Good day, and welcome to the Philip Morris International First Quarter 2021 Year-End 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 2021 first quarter results. You may access the release on www.pmi.com or the PMI IR 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 US GAAP measures, and additional heated tobacco unit market share data are at the end of today's webcast slides, which are posted to the website. Unless otherwise stated, all references to IQOS are to our IQOS heat-not-burn products. All references to smoke-free products are to our RRPs. Please also note that growth rates presented on an organic basis reflect currency-neutral underlying results. Today's remarks contain forward-looking statements and projections of future results. I direct your attention to the forward-looking and cautionary statements disclosure in today's presentation and press release for a review of the various factors that could cause actual results to differ materially from projections or forward-looking statements. Please also note the additional forward-looking and cautionary statements related to COVID-19. It's now my pleasure to introduce Emmanuel Babeau, our Chief Financial Officer. Emmanuel?

Thank you, Nick, and welcome, ladies and gentlemen. I hope everyone listening to the call is safe and well. Our business delivered a strong performance in the first quarter of 2021 well ahead of expectations, reaching a record high quarterly adjusted diluted EPS of $1.57, despite the continued challenges of the global pandemic. Most impressive was the continued strong growth of IQOS, which made up 13% of our volumes and 28% of our net revenues compared to 21.7% in the prior year quarter. We continued converting adult smokers at a very good pace and reached an estimated total of 19.1 million users, of which 14 million have switched to IQOS and stopped smoking. HTU shipment volumes grew plus 30% compared to the prior year quarter with record market shares in key IQOS geographies, 12 markets with double-digit national share and the share of 7.6% overall in IQOS markets excluding the U.S. Our operating margins were also significantly above the prior year quarter, and while somewhat flattered by timing factors, the bulk of this improvement reflect strong underlying performance. The resulting combination of strong organic net revenue and adjusted diluted EPS growth leads us to raise our outlook for the year. From a product standpoint, we continue to broaden our smoke-free portfolio and saw encouraging progress from new device and consumable offerings across multiple markets. We expect to benefit from further innovation through the course of 2021. Turning to the headline numbers. Our Q1 net revenues grew by plus 2.9% on an organic basis. This was an excellent performance in the context of an essentially pre-COVID prior year comparison and incorporates better than expected HTU, IMS and shipment volumes, which drove plus 32% organic growth in RRP net revenue. We also saw some higher-than-expected pull forward of shipments, predominantly cigarettes in the EU region, ahead of the Easter period and in Russia ahead of the April 1 discount ban. We saw strong organic growth of plus 6.9% in our net revenue per unit, driven by the increasing weight of IQOS in our sales mix and pricing on both combustible and RRPs. Combustible tobacco pricing was plus 2.7% of prior year combustible net revenues, reflecting solid pricing in many markets, partially offset by Indonesia. Excluding Indonesia, combustible pricing was over plus 4%. Our adjusted operating income margin increased by 580 basis points on an organic basis. This reflects the increasing weight and profitability of IQOS; the positive impact of pricing; productivity savings, including lower device cost; lower commercial spend due to the pandemic; the favorable comparison in Eastern Europe and certain other timing factors. Combined with a lower effective tax rate, our resulting adjusted diluted EPS of $1.57 represent plus 21.5% organic growth, a very strong performance. We estimate the timing factors in the quarter, such as the earlier shipment mentioned and cost phasing had a positive impact of around plus $0.08. Although one-time factors accounted for an estimated further plus $0.02 increase. This brings me now to guidance for 2021. While the speed and shape of the global recovery from the pandemic remains uncertain, the strong business results and underlying momentum of the first quarter, notably from our IQOS business, lead us to raise our outlook. We continue to account for a range of outcomes in our outlook for organic growth in net revenue and EPS. This range, assume that even in the event of renewed or prolonged restriction, we will not see a return to the depressed consumption level of Q2 2020. While we have not been affected thus far by the current global shortage of semiconductor, the guidance assumes a limited impact on the supply of electronic devices to consumer. This is a fluid situation which we are monitoring closely and where any constraint may arise, we intend to manage our inventories accordingly and prioritize device sales to other smokers who are new to the category. Regarding duty-free, a rebound in global travel is likely to lag the improvement of in-country mobility. Our guidance continue to assume no meaningful recovery in duty-free this year. We now expect organic net revenue growth in the range of plus 5% to plus 7% versus plus 4% to plus 7% communicated previously and organic adjusted diluted EPS growth of plus 11% to plus 13% or plus 15% to plus 17% in reported terms. The strength of IQOS is the main driver for this revision. We now expect to deliver HTU shipment volume of between 95 billion and 100 billion units, representing the upper half of our previously targeted range for 2021. Given the continued strong momentum across our market, the need to maintain inventory duration and preparation for the rollout of IQOS ILUMA that uses different consumable, we expect our full-year shipment to be slightly ahead of our IMS volumes. We also raised our assumption for organic adjusted OI margin expansion to around plus 200 basis points. This includes the expectation of greater investment in the second-half as our innovation and commercial activities step up. As detailed in this morning's press release, our other main assumptions remain unchanged. This projected organic EPS growth, including an estimated favorable currency impact of approximately plus $0.20 at prevailing rates versus plus $0.25 assume previously, translate into a raised adjusted diluted EPS range of $5.95 to $6 or $5. This guidance does not include any impact of share repurchases. However, we remain on track to resume repurchases in the second-half of the year subject to Board approval. Looking forward to the second quarter, we now expect adjusted diluted EPS of $1.50 to $1.55, reflecting strong topline growth against a weak prior year comparison, continued margin improvement and a partial reversal of certain Q1 timing benefit. For the second-half, assuming that many of our key market will have largely emerged from COVID restriction, we expect continued robust top line growth. This include the contribution of higher expected device shipments, which will result in less gross margin expansion, compared to the first-half. New product launches, investments in distribution and the phasing of productivities will also play a role. We will also step up our commercial investment in the future growth of RRP through portfolio and geographic expansion, including product launches such as IQOS ILUMA. We anticipate around plus $300 million to plus $400 million of incremental commercial investment compared to the first-half and consequently expect our organic OI margin expansion to be lower in H2, but overall, to deliver a strong expansion of around plus 200 basis point for the year. Before discussing our results in more depth, I want to highlight a few of the positive regulatory developments in the quarter. Recognition of the harm reduction potential of smoke-free product continues to gain traction. Example, so far this year includes the reversal of a long-standing import ban on heated tobacco product in Uruguay and the integration of the harm reduction principle in Lithuania's tobacco control agenda. We also note the recent report from an all-party parliamentary group of MPs in the UK, calling for the WHO to return to the founding principle of the FCTC, which includes harms reduction rather than the current prohibitionist stance. In New Zealand, we are reviewing the content and detail of the consultation paper published last week. The policy recognizes the role of innovative product in harm reduction, while at the same time, ensuring strict control to prevent youth access. In the EU, we continue to be hopeful that the revision of the tobacco excise directive will lead to greater amortization in the effort to smoke-free product, taking into account the relevant good practices and experience gained by member states in this area. Here and around the world, we continue to support differentiated regulatory and fiscal framework based on the relative risk to health. While there will on occasion be actions or proposals that do not incorporate harm reduction objectives, we believe that facts and science will guide policy over time and we continue to see positive changes in many geographies. Well, turning back now to our results, Q1 shipment volumes declined by 3.7% on the total PMI business. This reflects continued strong growth from HTUs of plus 30% to reach 21.7 billion units, driven by the EU region, Japan, Russia, Ukraine and an encouraging start from recently launched market in the Middle East. HTU shipment and IMS volumes were broadly in line for the quarter. While pandemic-related restriction persisted around the world, total industry volume declines of 0.7% were relatively benign incorporating over plus 25% growth in the heated tobacco category where we continue to have a share of over 80%. Though less severe than in Q4 2020, our cigarette volume declines reflect specific share headwind in certain markets, which I'll come back to. We expect better combustible share and volume trends in both the second quarter and second-half of the year. The strong performance from IQOS led to heated tobacco units, comprising 13% of our total shipment volume in Q1 as compared to 9.6% in the prior year quarter, 11% in the year of 2020, 8% in 2019 and 5% in 2018. We continue to expect this proportion to grow over time as a positive momentum on IQOS continues, providing a powerful driver of revenue and margin growth. Our sales mix is changing rapidly, putting us on track to achieve our aim of becoming a majority smoke-free company by 2025. Smoke-free products made up 28% of our total net revenue in the quarter compared to 21.7% in Q1 2020. IQOS devices accounted for approximately 6% of the $2.1 billion of RRP net revenue, reflecting longer replacement time for existing users due to improving battery lives and reliability, and lower device price in certain markets as we are preparing for IQOS ILUMA. The plus 2.9% organic growth in Q1 net revenue on shipment volume decline of 3.7% reflect the twin engine driving our topline. First is pricing on combustible and in certain market on HTU net of the lower device pricing I just mentioned. Second, the increasing mix of HTUs in our business at higher net revenue per unit continue to deliver substantial growth. And as explained at Investor Day, this is an increasingly powerful driver as our transformation accelerates. Let me now go into the driver of our first quarter margin expansion, starting with gross margin, which expanded by 390 basis points on an organic basis. This is driven by multiple levers as shown in green on this slide, including the mix effect of HTU within IQOS impact, in particular, our significant efforts on manufacturing and supply chain efficiency are bearing fruit, more than offsetting the effect of combustible volume declines, with around $150 million of gross productivity savings delivered in Q1. While somewhat front-loaded in the context of 2021, this represents a strong start on the journey towards our target of $1 billion over 2021-2023. As part of these savings, our gross profit increase was boosted by better absorption of manufacturing costs given a high level of production in the quarter and lower device costs with combined impact of around plus $60 million. Gross margin expansion was also accompanied by strong SG&A efficiencies with our adjusted marketing administration and research costs 200 basis points lower as a percentage of net revenue on an organic basis. This reflects the ongoing digitalization and simplification of our business processes, including our IQOS commercial engine and more efficient ways of working. We delivered around $60 million towards our '21-'23 target of $1 billion in gross SG&A savings before inflation and reinvestments. The pandemic also impacted SG&A costs in the quarter through the later timing of certain projects and reduced commercial and overhead costs due to ongoing restrictions. These latter factors accounted for around $100 million of the organic improvement. Focusing now on combustible, we continue to hold the leading international portfolio by market share and by brand strengths as covered at Investor Day. This gives us a formidable platform to accelerate the growth of IQOS via our commercial infrastructure, industry expertise and ability to communicate with other smokers where permitted. It is therefore imperative to maintain our leadership through selective investment as we also drive returns through pricing and efficiency. Our cigarette share underperformance in Q1 can be attributed to the combination of several factors. This includes the COVID impact on social occasion, where Marlboro overindexes; border closures and reduced travel; and instances of downtrading and competition in the mid and low-price segments in certain markets such as the Philippines and part of the EU region. This performance does not reflect our objective to maintain our share of cigarettes, net of cannibalization. We expect a strong sequential cigarette share recovery through the remainder of the year supported by portfolio initiatives and the enduring strength of Marlboro especially as pandemic restrictions ease. Accordingly, we target cigarette share to be about stable on the year-over-year basis for the next nine months, despite the impact of cannibalization. Share gains from HTUs will come on top of this. I will now turn to the South and Southeast Asia Region. After a difficult 2020, notably in Indonesia, headwinds are now moderating. In Indonesia, volume trends are improving with double-digit growth in hand-rolled kreteks, where we are the market leader supporting stable PMI share in the Tier 1 segment. Indeed, with industry volume recovering, we are targeting volume growth for our business here in 2021. Pricing remain the main headwind in Indonesia. New excise duty rates came into force on February 1, and while all major players have taken some pricing, progress nonetheless remains slow. Despite the negative consequences for government revenues, there has not yet been a significant move to level the playing field between the Tier 1 and below Tier 1 segment, which continues to grow. We remain hopeful that the government will address this issue over time. The Philippines has performed well in recent years. For this quarter, further industry pricing in H2 2020, a slow economic recovery and pandemic-linked restriction gave rise to a double-digit market decline. Our share loss reflects downtrading from the mid to low-price segment, with premium-priced Marlboro which make up over two-third of our volume growing share. Notwithstanding these challenges, we have plans to address the share decline and are targeting close to stable organic net revenue in 2021 despite the total market weakness. I'm also pleased to say that IQOS is off to an encouraging start in Metro Manila, with an exit share of almost 1% for HEETS after full launch in Q3 2020. Overall, this region delivered strong growth pre-COVID. While it may not be a meaningful growth driver in 2021, we expect far less of a drag on group result compared to 2020. We target regional organic net revenue to be at least stable over the next nine months. Moving now to IQOS performance, we estimate there were 19.1 million IQOS users as of March 31. This represents the addition of around 1.5 million adult users since December building on the step-up in the second-half of 2020. Our accelerated pivot to digital and remote engagement during the pandemic, combined with strong momentum for the IQOS brand is paying off. We further estimate that 73% of this total of 14 million adult smokers have switched to IQOS and stopped smoking, with the balance in various stages of conversion. Strong conversion rates notably reflect the increased prevalence of IQOS 3 DUO, which offers a superior user experience to previous device versions. As we mentioned at Investor Day, we seek to achieve even higher conversion rate over time with introduction of innovation, such as IQOS ILUMA. This user growth again reflects widespread momentum across all key IQOS geographies, including the EU region, Japan and Russia. It also reflects the enrichment of our offer and the segmentation of the category with new product and more price points, both above and below our initial HTU offering. In the EU region, first quarter share for HEETS reached a record 5.7% of total cigarette and HTU industry volume. Adjusted for estimated trade inventory movements, this reflects 46% year-over-year. IMS growth and around 10% sequential IMS growth accounting for fewer selling days in the period. I would also remind you of the sequential quarterly share dynamic, which can be distorted by the seasonality of the combustible market in addition to pandemic-related situations such as border closure and other social restrictions. With the region likely to reopen somewhat in Q2 and increase the total market, we expect further strong underlying HTU growth, but for share to be broadly in line with Q1. This excellent performance includes strong growth in Italy, surpassing 10% share, with the large majority of user acquisition coming organically as the increasing awareness and prominence of the product build its own momentum. Germany and Poland were also strong contributors. We added a further 700,000 EU region IQOS users in the quarter to reach 5.9 million, a continuation of recent strong performance. We continue to see phenomenal progress in key cities across the EU region, with a number of examples on this slide. HTU share in Rome is now approaching 20%. Warsaw and Lisbon reached 15%, Munich 8%, and London 5%. While a smaller city, the progress in Vilnius at 36% share is also a global standout. As covered at Investor Day, key cities are a good indicator of national share growth potential and I would also refer you to the appendix where we show shares for key EU market and global key cities. Strong performance continued in Russia, with our HTU share up by 1.2 points to reach a record 7.7%. Adjusted for estimated trade inventory movements, this reflect plus 35% year-over-year IMS growth and around plus 8%-10% sequentially once estimated consumer pantry loading effects are factored in. We continue to see sequential share growth for both our HEETS and Fiit lineup with good traction for the regular HEETS and super-premium HEETS creation variants. Moreover LIL SOLID and Fiit consumable continue to supplement user acquisition. In both Russia and Ukraine, the majority of consumer purchasing a LIL device are smokers entering the smoke-free category for the first time, with high level of conversion in line with IQOS. This bodes well for our ability to reach adult smoker in the medium and below price segments for whom purchasing power may be a barrier. Margins on midstream-priced HTUs such as Fiit remain attractive compared to cigarettes sold at the same price, and while the volume of Fiit remains small compared to our total HTU volume in this market given our large IQOS user base, we expect LIL to grow further in 2021. With this success in Russia and Ukraine, we plan to offer LIL SOLID in additional markets later this year. In Japan, on a total tobacco basis, including cigarillos and adjusted for trade inventory movements, the share for our HTU brands increased by 3 points versus the prior year quarter and by 0.7 points sequentially to 20.8%. Both HEETS and Marlboro HeatSticks grew market share following the October price increase, highlighting the strength of our price-tiered portfolio. We expect to see further HTU volume growth in Japan over the remainder of the year underpinned by ongoing user acquisition. For the second quarter in particular we expect robust sequential IMS growth. We also expect a recovery in the total tobacco market as the elasticity effect of the substantial October price increase fade, including on consumer pantry-loading. As such, while year-over-year share growth is still likely to be strong, Q2 share may not reflect this underlying sequential growth performance and may be broadly stable versus Q1 on an adjusted basis including cigarillos. In Q1, the overall heated tobacco category made up over 28% of the adjusted total Japanese tobacco market with IQOS maintaining a high share of segment. IQOS HTUs also reached an offtake share of 26.1% in Tokyo, after surpassing the 25% milestone in December. In addition to strong growth in existing markets, the geographic expansion of our smoke-free product continues. This allows us to provide access to better alternatives to an even increasing amount of adult smoker and as communicated at Investor Day, we aim to be in 100 markets by 2025. After launching in 12 new markets with IQOS in 2020, we added Aruba in the first quarter and launched our new e-vapor product IQOS VEEV in Finland, which takes the total number of markets where PMI smoke-free products are available for sale to 66, of which over half are outside the OECD. We are continuing to commercialize IQOS VEEV with Q1 launches in Italy, and as I just mentioned, Finland. This follows the initial launch market New Zealand and the Czech Republic in H2 2020. One of our key priorities is guarding against youth access for all our products and we are targeting for all our electronic smoke-free devices to be equipped with age verification technology by 2023. We will be testing this technology with IQOS VEEV in select markets this year. IQOS VEEV is a premium product, providing a superior experience and as we explained previously, the commercial infrastructure of IQOS allows us to deploy efficiently and at scale through a bespoke route-to-market approach. Our other market -- major innovation for 2021 is the launch of IQOS ILUMA, the next generation of IQOS, as announced at Investor Day. Building on the success of IQOS 3 DUO, we believe this simple and intuitive device will support easier switching and higher condition for legal-age smokers using Smartcore internal induction heating technology. We continue to plan for the launch of ILUMA in the second-half of the year. As we roll out both IQOS VEEV and IQOS ILUMA, we carefully plan our manufacturing and supply chain activities to manage expected demand, and external factors such as the current tightness of global semiconductor supply that I mentioned previously. The ongoing success of IQOS 3 DUO more than two years after launch demonstrates that significant innovation can have a lasting positive impact on growth, and both our recently announced 2023 HTU shipment volume target, and the upward revision of our HTU target for this year reflect this confidence. Our transformation is the bedrock for both business and sustainability performance. We do not have separate strategies, phasing out cigarettes by replacing them with better alternatives such as IQOS drives our growth and addresses our biggest impact on society. Our unique commitment to phasing out cigarettes is underlined by the new transformation targets announced at Investor Day, which are aligned with the 27 Business Transformation Metrics provided for stakeholders to measure and verify the pace and scale of our progress. This includes our ambition to become a majority smoke-free company by 2025, our aim to commercialize smoke-free products in 100 markets, and to generate at least $1 billion in net revenue from beyond nicotine products as we move into adjacent business areas with a net positive impact on society. Our best-in-class performance on ESG allows us to further our leadership in sustainability. I am proud to see increasing external recognition for example on our efforts to develop a fully sustainable supply chain and our commitment to address gender inequality. Further, we recently of data that was zero deforestation manifesto, strengthening our ambition undertaking to conserving forests across our entire value chain. We remain strongly committed to providing the highest level of disclosure on the key ESG and product impact areas of our company via integrated reporting and we released our 2020 disclosure on May 18. We recognize that EFG analysis can provide valuable insights about factors with a significant potential impact on financial performance and thus better inform investment decision. To further maximize the value of investor engagement and aid understanding of the significant positive impact PMI's transformation can have on society, we plan to hold a sustainability webcast in early June, building on our recent Investor Day. Please do mark your calendars. To conclude, we've had a strong start to the year and look forward with confidence despite the continued uncertainty on the operating environment due to COVID. This is the same concluding slide I presented at Investor Day in February, as I believe our start to 2021 demonstrates all of the key elements of our longer-term trajectory. Through IQOS we are building a business with multiple levers to deliver superior and sustainable growth over the coming year through improved volume dynamic, excellent topline growth, strong margin expansion and fast-growing earnings. Moreover, while every adult smoker who switches to IQOS is good for our business, it is also a clear positive for our impact on society and public health. We manage our transformation with care and responsibility for our stakeholders, guided by our sustainability materiality framework to maximize our positive impact across our Tier 1 ESG and product areas. This is essential for the sustainability of our business, and for delivering superior returns for shareholders over the long term. The increase in our organic growth outlook for 2021 is another step on this journey, also putting us nicely on track to achieve our 2023 financial and HTU shipment targets. Thank you. I am now more than 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 Vivien Azer of Cowen.

Good morning.

Good morning, Vivien.

So given some of the headlines coming out of the U.S. yesterday, it might be helpful, please, for my first question, if you could just level-set on IQOS' designation in your international markets in terms of the type of tobacco product from the tax perspective? Thanks.

So, I guess, Vivien, if I understand, well, your question is, how is our heat-not-burn offer and product classified versus combustible cigarette in our non-U.S. geographies. Correct?

That's correct. Yes, please.

Right. So I'm not sure that I'm going to be able to give one general answer because the classification can be different from one country to the other. I would say, today, probably the fact that the excise duty applied to our IQOS product is differentiated in the vast majority of the markets show that the treatment is differentiated, so the product is addressed already in a distinct manner on that particular element recognizing that it's a different product with a different feature than the combustible cigarettes. So we are, of course, going to see some situation that can be different from one market to the other. We are certainly welcoming a regulation that will further clarify the fact that these heat-not-burn products are clearly different and a better alternative to combustible in the future. And as I think I mentioned, we see the regulation progressing nicely country after country to take that into account, have been taking a few example during my previous speech and we expect that to continue. So, we expect more and more government regulated to further clarify distinction between heat-not-burn and other reduced risk products and combustible cigarettes and come as well with different regulation. And as you know, we are calling for a differentiated approach on two items. Certainly, on the way, we can communicate on these better alternatives and better product than the combustible cigarette. And also, of course, on taxation to make sure that we have an incentive to push the smokers to this better alternative for their health.

Certainly. That's helpful. Thank you very much. And then my follow-up, if you could just provide your assessment of the risk of other countries potentially implementing a nicotine cap on combustible cigarettes. Thank you.

Well, I think that is something that as you rightly say, Vivien, is not implemented anywhere today. And I think it's an idea that certainly would have to be investigated in all its dimension. I think that could have a number of impact in term of illicit trade, in term of people smoking, actually more combustible product to get to the same kind of nicotine dose and of course, therefore with negative impact. So I think at that stage, frankly, it's too early to say whether this is something that could have the right intent. In any case, that would have to be coupled with very strong awareness, availability of better alternative and certainly, starting with heat-not-burn if we were to work, and that should be perceived as an incentive for people to quit smoking or to switch to this better alternative and certainly, heat-not-burn being the first one that could be perceived as a nice and satisfying alternative for smokers wanting to go for better product. So, I think that the idea is -- and it's not new, because I think the FDA had put the idea on the table already in 2017. I don't think that much work has been done so far on all the potential consequences. We believe that a lot of work would have to be done on the impact and the loss of scientific evidence would have to be gathered and studied on that. And in any case, for us, that would have to be coupled with a very strong awareness, availability and present that as an alternative for people who don't want to quit, but want to keep consuming nicotine.

Understood. Thank you very much.

You're welcome.

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

Good morning, Emmanuel. Hope you are well?

How are you?

Yes, good. Thank you. And I just wanted to focus on the incremental commercial spend in the second-half. Could you maybe give some more specifics around what this will be behind? Will it largely be focused on the rollout of VEEV and ILUMA? And then linked to this, I was just wondering how many markets realistically are you targeting for VEEV and ILUMA to be in by the back end of the year? Thank you.

Yes. Sure, Owen. So on the commercial spending, of course, here it's expecting, we believe realistically, that in many markets, the situation on COVID will gradually improve. So everybody believe that in many markets with the vaccination and positive evolution starting in the summer, we're going to see a switch to a gradual improvement. So, as you know, during a significant period of time, because of COVID, we've been somewhat limited restricted in commercial action, I would say, across the portfolio, but of course, starting on our IQOS business. So as we see the market opening up, it will, in a general manner, be time to be back on communication, on making our IQOS product known, build awareness, again, around IQOS is absolutely key in building our IQOS business and obviously, that will trigger more commercial and marketing activity. On top of that, you're absolutely right, that will be a period of very important launch with ILUMA and VEEV. Although VEEV has been started to be launched, we expect a number of markets in the second part of the year. We see exactly what is the final number. We want to make sure that we do that well with the right focus. On ILUMA, you can expect key market to be first on the priority list for launch. So I'm not going to disclose at that stage the names, but you shouldn't expect key market for us on IQOS to be coming very first on the list. And of course, that will require specific investment to make sure that smokers or other already RRP user understand what is the benefit of ILUMA, why it is an even greater product than the IQOS 3 DUO and generating more conversion, more loyalty to our product, so that we require nice investment in the second part of the year. So that is really what is behind this $300 million to $400 million that we are mentioning here.

Thanks very much. Very helpful.

Our next question comes from the line of Bonnie Herzog of Goldman Sachs.

Hi. I wanted to ask maybe...

Hi, Bonnie.

…a follow-up – hi, a follow-up on ILUMA. Just trying to understand as you roll this out, what's the expectation of how incremental this can be? I mean, I guess I'm wondering from your expectations internally, are you expecting to see a lot of current or dedicated IQOS users upgrade to this device? Are you expecting for a lot of new users coming into IQOS? And then since you're introducing this broad range of consumables with ILUMA, how -- should we assume that there is some level of incremental costs view related to that and therefore a margin drag or not necessarily just trying to think about how accretive this could be for you?

Yes, sure, Bonnie, happy to answer on these two points. So on the impact of ILUMA, we broadly expect ILUMA to be positive. Well, first of all, of course, on acquiring new smokers, and converting new smokers, because you're going to find more intuitive, easier to use products and we make on convince with ILUMA smokers that we did not manage to convince so far. So that's the first element. Second, of course, we're going to also have a number of IQOS user or other heat-not-burn tobacco product user switching to ILUMA because it's really a severe product with a lot of benefit for the consumer. And lastly, because we believe that in term of loyalty and people fully adopting the heat-not-burn practices and not moving back to cigarettes, the fact that it's a better product is also going to play a very nice role. So we expect to have people abandoning and switching back to cigarette to be nicely lower once again because it's much easier to use, it's an overall better experience and we think it's going to be really having a nice impact on that one. So as you can see, we expect several drivers behind this ILUMA innovation to further boost our performance on the IQOS globally. Regarding consumable and globally as a launch, I would say you should expect like always when you launch a new product, you are coming with a product [ph], not fully optimized in term of manufacturing productivity. It's a new product; at the beginning, the volume are low; you've made some investment; it takes some time to be fully optimized. So there will be beyond the cost of launching the product for marketing and commercial reason. There will be some impact at the gross margin level at the beginning because it's a new product and there will be a ramp up on the profitability of this new product and on the consumable margin on this new product. And that is of course taken into account in our guidance.

Okay, that's very helpful. Thank you. And then, I wanted to circle back to some of the news that came out yesterday regarding a potential cap on nicotine levels on cigarettes in the US. So I guess my question is wondering if there is anything you can do to accelerate the rollout of IQOS in the US, since I imagine if a nicotine cap would ever be implemented, as I see it, IQOS would have a distinct advantage. So I'd love it if you could touch on that. And then, maybe your latest thoughts on potentially entering the US market with VEEV. Wondering if that might now become more of a possibility. And if so, will you or have you submitted a PMTA? Thanks.

So just on the second one, on VEEV, It is certainly our intention at a certain point in time to submit PMTA. We have not done it yet, and I don't have the timeline yet when we do that, but yes, it is certainly our intention to do that at a certain point in time. Now on growing the IQOS business, of course, we will work with our partner, Altria there. Remember, we are not commercializing IQOS in the US. We have licensed the IQOS commercialization to Altria. Let's not overreact to what is even [ph] not the news, I think it's a press article yesterday and therefore we should not run too fast to a conclusion or believe that the world is going to change overnight. I think it's just a press article. But now, we are convinced that the FDA has one clear objective, which is to promote a policy for harm reduction that will go through innovation and based on scientific evidence and they want to supervise that, the MRTP that we received on IQOS 2.4 signal [ph] that they see IQOS as a positive contribution and according to their own world, that it's appropriate to promote public health. So that means that we have with IQOS a role to play that we believe that this vision of the FDA is something that we can accompany and that we can foster and help to develop with our innovation and with IQOS, and of course, we'll make sure that with Altria, we try to maximize what we can do there

All right. Thank you, again.

Thank you.

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

Hi, good afternoon. I have two questions. First one is on IQOS market share. Now in the first couple of years, you've seen very good growth in 4Q versus 3Q and 1Q versus 4Q. And then market share has storms, and you can see that for example in Slide 19 and Slide 21, that sort of 2Q and 3Q, there's been no growth in Japan or a little growth and in the EU and in Russia. And I guess the question is should we expect the same sort of pattern in 2021? In other words, great growth in 4Q, you just have [ph] a great growth in Q1. But then the market share will be pretty stable for the next couple of quarters in your key markets.

Hi, Adam. Well, I think certainly the element, but I'm sure you have that in mind that you need to take into account is, first of all, that there is an underlying seasonality in many markets that is impacting the volume on CC and therefore the denominator being impacted that is even if IQOS continue to grow and globally heat-not-burn continue to grow very nicely that is impacting the overall market share. And in addition to that, the COVID impact on border closure impacts, impact on illicit and some market that was not tracked that emerge and that was mainly CC business, of course, there again, changing the denominator has been impacting the market share. So it's going to be a mix we believe in 2021 still with impact from the COVID of this normal seasonality plus the specific impact linked to the COVID. Now, we target a progressive growth overall, but it's true that on certain markets, we may have after a very strong acceleration in one quarter, for all this reason, the following quarter that could be with the lower growth and even stable -- of course year-on-year, it's still very strong growth. But you appreciate that. It's sequentially that the market share is potentially not growing at the same pace. It doesn't mean of course that the volume even sequentially are not growing either [ph] you can have volume growing as well with the market share stable. So I think market share has to be taken with a pinch of salt and should be appreciated over a longer period of time to be meaningful in what they say [ph].

Thank you. That's very helpful. And my second question is around your quarterly EPS guidance. And really the question is whether you're worried that people are beginning to disregard it and sort of consensus is just sort of, well, [ph] not consensus, but the way the market thinks about you is no longer under your control. Now, let me try to explain that question a bit more. In the past two or three years, every time you've given guidance on a quarter [indiscernible] massively. Are you currently no longer take Massimo's [ph] office or at least if you give a guidance for certain out [ph] of EPS, I think it's probably going to come in 10% or 12% more, but it started again this quarter and yet the shares are fundamentally flat. Now, there might be other reasons for that, but it looks to me as if the market is sort of disregarding your EPS guidance on the quarter. And to me, that seems quite a dangerous situation for you. As I was wondering if you think that's right, if you're worried about it, why you didn't actually -- you're going to bet [ph] for new ships more at the end of the quarter and you didn't tell the market, and how you think this dynamic is going to play out going forward?

Yes, Adam. So taking your challenge on guidance and what we deliver, I would identify two sources for -- and two reasons, two [ph] driver for beating often the guidance. The first one and I think it's a good one, is the fact that we are often surprised by the strength of the IQOS business. So we expect something and it's coming even stronger, which is a case in this Q1 for some of the beat. So we are trying to make a fair assessment of what we can expect, and then when things are coming better, we take that as a good news, but it's true, we've been too cautious in the way we've been forecasting. The other one, which I hope everybody understand, is that in today's environment, it's more difficult to anticipate, predict things because you have a lot of volatility, and we've been -- it's true, surprised by things that we did not necessarily anticipated well and that can be a spending that we thought we would do even in March and that we eventually did not do, and in term of investment and we are going to do that later in the year or some movement in market that were not well anticipated. Again, with the COVID impact creating a lot of nervousness, volatility, and frankly, somewhat a roller coaster in some of the attitude of the trade and then -- and even pantry-loading from customers. So that would be really the true driver explaining why we've been beating on the few occasion, our guidance. And when we know early in the quarter that we're going to beat, I mean we share with that when it really happened at the end of the quarter, I think we believe that it's -- it becomes clear at the stage where we say we're going to -- we see that very close to the communication if [ph] you want. Now, on your challenge of -- or your question of, does it mean that the market is no longer following you. Well, I don't think this is a case. I think everybody understand the specificity of this COVID situation and accept that there can be volatility and things that we don't anticipated -- anticipate well. And then you know on the strength of IQOS, I think everybody can have a view on what we can deliver. I think we are today revising towards [ph] the guidance on the number of HeatSticks for the year to 95 billion to 100 billion. I think based on the Q1 that's really sharing with all investors, shareholder analysts, the best possible assumption that we can make and really reflecting our vision at that stage.

Okay, thank you. It was a tough question. Thanks.

Thank you.

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

Good morning. Thank you.

Hi, Michael.

I just wanted to come back to your comment about pricing on HeatSticks and how you've begun to differentiate a little bit more there. And I assume if I heard you right, you said you're now doing both above and below the original price points you'd had. Obviously, in Japan, we saw what's the HEETS launch lower price point introduced, but could you give a little more color on how you're doing above where you have been price point? And is there additional new brands you have or a second or a third one? And just how that's positioned and if it's not too, too early what you're seeing so far with that?

Sure, Mike. Happy to do that. What is happening on our IQOS business and on the consumable is typically what you would expect in a market -- consumer good market where things start to mature a little bit. And I'm using this word with a lot of cautiousness of course because it's a very young market still, but in a few markets like Japan, for instance, a few other markets where we are not double-digit market share, it's maturing a little bit. So typically, the consumer -- the customer will expect based on his purchasing power, based on his personal lifestyle and what he wants to enjoy or what he wants to say about his life or her life around him. We'll want to have different I would say positioning on what he is consuming. So when you go for innovation, what we did with the HEETS consumable, you have one single reference at the beginning. And then rapidly, you see the need for segmenting the market, there is a category of the consumer that will be very keen to have an even severe experience. So to get to an even better consumable and ready to pay more for that, so to have higher expenses that's what we have with whether the Marlboro HeatSticks in Japan or HEETS creation in Russia, you keep the premium below the hyper [ph] premium if you want. And then, at a certain point in time, there is also a need for a medium and probably later in the future for a medium minimum positioning because other consumers will be keen to have an inferior overall experience but still great rewarding versus what they used to have with the same category of combustible and of course, at a lower price point. So I think we're just doing the right commercial marketing job to make sure that we give satisfaction to all the expectation of our customers. It happens gradually, it's relevant yet in every country. But as more and more country are becoming a bit mature, that will become increasingly relevant in more and more market in the future.

Okay. That's a really helpful color. And on your sort of quote mature Japan market where you grew three or four share points year-over-year, I just want to make sure I understand some of the dynamics there. You gave the adjusted share which of course excludes some trade moves but also cigarillos and then the other share. The gap between those has widened a little bit over the five quarters you show, it's like 1.3, 1.5, 1.6, 1.9, and then 2.6. Unfortunately, we don't have great visibility on cigarillos. Is it just growth in that segment, that's the key driver there or is there also a little bit of an inventory build we should have in mind as we think about modeling 2Q and beyond?

No, Michael, there is no concern of inventory bill whatsoever, that certainly the level of cigarillo, remember that is a specific category. The tax advantage will fully disappear next October but there is still, until now, a very dynamic category in Japan. So what we are, as I said, seeing in Japan has been following the October excise duty increase and price increase. A very, very nice reaction from our IQOS business altogether both Marlboro HeatSticks and HEETS, we've been gaining very nice market share at the end of the year 2020 in Q4. It continued in Q1 and therefore we are disclosing very positive and genuine market share growth during the last two quarters and we are very happy with it.

Okay, great. Thanks so much.

Thank you.

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

Hi, good morning.

Hi, Chris.

Questions were asked. I have just two quick ones for you. I was just curious in relation to IQOS, you've had really strong development of market share in Russia and the EU. Those were also markets where you continue to build your availability of the product. Do you have a rough approximation of how widely available IQOS is, say in the EU and Russia? Is there still more distribution potential in those markets to get it in front of more consumers?

Well, clearly, we said it in Russia, we have not a full coverage of the country yet. In the EU, we have a number of countries where we are in the big cities, but not yet with an important full coverage, I would say with a lot of capillarity I think Yatsik [ph], at the time of the Investor Day, highlighted the market share that we have in key cities and signal that if we look backwards, the market share a few years upstream are good -- in big cities are a good indication of where you can get the whole market, a few years down the road. So, I think that's a pretty good indicator of the fact that we manage, of course, to get an even higher market share in key cities and the overall country and the fact that we have done that in key cities mean that we are very likely if we continue to do a good job to reach the same kind of market share globally for the country. But of course, it's not the end of the road because at the same time, we kept increasing share in the big cities, so it's an ongoing improvement if you want. But that's I think the way you should be looking at things.

Okay, that's helpful. Thank you. And just one other question in relation to combustibles in an area where you've had a little bit of share pressure again this quarter, and there's some reasons for that. But I just was curious when I think about commercial investments in the second-half of the year, I was thinking that in relation to IQOS and reduced risk products, do you need to apply more money, more attention, whatever the right word is towards combustible cigarettes to try to shore up some of that market share decline? I know some of this is being generated by the success of IQOS but just curious how you're looking at that and is there any kind of change in the competitive dynamic you're seeing in combustibles.

I mean we are certainly seeing competition quite active on combustible because for many of them, they have only little presence in RRP. So they are trying to protect and build their business there and especially sometimes they are under pressure because of the growth in the heat-not-burn category. Chris, we are just reminding everybody that maintaining our leadership in CC is an absolute priority. We need this leadership in order to make sure that we keep the link with the smoker that we want to convert in order to keep the impact with the trade to bring our RRP offering to customers and of course, for the financial resources that it provide in order to invest behind RRP, so you should expect us to continue to invest on CC to maintain this market share. It is clear that, although it's not going to be the majority but there will be some investment in the second-half on the CC business as we defend our business. And as we see some of the markets where we've been sometimes hit hard by the COVID and we talk about the social consumption that has been hitting [ph] Marlboro. Well, as we think the world is back to more social life in the second-half that will probably be a time to be back on making sure that we maintain and further strengthen the leadership on Marlboro as an example.

Okay. That's very helpful. Thank you for the color.

Thank you.

Our next question comes from the line of Pamela Kaufman of Morgan Stanley.

So I just wanted to come back to understanding your guidance and the cadence for this year given the strength in the first quarter and outlook for Q2, your guidance for EPS implies a moderation from about mid 20% growth in the first-half to high-single-digit growth in the second-half, and obviously, you pointed to added incremental investments, but are there any other factors impacting the second-half outlook? Because even when adjusting for the added incremental spend, it implies a notable moderation in growth. So just trying to understand what's considering the fact [ph]...

So, Pamela...

[Multiple Speakers] how conservative it might be?

Happy to take that one. So I'm sure we've highlighted the fact that the Q1 margin has been helped of course by some deferral of investment on SG&A and we signaled the fact that we'll be much more active in H2, and the $300 million to $400 million extra investment versus the first-half but we also signaled that gross margin has been -- I mean, the performance on the gross margin is absolutely impressive in Q1, and we're going to deliver a very strong performance on gross margin rate improvements through the year. But we flagged the fact that Q1 has been boosted as well by non-recurring element on manufacturing productivity and therefore we think that as it's not going to be reproduced, we're going to have here a moderation. We also are going to face -- and that was Bonnie's question previously, some impact coming from the launch of ILUMA and the consumable of ILUMA where there will be some pressure on gross margin because of it is -- of the launch and the time for the ramp up on manufacturing productivity and we will have also a number of investments that will be in the gross margin on distribution in the second-half. So, if you combine the fact that Q1 was exceptional for a few reasons and the fact that there is boost [ph] at the gross margin level in Q2, some element that will be impacting negatively plus increase investment that is driving the outlook for the margin in the second-half. Although, as I said, we're going to keep with a very nice margin improvement but I'm sure you've noted that already.

Thank you. Also, I just wanted to ask about IQOS VEEV learnings and performance in your initial launch market. I understand you're leveraging your existing IQOS platform to commercialize VEEV. So how are you steering consumers across the various products?

Yes. So as at stage, Pamela, it's very early stage, few market very preliminary. We have very good feedback from customers reflecting the fact that it's a superior experience versus most traditional vaping experience. So we are collecting the data we are reviewing the first information coming from these markets and when we have a bit more element to share, we'll do that. I would say for the time being on the limited number of markets and with very small volume, we are happy with the qualitative feedback that we are getting from these markets.

Great. Thank you.

And ladies and gentlemen, we have time for one more question. Our final question will come from the line of Gaurav Jain of Barclays.

Hi, thank you. Good morning, Emmanuel.

Hi, Gaurav.

Coming back to the questions which have been asked on repeated earnings beat and earnings coming ahead of guidance, how does this impact your thought process around the magnitude and timing of share repurchases?

I don't think that this is having a meaningful impact, Gaurav. I think we've signaled previously that we are absolutely on track, provided of course that we receive board approval to start share buyback in the second-half of the year as announced at the time of the Investor Day. I'm not sure that at that stage, we are building a strategy based on that. As I said, I am hopeful that with the COVID headwind abating, we're going to be a better forecaster in the future for our quarterly guidance. So I don't take that as a kind of element that would be here to stay.

Sure. Thank you. And my second question is on -- and maybe I'm incorrect in what I'm saying, but as I understand, a part of IQOS is [ph] about 6 grams of tobacco, while a pack of cigarettes has 16-gram of tobacco. So does it imply that a pack of IQOS has lower nicotine versus a pack of cigarettes, which could therefore be something which helps you in this debate around nicotine caps?

No, Gaurav, not necessarily. It has an impact on some time in some country, not everywhere on the excise duty because excise duty is on the weight of tobacco in several countries in the world, but the weight of tobacco is not directly going to guide the nicotine content that you're going to inhale through IQOS consumption versus combustible consumption.

Okay. Brilliant. And thanks a lot.

Thank you. Thank you very much.

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

Well, thank you very much.

Thank you.

That concludes our call today. Sorry, Emmanuel, unless you had a comment.

No, no, I was just to thank everybody for attending the call today, and we look forward to talk to you soon.

Thank you. If you have any follow-up questions, please contact the Investor Relations team. Thank you, again, and have a great day.

Bye-bye. Bye, everybody.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect.