Philip Morris International Inc. ($PM)

You've got some opening remarks. Okay. Good morning, everybody, and thank you for attending this meeting. fireside chat with Jacek Olczak this morning, Chief Exec of Philip Morris. I'm Damian McNeela, Head of Tobacco Research here at Deutsche Bank. I think Jacek, you have some opening comments to make before we get into some questions.

Yes, just closed the earlier today, issued a press release reflecting the latest dynamic environment on the exchange rates have adjusted our guidance just for the currency, the whole underlying views for the year remains intact. I guess, later on, we're going to talk, which was also in our release about ZenAltra and maybe in Japan. But the way we look, how we are unfolding well, almost about a half of the year through I mean most of our assumptions are coming as we predicted them how we're estimating them at the beginning of the year, including the evolution of the volumes in Japan post the tax hike price increase. And also, I know there is a lot of focus on the U.S. quite rightly and the expansion of the portfolio. But at the beginning of the year, when we're giving a guidance, we have said and communicated that we expect as an expansion towards the end of the first half. And actually, we have said this before the FDA guidance have been released. So now we actually converge in terms of FDA's views and our views how the market is going to evolve. The rest is in the release in the detail.

Okay. Well, let's start there then. I mean, obviously, IQOS is the driver of the business. But I think given the focus of what's happening within the FDA, is it worth just sort of talking through your current views on where the FDA is heading, what you think of the progress has been made in terms of sort of how they're changing the enforcement guidelines -- and then we can sort of dig into the U.S. performance of ZYN and what you hope to do with Zinaltra.

Look, any clarification from a regulator, especially like FDA is very warmly welcome, right? So we avoid assumptions and speculations and we're receiving on the receiving as we somehow can incorporate this into our planning. So as a consequence of these guidelines and our assumptions before we start shipments of high cost, excuse me, is in comedies. But as in Ultra in the 9 and 11 milligrams trend and the portfolio of flavors, essentially this week, we started the shipments. We have started the manufacturing already some time before. So it's all -- it's a convergence, as I said, of FDA views on how they want to regulate, wish to regulate the market and our views how to interpret the regulations. And there will be more to come. I see the guidelines as a net positive. Obviously, the ideal scenario is that you have a very firm or very clear regulations. But in absence of those this words from FDA found very positive, which should contribute, I'm talking about the pouch category or oral nicotine category. I think this should contribute to the further growth of the category. So let's remember one thing, that the category is still in a very embryonic phase and phase -- and as the portion of the total nicotine space very much in the U.S., but also in international is the smallest one, okay, by all measures. So this is good. I mean we're also taking opportunity while introducing Ultra to the market to address some pressure on the price points. So I mean we said it on the release, but just to be very clear, the Ultra will go in a pace in a can of 20 pouches. But the price which we set for the present portfolio is an equivalent of 16 pouch. So per can is a slightly more expensive pouches. We're adjusting the pricing index. And at least this is our move for now.

Yes. And what's sort of driven that sort of thinking? Because obviously, then as sort of maintained its premium price point throughout the sort of the last couple of years. What's behind the thinking with the pricing we...

Well, I think as the -- if you Zezas we all know it, and the market for pressure over the last few quarters for a variety of reasons, partially because of what I call the asymmetry in a portfolio in upper products from a competition and lineup of the products from us, from them. but it's also the price I mean essentially, as we speak now, then we'll be trading or retailing, sorry, about it's 160 plus 170 price index. 70% premium. I believe, obviously, this translates into the share of pressure. Now the good thing about it is that at 70% premium many other product categories, including combustibles I compare Marlboro is we're completely unbeatable price premium. So then under the circumstances, obviously, it's not growing, but it's also not tanking. Very sorry, for the language. I believe adjusting to the adjustment in a price premium is needed there, but I believe Zen has the ability to command the premium price positioning of price premium in the market.

And given the sort of the changes with the FDA and your ability to perhaps move innovation faster or start to move innovation full stop. What do you think the outlook is for the category in the U.S.? I mean some people talk about it tripling over the next couple of years. Do you subscribe to that...

I mean category today. Okay, category today, is growing somewhere in the range of, I don't know, 20%, 30%. Can this accelerate from this level would see the ada. Will it happen? I mean, it's very much on the consumer readiness. Remember that switching between inhalable products from a combustible cigarettes to the inhalable smokefree requires a different behavioral, et cetera, adjustments from the consumers than going from the inhalable to the oral category. Obviously, for people, for consumers who are in the oral tobacco, slows us tobacco, et cetera, which is quite not large, but still a substantial market in the U.S. It's definitely much easier to migrate in a cleaner form of the product formulations, which are the pouches. The same is in the Nordics, in Sweden, et cetera. in vast majority of our locations. I mean people have to go for the inhalation to the oral use, which is not so lobby. So the runway for adoption is longer and you need to have the right product portfolio and the right marketing approach, how to get the consumers there. Pouches obviously offer much less, if you like, much more opportunities during a day. It depends on how the day go on. I mean the office, I'm at home, I'm in a taxi. I mean all of the situations when people will reach out for nicotine-containing products. Obviously, the freedom of use is a vastly better visits almost unrestricted, right, compared to inhalable products. So I think long term, oral has the great potential. The question is now how quickly consumers will be going into this category.

Yes. And do you think innovation has got a big role to play in that?

It is. But the space is today, the way I log into this cold thing from all smoke-free product categories, so it not burn wave and oral. I mean, the product differentiation on a heat-not-burn is presumably the broadest one, between market, what is in the market, very much to the advantage of our iQOS and hence, 10, 11 years after the lungs will still come under 3/4 of the of the total market. And there is a product differentiation. And obviously, consumers are preparing IQOS to our proposition. E-vape space is a little bit convoluted in absence of other where is this mix of elicit and a lot of flavors, a lot of proposition, it's a little bit -- it's difficult for economics to navigate. Product differentiation on the pouches is not the level which you will have on a hint Yes, you have a drive formulations, you have a moist formulations, they translate in a different speed of a nicotine release, which some people prefer these ones, some people prefer the other one. But I think there is more product differentiation than heat not burn than on pouches, for example.

And onelast question on pass before we get on to the iQOS. In terms of the international markets that Zen is in, -- are there any ones in particular where you're particularly excited about the potential of the brand?

I mean, we are today in a 30-plus markets, right, where Zinn I mean the reason -- obviously, we're leveraging the scale which we have for infrastructure, if you like, which we have built for IQOS. So it's relatively easier for us to use the same brand retail infrastructure, but many other consumer-driven infrastructures, which is deployed in about 100 markets. Some of these places we're going also to test in what is the reception of this category in a given market. Obviously, if you go to the markets, as I said before, when you have a history of oral usage of tobacco is obviously starting point is different. It also requires a different product portfolio. If you go to the markets, which they're not even aware that you could consume a tobacco, nicotine oral forms. I mean the starting point is different. Now in every market, you will find today phenomenal growth, but we also have to be aware that this is your early adopters, group of consumers, which I believe is in every category. And obviously, it's good how consumers -- what is the first reaction for the consumers, but I believe more time is needed to see what actually takes. And once you go for those people who will always are very open to innovations and trying new formats, new formulations would really will stay in the market. But I do believe that in every market when there are new oral pouches exist, you could see the growth, okay? So I think may well follow the same power as a hit not berate presumably the runway will be a bit longer. But for us, the most important is the destination, right? Is the consumer finding this format is interesting. Maybe I'm not fully okay of adopting my full day consumption into this format and the mix, and we have said it in previous communications that list PMI, we strongly believe in a multi-category approach, and we see a synergic effect between heat not burn, vape and pouches, not only from us leveraging the route-to-market infrastructure, consumer-facing infrastructure, but also consumers. And you could see that consumers don't mind having another product format in the pocket because it offers the ability to consume that nicotine consumer to consume the product in a different moments over there. So I mean I myself by Micro's users and okay, I'm in Paris, so I wouldn't tell you when I had talk about the about I have a very busy well in my backpack. So -- and I can find the places where something is convenient as -- so it's a synergistic fit that some of the free is more than the individual one of the category at the consumer level, and this is what we're trying to push the commercial strategy.

Yes. If you move to iQOS now, I mean, I think going towards the end of last year and through this year, the sort of some investor concerns about IQOS' ability to maintain its share in key markets like Japan, given expectation of increased competition. And as I said, look, we've got -- we still maintain strong share in Japan. I mean given the journey that you've been on with iQOS, can you give some high-level key learnings about the brand that supports your conviction in your ability to...

IQOS, a great question. So IQOS is -- okay. Look, it's 10-plus years so fast staying behind the IQOS. And I think as many of you have noticed, is the 1 execution across every place where you go, in Tokyo, London, whatever and hopefully, soon U.S., you all say the 1 product presentation is the 1 brand presentation is the 1 retail presentation, et cetera. is nothing else, by the way, that as recycling the recipe from the past, how we built Marlboro, okay? So our aspiration is to build a truly global leader premium position breadth. And we know that the consistency in execution is very important, especially in the world that everything is extremely connected online, offline asset. There is a product differentiation and the experience which IQOS offers you today from a duration of experience, consistency of experience when I'm consuming stake is still today not matched by other products in the market. And also, and that's very interesting, is that IQOS price premium index is presumably the highest and SFP categories, if I compare it to other products. So that's the brand and product differentiation. I never know how these methodologies are done, but last 2 weeks ago, I think it was forgot now the agency, we just show the top 100 most valuable brands in the world. And obviously, Marlboro Iconic is on a 30-something position. IQOS made it to the list with the position 70-something. I know it's not the #1, 2 or 3 but within 10 years, if you're building the brand, which is being recognized and start entering the rankings, it means we're doing something very right. So IQOS is the brand. To the extent that we also know that the IQOS is extendable because of a common usage of infrastructure to our product proposition. Let me just translate it is if we have a our EVA proposition and we'll put the deep commercindising core presence in a brand retail, et cetera, despite the reef doesn't carry the symbols of IQOS and the name of IQOS, Consumer will connect the dots and will treat it as another innovation from IQOS. And this is where the brand is start being expandable or extendable to our categories. We don't talk about this because it is in very early stages. But as we speak, with launching or trying in Japan when we're doing them by IQOS. So this is the examples when 10 years of investment behind the brand, we can start leveraging to accelerate the growth of our propositions. Obviously, the product has to be right, et cetera. But then and -- excuse me, IQOS stands definitely for the -- it's a reputable brand for the high-quality grade experience, et cetera. So these things is not just the money which you put as an investment. But the time and the repetition of the investment, which gives you the ability to leverage this later.

Yes. Okay. And if we sort of move to Japan, I mean, I think you described it as an atypical year for 2026. Can you just talk through some of the strategies that the business is deploying to sort of, a, fend off the competition and, b, deal with the exercising.

Yes. So there is what we have in Japan is the first out of 3 steps of a tax -- excise tax changes on the heated tobacco products and cigarettes later on. And obviously, it has resulted in the price increases. So we have increased our portfolio of heated tobacco products, etcetera and Sentia by JPY 30. And what we see, okay, there was a pantry loading. I mean, a very propulsion or maybe even this proportional at the consumer level to the size and the relevance of IQOS in the market. So we had this distortion on uptake level. But I think the things now have ironed out. And we'll see where the category is obviously is a slowdown in a growth of a category because it's just the heat not burn which increases the prices, not the cigarettes at this stage. And IQOS share plus/minus is intact. The obviously, is on the higher pressure than the second-tier product which we have in the portfolio. So the second-tier product captured more. But so far is going as per our assumptions or expectations. As you know, Japan is not the market when you have a frequent price changes, right? So every time you take the price and especially if you take the magnitude that as we did, there will be some adjustment or time needed for consumers to adjust to the new reality. But so far, cross the finger is so good.

Yes. And then sort of you touched on it earlier with the sort of the potential launch of IQOS luma in the U.S. Can you just give us your thoughts on, a, where you are with that application in...

Okay, every time when I got this question since I remember...

Yes.

And look, I'm CEO, not the fortune teller, right? But every time I said, I think it is close we have to define what is closed. But I do believe it is very close. Look, the file is being to our information and there is quite a regular exchange is of our U.S. unit with FDA. I think the file is being processed. I mean FDA is doing these things very thoroughly, like 1 coder you could do it faster buses literal, but I think IQOS is coming -- is closer to us than we think. I'm not saying this will be this quarter, et cetera, but I could see that we're progressing well. And we always are also very clear that I mentioned earlier about the multi-category our aspirations added in every country in which we operate. We are present in all 3 categories of smoke free products as we have today. And in order of priorities, when we reenter or enter U.S. okay, Swedish Maje acquisition pouches. I mean, IQOS is longerwaited to get into the market. I believe there is a potential for the product proposition like it is. But we also start thinking what we do about the e-vape, et cetera, because I think vape and I do appreciate the or I don't understand the fact that most of the countries very much in the U.S., e-vape has its own problems and the category is not properly regulated, and it led to the massive penetration of so-called elicit product, but we have to be careful. The deal is it on a combustible products is very much about the tax price arbitration between the countries where list on the small free product is very much by the fact that the regulations do not allow some product to be present. And therefore, as the response to the demand and a growing demand the so-called elicit products finds the way the BP-ocategory is also very attractive. It's ultimately eventually the problems in the market organizations will go away. The most important for us is where is the demand, and if I see that one thing which we see very clearly after this 10 years of transformation, there is not a single country, which you will not see the growing demand for the smoke-free products. Maybe some more e-vape, maybe more pouches, maybe more a hit not burn. But the direction of travel for the smokers is set. And you see the acceleration or the acceleration of this demand growth only driven by the ability to supply the product to the market, in illegal, in a regulated type of a meter. So I think this thing, we have confirmed that the smoke free, not just a sentiment of this quarter. but this is what the small curse of current negative users are looking for.

Yes. And just going on that point about potential U.S. vape opportunity, I mean it's clearly very large at the minute, but have dominated by elicit. Sort of what did good improvement would you need to see before you sort of...

Okay. So I will bridge to one of your earlier questions. I think the guidance, which we read very much obviously from the pouches perspective. I think what I can say, by the design or by coincidence, but what FDA does right is that if there will be more innovative innovations or new products coming in the oral category from the legitimate part of the market, the less space you're living for the illicit market. . What went wrong, I believe, on the e-vape category is that FDA, as such, through the authorization process have not created the legal market in a sense of product offerings, whatever a consumer is looking for. And obviously, when you have this massive demand, demand will find the supply. Unfortunately, there is illicit supply. So nobody knows what consumers are using. EBITDA is not comfortable. And you have a couple of other things, which is more difficult to enforce, for example, youth prevention and you name it, right? So over quite significant serious concerns, which people might have around the category. So I think what is right, what is happening in the U.S. that the pouches somehow are finding a regulated pathway to the market. which by definition takes Dogen out for any attempts to supply the market from illicit sources. And the consumers don't really feel like going and buying something in Mimas, whatever questionable shop, et cetera, environment, they want to participate in the legal market when they have a guarantee of the product quality, et cetera, et cetera. So this is good. And I believe, ultimately, FDA will achieve the same on an e-vape market. It's just the starting point is very messy at this stage as we are today.

Yes. And I think sort of a lot of the organic growth that PMI delivers is driven by IQOS. Can you just talk about how much further the margin opportunity is from sort of increased scale in the IQOS platform from where we are today?

Well, there is. I mean we have guided the straight that we see the opportunity for the margin improvement this year, and there is a margin improvement is baked in into our years of midterm if you like a growth algorithm. But this is coming from the -- I mean, a number of factors, but we operate at scale, okay? So we're truly leveraging the global footprint. This is followed by the same product strategy, et cetera. So upstream economies of scale are going into our direction. . And if we would talk about the cost of our propositions. This is a matter of product at the very beginning when you have the small volumes and you don't know which of the product formulations will stay, you take devices, you can get consumable but also e-vape where out today, you have a massive advantage to this. Second is that over a period of time, you also normalizing your value sharing between the retail yourself and so on. So all of these things are actually coming to the margin enhancement territory. And third category component very much which you will see on a heat not there. Obviously, as the taxation is lower, but very often, we forget about the thing that price activity on a heated tobacco products is better than the price productivity of the combustible due to the tax structures, not tax levels, but tax structures, essentially the difference between paying per unit, whatever the unit is we were more skewed to the ad valorem price related. So net-net, there is for smoke-free category, there is the room for the continuous margin improvement. Now having said so then I know that we will run out of time, we'll never talk about the cigarette, but we still see the room for improving the margins on a combustible cigarettes, which is the case as we speak. There's obviously different dynamics and different levers, which we're using there. You know that we're playing to the value extraction from a combustibles category. But you could look at our past results and what we see going forward, there is still a room for the further margin already high, but the margin enhancements in the combustible products.

Yes. Okay. I mean let's jump into combustibles, and I want to come back to VEEV and the other plays in the multi-category strategy. But like you say, we probably run out of time and combustibles are still the largest part of the business. I mean, how should investors think about how you prioritize your efforts on maximizing value from combustibles whilst trying to drive that smoke free business.

Okay. Great question. So okay, if I take it from a resource allocation and the long-term resource allocations, which is your R&D, which is our excuse me, R&D and CapEx 90-plus percent is coming behind the small fee product. I mean I use this as an example that our CapEx on the combustibles is well below the depreciation on a combustible. We have not built about the last 10 years, a single cigarette factory, but we have opened manufacturing centers for the smoke free product. So this is how -- how you allocate the resources. 3/4 of our commercial spend is behind the SFPs, smoke free products. and so on and so. However, this close, how much time I spend as the CEO on the smoke-free and the non smoke-free, but is a significant amount of time. A little bit less than R&D, but No, but that's the alignment because, look, this is where we see we brought the company to, I believe, a very strong top line growth, starting that for the last years, we absolutely today operate on a different trajectory of the volume evolution because I remember the days when you always get a pressure on the volumes offset by the pricing. And today, we brought the company on a combined basis to flat or growing total volumes, which in reach, obviously, have the clients combustibles grow SFPs. Pricing on a combustible stays intact. And obviously, you have all the margin enhancements coming from SFP. So both parts of the business are actually delivering as intended. There is a massive resource allocations from the combustibles going to it's difficult for me always to talk about the average. But I think one thing which people may underestimate how we approach the transformations of the vision of a smoke-free that -- we didn't treat it we're not treating this as addition to the existing business. We make up our direction of travel is, this business is to replace the previous business, but we will borrow from the past business, the best of the things, which we like in a past and try to protect them and enhance them in the new business. So one of them is a margin profile. Another is the high cash conversion. And I can go on and on and on, which we're trying to take ability to build a great brands like Marlboro and now we're trying to use it for IQOS in and for other ends. So this is how we're playing this game here. But I think it's very important that if you make up your mind, do I want this business to be extension of the business or addition to the business. So this is one business which is over shared when I take over the other business is completely different decision-making, mobile short term, but very much long term. And I believe today is still differ results in the marketplace this razor or focus on where we want to go. Here is the results. So as I said, I started with the top line. Unlike in the space in which we operate in our industry, you have a flat growing volumes. You have a pretty quality, I would argue top line growth. And we not only retain the margins from the past business, but we're actually enhancing the margins further. There is still a lot of things we can do, but so far, I believe so good.

Yes. Okay. And just moving back to the final leg of the multi-category strategy. It's done really quite well across Europe. What do you attribute that success.

Well, there was a massive learning of organization, okay? Because we always talk about the resources in terms of the monetary, but what we know today, it's not me, but the thousands of people with PMI. What we know today about the consumer centricity, consumer journey. Remember, we'll be repositioning the company from a classical B2B to B2C, not maybe from a transactional perspective, but from the relations perspective, and I think it serves us very well, okay? And this is now we're leveraging the investment, which very much was carried by IQOS. I said earlier, we can leverage this to other product categories within a smoke free territory. I think maybe there were setbacks, right? I mean the questions that you never got flat -- sorry, the grow line and interrupt it, is always something happens on the regulations, okay, I mentioned unintentionally or intentionally, the new regulations in France that can end up in jail, but having a nicotine pouches, look, the level of the human stupidity sometimes have no limits. And over time, we're getting surprised. But look, I've seen a lot of crazy things in my life. And I think, okay, it's just the blip. At the end of the day, people will come up to a senses and we'll have a sensible regulation. So on the one hand, you have almost enthusiasm pouches in the U.S. you have France, which is in the moment of weakness, one of my -- the regulations like this I'm not involved in a French politics. So I think the experts in this country who know what to do, but I think the regulation is simply stupid.

Yes, I do have a question on the EU regulation, which I think you probably...

EU regulation. No, actually, no, it's very important, actually, because we haven't talked for a while. I mean we are in the middle of the final stages of a tobacco excise directive conversations, final negotiations. We'll see, I think, in the next few weeks, we should have an outcome of this. I think it will go in the right direction. So obviously, EU everyone has the say and there is a lot of conversion in the divergent opinion, but I believe it's going in the right direction. Within EU you have mix of a country, which is very open mind forward-looking carbon reduction-based regulations. And you have eye lens of still being stuck in the past. But I think the things are going in the right direction. So I'm positive on this I believe when we'll be closing the quarter with second quarter, we should presumably know more facts about the Kabarai directive, and there was a tobacco product directive, which is next pave our regulations though.

Okay. And slightly conscious of time. Just I know you've reiterated guidance this morning. It's always a focus for investors. What are the key sort of risks, both positive and negative to delivering the guidance for this year?

Yes. So look, I don't think we are unique, right? We're all exposed to the same external work dynamics, right, you have impact of conflict, is not the one conflict and you have energy prices, which start to going up. So you have to somehow accommodate this into your numbers. You have currencies, which are -- they never been very stable, but definitely, this is not a period of uneventful worth for the currencies, but we're reiterating the guidance. I think we have ability in the business to offset some things which were not been thinking about at the beginning of the year. But on the other hand, is we operate that scale at a global basis, smoke free products in 100-plus markets. There's always things which are going a bit better so you can accommodate the things which are going against you. Not the major things. I always underline this whole thing. The things which keeps us going and keeps me going is the demonstration of a growing demand behind smoke-free product in every part of the world. And that's the nice problem to have because if I see where the consumer is going and the consumer is voting I want and I am open to try more smoke-free products. The rest is closer to where we can to our abilities, how do we develop the product, how do we market the product, how we advocate for the product with the regulators, et cetera. There are some other industries which have a demand problem. We're not in the space with the demand problem, and that's a nice problem to have.

Okay. And I think maybe just sort of the final question is around -- I mean the businesses has had very strong cash generation gearing has been coming down consistently over the last couple of years, and you look to be on track to sort of hit the sort of the 2x net debt to EBITDA. So how is the Board currently thinking about capital allocation priorities?

The same way as a management and the same way as the investors every time when you bring your balance sheet to the territory rate, we've been very transparent and per the proper conversations will be what do we do with access available new cash. And as always, there is not magic, right? You don't have to use AI for this one, either you invest or give it back to shareholders. . You know that Philip Morris was always very strong about the dividend policy. We have very nicely over last period brought the dividend payout ratio to the level, which I believe it's good sustainability of dividend and the progress of the dividend in terms of a growth. And it's the questions if we have a view on the permanent excess of cash you know what we did in the past. We returned it to shareholders...

Shareholders. Yes.

So the Board is aligned to there's no magic, right, in this whole thing. It's more the questions now about the timing, okay, when it appropriate for this one. And we have to refund 1 thing that on the underlying basis, transformations, not transformation, PMI is always doing well. What send us out or what forced us at that time to stop the buyback, et cetera. was not that we start having underlying performance problem with the current, right? And we have launched a lot of the cash flows, if you like, due to the currency conversion and we put us into the territories, obviously, then you have a Swedish Match acquisitions, et cetera. But this was 1 of the key factors around being our numbers. We're going into territories that the currency is not really the drag on us. is actually becoming net positive. And underlying business is still delivering and actually continue growing in, I think, in a good quality manner. So the path and with the margins which we have and a cash conversion, which we have, CapEx is not really the -- we are not in the data there chips type of a business, our CapEx is the 1.5, 1.4 point on the period business. So if you take the cash which the company raised versus CapEx, that's it or minus dividend, okay, the rest is available.

Yes. So there's no timing update on when the share buyback is going to...

But we have regular meetings with the Board. Yes. I mean look, the Board looks at the management at the balance sheet with the same frequency and see whether we have said that we will bring that leverage ratio to the level where we wanted to have before the year-end. And it seems that we we're lending there where we wanted to. So those conversations are in front of us. .

Okay. That's a good place to end it. Yes, thank you very much for your time. It's been very very insightful.