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

Okay. We're only about 30 seconds behind time, so I'll start now. Welcome, everybody, to this session with Philip Morris International. Emmanuel Babeau, CFO of Philip Morris International, welcome to our 20th Global Consumer Conference here in Paris.

Thank you, Gerry.

My name is Gerry Gallagher. I'm one of the consumer team at Deutsche Bank in Europe, and it's my very great pleasure to introduce Philip Morris this morning. So with that, the way we're going to do this is I've got a series of questions. But before I ask those questions, I'm going to ask Emmanuel to say a few words. Philip Morris released a statement this morning reiterating their full year guidance. And intermittent to the questions I ask, I will offer questions out to the audience. [Operator Instructions] So with that, Emmanuel, over to you.

Thank you, Gerry. Great to be with you guys back in Paris in this wonderful month of June. I wanted to start sharing a few thoughts. Of course, first of all, please read very carefully the forward-looking and cautionary statements as always. Thank you for that. And I'd like to share with you the latest update on how we view our second quarter. And I'm pleased to report that we expect to deliver a strong second quarter, which is going to be driven by the success of our smoke-free portfolio, and that is going to trigger dynamism on volume and on top line. When I look at our great team that we have now within PMI, IQOS and ZYN, first, with IQOS, we expect to have a strong performance in Q2. We see continued momentum behind the brand. We see the launch of ILUMA that is continuing in a number of country, each time it's delivering further momentum behind the brand. And we now expect to be, in terms of shipment volumes, between 31 billion and 32 billion stick for the second quarter. This is the upper half of the previous range that we've been giving. Next to IQOS, we have ZYN. In the U.S., the brand is buoyant. I'm not bringing anything new. I'm sure that you have seen the Nielsen and the scan data. We are seeing a very strong growth for ZYN in the U.S. And of course, that is very good news. So that is driving this momentum and dynamism on the top line. In addition to that, I would say, in line with our expectation, we expect to see the trajectory on our margin to start improving in the second quarter. That is going to be driven by 2 elements. The first one, at the level of the gross margin rate, we are still seeing a number of headwinds, but we see some of the headwinds abating, notably some of the headwinds that were linked with the disruption on the supply chain and some element linked with the first launch of ILUMA. So it is a gradual progressive improvement, but we're going to start to see this in Q2. And in addition to that, we are expecting to grow SG&A much more in line with revenue in the second quarter. And therefore, this was a big drag in Q1 because SG&A had been growing much faster than revenue. That was a drag on profitability. This should not be the same drag in the second quarter. So these 2 elements mean that we are expecting a sequential improvement of our adjusted OI margin, which could be up to 100 basis points. And when we look beyond Q2, we are expecting this margin trajectory to continue to improve, again, in line with expectation. And I'm reiterating here the fact that we expect for the full 6 months of the second half an organic improvement year-on-year of the H2 margin for '23 versus '22. Now the good news for the Q2 means that we are now able to target the top end of the bracket that we gave for the second quarter, which is $1.42 to $1.47. So we are now targeting to be in the upper part of this bracket. And based on this good Q2 that we expect, reaffirmation of dynamism of top line expected for H2 and this margin improvement that is happening as expected, we are confirming our full year guidance. And you can, of course, read the term of this confirmation. I think what is probably the most important with this Q2 is that clearly, we have the confirmation that IQOS and ZYN together are a formidable team. And thanks to them, we are making good inroads in our objective to become a predominantly smoke-free company. And you can be sure that we work very hard on maximizing the potential of IQOS and ZYN. Thank you very much. And Gerry, I'm more than happy now to start the debate.

Thank you, Emmanuel. So your opening comments did a good job of taking away my first 2 or 3 questions.

Sorry about that.

So I just want to say, thanks for that. And I apologize for anybody in the audience, I'm very conscious of my head and very, very bright lights. So if it's bouncing off and causing the problem, I do apologize, but there's not much I can do about that.

So you did a good job of laying out -- a very good job of laying out the Q2 and into the second half of the year. So I think that question has been addressed with your opening comments, Emmanuel. But could you take that a step further and just give us your view of what the business can do on a medium-term basis from a top line perspective and also from a margin perspective? Your comments around SG&A in the second half were quite interesting. Could you just talk about the top line and the margin just on a medium term...

Sure. Well, I think we are seeing a lot of dynamism in our business, clearly driven by smoke-free, but I would say, resilience of the combustible business is also important in the overall equation. If you look at the trajectory of our organic growth for revenue for the '21-'23 period, if we deliver the guidance that we have for the time being, we will have been delivering 3 years in a row more than 7% organic growth for the revenue. So it's a very dynamic business. And when you look at the IQOS trajectory today, when you see that now IQOS is no longer the only driver, we have ZYN next to it, which is powering up extremely nicely, I think we have the driver for a good momentum on volume. We have this capacity on top of that to continue to increase price on combustible, but also, of course, tomorrow on our smoke-free product. So you will have to bear with us until our Investor Day in September when we will come with a more medium-term vision. But I think you see the ingredient, the element for the continuation of a nice dynamism on the top line. Now when it comes to margin, we know that we've been facing a number of headwinds, of course, like everybody, the inflation, but on top of that, the disruption coming from the war in Ukraine, and we've been really significantly impacted. I explained that we are progressively gradually overcoming that, but it's taking some time. I think in addition to that, there were all the costs attached with the launch of ILUMA. Here again, it's a gradual progressive improvement, but we are now in this phase of improvement. And remember, the business on IQOS is having a fundamental positive mix. Our gross margin rate on the consumable for IQOS is about 10 percentage point higher than noncombustible. So there is a positive effect when we grow the IQOS business coming from this consumable. On top of it, I know that I still have some difficulty to interest people to that, but ZYN is coming with also a very nicely accretive capacity on the margin. I mean we flagged it. Swedish Match is an accretive acquisition at the level of the top line, at the level of the margin, at the level of the cash flow, at the level of the adjusted EPS. And therefore, that's also going to participate in the margin trajectory. So here again, Gerry, sorry, you will have to wait for September, we'll be more precise about that. But I think we have clearly the element to show that we can expect some positive evolution for the margin, even if we acknowledge the fact that we will need to invest to extract the full potential of our smoke-free portfolio.

Just on ZYN, how big can that brand get? Can you talk about what you can add to ZYN on top of what Swedish Match had in terms of its distribution infrastructure, et cetera, and how you can potentially grow that brand a little bit quicker than it otherwise would have done?

Sure. First of all, I think I have to say that we are probably surprised on the upside by the speed at which ZYN is growing. So when we are comparing with when we were looking at Swedish Match more than a year ago and when the whole idea of combining the 2 businesses was being discussed, ZYN was not necessarily having the same dynamism or at least there was some question mark on whether that could carry on at the same speed. So the first good news is that the U.S. potential seems to be enormous. Remember, today, we are in a situation where, yes, the western part of the country has started to be developed for ZYN. But clearly, there is both the potential for increased consumption in this western part. And actually, we see that in what we call the velocity in the sales point. So the number of [ can bought ] every week is accelerating. And then there is a full extension, geographical extension that is providing a big upside potential. So we believe that we are just at the beginning of the potential of ZYN. Of course, we're going to increase the capacity behind ZYN, in line with also the investment that we are going to make on IQOS, which is going to benefit both ZYN and IQOS. But I think here, just that, I would say, is drawing the picture of a very nice growth for the coming years. And on top of it, of course, we have the potential of growing ZYN outside the U.S. We're going to be launching in 5 to 10 markets in the coming months. That will be a combination of market where the oral category does exist already, and you may have already some player there. But there will be also a few new markets where we are strong and where we believe that the category could have some relevance. So that is obviously nicotine pouches, but you hear it from my comment, that is having a strong double-digit growth potential for the long term, for sure.

Could you talk a little bit about how you can have what may be emerging as a, correct me if I'm wrong, please do, a dual-hatch strategy with iQOS and ZYN, albeit smaller than IQOS, but a dual-hatch strategy with those 2 noncombustible products? Could you talk about that a little bit? Is that wrong? How do you see that?

Well, if I understand well your question, of course, with IQOS and ZYN, we have 2 outstanding assets in the PMI team today. So we're going to play them fully, and we want to make sure that we put our money on the 2 category where we see the biggest potential, the biggest relevance for the consumer and, of course, the biggest potential return given the specificity of these 2 categories. So I'm not saying that the IQOS and ZYN team or tandem will be relevant everywhere. But nevertheless, we believe that this overall category will find gradually its place, its relevance in many, many country because of the fact that it is probably the ultimate level in terms of tobacco harm reduction, the fact that it's extremely situational and convenient in term of usage. And actually, we see significant poly-usage among the oral nicotine consumer. I think they like to enjoy their nicotine in any kind of moment, any kind of place. And also with this unique capacity of you can still be active, be working, be even playing sport, be doing something else with your hands while enjoying the product. So that's a product that is very, very specific. And I think we believe as it is gaining in awareness, understanding the potential is everywhere. I'm not sure I need to express again the fact that the potential of IQOS is, we think, absolutely across geographies. I think we've been illustrating that enough. So yes, we're going to place this team fully. And I guess, maybe beyond your question, there was a question on vaping, I don't think we're seeing vaping is irrelevant. We think the category has absolutely its role to play. I'm happy to elaborate on why we see today a number of difficulty and less potential. But with VEEV, we have a great product. And we are certainly not discarding the fact that in a few market where we think that the conditions are gathered, we're also going to play VEEV as a very interesting play as well.

Well, I will ask you, what are the difficulties...

I knew you would. I knew you would.

What are the difficulties? And are we talking a dozen countries? Or what -- give us a -- from your perspective, how big do you think the vaping market really can be?

Look, today, the vaping category is close to twice the size of the heat-not-burn category in term of user. Now it is much less loyal, and the profile of the user is different. It is driving much more poly-usage. Full conversion to vaping when you are a smoker is much less efficient. I think fundamentally, but I've been saying it, we're seeing a number of difficulty with the category. First of all, the fact that the technology barrier are not that big. So actually, you don't find a lot of differentiation in the product. Second, the fact that it's very poorly regulated in most countries. And therefore, it is a wild, wild West with some behavior that are absolutely unacceptable from a marketing standpoint that can drive to underage consumption, which is not acceptable. So that is a real problem for us. And of course, we know that because we will never do that, there could be, in a number of market, a situation where it's going to be difficult for us playing with all the rules to be relevant. Last but not least, all these elements I've been describing mean that it's difficult to build the right return on the investment. And the loyalty of the consumer, changing brand and so on, mean that you can invest on device, on brand, but the return looks quite uncertain. So for us, the strategy is clearly to say, well, let's look at the market. And today, with VEEV NOW and VEEV ONE, we have really 2 great product on disposable and closed system. I think that is matching any competition in term of quality of the product. It's -- let's go for the market where vaping is a significant market; where there is the hope for minimum regulation today or coming soon; and where, of course, with the strength of PMI, we can generate a difference and, of course, playing it as a team with IQOS, for sure, and within potentially at the [ 13 ]. But it's going to be, I would say, maybe 10 markets, around 10, where we see the condition for investing on the category. And again, we're not going to lose track from the fact that with IQOS and ZYN, we have already a fantastic team on which we can invest.

Turning around a little bit, look, I know you're never going to be complacent as a business, that's clearly the case. But there is an argument to say that you've already won in heat-not-burn. What would you say to a comment like that?

Well, it's, of course, extremely good to have 75% market share of the category. We are coming with more innovation with BONDS that, as you know, we are testing in emerging country. Without betraying any secret, you can expect us to come with more innovation in the future. So this is not the end of innovation. I'm sure in September, we will elaborate on that. But as you said, let's not be complacent. Competition is certainly going to progress. And actually, we've been saying it, but I'm really happy to repeat it, I mean we want the full industry to be committed to going smoke-free and, of course, to develop all the categories themselves. And of course, the beauty with the heat-not-burn category is that we see both the technology, even if there will be certainly some catch-up in the technology in the future, but nevertheless, the technology and how you build the capacity to produce billions of stick coming from a new technology as a significant barrier to entry to create volumes and efficiency on the cost of goods and get there. So we have a leadership. Our, of course, objective is to continue to nurture this leadership. But I think we're also realistic. And probably, we desire to see competition being committed and coming and continuing to invest. And I don't think it would be realistic to say that we're going to keep necessarily, over the long period of time, the 75% market share. But that would be good news to see really the competition leveling up their game in this category.

Do you have -- I have a detailed question, but it always comes to mind. Do you price the device to be gross margin positive? Or are you happy for it to be gross margin neutral?

Well, I think we are even happy in a few country to have gross margin negative. So I don't think that we are here with a strict policy. It depends. It varies from each market depending, of course, on the purchasing power, on the specificity of the market, on the maturity of IQOS in the country, on I mean the market share that we have, do we need to convert people who are smokers and they want to discover the device and the IQOS universe or are we trying just to retain already convinced people about IQOS and the strategy, of course, can be a bit different. We are clearly seeing everything we're doing behind the device as the necessary investment that we need to make for people to push the door of the IQOS universe. So that's why in a number of country, we accept to be negative on the margin.

Okay. I'm going to change tack a little bit and come on to the subject of ESG. And yes, it was -- there was an article in one of the financial press the other week from a discussion you had with the journalist there. Could you talk about the question of exclusion of tobacco and how that's moving? To make a point, the equity market is about looking forward and where businesses will be, and it never ceases to amaze me that the ESG debate around tobacco gets locked in time and not even today, maybe even looks backwards rather than forwards. Could you talk a little bit about -- I'm getting some odd looks from the audience. So clearly, some people disagree with that. But could you talk a little bit about where you see the potential for ESG investors to open up to your story?

Look, we are absolutely convinced that ESG is -- should be at the core of our strategy. And there won't be a future for PMI if we're not a leader, I would say, a role model when it comes to ESG. Now we have to be realistic. There are specificity about PMI when it comes to ESG. Like any other player, we need to be absolutely perfect on the impact of our operations on ESG. So you can expect us to be when it comes to diversity and inclusion, how we are dealing with our people, impact on community, fight against climate change, biodiversity, water stewardship, I mean all these elements are matters on which we want to be absolutely best-in-class. And I have to say, I'm super pleased because just a few days ago, the magazine Forbes elected us as the leader in the FMCG category for a company targeting to become net zero carbon emission. So I think we are recognized as a leader in more and more dimension. But next to this traditional dimension, there is, of course, a dimension of the impact of our product. And that's where, I guess, we have the debate because I think on the first part, I think increasingly people recognize that we are a reference and the role model. Now impact of our product, I mean I understand that there can be some question marks, skepticism even, debate about, are you serious about moving away from combustion? What is the impact of your new product? All that is absolutely legitimate. I think we are asking and calling for debate. We want to share scientific evidence. I think we are accumulating that. We are increasingly able to show that from the theory that was already done, but now in practice and probably with Swedish Match, we have now very detailed data for Sweden and the impact on public health versus the country that have a significantly higher smoking prevalence. You see the impact of developing a smoke-free category on public health. And we believe that ultimately, we will be able to convince everybody that we are today developing a business that is sustainable because the impact of the smoke-free product will have on public health a much reduced impact, which I believe, this is my conviction, will compare very well versus other industry. I'm even not talking about the alcoholic beverage industry, but even sugar, fat, things that are having other impact on health. But I think we also have to be humble and accept that it is -- there is no epiphany, Gerry. There is not the moment where everybody says, oh, yes, PMI, this is it. No, that is a gradual journey, step after step, talking to people, sharing data, convincing. And I have to say, we're not there yet, of course, in convincing everybody. But I see a growing number of people coming to us and saying, now we can speak to you. You have something to say, we are interested. I'm not saying that they are necessarily coming already convinced, but they say something is happening, let's start to discuss and understand what's going on.

Okay. I'm going to move on to capital allocation and the balance sheet and matters like that. Swedish Match, 3x levered. Could you talk a little bit about how you see the dividend from this point moving forward and talk a little bit about where buybacks sit in the whole agenda for your business?

The dividend, we said it, and I'm happy to repeat it again, is sacrosanct. So this is, of course, when we talk about capital allocation, this is coming first. And when we look at the dividend story since the 2008 listing, I think it has been a 7.5% CAGR. We have a progressive dividend policy, which means that there is only one way for the dividend and that is up. I think we've been very nicely sticking to it. Of course, we had to cope with various evolution of the environment of the ForEx, but I think we've been very consistent. And please look at our consistency in the past, I think there's a lot about what's going to happen in the future. Now when it comes to buyback, I think we are happy to, on top of this dividend policy, to reward shareholders with buyback. We just want to do that when we have the optimal balance sheet. And when I look at what would be the optimal balance sheet, I mean it's relatively easy, it's just to be back to where we were before the Swedish Match acquisition, which was to be a bit below 2x net debt-to-EBITDA. And I think in this area, we are very happy to do buybacks. So buyback will come back in due course, but we do that at the time where we have a certain level of, I would say, leverage in the balance sheet.

Okay. I think it's -- from the outside-in, it looks like an acquisition the size of Swedish Match moving forward over any reasonable time frame appears unlikely. Could you talk about what areas of adjacencies that interest you guys where you can see a bit of CapEx going in, where you can see some small bolt-on acquisitions, where you can put some investment into something you're developing internally? Just help us understand that part of the business.

Sure, Gerry. Yes, happy to do that. I mean back to my earlier comment on the dynamism that we see in the business, I mean we see so much potential and there is so much excitement behind IQOS and ZYN that before talking about CapEx behind inorganic growth, really, the focus internally is to invest behind our brands. And of course, IQOS, ZYN, VEEV as well, but in a kind of much more reduced manner, so that's really the priority. Now I cannot totally discard that we could continue to invest on the core of the business, so on our smoke-free product, if they were seeing that we are making sense and available. Remember, because of our strengths, we are capable of making acquisition, whether of a technology, patent, brand, and leverage that and create value. I have to say that when I look at the Swedish Match acquisition, I mean, so far, we are just super happy. I think really, it has been a great acquisition, great timing. And both the dynamism of what we've been buying, the impact on the U.S., what is opening up, I think, is just confirming that when we have the right target in this core space of our business, it does make sense to invest. So there is nothing today specific on the agenda, but I'm not closing the door to that. But I think I would rank things in this order: so first of all, we organically invest; then I think on the core, smoke-free. But there is just one Swedish Match, to be very clear. There is nothing comparable to Swedish Match out there.

Okay. Moving on from an even sort of bigger-picture perspective, if you like. Your shares have been a good relative performer to the tobacco space. You've compounded about 9% a year in U.S. dollar terms for the last 5 years. But a lot of that has come from the dividend rather than the capital side. To what extent is that -- is it an issue from a staff morale perspective, from a recruitment perspective, all that sort of thing? 9 -- there's nothing wrong with 9%, but I bet you think it should be...

Well, we'd like to do more. I mean -- so yes, 9% is good, but it doesn't mean that we are happy with that, and we say that that's fine. Let's be clear, we've been impacted in the last 5 years by what I would call -- and I'm not trying here to find excuses, but the fact is that we've been facing a bad cycle on the dollar. The reality, I've been now a 20-year CFO of a multinational, and I can tell you, I've been seeing a few phases on the dollar versus other currency. So it is true that recently, the dollar had been more on a strength pattern versus currency. I don't know, so I'm not making here any kind of forecast and so on, but it doesn't mean that it's going to carry on that way. It is quite obvious that the overall performance would have been much above this 9% in a more favorable -- even a neutral cycle of the dollar. So I think we have all the element to continue to grow very nicely for the future, top line, bottom line. We'll share more details with you in September with our Investor Day. And then certainly beyond this growth, the ForEx will have its impact. Hopefully, it will be more positive, and that can drive even more than this 9% return.

Okay. Looking at that a slightly different way, your multiple is give or take twice the -- or in some instances, more than twice the multiple of some of your tobacco/nicotine peers. But if you look at the business characteristics of what you deliver from a financial perspective and take the nicotine/tobacco out of the equation and just look at the math, you're as good as any FMCG business out there. What can you do to make the market think that way? I mean I've been trying 27 years to [ sway ] the market think that way, and I still fail, but have you got any insights?

Look, I started to be the CFO of Pernod Ricard in 2003. And I can tell you that at the time, the multiple of the spirit industry was not at all the one that they enjoy today. It was a different view on the spirit industry. And gradually, people realized that that was an industry that was sustainable. So not going to enter in any kind of judgment, alcohol versus smoke-free product, but anyone can have its own judgment. But there was a gradual change. So I think we know what we are able to deliver. It's for us to keep, as I said, brick after brick, building this convincing, I would say, execution on our strategy. And I believe that people will eventually come with a view that the multiple deserve to be higher that indeed -- I think the whole question is about the terminal value, to be very clear. I think that what is driving today a lower valuation. Indeed, if you look at our top line and bottom line versus other peers in the FMCG, we should be higher. I mean it's our job to keep convincing people that we have all the elements to show that indeed, this is sustainable, and this is a business that is going to stay with different capacity for us in term of growth. I mean, remember, we are moving away from a combustible business where we're enjoying 26%, 27%, 28% market share to a smoke-free product where today, we enjoy more than 50% market share, I mean, it depends on how you calculate that. It is also a part of the business that can enjoy higher margin than the combustible industry and that we believe will be ultimately much better accepted by society given its impact. So I think the growth profile remains extremely attractive over the long term, and we're going to do everything we can to convince people about that. I believe it's going to come.

We have a question from the audience, if there's a mic available. The mic is on its way. Just here.

Can I ask a quick question about IQOS, please?

Sure.

And I might be mistaken, but I think you bought back the rights from Altria last year to resell that or sell it again in the U.S. market, and I think you're building up to doing so again next year. Can you just talk us through what's happened and what your aspirations are as you relaunch that business? In the U.S. market, in particular, how big do you think it can become there? That would be great.

Sure. So you're absolutely right, we've been buying back the right for the commercialization of IQOS in the U.S. We will actually recover them in April next year, April '24, and we are working to be ready. It is very clear that now that we have the Swedish Match team in the U.S., we have a very nice sales platform to do that job. I don't think we can speak of a relaunch. I think it's rather relaunched because let me be clear, Altria has never been doing anything serious about that for probably some very good reason that you can understand. You have more than 30 million smokers in the U.S. today. And we believe that IQOS can be relevant to millions of these smokers. And we are preparing the launch like we did in many other country with one specificity, which is, of course, the size of the U.S. market. So today, we have a PMTA, so the authorization to put on the market IQOS blade, IQOS 3, not our IQOS ILUMA version. We even have an MRTP, which is the authorization to explain that this product present reduced exposure to toxicants. So this is a product that is with very nice basis, I would say. We're going to be, probably for a long period of time, in monopoly in the heat-not-burn category because we are the only heat-not-burn product approved. And there is no grandfathering of other product, which is both a positive thing and a difficulty: positive because, of course, we're going to be the only one and anybody wanting to go for heat-not-burn and all the specificity of this category will have to come to IQOS; the difficulty is the low awareness of the category because it is unknown today. And probably between vaping and heat-not-burn, we need to explain the difference. So in order to be successful, we are doing a number of things. We are leveling up our game, first of all. So we are building more sales force, which is also accompanying the growth of ZYN. This is the first thing that we do. We are building a digital commercial engine, exactly the way we did in other country, to be able to have this great digital customer experience that is creating this connection that is absolutely important to enroll consumer in the IQOS universe and IQOS journey. And we are also building some more external affair capacity because we need to go state by state to explain what heat-not-burn is about, explain the MRTP that we have, talk about regulation, talk about taxation, excise duty on the product. It is likely today that we're going to start rather targeting the key states where we see the highest potential for IQOS until ILUMA has a PMTA. So the key states will probably be the one with a large smoking population, purchasing power and, I would say, openness to innovation. And we said that it was a reasonable ambition, it's an ambition and aspiration, if you want, to target to have about 10% market share by 2030. We've been doing that in many other country over the same period of time for IQOS. So that's what we can say at that stage. Again, in September, we will come with much more detail on the plan and more visibility on what we intend to do there.

[indiscernible]?

Of the combustible and the HTP market, yes.

Yes, predictably another question on IQOS. Can you talk about the life cycle of innovation on the devices? Obviously, you got ILUMA coming out. I mean presumably not iPhone-esque in terms of every year, but are we thinking every 3 years? And then related to that, you said you think your 75% share will come down, but hopefully within a substantially growing market. Would you expect to cede share to other combustible players? Or do you see a myriad of sort of noncombustible players coming into the heat-not-burn category over time?

That's a good question. Well, first of all, on the cycle of innovation, I mean you cannot develop the technology -- I mean, remember, the idea is to mimic as much as we can the experience of smoking to convince smoker to switch away from the combustible cigarette. And remember, you still have one more -- more than 1 billion smokers in the planet. So there is a huge population that we need to convince that there is a much better product that does exist that is reducing toxicant by up to 95 -- exposure to toxicant by up to 95%. Now in terms of innovation, we come with this induction. I'm not saying that we're going to come immediately with another technology, and I'm not sure that there is necessarily today something clear in terms of better technology. Each time that we switch technology, there are big investment in terms of production capacity, in term of changing the device and so on. So we're going to improve the device certainly that we have and coming here with more innovation and that's going to come -- it can be in the design, it can be the functionality of -- in the foreseeable future, in the midterm in terms of innovation for the induction technology. We have a second part of innovation on what we call for the emerging country, design to cost, cheaper. And here, we go for peripheral, eating probably more traditional smoker, different characteristic of where they are smoking today. So we have 2 pools of innovation. And then we're going to invest on innovation for consumables. So you should expect us to come with innovation on consumable, I won't say more today, but there is more to come in that respect as well. So that's really what you should expect. As I said, that is requiring significant innovation, not totally obvious for people to develop that. And once you have the technology, not totally obvious to develop the capacity to produce 1 billion stick. Because here, I mean you are in the cigarette model, you produce 1 billion stick that you need to have when you heat and not burn of great, I would say, quality in the way you produce them and how the tobacco is put together. So I'm not discarding the possibility that new players are coming. I have to say, today, we don't see many of them. And I would still believe that indeed, what we're going to say is probably a further acceleration because we hope that more industry player will be committed to the category. So more acceleration, but probably driven by the big players in the industry rather than newcomers. The jury is still out. I have to say, so far, we haven't seen any meaningful new players.

Well, we're going to take advantage of the break, and I'm going to annoy Emmanuel a little bit by keeping me here on the stage for a bit longer because we've got 2 more questions from the audience. So we're going to use the time, if that's okay, Emmanuel, to take those 2 questions.

When it comes to the price gap between IQOS and cigarettes at 2.5x, should we assume that, that is maintained? Or how should we perceive that gap evolves over a 10-, 20-year period?

Yes. So that's the revenue per stick. You're absolutely right, that is absolutely 2.4x to 2.5x higher on the heat stick versus a combustible. This is driven by 2 things: the first one, [ Juul ]; and the second, of course, is lower excise duty. I think the premise is the [indiscernible] stay of product targeting more emerging country, and I mentioned the bonds technology. But I think it would still compare favorably with the combustible product it will replace. And when it comes to excise duty differential, I think we are expecting some gradual reduction, probably largely driven by the fact that the government will need a bit more money. But we also believe that the accumulation of data pointing to the better impact on public health of our product will also continue to legitimate to have a significant gap. We think 50% and above is really legitimate. And actually, when you compare heat-not-burn and vaping, and remember, heat-not-burn and vaping in terms if you have a good vaping product, which is always a question, reduction to toxicants are about the same. We talk about very similar impact in terms of reduction to exposure to toxicant. Today, vaping is much less tax. So you could have -- in a continuum of risk, you could have the argument of actually heat-not-burn is too much taxed today, and that should be reduced to be more in line with vaping. Last but not least, there is a number of market today where we are not pricing with Altria or HEETS at the level of Marlboro and our premium portfolio. And obviously, that's not something that is going to stay in the future. I think today, because of all this positive mix that we have, the revenue per stick, the margin that is higher as well, I think it's more a play on accelerating the volume growth. But of course, ultimately, with IQOS, we are, if you want, building the new reference of the category, the new Marlboro, if you want, of heat-not-burn. So we have the capacity to also price up and continue to have this advantage. So I'm not able to say it's going to stay at 2.4, 2.5, but it's going to stay certainly with a nice differential.

Do we have one more at the back? Yes.

So IQOS is a closed system and clearly been very successful. You've seen this for yourselves. When you look at systems like Nespresso, for example, you've seen a proliferation of people making capsules, eating into that category. Do you see that on the stick side of your business? It's nothing I really see on the shop shelves, but is it possible for others to make sticks and be compatible with IQOS? Is that happening in some of your markets and you think of as a potential threat?

Look, there is few attempt in a few countries. I think it raises a number of questions. First of all, remember [indiscernible] and you have [indiscernible] you cannot [ guide ] in an easy manner. That would be extremely complicated to replicate the stick recognition. And that's probably a feature that can be installed beyond the technology of induction in all our products. Then there are a number of patents, of course, even on the stick. So people using the way we are producing the stick, whether you're going to get to a quality that is going to be of a much lower, I would say, experience and, therefore, not great for [ the customer ] or I think there's also some limitation there. So I cannot totally say that we are not going to see people trying to take some benefit of that. But at the end of the day, I think we're going to keep, on the long term, a lot of protection, patent, stick recognition that should protect us to a nice extent. And then ultimately, of course, the brand -- I mean, remember, we are in the branded business. So when you are with your friends, what you are using, what you are consuming tells a lot about you and about who you -- what you want to show as a personality. And ultimately, of course, the brand will also be important. So that's a combination of all these element that will protect our business on the long term.

It's 10:02. Emmanuel Babeau, thank you very much indeed. Thank you.

Thank you, Gerry. Thank you all. Thank you.