recent news that we have got from Saudi Arabia, and the fact that our distributor has, to a large extent, lost in front of the Court of Appeal in the custom duty case. We are assessing the impact for us of that adverse decision, and we will accrue a number related to that event that we estimate today to be up to a negative impact on adjusted EPS of $0.18. So that will be booked in the second quarter once we have the determination of the final number. We are still working on it. And as you understand, it won't be part of the adjusted EPS. But that would be, of course, included in the full EPS for the year. If I focus now on Q2, we are continuing to see very strong momentum on IQOS. And I will elaborate on that in a second. And at the same time, we are seeing an improvement on our combustible business with rebound versus last year, which was a different quarter as we all remember, but also with a nice commercial progress in a few markets that is enabling us to gain market share. Regarding IQOS, we expect continuation of a strong growth of volume globally, both quarter-on-quarter and year-on-year. We expect to deliver a shipment of about 24 billion stick for the quarter. When we look at all our key markets, we do expect to see this strong growth, both as I said, quarter-on-quarter and year-on-year. Now if we look at the market share, we expect to deliver a very nice growth in market share globally and in all key markets year-on-year. And when it comes to the quarter-on-quarter evolution, as expected and as we flagged very clearly in Q1, because of seasonality, and also because of some evolution of the CC market where we have a decreasing illicit and therefore, what we can track as the CC market growing artificially, we expect in our key market just to be about flat between Q1 and Q2 after what has been, I'm sure you remember, a very strong growth in Q1 versus 2020. We are very pleased to see a growing momentum on the category overall as we see investors growing investment and commitment to the category. Principally on the low-price segment, we believe that this increased commitment and increased momentum is going to further accelerate the growth of the category. And as the ASH leader of the category, we see that as a very positive development. For the year, we are confirming that we are targeting to reach 95 billion to 100 billion sticks. And we are super excited as we are getting close to the launch of IQOS ILUMA in the second part of the year. Now on CC. We do expect to deliver a solid performance in Q2 with a rebound, as I said, versus markets that were impacted by the COVID crisis in 2020, but also with some good gain in market share versus the first quarter. When we look at the various situations by market, you have a first group of market, the one that has been principally, I would say, impacted by the COVID crisis in Q2 2020, where we expect a good rebound. I could mention Spain, Italy, Indonesia as one of these markets where year-over-year, we expect good growth. There are a number of markets where, as I said, we are clearly doing some very nice commercial action and with a nice success, and that's going to enhance our market share. Turkey and Mexico could be 2 examples of that group of markets. And then you have a few markets that continue to be more difficult, still impacted by the COVID crisis. And I would mention Philippines as one of them and certainly an important one for us. We also expect some markets where we have little, if no presence, to be growing fast in combustible. That's going to be the case of Bangladesh, that's going to be the case of Vietnam. And that is going to artificially have an impact on our market share evolution because we have little presence in this market. I just wanted to finish rapidly by coming back on our webcast on sustainability that took place a week ago. We are really pleased with the level of attention and the attendance that we got from that day. We used this webcast to show how we are really putting sustainability at the very heart of our journey to become a smoke-free company. We elaborated on how delivering better product is potentially changing the life of 1 billion smokers. We explained how we are becoming a reference on all ESG matters. And last but certainly not least, we explained why we believe that investors have a big role to play in pushing the sustainability agenda. When there is a problem, and when a company is working to fix the problem, exclusion is not the solution, we think. On the contrary, if investors are going to invest in a company, the company that is improving things, it's going to generate the right impact. It will be, by its investment, fostering the journey toward transformation and improvement. As a shareholder, they will have the possibility to track that the company continue to deliver in the right direction and according to plan. And they will be also able to communicate, publicize to public opinion to regulator and government and further enhance the journey. So we believe that investors, by investing in these companies such as PMI that are transforming and improving things are having the right impact on pushing the sustainability agenda. That's it. Thank you, Gerry, and very happy now to answer questions from you and the audience.

Emmanuel, thank you very much. You've done a great job of -- obviously, I had some prepared questions in my head. You've done a great job of knocking them all out of the way and more questions coming into my mind. But hopefully, we'll get there. So we're going to take the fireside chat format, as you say. I encourage the audience to type in their questions that they can via the web link, and we can incorporate those questions through the remaining time that we have. So -- but you touched on the trading. So -- and you reiterated your guidance. I think just help us frame the level of comfort and I'll have a follow-on question. Could you talk about your level of comfort, at this point this year, compared to this point last year, and whether you feel much more robust in terms of the guidance you're giving? And then as we move out of COVID, which may be more of a fourth quarter 2022 event, given the movement in travel retail volumes, duty-free, heightened illicit trade, maybe excise increases, to what extent is it a naive question to ask you, isn't a COVID world a more -- is a COVID world not that too bad a world for tobacco business? I'm not phrasing that very well, but I'm sure you get the gist of the question.

No, I understand what you mean, Gerry, and I understand where you're coming from. Great question. So on the first one, on the level of comfort on the guidance. Remember, last year, we stopped the full year guidance for a bit of time, precisely at that time of the year when we had little visibility, and we were giving a quarter-by-quarter guidance at that stage. And then at the end of Q2, we moved back to a full-year guidance. Quite obviously, today, we don't have the full perfect visibility that we would have in normal time. But clearly, versus a year ago, I think we have better visibility. The Western world seems to be progressively, thanks to vaccination, coming back to normal. I mean it doesn't mean that all the clouds have gone away, but we seem to be progressively getting back to a more, I would say, normal situation with a bit more visibility. Then in the new economy in emerging countries, it's kind of a mixed bag. But nevertheless, yes, I would say today, we have a better visibility, far from being perfect for sure. But we have a better visibility, and that's with this increased understanding of visibility that we are building the guidance. Now on your question on COVID, which I think is a question that -- it makes sense because everybody realized that a lot of the traditional parameters have been transformed through the COVID period. You mentioned duty-free, which is, of course, negative for us. And we are back to normal, that will be good news. Illicit trade is positive, although we are putting all our energy to fight against illicit trade. It's true that illicit trade is going down in COVID time, and that's good news for the tobacco company. I would say, at the end of the day, without any doubt, any hesitation, we are very pleased to be back to normal, if it is the past that we are following. Remember, we are in a very ambitious transformational journey, and the condition for success is the capacity that we have to explain to smokers throughout the world, why IQOS, and heat-not-burn category, is a much better alternative to smoking. And to do that, we need to be back in a normal life where we have normal interaction, social time with the people, and where we are much more able, if you want, to create a link to connect and to make our story known to the largest population of smokers. Thanks to digital, despite the crisis, I think we managed to, I would say, mitigate the impact of this limitation. But it is very, very clear that we believe that we should be able to be much more impactful and be much more efficient in converting people when we're going to be back to a normal world. So all together, clearly, yes, it's positive. And we are very, very impatient to be back to normal. Hopefully, this is what's going to happen. But as we all know, there is still plenty of uncertainty.

Great. Thank you for that. So my next question is -- probably, it could be characterized as pretty aggressive to ask the CFO, but I'm going to ask it anyway. Your EPS guidance has proved too conservative over a number of quarters. What do you say to people who just automatically default to the top end of the guidance and maybe go a little bit higher? Why shouldn't they do that?

Gerry, fair question, and I take the challenge. I think everybody understands that in COVID time, it is clearly much more difficult to anticipate what's going to happen. You have so many parameters, and we've just been discussing it, that are dancing all around, and it was very difficult for the last 15 to 18 months to have visibility. So in this environment, we've done our best to try to provide visibility. And it's true that in most cases in the past quarters, we came up with a higher number ultimately, which was a mix of market eventually being better than what we thought. But, at the same time, certainly us doing stronger on IQOS and heat-not-burn than what we initially anticipated. So the combination of the 2 has meant that on a few occasions, it's true that we've been beating in a significant manner, the guidance. I would always prefer things to be that way, but we are certainly, and hopefully now that we are gradually, as I said, be back progressively to normal. When we are building a guidance, we are putting the fairest reflection of our understanding of the situation at a certain point in time. So people should not expect us to be giving a guidance to beat in. No. We are coming with the effect, which is a reflection, of course, to the best of our knowledge at a certain point in time. And I would expect that we're going to get better to this exercise. As I said, the markets are becoming more predictable.

Okay. Thank you. I must apologize before I ask my next question, I'm working from home. My landline has just rung. My answer phone has kicked in, but hopefully, I can talk -- you can follow that process so I apologize. I now want to pick up on the sustainability webinar you guys did last week and pick up also on one of your introductory comments there. Typically, an investor makes money in the equity market, not by looking at where a company is, but by looking at where a company is going to. Now if your trajectory of your new category products, whether it be tobacco heating products, or vaping, or whatever, would suggest and according to your own metrics you're pushing out into the future years that the business will be much more of a nontobacco business or a nonsmoking business than it is currently today. So my question is, to what extent does that frustrate the business? Is there things you could do better in terms of educating people? You referenced the shareholders perhaps being able to do a little bit more with stakeholders. It feels like there's a lot of upside on the rating of the stock if people combine the [indiscernible] agenda that the business has got. So what do you say to all of that?

Like in any transformation, Gerry, I think that a company has to understand that, that's by delivering tangible proof and evidence on the fact that it's not just wishful thinking, but they are delivering on the journey that they will convince shareholders to join. And my feeling is that we are on our way to do that. So some have already joined the company, and others are still looking at us and saying, well, can they really make it? And are they serious in their journey? And do they have, of course, the resources and the capacity to deliver on their ambition? So it's -- I'm not sure that there will be a kind of pivotal moment but certainly, everybody will say, oh, yes, they're there. Now you could have a few acceleration at a certain point in time. I think when you reach a number of single threshold, that could be the case, and there will be quite many of them. We've been clearly setting the course. Direction is very clear. We said by 2025, we want to be predominantly a smoke-free company. I hope people will fully buy in our transformation before then because I think we're going to deliver in a very systematic and in a very, very incremental manner to get there. But I think it's for us to continue to come with the right transformation, the scientific evidence that continued to show, and you've seen that last week. We've been showing more things on Japan that are going to show the impact on health. And that will be this accumulation of proof, evidence, achievement consistently in the same direction that will, I guess, convince everybody ultimately.

Okay. Accepting you're on a journey, and I think it's -- I can't envisage a situation, and I could be very wrong, where Philip Morris needs to come to the market to raise equity for some transaction. I could be wrong, but I suspect that most would agree that, that won't be the case. And most people on this call will have an equity bias, and will be thinking about ESG from an equity perspective. But there is the other side of the equation, which is your liquidity, your funding, et cetera. Have you seen any impact on your ability to raise the finance at attractive rates because of ESG concerns around at the moment being a combustible-dominated business?

No, Gerry. The answer is no, and we have more than what we need in terms of resources, both credit line with the banks. Each time that we go in the bond market, we are very successful and oversubscribed. So we don't see that at all. Now having said that, let's not be complacent. And that's why it's important that we are very clear on our journey, very transparent, and that we share this ambition and all the achievement, the milestone. We're doing that with shareholders, but as you can imagine, we are doing that with lenders as well. And therefore, we're working with all stakeholders. And I would say mirroring what is happening with the investors in equity, we see a growing level of interest from bond holder and even banks to better understand what we are doing and how they should understand our ambition to go for a smoke-free world. So today, we have no issue, and in order to make sure that it continues, I think it's important that we keep this level of communication and transparency with lenders as well.

Okay. That's helpful. Now if I think about your sustainability agenda, you're right at the ESG agenda, that makes me wonder whether there's a potential negative implication for margins. So that's one question. But the second question aligned to that is, do you care? And what I mean by that is if your sustainability agenda means there's a margin impact, that doesn't matter because the impact on your profitability will be offset by, I assume, a higher rating on the equity. So taking a hit on the margin, no matter how small, is worth paying because the rating will improve. How do you think about that?

Gerry, that's a fascinating debate. What is the exact cost or return that you get from your investments on sustainability? And I want to be very clear, first of all, I see the 2 dimension, finance performance and sustainability performance to be totally entangled. So of course, you need to have great financial performance towards the resource to invest in sustainability. But in return, it's because you are becoming more sustainable that you're going to have, in the long term, better access to cheap resources because they're going to be renewable; you're going to have the right talent in the company that are going to join you; or you will have the right I would say, mindset engagement from your people. And then as you said, there is this implication on, okay, what's the rating on the multiple because you are a great company on ESG, and therefore, how do you play that versus investment that you are making that could have an impact on the bottom line that you're going to enjoy a higher multiple. All that to say that it's still, I think, probably a still in the making in terms of how do you assess that, but I have absolutely no doubt that you're going to get great return on your investment on sustainability. I think the return on the people is huge. The involvement, the level of improvement that you get in the engagement and the mindset, the energy that you have from your team, when they have the feeling that they are contributing to the common good and to do great things, is absolutely amazing. Then, of course, everything we do on the manufacturing supply chain where it delivers productivity, it deliver better access to cheap resources, and that's obviously getting in the right direction. So I really believe that it's quite an easy case, I would say, in terms of investment. I don't see that as a drag at all on our performance globally. On the contrary, it's a product booster.

Okay. I just want to move on and sort of think perhaps even bigger picture. So your statement of purpose says, smoke-free alternatives are not risk-free and should not be used by youth or nonsmokers. We don't want people to enter the combustible market. And a combination of those 2 suggests that there's a finite period, you don't have a business. Can you -- when I say a finite period, I'm talking 40, 50, 60 years. Can you talk about that?

That's a very long horizon. But thank you, Gerry, for referring to our statement of purpose, which, of course, is a guiding element for us. I think nobody should be misunderstood. Yes, we want to convert smokers. But today, with slightly less than 20 million IQOS user at the end of Q1 for a total of 1 billion plus smokers, we're just scratching the surface of the waves. So you can imagine the growth potential that we have, and it's already -- last year, it's already close to $7 billion business. So you can imagine what is at stake, if we are successful in really growing this business, delivering these better products to the 1 billion smokers worldwide. So we are definitely a growth company as, by the way, illustrated by our objective for the 2021-2023 period, where we said more than 5% organic growth for revenue, and it goes, of course, beyond 2023 in terms of ambition to grow. And on top of that, as we have signaled, we are developing this beyond nicotine ambition. That's one of the perimeter that you have defined, where we're going to capitalize on well-being, wellness, I would say, expertise that we have been building through our IQOS journey to deliver great sensory experience, product delivering more energy, better sleep, really the well-being sphere, I would say. That's one pillar of our beyond cutting strategy. And then the other pillar, which is everything linked to better health and notably on the respiratory drug delivery. So as you can see, we have already, with our reduced-risk products, fantastic growth opportunity. And on top of that, we are already working on the next growth generation with our Beyond Nicotine initiative.

Okay. I might come back to that depending on time. I now want to move on to the comment around potentially exiting combustible markets in the next 10 to 15 years, and that raises a whole number of questions in my head. But if I just sort of give you a sense of some of them, how much combustible profits are you prepared to leave on the table at the point of exit? Is there a low point of market-wide combustible share that you -- the market needs to reach before you exit the combustible market? How do we ensure you retain that residual combustible share in vaping or heat -- or tobacco-heating products, whenever that point is? And a lot can change in the next 10 to 15 years, excise probably being a key dynamic around all of that. So could you just sort of help us frame the debate around leaving combustible markets over the next 10 to 15 years against all of that and a lot more, I'm sure?

Gerry, I certainly understand the question, and it's a legitimate one. The time for answers will come. But at that stage, I have to acknowledge that there is one certainty is that we will be 1 day, a smoke-free company, in line with our ambition to unsmoke the world. I'm not able to tell you when this will be the case and how it's going to happen. So I don't have the horizon, and I don't have the scenario to get there. And as you can imagine, you have several scenarios and certainly not to able to say which one will happen ultimately because it will depend on so many things. One of them is that simply we're going to fully kill the combustible category, which is one objective that we have. And another one will be that at some point in time, the combustible business will leave the perimeter of PMI. But again, plenty of different scenario. Absolutely unable to tell you what's going to happen and when. Now the landing point is known, we'll be one free -- one day, a smoke-free company, and that will be absolutely in line with our ambition to unsmoke the world. In between, Gerry, if you allow me a comment, in between, we are retaining the very clear objective to be a strong leader in combustible. And that is really important to retain that position, which is not at antagonistic with the fact that, at the same time, we want to kill the combustible category. So we want to kill the combustible category. But as long as this category exists, we want to be today, playing a leadership role in this category. That is, of course, helping us to finance all the investments that are needed on reduced-risk product, and we know that they are important. That will also give us capacity to start financing the Beyond Nicotine initiative and ambition. So that's going to be important. Second, let's be clear, as we made very transparent, we want to convert smokers to our product, to IQOS and other reduced-risk products. But if you lose the capacity to stick to smokers, if you lose the connection to smoker -- today -- maybe a few years down the road, it will be different. But today, I think you are losing some capacity to convert the smokers to your product. So I think it's really important that we have this connection with smokers to be efficient and impactful in conversion. Then, of course, all the relationship that we have with the retail, with the trade today, through CC, it's also important if we want to push with strength and impact our IQOS business and globally, our reduced-risk portfolio. And last, but not least, we think that that's an encouragement if we continue to be a tough player in CC and defending our position for other tobacco players to also switch to reduced-risk products. So we view that as positive. And again, there is no contradiction in the vision. We want to kill the CC category. But as long CC is there for us, for the time being, we want to retain a strong position there.

And how big a deal is ILUMA in terms of the next stage of the growth of the business?

I'm sure you perceived the excitement, the enthusiasm behind the launch of IQOS ILUMA. I would summarize that by saying that we believe we're going to kill the remaining pain point that some of the users are having today with IQOS 3. And so, of course, you will see when the product will be available. That is enabling us to target higher conversions. So there are probably people who haven't yet made the test and who are not using IQOS today, that we think could move now, thanks to this better -- even better product, IQOS ILUMA, to heat-not-burn product. We believe that it will also drive a higher full conversion. As you know, you have a number of little bit, say, 30% of the IQOS user, which are still using potentially our cigarettes. And our poly-usage product, we think that it should drive a higher level of full conversion. We believe it should drive higher retention and lower level of abandonment because problem that we can have is cleaning, blade issue that's going to disappear. So some of the difficulties is going to disappear. So we think it's going to lower the level of abandonment. And altogether, it's going to increase the Net Promoter Score and loyalty of IQOS customers. So we see that as having potentially a very nice impact on volume growth and the trajectory in the long term.

To what extent do you think the industry is pivoting to favor heat-not-burn over vaping as the category in the new nicotine environment? Or is it more complicated than that?

Well, we all have to admit that in this reduced-risk product, you will have various type of expectation. Markets are different, and consumer may have different needs and expectation. Now one thing, I think, is becoming very clear is that when you want to convert smokers, you need to deliver an experience that is as close as smoking as possible. Otherwise, what do you risk, what you risk is poly-usage. So people from time to time use another RP, but they continue to smoke, to a large extent, or you are going to generate abandonment, people try something and then they get back to the cigarette. And therefore, if you want to deliver an experience that is very close to cigarettes, with heat-not-burn, and of course, heat-not-burn is the best of the technology. And here again, it makes a difference but that's what we are providing with IQOS. Going to be, we think, as I said, even more the case with IQOS ILUMA, you are really mimicking the overall experience. And then that's why we think on the long term, you're going to be much more successful to convert smokers to heat-not-burn. And that's why we think the heat-not-burn category, again, with the right technology is a winning one today. Everybody can see that. And you have, not only a fast-growing market, but also higher loyalty, and probably the stickiness of the changes is much, much, much higher for the reason I've just described. We always take the example of a ristretto in the coffee drinker. So you are used to ristretto. And you want to change. But of course, you love your ristretto experience. Well, that's when you are a smoker. So you drink ristretto. If you go to IQOS, you're going to have a nice espresso, okay, full of flavor and still nicely powerful, of course, in our case, with a significant harm reduction. If you go for an Americano, a kind of coffee, we can have a debate on whether it's close to coffee or not. Well, some can get used to it, but it's going to be quite a different experience. Well, it's probably what you're going to get with a lot of the vaping experience. So that explains why it's more difficult to switch smokers to vaping. I don't know whether the imaging will speak for itself, but...

Yes. Yes, I understand. So maybe the lack of the quality of the product and the relationship with the smoking meant that the -- I think we would all conclude there probably wasn't a first-mover advantage in vaping. Is there a first-mover advantage in heat-not-burn?

Well, I would phrase it in a different manner. What is the technology at stake to deliver vaping versus technology at stake to deliver heat-not-burn? And I think what we see for the time being is that there is much more technology involved in a great heat-not-burn experience. And that is explaining why -- I don't know whether it's a first mover or at least the one owning the technology and having the right innovation, if you want. It's probably less clear for vaping where you probably have experience matching each other with a much lower level of differentiation. So for me, I mean, we happen to be also the first mover. But I think it's, first and foremost, we are the one coming with the right cutting-edge innovation and that is making a big difference for the customer.

Okay. If I move on slightly, one of my earlier questions around -- was around the volumes in the business long term, given your stated purpose, et cetera. But now to contradict myself, do we believe combined combustible and nicotine volumes could turn positive for the industry?

Well, it has not been the case for the past...

[indiscernible] yes.

I would say difficult to see why today. I mean you may have -- I referred to a few markets in new economies that are growing very fast, like Vietnam or Bangladesh. So that can have an impact. But we know that otherwise, there is a trend for a moderate decline in the overall nicotine market, and therefore, in the combined, if you want, heat-not-burn plus combustible. I don't see today will change that dramatically. Now it's going to depend, of course, of what is your exposure to heat-not-burn that is growing very fast, strong double digit. As you know, we have 80% of the category. We are growing in 30% in -- or close to 30% in volume in first quarter, reflecting to a large extent what we've done in 2020, by the way. So that is a very fast-growing category. And the more this category is going to keep growing, and the more it's going to have a big weight in the combined combustible plus heat-not-burn, the more probably the CC category will be under pressure. So I believe that there is certainly a much better outlook for the players who are going to have big share and increasing shares in RP versus competitors that could be mainly predominantly principally exposed to CC. Now to your question, as far as we are concerned, I think we flagged the fact that we are targeting to be on, over the '21 to '23 period versus 2020, broadly flat in terms of volume. That's what we said, which would be significant improvement -- I mean, volume, of course, which would be a significant improvement versus the trend that we've seen since 2012, roughly speaking, where we have seen a decline in volume. So we would be already, if we were to deliver that performance, clearly benefiting from our strong exposure to the heat-not-burn category.

Some just questions popped into my head. Do you make a positive gross margin on the IQOS device? And do you care whether you do or not?

That's certainly a desirable objective to at least be breakeven on the gross margin. We're not there yet today. It's again, certainly, it's desirable. Is it a big obsession for us? Not really. At the end of the day, it's quite important, if we want to convert smokers to suit that, we put the device in their end, okay? And we know that there is a price at which it's going to happen in a more easy way than if we are at a very, very premium positioning. And then it's not enough because, of course, then you have the overall experience, as I explained between device, consumable, and then the kind of chemistry that is coming on. You put the 2 together to replicate the overall experience of smoking. So one could see that actually as a nice commercial investment in order to convert people. And like any investment, it has to be assessed in what's the return that you get on the investments, what is the benefit of that investment, and it has to be, of course, at a reasonable level still to create value. So in a nutshell, that's the way I would be looking at this question mark on gross margin. Great, if 1 day, we can be on breakeven, but not an obsession. It's certainly a place where we are very happy today to make some commercial investments.

Yes. That answer makes absolutely perfect sense to me. It's a facilitation of the heat stick rather than being a profit pool in itself is how I would...

Absolutely, absolutely.

Yes, yes. Now maybe this is a bit further down the road, but we've touched on Beyond Nicotine. I just want to think about what that may mean for margins in your business vis-a-vis nicotine margins. On a percentage basis, my gut sense is that they will be lower. But that probably won't matter on a dollar per unit basis if we can measure equivalent per units. Because if there's no excise, your revenue is going to be higher, your percentage margin may be lower, but my sense is you're neutral -- it may be neutral on $1 per unit margin. Have you guys thought about that?

No, of course, we're working on it. A couple of commentary on that one. First of all, everything linked to better health and what we call respiratory drug delivery, I don't necessarily see a lower margin. We're going to come with something that will be making a real difference for the people. And of course, it comes with the value and the price for it. Then on the part that is linked with well-being and lifestyle, it's going to be a whole world of new experience, which is going to be really delivering great pleasure, self-indulgence, personal benefit. And that's going to come with an overall great experience in terms of combining device and the product. It's going to come as a great lifestyle, I would say, overall construction. And branded, of course, like what we're doing on IQOS. It's going to be something that is going to appeal to the consumer in terms of status, in terms of confidentiality, in terms of moment share, or just in terms of personal enjoyment. So we really believe that there is here, a market with a lot of value because we will deliver great value to the consumer. And the consumer is always ready to pay for the value that is perceiving from the product. So combination of innovation, great brand, great product. Of course, to the commercial strength of PMI, we think that this can be a very nicely profitable business.

Okay. Your answer was -- came with one more question in my mind before I go to the last one, time is running out. Things will change a lot over the years to come. So there's -- the current management team, whatever happens in terms of the product portfolio moving forward, Philip Morris, to an extent, will always be -- is it fair to say will always be a consumer goods business rather than a quasi-pharma technology business? How do you think about that?

That's absolutely our vision. We don't envision to become a pharmaceutical company. And when we talk about respiratory drug delivery, which I guess is what is behind your question, I think it's not about developing new molecules, but rather how do we bring in an impactful manner, a thing that today are, I don't know, you should take -- we always take the example of Aspirin that you're going to take through tablets. If you manage to deliver it through inhalation, having a much faster impact that in many, many circumstances, can be very important. We're not recreating, of course, the molecule behind Aspirin. We're just innovating on how you bring it to the patient, to the consumer, and that's how we create value. So it's a kind of consumer good, if you want, or specific angle. It's not about putting $1 billion of R&D in a molecule development, if that answers your question.

Understood. So the last question is not particularly original, but I feel like I have to ask it, it's the final wrap up. The smile on your face probably tells me you know what's coming. Can you tell...

I don't know why. I have a sense of what it could be.

Could you talk about the balance sheet, the share buyback, where we are on dividend payout, bearing in mind the dollar dividend, the non-dollar revenues, et cetera? Could you just talk about the latest thoughts around all of that?

Third question on capital allocation, Gerry. Well, first of all, on the buyback, we said it at the end of Q1. We are on track given the outlook for the year to start our buyback program in H2, but we are still waiting for the approval of the Board on this program. So we need to follow the rules. But of course, we'll inform the market once we have got there and when we are in a position to launch the buyback program. And on the dividend, we've been very clear. We have a progressive dividend. So there is just one way for the dividend, which is up, and that's what people would expect. At the same time, we said that today, we have a pretty high payout ratio. Of course, with a nice expected growth on profit here. We have a way to, I would say, make it evolve in the right direction. And we signaled the fact that on the long term, we do not give an horizon for that. But on the long term, we want to have a payout ratio of dividend on net profit to be about -- adjusted net profit to be about 75%. So we -- it's probably going to take a few years before we get there. But that means that will not necessarily increase every year the dividend in line with the growth of the net profit. But of course, we're going to keep rewarding our shareholders with nice growth of the dividend.

Emmanuel, time has peaked on us. I found that a very informative session. Hopefully, those joining us did likewise. Thank you very much.

Great day to be with you, Gerry. Thank you. Talk to you soon.

Thank you. Bye-bye.

Bye.