Nick Rolli - Vice President of Investor Relations and Financial Communications Martin King - Chief Financial Officer

Bonnie Herzog - Wells Fargo Judy Hong - Goldman Sachs Chris Growe - Stifel Nicolaus Adam Spielman - Citi Michael Lavery - Piper Jaffray Jon Leinster - Berenberg Owen Bennett - Jefferies Pamela Kaufman - Morgan Stanley

Good day. And welcome to the Philip Morris International Second Quarter 2018 Earnings Conference Call. Today’s call is scheduled to last about one hour, including remarks by Philip Morris International management and the question-and-answer session [Operator Instructions]. Media representatives on the call will also be invited to ask questions at the conclusion of questions from the investment community. I will now turn the call over to Mr. Nick Rolli, Vice President of Investor Relations and Financial Communications. Please go ahead, sir.

Welcome, and thank you for joining us. Earlier today, we issued a press release containing detailed information on our 2018 second quarter results. You may access the release on www.pmi.com or the PMI Investor Relations App. A glossary of terms, including the definition for reduced-risk products, or RRPs, as well as adjustments, other calculations and reconciliations to the most directly comparable U.S. GAAP measures, are at the end of today’s webcast slides, which are posted on our Web site. Today’s remarks contain forward-looking statements and projections of future results. And I direct your attention to the forward-looking and cautionary statements disclosure in today’s presentation and press release or review the various factors that could cause actual results to differ materially from projections or forward-looking statements. It’s now my pleasure to introduce Martin King, our Chief Financial Officer. Martin?

Thank you, Nick and welcome, ladies and gentlemen. I will open with some brief remarks on how we currently see our business halfway through at the year. For our combustible tobacco portfolio, the fundamentals are robust, reflecting a strong pricing environment and improving volume trends. This is a very positive sign given the majority of our profits and cash flow continues to be generated by combustible tobacco products. With regard to IQOS, we are tracking below our very high initial expectations for this year, primarily due to the current project trajectory in Japan. However, the year-on-year performance across geographies remains very strong and we continue to view RRPs as our largest growth opportunity going forward. As Andre explained during the Annual Shareholders Meeting in May, RRPs will experience periods of acceleration and periods of slower growth as they expand. The related timing is very hard to predict precisely, especially at this initial stage. This is the case with virtually every new product category and IQOS will invariably go through these phases. What is certain in our view is that adult smokers worldwide are looking for better alternatives for smoking. We believe that the IQOS is the best alternative on the market today as evidenced by the fact that 5.6 million adult consumers around the world have already stopped smoking and switched to IQOS. Let me now take you through our second quarter results, beginning with total shipment volume, i. e., cigarettes and heated tobacco units combined, which increased by 0.9% or by 0.6%, excluding inventory movement. This growth was driven by higher heated tobacco unit volume across IQOS launch markets, led by Japan and Korea, partly offset by 1.5% decline in cigarette volume, which includes the growing impact of adult smokers out-switching to our heated tobacco products. Importantly, heated tobacco unit volume growth in the quarter was relatively balanced with about half coming from outside the East Asia and Australia region. This illustrates the broad-based progress of IQOS across geographies. For the first half of the year, total shipment volume declined by 0.6% and was essentially flat excluding inventory movement. Our cigarette volume decline in the quarter was due notably to Russia, mainly reflecting the impact of price increases and higher illicit trade in Saudi Arabia, primarily due to the impact of tax driven price increases, following the June 2017 excise tax introduction. The decline was partly offset by growth in a number of markets, most notably Pakistan and Turkey, primarily reflecting higher industry volumes. We also recorded cigarette volume growth in important geographies, such as Indonesia, North Africa and the Philippines. On a sequential basis, our cigarette volume performance in the quarter marked a significant improvement compared with the 5.3% decline of the first quarter. Turning to our second quarter financial results net revenues increased by 8.3% excluding currency, driven by strong pricing for our combustible tobacco portfolio and higher volume of IQOS devices and heated tobacco units. Our pricing variance for combustible products in the quarter was more than 8% of second quarter 2017 combustible product net revenues, driven by Argentina, Canada, Germany, Indonesia, the Philippines and Russia. Year-to-date June, our combustible pricing variance was 7.5%. Adjusted operating income increased by 9.8% excluding currency, reflecting the growth in net revenues coupled with lower manufacturing costs in the East Asia and Australia region, partly offset by an incremental RP investment in all IQOS launch markets. Adjusted operating income -- margin increased by 0.5 point, excluding currency. Currency neutral adjusted diluted EPS increased by 20.2% in the quarter and benefited from a lower estimated full year effective tax rate, as well as lower interest expense. Our effective tax rate in the quarter was approximately 22%, reflects the impact of a revised full year effective tax rate estimate of approximately 24%. The reduction compared to our prior full year estimate of approximately 26% is mainly attributed to further analysis, interpretation and clarification of the scope and impact of the 2017 Tax Cuts and Jobs Act in the United States. Our lower interest expense in the quarter primarily reflects the impact of our ongoing efforts to optimize our capital structure following the passage of the Tax Cuts and Jobs Act. This included the decision to use existing cash to repay the principal of our recently matured May 2018 10-year U.S. bonds, which had a coupon of 5.65%. Our total international market share excluding China and the U.S. increased 0.8 points in the quarter to 28.4%. The growth was driven by our heated tobacco brands, which reached 1.6%, up by 0.9 points. To put this performance into perspective, our heated tobacco brand now enjoy an international market share equivalent to that as Philip Morris, our fourth largest international cigarette brand after just over two years since the initial IQOS commercial expansion in Japan. Despite the increasing impact of adult smoker out-switching to our heated tobacco products, share for our cigarette brands was stable at 26.9%. I will now cover our performance in select geographies, beginning with an update for two markets; Russia and Saudi Arabia that reflect previously as potential watch out. In Russia, we recorded a strong pricing variance in the quarter, mainly driven by the annualization pricing announced in the second half of 2017, and further supported by price increases earlier this year. This built on our favorable pricing brands in the first quarter and is a welcome change from 2017 during which we recorded essentially no net pricing in the market. Pricing in Russia was the main driver of the Eastern Europe region's 14.7% possible pricing variance for the year to date June period. We continue to closely monitor the pricing environment in the market, particularly in the context of the excise tax increase that came into effect at the start of this month. Encouragingly, since June, the industry has been progressively announcing price increases in line with the tax increase pass on of 5 Rubles per pack. It is important to note, however, that there continue to be differences in timing between when price increases are announced and when they actually reached the consumer at retail. Separately, I would like to highlight the favorable IQOS momentum in Russia, with HEETS to off-take share in Moscow of 4.4% in the quarter, up by 1.7 points sequentially versus the first quarter. This growth was supported by the successful rollout of our new digital initiatives. In Saudi Arabia, cigarette industry volume and PM in-market sales volume remained under pressure in the quarter, declining by about 24% and 40% respectively. However, the declines in both cases improved on a sequential basis as the excise tax driven price increases from June 2017 were finally lapped during the quarter. We expect continued improvement in the sequential trends for both industry volume and our in-market sales over the balance of the year. Importantly, we will enter 2019 with this major drag on our profitability behind us. These positive developments are being reinforced by strong cigarette portfolio performances in a number of key markets, such as Germany, Indonesia, The Philippines and Turkey, as highlighted on this slide. Turning now to IQOS in Japan. We recorded HeatSticks’ market share of 15.5% in the quarter, an increase of 5.5 points compared to the second quarter of 2017. While share for HeatSticks declined by 0.3 points compared to the first quarter of 2018, let me remind you that our first quarter share was favorably impacted by a low total market in January, reflecting a cigarette inventory reduction by our main competitor. In fact, in-market sales of HeatSticks in the second quarter increased by over 5% versus the first quarter to 6.6 billion units. We remain focused on reaccelerating HeatSticks’ share growth, particularly as competitors expand the availability of the heated tobacco products. In this regard, we are rolling out a range of initiatives this year, which do not require incremental marketing expenditures to drive further switching to IQOS, including the introduction of the next generation of IQOS devices, which will offer significant improvements that address key consumer needs, including consecutive use; the planned launch of a stronger tasting HeatSticks’ variant in order to facilitate full flavor adult smokers switching, as well as a main stream price product for more price sensitive consumer; the simplification of the registration process for new users, which was a significant barrier to entry, particularly for older smokers; the intensification of our loyalty program and deployment of more targeted and relevant communications for our existing and perspective IQOS users; and the already address device reliability issues in the current generation of IQOS, they have caused frustration among certain consumers. We conservatively assume today that these initiatives will have a limited favorable impact this year with the full favorable effect coming as of the beginning of 2019. We continue to observe strong consumer interest in heated tobacco category. As of June 2018, we estimated 34.7% of adult tobacco users in Japan that use the heated tobacco product in the preceding seven days, an increase of over 2 points since March. This equates to around 150,000 additional users per month over the period. It is important to highlight that this general growth dynamic has not changed as a result of the presence of competitive products. However, there are different patterns of full adoption depending on product with IQOS having the highest exclusive use and per device heated tobacco unit consumption. Other products appear to dilute the correlation between the number of users and the category share. Thus, the heated tobacco categories’ consumption share of total tobacco volume, which reached around 21% in June, is lagging behind general heated tobacco user share, as the latter reflects an expression of interest in heated tobacco products and the potential for further conversion going forward, this offers well for both the category and IQOS. We have previously highlighted the roll that competitive churn associated with the introduction of the new heated tobacco products to the market is having in Japan. In general, competitive products have the greatest impact following the initial launch, but critically overtime as consumers recognized the benefits of IQOS. Given the geographic expansion of the competitive products in recent periods and the related impact that this has on the national share for HeatSticks, it is helpful to look at specific geographies within Japan to help gauge better the impact of competitive introductions and the related churn on IQOS’s performance overtime. This slide shows heated tobacco unit off-take share trends in Fukuoka, Sendai and Tokyo, three geographies where multiple heated tobacco products have been available the longest. As all three geographies illustrate, the longer the competitive products are in the market, the better IQOS performs. Importantly, IQOS remains the heated tobacco proposition with the highest full conversion rate, which drives recurring HeatSticks purchase and therefore revenue. In Korea, HEETS market share reached 8% in the second quarter, an increase of 7.8 points versus the prior year period and 0.7 points sequentially. Over the past few months there regrettably has been confusion among the adult consumers with regard to heated tobacco category. This sense primarily from government discussions on graphic health warnings for heated tobacco products, as well as the Korean FDA mischaracterization of the tar generated by such products, which we have vigorously refuted through compelling scientific evidence publicly and by directly informing our IQOS users. Unfortunately, the KFDA has risked confusing millions of people into thinking that heated tobacco products are as harmful as cigarette, contradicting its own scientific findings. In spite of this, our existing user base is staying with IQOS, demonstrating consumer confidence in the product and its benefits based on personal experience. We have comprehensive plans in place to ensure that the confusion dissipates, so that the many adult smokers who are understandably hesitant at this time will resume switching from cigarette to the heated tobacco category. In the EU region, IQOS continued its steady growth. HEETS reached the regional share of 1% in the quarter, up by 0.8 points compared to the second quarter of 2017. This growth was supported by strong performances across IQOS launch markets, most notably Greece and Italy, where HEETS shares have increased by 3.1 points to 4.1% and by 1.3 points to 1.9% respectively. As the marketing focus behind IQOS continues to be limited to select geographies within EU launch markets, the regional share, not to mention the national share for any specific market, clearly understates the success of IQOS. It is also important to monitor the number of IQOS users, which serves as a leading indicator of heated tobacco unit consumption. Over the past 12 months, the estimated figure in the EU region has increased by more than fourfold to approximately 1.2 million. Importantly, we have maintained the overall level of quality of the IQOS user base as demonstrated by full and predominant conversion rates, while growing the number of users substantially. We have also been able to increase the user registration rate, which now stands at over 80%. User registration is very important as it enables us to follow and better service new IQOS users during their initial conversion journey, while also increasing the loyalty and retention of existing IQOS users. Turning to our full year 2018 outlook. We continue to anticipate a total industry volume decline of 2% to 3%, excluding China and the U.S. Against this backdrop, we also continue to expect decline in our total shipment volume of approximately 2%. However, we now anticipate a change in the composition of our shipment volume, reflecting higher cigarette volume and lower heated tobacco unit volume compared to our prior forecast. We expect a significant increase in our global heated tobacco in-market sales volume to around 44 billion to 45 billion units, including revised more conservative assumptions regarding the impact of our product and marketing initiatives in Japan to support IQOS. We now target heated tobacco unit shipments of around 41 billion to 42 billion units. This excludes an anticipated full year net inventory -- this includes an anticipated full year net inventory reduction of approximately 3 billion units, reflecting an estimated 4 billion unit reduction in Japan and 1 billion unit increase in other markets. We expect the reduction in Japan to be concentrated in the third quarter. The revised shipment target represents a total net inventory adjustment swing of 5 billion units compared to our previous communication during our Annual Shareholders Meeting in May. And we had assumed a full year net inventory increase of 2 billion units. Our heated tobacco unit in-market sales volume target for this year reflects growth in the second half of approximately 60% compared to the same period in 2017 and almost 20% compared to the first six months of 2018. We now expect net revenue growth this year of 3% to 4% excluding currency. The revision compared to our previously disclosed estimates of approximately 8% is primarily due to lower than anticipated shipments of IQOS devices and heated tobacco units, predominantly in Japan and the impact of accounting for affiliate in Argentina as highly inflationary effective July 2018, partly offset by the better than expected performance of our combustible tobacco portfolio. Let me provide some additional granularity behind the revision, beginning with the devices, which accounts for approximately 2.5 points and mainly reflect the following; the worldwide introduction of the next generation of IQOS devices towards the end of 2018, which I touched on earlier; this requires an adjustment to current generation device inventories, while the ramp-up of new devices is expected to occur in 2019; the fact that we are reaching out to more conservative adult smokers in Japan who need more time in different communications to switch to heated tobacco, as well as the assumption of continued competitive churn as consumers experiment with other heated tobacco products; thus, impacting the rate of adult smoker acquisition; improved device reliability and longer life cycle, leading to fewer IQOS replacement purchases; higher sales of second IQOS holders versus relatively higher price full-kit purchases; and the alignment of the retail selling price for all IQOS kits in Japan to the previously discounted price of approximately ¥8,000 independent of device registration. Given the current unit margin structure of IQOS devices, the impact of lower device sales is felt predominantly on the net revenue line with a slightly positive corresponding impact on operating income. Heated tobacco unit shipment volume accounts for further 2 points of the revision; mainly reflecting the anticipated full year inventory reduction mentioned previously and the slower growth of in-market sales in Japan. Our revised net revenue forecast is based on the conservative view of a very limited favorable impact from our initiatives in Japan in 2018. The upward revision for our combustible tobacco primarily reflects better than expected cigarette performance across a range of geographies, notably Germany, The Philippines and Turkey. We continue to anticipate a full year combustible price variance of approximately 7% of our 2017 combustible product net revenues. Given our year-to-date June 2018 currency-neutral net revenue growth of 8.3%, our full-year target of 3% to 4% implies a slight decline for the second half of the year on the same basis. This is primarily due to the challenging comparison that we face in the second half of the year related to the sizable shipment of HeatSticks that we made in 2017 as part of our planned inventory build in Japan. As a reminder, in the third and fourth quarters of 2017, we recorded currency neutral net revenue growth around 9% and 19% respectively. While the inventory build of approximately 13 billion heated tobacco units was appropriate at the time given that then forecasted demand, our or heavy reliance on a single production center and the shift from air to heat rate, it is now resulting in lower heated tobacco unit shipments and related net revenues, especially as we adjust existing inventory levels, mainly in the third quarter. Consequently, we forecast net revenue growth of around 1% excluding currency in the third quarter and a decline of around 4% on the same basis in the fourth quarter. As announced this morning, we’re revising our 2018 reported diluted EPS guidance at prevailing exchange rates to a range of $5.02 to $5.12. The change primarily reflect lower anticipated heated tobacco unit shipments in Japan and the unfavorable impact of currency, partly offset by a lower estimated full year effective tax rate of approximately 24%. We continue to target net incremental investment behind RRPs of approximately $600 million for the full year. Our guidance now includes $0.07 of unfavorable currency of prevailing exchange rates excluding currency our guidance represents up to growth rate of approximately 8% to 10% compared to our adjusted diluted EPS of $4.72 in 2017. The unfavorable $0.13 change in the currency impact on our guidance as compared to our previous guidance on May 9th is due notably to the Argentine peso and Japanese yen. For the year, we are now targeting operating cash flow of approximately $9 billion, subject to currency movements and year-end working capital requirements. We also now anticipate capital expenditures of approximately $1.5 billion compared to $1.7 billion that we communicated in May. The change primarily reflects lower planned spending on heated tobacco unit manufacturing equipment, driven by increased production efficiency and greater flexibility associated with dual production of our existing factories, as well as an adjustment for the revised production forecast. In June, our Board approved an increase in our quarterly dividend to an annualize rate of $4.56 per share. This mark the 11th consecutive year in which PMI has increased its dividend, representing a total increase of 147.8% or a compounded annual growth rate of 9.5% since PMI became a publicly traded company in 2008. The timing and magnitude of the increase reflects the Board’s confidence in the growth outlook for our business, underpinned by the potential of our smoke free products, and underscores the Company’s steadfast commitment to generously reward shareholders overtime. In conclusion, the fundamental supporting our combustible tobacco portfolio are robust, namely strong pricing and a modern cigarette industry volume decline. While we are tracking below are very high initial expectations for IQOS this year, primarily reflecting the current growth trajectory in Japan, the year-on-year performance across geographies remains very strong, and we are confident that RRPs constitute our largest growth opportunity. We are implementing the right marketing and product measure to reinvigorate growth in Japan. These initiatives, which require the rightsizing this year of our existing IQOS devices and HeatSticks’ inventories will position PMI well for a strong overall performance in 2019. Thank you. I am now happy to answer your questions.

Thank you. We will now conduct the question and answer portion of the conference [Operator Instructions]. Our first question comes from the line of Vivien Azer of Cowen.

So I appreciate all the color and your efforts to be transparent around guide down. I’m just curious if you could just offer some thoughts on why you didn’t update your guidance at the AGM formally?

We’ve been assessing the whole situation. We have been putting the programs in place in Japan. And we gave you quite a bit of detail at the AGM on the dynamics of the consumers, and some of the uncertainties involved. And we gave some better color on the forecast for shipments. We decided not to give a new net revenue number, because at that point in time, we were still recalculating and figuring the effects of all these pieces. But the key is we're really confident going forward in these projections. We have time now to understand the consumer situation Japan, and to put together a really good plan there. And we have a great deal of confidence going forward that we will hit these numbers, including the shipment and IMS for the heated tobacco units.

Sticking with Japan then please with the more affordable variant. Can you talk about how that will benchmark from a revenue accretion standpoint relative to some of the metrics that you guys had offered at your shareholder meeting in 2016?

I think the key point with regard to the heated tobacco unit, whether it’s mainstream price or premium price in Japan, is these products have better margins than cigarettes do. And their price, and including the mainstream variant, will be priced such that it's adding quite a bit of profitability, even above what we would get from a similar tobacco product. Because Japan, for example, our portfolio on the conventional side, has always included Marlboro Lights, Lark and other brands so we've always had brands priced at difference points within Japan. And with heated tobacco units, you're going to follow a similar logic that you need more than one price point in order to reach a broader group of consumers. And we’re still going to be, on average, above the average price in Japan. And we're going to be adding profitability very strongly with our RFP portfolio in Japan and everywhere else.

One last one from me, on South Korea. Can you give us some color on how you're thinking about target market share for the full year, given the deceleration and the confusion in the marketplace?

Well, I mean, it's unfortunate that there is confusion in Korea, because we've been growing tremendously well there. And we are still adding consumers in Korea. But unfortunately, with the confusion, we've had a pause in the rate of speed of converting people; we're sorting through it and getting them the right information, the consumers the right information, which factually we have a very good story to tell; and all the scientific backing, including coming from other government agencies. In fact, the KFDA itself, if you read their evidence, they understand that the composition of the aerosol is much better with our products. Unfortunately, that didn't come through in their final report. So there's some confusion, but we're clarifying it. And we think that Korea will continue to grow. It’s not as fast as what we had been on very good trajectory, but we'll get back to those fast speeds of growth in the future. And I think we're still going to see very good growth in the second half of the year.

Our next question comes from the line of Bonnie Herzog of Wells Fargo.

My first question is your revenue outlook. It’s much lower than previously. And you highlighted IQOS in Japan as one of the biggest drags on your top line. But I'm trying to understand your outlook for pricing or revenue for IQOS in all of your other markets. I guess, I assumed it would have bigger contribution as these markets ramp, especially given the tax benefits. And then also, do you expect you’ll need to introduce lower price points in some of the other markets sooner than you had previously planned, possibly as soon as next year to increase conversion. I guess I'm just trying to get a sense of your thinking on all of this.

Our intent is to keep the premium positioning for heat. It’s important as you’re establishing the new category that remain premium, you have to remember in Japan we have reached the market share, which is very, very substantial to this point where you get running out of premium smokers, if you will. And you need to expand once you hit very high market share. In other markets, we’re not there yet, we will get there eventually. So certainly, if we get well into the 15%, 16% market share, we’re going to have to deal with this issue in other places. But we’re still not there, we are growing very rapidly in the EU. In a number of markets, we’re doing extremely well. Italy, Greece, we called out already, but there are number of other markets that are growing. And when you look at the consumer uptake, it’s really taken off in the EU and we’re very pleased with the results there and looking forward to higher market shares. But it will be away before we get to the point where we would need to be thinking about introducing a second line up of SKUs. But overall, I mean the HeatSticks as you point out, are very profitable in EU. They enjoy some favorable tax positioning, and it makes it quite accretive in a number of markets.

And then the incremental spend behind IQOS of $600 million this year. Could you update us on the phasing of this spend -- and for the rest of the year and then more color possibly on some of the initiatives that are working? You touched on the digital initiative in Russia, which seem to be having very positive effect. And then I know it’s early. But how should we think about potential stepped up investments behind IQOS next year? Should we assume you’ll continue to ramp spending, so you can increase further conversion in the future?

So we’re still on track for the 1,600 incremental. As far as the phasing, we’re about 50% already in the first quarter. So it’s pretty on track, and we’ll expect about the same for next second half. Obviously, we spent half we’ll have half to go. So that remains intact. We are seeing some very good impacts from some of our investments, digital, absolutely. I mean, Russia, you see the market share really talking in Moscow. Its due to a number of initiatives, digital is playing a role. We’re getting better at finding leads and being more efficient in how we decide to approach those smokers. And it’s paying off inefficiency that we hope. We will see rolling across other markets towards the latter part of this year and into next year. And it really gives us much more leverage with our coaches, for example, where they can work on leads that are already verified and already delivered from the digital process. It's also helped us follow during conversion and a number of other benefits. So the spending that we’re making in digital is paying off. Our retail footprint is improving. We’re getting more consistent higher quality, getting more effectiveness of our retail spend. So there are number of variance where the spending is really starting to pay off, and will pay off even more in next year. As far as next year, when we look at that 600 million, about half of it, say 300 million, will be in the base but will not grow any further. They work through specific initiatives that are being built that can handle much higher scale. So we will not need to grow or have more spending behind it in order to provide the benefits to a huge number of consumers and across all the markets. The other half will scale somewhat on how fast we rollout markets and how fast we have uptake in the consumer conversion piece. But it should not grow as quickly as the consumer pieces. So we’re looking at the profitability coming from the whole RRP investment to begin paying off much better next year and going forward, because if you realize it, the consumables are being sold at a net factory price around the world that’s about twice of our average CC. So we’re getting very good benefits as we grow the volume. And that allows us to amortize the costs of conversion and of these other essential initiatives over some very good profitability. And we’re seeing more and more and more markets now have passed the point where they’re accretive and they’re profitable; obviously, Japan and Korea were there; there are number of markets in the EU there; there obviously, Italy, duty-free. So we’re getting now much more benefits from all these investments and very helpful going forward.

And then maybe just one-time a quick one from me, I am just curious to hear how IQOS has been performing in markets where e-cigs are much more prevalent. And really what the interaction has been. And then what are your plans for introducing e-cig technology, either organically or possibly via an acquisition? Thanks.

We don’t have as much exposure to e-cigs as other companies. Our biggest e-cig exposure or markets, is in the EU, UK would be obviously the one with the highest level. We have a lower market share in UK, so a lower base from which to deploy our commercialization and so forth. So it’s hard to really say where e-cigs versus IQOS. We know that IQOS is a better product from the point of view of converting consumers, especially adult smoker that has lower total usage that has higher conversion rates than e-cig. The taste is closer, the delivery of nicotine and the satisfaction of the smokers is much closer than cigarette. So we are confident that IQOS is a better option for adult smokers, and that we will be successful -- are successful when we go into markets with e-cig. One example would be like, Italy, where there are e-cigs in the market. Obviously, IQOS is doing extremely well there. And then I think from a point of view of looking at e-cig. We think the IP in the regulation around the tobacco product of heat-not-burn is a different categories, it’s difficult to replicate the IP that we have and the scientific substantiation. Whereas e-cig category tends to be much more of a commodity, the technology is pretty much weakened coil across the industry. There aren’t a lot of unique IP around it. And then the regulation as a tobacco product, while we think heat-not-burn should be regulated differently than cigarettes, we recognize there’ll still be regulation around tobacco products and so forth. So it makes it more difficult for competitors to come into this space if they don’t have the experience of the tobacco regulation. So overall, we do believe that e-cigs have a role to play. We have very good technology with our MESH that we’ve developed. And we will be putting out a newer version of that soon. And we think that our mesh approach has better consistency. It has the better IP protection. And we’ll deliver better over the long-term in the experience of consumer. So we will compete in e-cigs. We’ll be very successful there. But at the same time, we feel that the winning product right now is actually in heat-not-burn and that’s where we can achieve better profitability, better uniqueness and also better conversion of smokers. So we’re pleased to compete with e-cigarettes in any market.

Our next question comes from the line of Judy Hong of Goldman Sachs.

First just in terms of your EPS guidance for the full year, so ex-currency, it's now 8% to 10%, which is slightly better than the last guidance. But your tax rates now come down by about 400 basis points since beginning of the year. So that should be adding means something like 6 points to EPS growth. So I guess I am just wondering what's causing the shortfall that FX neutral guidance is actually not going up more at this point.

It's the things we made out before. Obviously, the tax is coming better. The business is being impacted by the heated tobacco unit shipments, but also now the currency, I mean the inventory, which is about a 5 billion swing from what we talked about at the annual meeting. The devices don't have much impact because of EPS and that we're getting some offset from the CC business. So the main impact is difference between where we were projecting Japan versus where we are today. We're still very confident in Japan and we're taking the actions necessary. And this step around inventories, for both devices and for heated tobacco units, is to clear the deck and prepare Japan for better growth going forward. So that the initiatives we put in there, the new heated tobacco unit offerings, as well as the very compelling new devices, have an opportunity to blossom and to do really well and drive our growth going forward. So we're setting the base for a better 2019, and to deliver the numbers.

And just to clarify the Japan inventory impact. So when you think about third quarter. So if we assume a similar in market sales growth for IQOS in third-quarter. So if you get something like 6.5 billion units, you have an inventory reduction of 3 billion. So basically you could have an IQOS volume in the third quarter for Japan something like a three or 3.5 billion. That's the right way to model?

I think that's about right. We're going to take the inventory adjustment of 3 billion to 4 billion in Japan, because remember the net is 3 billion. It includes a plus one by the end of the year coming from other areas. So in Japan, we're looking at about 4 billion inventory, it will come mostly in the third quarter. I think almost entirely in the third quarter. And we're you know making sure we have the right inventory of the Marlboro heated tobacco units to make room for the new line up of SKUs. And we have a really flexible manufacturing base now we're able to supply. So rather than end up with too much inventory of any one particular product, which is hard to predict how it's going to perform going forward, especially given the pricing that's coming in the market and the tax increase October 1. So to clear the decks and have a lower inventory so we can be more flexible is what we're doing.

And then just lastly, in terms of your price guidance of the combustible, I'm assuming it does not include any potential benefit from Japan. So I just wanted to confirm that. And then just confirm if you've gotten any clarity around the application that you've submitted?

I mean, our guidance is all in. We don't carve out any particular instances. We have put in the application on conventional product in Japan. The tax increase is ¥20 per pack. We applied for ¥50 total increase. On the combustible side, there are some technicalities around the calculation of the device -- on the RRP, the heated tobacco unit side. There are some technicalities on how the new tax based on the weight of tobacco or consumable product is calculated. So that's held off a bit the timing of the applications but obviously, the tax is going up October 1. So we’ll need to submit new price list as soon as we can for those products as well.

Our next question comes from the line of Chris Growe of Stifel.

I just have two questions for you. So I'm curious if you look at your new initiatives you have set for Japan in the second half and new devices, HeatSticks pricing and that kind of thing. Do you believe that that will increase the overall level of heated tobacco users in Japan? Is this what's going to hopefully draw in some of late adopters? And if I can add to that, you’ve mentioned that there is 35% of consumers that are using new tobacco about at 21% share. And I think you have a bit of an explanation and I couldn’t recall what the explanation is for the GAAP between those two figures there, if you can help with that too?

So first of all, the number of consumers coming into the heat-not-burn category is growing. We estimate it’s around 150,000 per month. And the 34.7% number is anybody any smoker who has used a heat-not-burn product in the last seven days. So it doesn’t necessarily mean that they’re fully converted. It doesn’t even necessarily mean they yet bought a device, but they’ve tried the product. It could be also from a friend or somebody else. But it's an indication of interest and that I think is the starting point. Then you get to the question of, will consumers convert. And this is what our initiatives are around. And we find that IQOS is the best at converting consumers and we find that it's the best product in the category, so as long as the category has interest and people are coming into it. And look we’re selling over 500,000 kits and/or holders every month in Japan. So we are bringing people into the category. It's being hidden a bit by this churn and the fact that consumers are trying many different products. And so the number of sticks per device and consumption has come down a bit. So you don't see quite the volume and share growth that you would associate with that number of consumers. So we’re convinced it’s going to settle out that IQOS will win, it's the best product in the market and we will see higher rates of growth. Now that’s underpin by the three buckets of things we’re taking in Japan; we’re improving the basics, so the device quality issue and reliability; the loyalty programs for existing users to make sure they stick with IQOS since they appreciate the brand; the holders have programs to get people the ability to do some and use in short-term; we’ve simplified pricing registration and you’ve got the messaging to reach a broader consumer base; and reach, for example, we flag the 50 plus group, which is pretty large in Japan; we’re adapting our messaging to those to that group and focusing on smoke-free Japan; going to where they are and more suburban; there is a new campaign on the way; so that's all around messaging and consumer. And then the products are a key part of it; the new flavor SKU; the new lineup of consumables at the mainstream price; and then very importantly, the new generation devices, which is a nice improved device; and we are convinced, it’s going to do really well, even at a premium price to the existing devices, which is why we’re bringing the inventory of the previous devices down, so that the new devices have room to sell. So all these things, put together, I think will increase the rate of people coming into the category. Overtime, the churn will dissipate. It may a take a while. We still have the spread of competitive products. But you see what’s happening in the cities where we’ve already been in the longest, we start to tick backup. So it’s got a come, it’s just a matter of being more conservative in our estimates about when that will happen and making the room for these initiatives to take route and be successful through the inventory resizing. So that’s the story around Japan. We’re really confident in the future. We are absolutely sure that the basics are in place, the product is right and it’s going to resume growth. We’re just being more conservative about when we forecast that will happen and giving run through the initiatives to take place.

And if I can just, one other quick one is just that -- and from a high level, I guess. When you saw in Japan and Korea the product reach up to 2.5 share. We started to see an exponential increase in market share for that, point forward. It got a real -- a lot of consumer adoption from that point, got to be well known in the market and that kind of thing. You’re not seeing that quite so much in Europe. Is that what we should expect the EU is just different than Japan? Or is it around the way you’re standing behind the product or anything you could add to that? Just to understand how the shares develop in the EU and when they could really take off from here?

There are couple of markets that have accelerated notably in the last few periods. I mean, you call out Europe. Take Italy. Italy is starting to take some pretty big jumps in the share quarter-over-quarter. I mean we were at 1.5 share points in the first quarter, now we’re at 1.9. So maybe it’s not taking off quite as fast as Korea or Japan. But that’s a noticeable acceleration in share. Russia, Moscow being the leading city for Russia. I mean, to you jump from 2.7% to 4.4% in one quarter, that is a serious acceleration. Also, Greece is another example, and there some of other markets. I mean, I’m not going to go through the whole list. But we are starting to see faster growth across a variety of markets. And I think part of it is the efficiency of our initiatives and we’re learning how to do it better. Our spending is paying off better. But it’s also I think which you pointed out, which is word of mouth. At some point, it gets to a critical mass where people start seeing each other using it and they start reaffirming their choice and you start to see a difference in the growth rate. And we are seeing that. And obviously in differently geographies, it might be to different extremes, but it is significant growth and we’re very pleased with the progress across EU, Russia, a number of different geographies, as well as the great success that we’ve had in Japan and Korea. So it’s getting very broad base now. We’re very pleased with it and very confident in the future.

Our next question comes from the line of Adam Spielman of Citi.

My first question is really focusing around the 600 million, how you’re spending and how that varies in the life of a slowdown in Japan and Korea. And I suppose what I’m really trying to ask is this. It sounds like, you are ramping your marketing investments in Japan in response to the slightly disappointing trajectory in Japan. But you’re keeping the 600 million stable. Does that mean to say that you’re not investing as much in Europe as you would have done? And that’s my first question.

Well, in Japan, we’re actually spending this year what we plan to already at the beginning of the year. We have not increased the total spending in Japan above what we had already planned. And I’m sure within the 600 million that we’re spending across a variety of markets, including Japan, Korea, EU, a number of different geographies. But the plans, as far as how the markets are spending it, are pretty much on track and Japan is actually right on track with its spending. So it's a step up from last year and that's maybe what you're seeing when you look through our earnings release. But that was already planned and it's already in the 600 million number, we haven't increased either the 600 nor have we increased its allocations to Japan.

And then as I look at the rest of the world, so excluding Japan and Korea, we've talked about a lot. It seems to me that certainly compared with my expectations it's doing better in certain geographies. You've called out Greece, Italy, Russia than I would expect, but correspondingly less well in others. And I'm really talking Northwest Europe here. Is that, compared with your forecast let's say this time last year, is that how you would see it as well? Better in some place, worse in others, net-net in line with what you expected.

Well, I think we expected it to do well across the geographies. It's done a little bit better in some, obviously, and in others we're hoping to accelerate the growth. And we're still confident it'll come. I am one where it would pay off tremendously if it grew, but is challenging, is Germany. We knew, because of the characteristics of the consumer and so forth, there was a little bit more of a show-me type market and would take more effort and more incremental growth to where we get to a point. We are growing in Germany. We're gaining consumers. We're making progress. It's going okay. But obviously, we would like to see it do better in Germany, partly because it would be extremely profitable, as well as the fact that it's a key market for us and we would like to grow it. But we're very confident it's going to happen. We are applying these new tools and the learnings and getting better every day and it is starting to move faster. But we're all always looking for more.

And very quickly, it's not my final question, the UK. I live in London, it seems to me you're making big efforts here. But I just wonder how it’s doing in London?

I think we're making progress we have good efforts on the ground there. And it's a market that is very interesting, because it has a fairly large e-cigarette component and we have consumers there. And we also would like to see it do well in the UK from the point of view of English-speaking, and would spread the word better around the world with word-of-mouth. It's going fine, we're making progress. But that's a market that we're putting a lot of focus on and trying to accelerate the growth in.

Finally, just you've dropped some hints about pricing. One thing you said, I think you said is you're applying the new device to be at a premium to the existing IQOS device. I'm intrigued by that, particularly in line of the fact that the heavy discounting from the glo device and to some degree from plume. And also I think I heard you say that you're definitely planning to submit a new price list for IQOS in Japan in due course to deal with the tax rise on IQOS. Is that correct?

So for the existing line up of devices in Japan, we said the price now as a simple one price as opposed to the situation before where you had discounting and you had most consumers having to go through the registration process to get the discount price. It also gave the impression the device being marked down. So we made it simple. We simplified the registration. We also didn't require the registration in order to get the same price, the ¥8000 price, which is where most consumers were getting to anyway but only after some pain and suffering. And that was also in anticipation of bringing the new line-up of devices. The plan all along was when the new devices arrive would be to have two price tier system for the existing line-up and then the new and improved line-up at a higher price. None like you would see for other electronics product line-up. So we just accelerated that, took away the pain and suffering of having to go through a long process to register and get the price, which you should have gotten anyway and put it there. So yes, when the new line-up comes, it will be an improved device. It will offer better functionality, performance, design, all the great things and consecutive use too, by the way. And so in general, it will be priced above the older device, which you would expect that that’s not surprising. As far as the consumables pricing, I was just referencing in October 1st, there is a tax increase in Japan for both RRP and conventional cigarette. So obviously, you need to have your price list in before any tax increase. We've already put our price listing for the combustible. And so we were delayed a bit by this technicality on the rest of our portfolio, and so that’s what I was referring to.

But the new retail price will be higher to take into account the tax increase on the consumables of IQOS?

There is a tax increase and we’re going to file a price list that deals with that. I can't comment further on pricing.

And one thing I didn’t ask. You feel the ¥8,000 is right in the lights of the ¥3,000 for some glo devices?

We’re still selling a nice amount of devices, and we do have a superior product we believe. So we want to have the premium positioning. So yes, I think this is about the right price.

Our next question comes from the line of Michael Lavery of Piper Jaffray.

I just wanted to touch on Russia. It's your largest cigarette market where you’ve launched IQOS. And you’ve highlighted some of the momentum there. Can you just help me to reconcile a few of the data points you’ve given. You talk about the 4.4 share in Moscow, and that’s close to 10% of the population of that country. I think you’ve also got almost 1 billion sticks in that region, which is primarily Russia and Ukraine. I guess, I’m just trying to reconcile that with your appendix 1 where you show zero rounding, I suppose, to zero market share for Russia. If you took say half of the segment number divided by the market size, you’re still looking at around 0.7 or 0.8 share. Obviously, the 4.4 at around 10% in the country would be close to four tenths of a share. Why is there no share registering on the national basis and how should we think about tying all that together?

I think this has to do just with the data source for the shares at Nielsen for Russia, I think. It may just be that -- I’m not sure, to be honest with you. It may just be that the way we pick up share in Russia is still not picking up in Moscow rather, it's still not picking up in there. But I honestly don’t have the answer for that…

Can you give us a sense of what the split is between Russia and Ukraine, or any other markets in that segment? Just how big the -- when you look at that shipment number, how much of that is coming from Russia?

We really haven’t split it out by market. Obviously, Russia is probably the biggest component but it’s not split by that.

And now that you’ve got no issues with capacity, would you -- are you looking at a national expansion in Russia, or further expansion beyond? I know you called out Moscow typically. You’re also in St. Petersburg as well. What’s your thinking about reaching beyond those?

We’re having terrific results in Russia. So logically, we would expand -- we will expand, yes. We will continue to expand in Russia. I’m not going to say when and so forth. But absolutely, with the results that we’re having and the programs working so well, it’s only logical that we will continue to expand in Russia.

Or any sense of timing maybe as a better way to put it?

No, not at this time…

And then just one more on Japan, there is the smoking ban coming into place. It looks like that applies the heated tobacco as well. How does that influence your outlook for the market there, and just any thoughts on what you expect from that coming through?

I don’t think we really have an impact from that on the market development, going forward. I mean, usually smoking bans aren’t a big impact on volume in the market. I think it’s disappointing if they don’t allow heated tobacco units, because I think it is materially different to combustible and it should allowed, it does not impact into our air quality, we have the studies to prove it. In fact we did a study in Japan on actual consumers and looking at the biomarkers and individuals, and proved that the IQOS device does not impact air quality or give a problem to non-smokers in the area.

Michael just a follow up -- Michael it’s Nick. That ban does apply to both combustible and heat-not-burn. They’ve carved out some differences between the two. So I think that’s the good news is to recognizing the heat-not-burn category as a bit different.

Just to clarify then you said it does apply to both, but there’re some carve outs…

There are some differences and I can get you the specifics on that after the call. In restaurants, and bars and things you maybe…

I think there’re different categories…

Something like the establishments and things of that nature where you can’t use CC but you can use heat-not-burn.

Our next question comes from the line of Jon Leinster of Berenberg.

Just going back to previous question. What plans have you got if any for the full commercialization of platforms two, three and four? Where are we in that?

So platform two, which is the heat-not-burn product, deliver similarly to platform one but it uses carbon tip to generate the energy. That product has been launched in a limited city test in the Dominican Republic. We’re gathering consumer data and consumer information on that and preparing to ramp up the production. And we’ll give plans for that going forward. Platform four, which is the e-cigarette MESH product I referred to before, is -- the new version of it is being finalized and it will be launched soon. And it is an improve technology that we believe and a differentiated from others in e-cigarette category. So we have high hopes for that product and continue development of that product going forward to deliver better satisfaction to smokers. So that will be put out in its market before the end of the year. And then platform-three is little bit more in development and we don't have it in test market yet. But we will get into a test market as soon as we can.

Does that mean we should expect -- when will we expect first national launch of any of these products?

We haven't said, so don't have any new update on that.

Secondly, certainly there was trade press, suggesting that the announced IQOS factory in Germany was no longer going to go ahead. Is that true? And there are some of the other ones that you announced too; Romania, Greece, the Dublin, the size in Italy, Switzerland investment, Russia investment? Are some of those also being scaled back or perhaps not going ahead?

We're reevaluating our whole CapEx for RRP. The reality is we're in good shape with RRP capacity. We have better efficiency with the spend because you have better up time. We've had lower waste numbers and we've also figured out how to better use some existing facility layout. And with the new growth forecast we're in pretty good shape. So we have now changed the timing on some of our spending for CapEx, that's why we have lower CapEx number for the year. And we're going to continue to evaluate the footprint for RRP going forward. We don't have any announcements on individual factories, but we're doing the assessment now. And we'll give more information to the individual areas as they might be impacted or not. From a company perspective, it's a story of us being more effective and efficient with spend and phasing of the timing of our investment on CapEx to match the situation.

And within Japan now, you may or may not be able to answer this. But I mean is there going to be direct connection when you're talking about potentially launching higher tar and nicotine product but also lower price products. Is there actually going to be a direct connection between the pricing and the level of tar and nicotine? In other words, is there going to be a -- is the market going to be stratified into a higher priced product, which are more flavorsome but more tar and nicotine and the lower price product, which perhaps gives less of a kick. Or is that not going to be the case?

That is not going to be the case. We're not launching higher tar and nicotine product. We said more flavorful. First of all, tar doesn't really make sense when you talk about heated tobacco units. The aerosol is dramatically different. It's not really -- tar doesn't really make sense in the case of those. And the nicotine level doesn't necessarily go with the flavor level. It's about the selection of tobaccos in the way we make the tobacco, print tobacco in the raw that creates a different flavor. So we're talking about more flavorful ones that -- products that give more taste in the consumer experience in order to bridge better to full flavor smokers. But it's nothing to do with tar and nicotine. And as far as price goes, we're going to have a line-up of different flavors. We would not price according to the flavor or the nicotine amounts or anything like that, nothing like that, no.

And lastly I think, historically, you’ve talked about having a new EPS algorithm at some point in 2018 given the uncertainties. Is that still the plan at some point, or is that perhaps going to be later?

We have our Investor Day that’s coming up at the end of September, and we will talk about the future in much more depth there and talk about the different aspects of our growth and the very positive plans we have for the future. I think that’s probably the best venue in which to talk about longer-term prospects on growth for the Company.

Our next question comes from the line of Owen Bennett of Jefferies.

I think you may just filled my question in talking about long-term is more of a long-term question. So I’m assuming you’ve modeled a number of scenarios internally. And so with that respect you’ve spoken quite bullishly in the past when IQOS was continuing to grow very strongly. The double-digit organic sales growth each year was possible going forward. My question is if IQOS growth stays at the current rate, we increasingly see lower-price variants introduced like you plan to do in Japan, and perhaps later becomes much more prevalent on a global basis than you had expected. And what sales growth will be expected in that scenario?

I mean, first of all, we don’t believe that scenario is reflected with what's going to happen. The heat not burn category is profitable. The products that we sell in that category are more profitable than our convention cigarette products and we think it will stay that way, some of its coming from tax differentials. We think we have very good arguments for maintaining tax differential. We’ve been very successful around the world having these products at a lower tax than conventional cigarettes. And if you couple that with the fact that the production costs are roughly the same as cigarette and the trade margins are the same as cigarette, you have a much more profitable category. We think it’s defensible with our IP and the regulatory situation around tobacco. We think that the conversion costs are reasonable given the higher income stream coming from the higher margins on these products, and they are coming down the conversion costs as you amortize the central costs and the set up costs over more and more volume. The conversion costs will come down and the scale will help us with that. We’re building brand equity with IQOS. So we have every reason to believe that the profitability of IQOS and heat-not-burn category, in general going forward, will be very good and better than cigarette and we are very confident in that scenario. I think the success we’ve had around the world and the fact that these products and these markets, even at relatively low market shares, are accretive in adding profitability to the Company is a testament to that.

But then just in terms of when you speak about double-digit organic sales growth. I mean, even given the trends we’re seeing right now. Do you think that is still a long-term possibility, or perhaps that needs to come in some more?

I mean, I think at Investor Day, we’ll talk about the further out periods. I think 2019 will be a better year for us. We’re lapping some challenges around Saudi for this year that 3 EPS point. The combustible business is better and strong, it’s improving. We’ve got volume. We’ve got share improved on combustible. We’ve got pricing that’s going well. Our investments going forward, I already talked about, are more manageable in the out years, because you don't step up the infrastructure cost that you built for bigger volumes. We’re taking the inventory rightsizing and the initiatives in Japan that will help set the deck for 2019 and help the initiatives in Japan really take effect, and get us better growth there. And then you’ve got tremendous growth across a bunch of geographies on IQOS this year that are very well for the future next year. So I can tell you 2019 we’re quite confident in and very bullish about and we can talk more at Invest Day about the longer-term and the different elements of our growth.

And we have time for one more question. Our final question will come from the line of Pamela Kaufman of Morgan Stanley.

I just wanted to ask about the combustibles business and what’s driving the improved expectations there. Is it less cannibalization from IQOS? And are you reallocating some incremental investment back into the cigarette business?

No, I think that the spending is -- just the flip side of what we’ve talked about with the $600 million on RRP. We haven’t really changed greatly the investment plans behind the combustible category. And our pricing went very well this year across a broad series of geographies, so that’s helping the overall. And our share is doing better. I mean there were another -- a number of markets that have been dragging on us, which are now turned around. I mean, you go to the Asia, South and Southeast Asia region; Indonesia is positive share this year and doing better on first half on volume; Philippines, we’re getting great share growth in the Philippines and the profitability is improving. From a volume perspective; Thailand and Pakistan are adding, whereas before it wasn’t as much; Turkey, the market is growing due to illicit coming back into the legal market, and we’re benefiting greatly from that; in Germany, our pricing and initiatives went very well this year. We had growth in share in the second quarter. And so it’s starting to deliver some good benefits. So it’s a broad range of geographies where the brands are doing well, the pricing is a bit better and the overall market volumes, in a few cases, are a bit better like I mentioned in Turkey but also in some of the geographies that had been causing us issues before. We have situations and we have volume coming back from illicit due to a number of factors like in Pakistan the new tax tier, et cetera. So you add it all up and we have a very good picture, going forward, not just for the second quarter but going forward on the conventional products business.

And then I was just wondering if you can elaborate on the commercialization strategy for the next generation IQOS device. Are you going to be rolling it out across all markets or initially just in Japan…

I think you’re going to have to wait and see on that one. I can tell you that we’re very excited about this new generation of devices. They really are better from the way the consumers use them, the interface, the way they look and the performance of them. And we have a good plan for introducing them and you’ll have to wait and see.

And can you comment on the battery life. How many uses the device have?

We flagged as one of the drivers of having to reduce inventories and device sales, going forward, is that that we’re finding that our devices are actually holding up better as far as the life of the battery, if you will. You buy a battery and it’s rated for a certain number of cycles. But the reality is in the real life and with the consumer use, people are tending to get more cycles out. So the replacement rate for battery life issues is actually turning out to be bit lower than what we had planned. And therefore, consumers can hang onto them and use them for a longer period of time. So the batteries in these devices are fantastic technological quality and they are lasting better.

Thank you. That was our final question. I would like to turn the floor back over to management for any additional or closing remarks.

I just want to close with just reiterate three key points for our outlook. First of all, the base business we talked about it, it’s doing better. We've got improved volume to share. The Marlboro is doing well across the world and the pricing is coming in very nicely this year. The RRP growth is substantial. Year-over-year, we're growing our IMS, nearly doubling it and it's really broad based. It’s covering a number geographies, not just Asia now with Japan and Korea which are great success stories, but also EU, Russia, other markets are starting to kick in with significant additions to our volume growth. And the last point is that we've taken some decisive actions to improve our growth, going forward. In Japan, in particular, the initiatives we put in place in rightsizing these inventories. We're doing that in order to give us better results, going forward, not only that the initiatives have better impact but also prepare the decks for 2019. So we're very confident about the future. We look forward to giving more detail at Investor Day, and we look forward to improve results going forward. So thanks very much, everybody.

Thank you, ladies and gentlemen. This does conclude today's Phillip Morris International's second quarter 2018 earnings conference call. You may now disconnect, and have a wonderful day.