00:00You're coming off of an investor conference over at the Barclays just a couple of days ago.
00:06And I do want to talk about the expansion of this company deeper into the U.S.
00:10It's been about 18 years since you were effectively spun off to be an international company,
00:16obviously with some of the regulatory issues surrounding tobacco sales.
00:20But obviously with the rise of smokeless products, you found opportunity back here in the U.S.
00:25Give me a sense here as to when we can start to see growth and more importantly, your market share
00:31in the U.S. start to increase.
00:34Obviously, I mean, a big part, big bulk of, you know, Philip Morris' international business is international, excluding U.S.
00:42U.S. is the newest addition to our territories, very pleased with the acquisition of a Swedish match.
00:48Not only it allows us to reenter, if you like, the U.S. market, but also very importantly, allow us
00:56to play the leading role in the oral category in the new cotton pouches.
01:01So the acquisitions in the U.S. was all about the new cotton pouches.
01:04The category is developing very well.
01:06We're expanding our portfolio.
01:09You know, we are the market leader.
01:12I think, you know, it's another alternative which allows people who, you know, smoke still a cigarette to migrate from
01:22a cigarette.
01:22There are much better alternatives.
01:24Sourcing of the category is coming from a combustible, from the eBay products and from a very traditional, you know,
01:35oral tobacco usage.
01:36And that's very particular situations in the U.S.
01:39You were just talking about the Swedish match deal.
01:42I mean, it's about four years since that deal actually closed.
01:47Obviously, that was largely a big play for Zinn, $16 billion.
01:51You promised that the return on invested capital would actually exceed your cost of capital within five years.
01:57We're heading into the fifth year now.
01:59Are you still going to make good on that?
02:01I think, yes.
02:02I'm very pleased with not only today's, but also, you know, tomorrow's returns, which we see.
02:07The category is very nicely developing.
02:10The whole new cotton pouch category in the U.S. is growing well above 20% year on year.
02:15I mean, it's a growing demand.
02:17Consumers are trying the product.
02:19It's a very good alternative, not only for smokers, but also for those who are using giveaway products and oral
02:25tobacco.
02:26So there is a solid underlying base, which creates the demand for these categories and remains the market leader.
02:34I mean, very recently, we have expanded further the portfolio to better cut even to the needs of consumers.
02:42I'm very pleased.
02:43I'm very pleased with this acquisition.
02:44With some of the inventory issues that we saw with Zinn earlier, I mean, obviously, it's been a runaway phenomenon,
02:49but you ran into some inventory issues.
02:51I know that's sort of been addressed here, but give me a sense as to what your year-end market
02:56share target is for Zinn and whether sort of adding sort of these larger cans with the 15 to 20
03:03pouches, whether that actually helps on a revenue side, but also on a margin side.
03:09Well, I think that the capacity issues, which we have very much encountered in the past years, well put behind
03:16us, which has very recently opened our manufacturing center in Colorado.
03:22So I think a capacity, both in terms of a complexity and absolute volumes, I think we are on the
03:28front foot now.
03:29This also allows us to further expand the portfolio.
03:33I think, you know, judging from the most recent developments, you know, stabilize the market share, we put the Zinn
03:45back on the growth.
03:46So I'm, you know, very optimistic about the Zinn potential this year and beyond.
03:51We're adjusting, obviously, the value proposition to the consumers.
03:54We're going from a 15 to 20, not just the price per can.
03:58So there is extra value to the consumers, but also reacting to the, you know, the current market dynamics and
04:05market situations.
04:06Let's remember when we bought Swedish Match four years ago, Zinn was essentially the lonely or a lone player in
04:15the category.
04:15I mean, today you have other market participants, so you need to adjust your commercial and marketing strategy.
04:22But, again, I think this is one of the best acquisitions PMI has done in its history.
04:29On the marketing strategy, is there any – I saw that the FDA has actually given Zinn that modified risk
04:34order to kind of basically legally tell potential buyers that this is a lower risk nicotine product.
04:42Are you going to highlight that in your campaigns?
04:46Because I was taking a look at, you know, some of the – when it clicks, which just seems to
04:49be more lifestyle-based, doesn't really get into some of the health issues.
04:53Is there a deliberate reason why you're not leaning more into trying to sell maybe the relative health differences of
05:02these smokeless products relative to cigarettes?
05:05Yeah, I guess, you know, it's a relevant information, obviously, to the smokers, more the questions, you know, for which
05:10channels and et cetera you want to deliver this.
05:13I mean, a fact also is that there is quite a deep understanding of the category benefits from the perspective
05:20of a reduced risk among, you know, the current adult nicotine users, very much smokers, et cetera.
05:28So, yes, we just started the When It Clicks campaign.
05:33Let's remember, I mean, there is the lifestyle element in using all of these products.
05:38I think it sends another signal of somehow normalization of the new category and a further incentive for those who
05:47very much, you know, using telecombustible products to consider, try and move to this category.
05:54So, it's a different communications, messages for, you know, for the different channels, the different audiences.
06:03Give me a sense here.
06:04But, you know, we're very happy, actually, with, you know, the FDA progress, at least with regards to the oral
06:11category.
06:12And I think it serves very well the public, the consumers, and obviously us.
06:18Give me a sense here about IQOS.
06:20It has done pretty well overseas.
06:23This is obviously the heated tobacco product.
06:26But there's still some concerns about how the excise taxes and some of the increasing regulation on some of those
06:32products might affect sales, both internationally, as well as any potential rollout here in the United States.
06:39Yeah, so, you know, IQOS is obviously today the growth engine of our smoke-free propositions.
06:47I mean, it's a key contributor to us achieving more than 40, 42 percent of revenues coming from a smoke
06:53-free.
06:57Continuous growth in that majority of geographies.
07:00Okay, we have a particular situation this year in Japan, and there was quite a heavy, if you like, excise
07:08increase, which obviously followed by the price increase.
07:11So, category has temporarily slowed down its growth.
07:16IQOS returned it, sure.
07:17But, you know, so far, so good.
07:19And I believe once we, you know, put the 26 behind us, we go into 27.
07:24IQOS will resume its past strong growth.
07:29You know, not that many people know, but, you know, Japan is the first market when a heated tobacco products,
07:35very much represented by IQOS, have oversold cigarette category.
07:42A heated tobacco products category is larger than a cigarette category.
07:46You know, everything was achieved in 10 years.
07:49I mean, we're very pleased with the performance in Japan, and we always will have some headwinds on the way.
07:55Yeah.
07:56But the way we're looking into this whole thing, you have one very important tailwind behind, in general, the smoke
08:03-free category.
08:04It is a growing demand and a growing interest among those who still stay on a combustible side of the...
08:10Well, that brings us to the two other products.
08:13I mean, you have Aluma, which is already doing well, but then you're already talking about developing the next big
08:18thing.
08:18But we should point out, we can't even get the first big thing here in the United States.
08:23So give me a sense here as to what you're waiting for to hear from the FDA to either be
08:28able to sell Illumina here or whatever this next big thing is after that, and whether that will actually have
08:33a market here in the United States.
08:36Yeah, so we have an authorization from FDA, but for the previous version of ICOS and, you know, our intentions
08:43would be to bring to the U.S. consumers the latest developments, which we have on hand.
08:48And otherwise would be in this a bit odd situation, a very odd situation, is that the U.S. market
08:53will be using a technology, which we essentially almost retired entirely on the international.
09:00So now we have pending applications with FDA.
09:02I mean, hopefully soon we will hear positive news from FDA.
09:07We just have to go through the process.
09:09As we know, FDA takes its time.
09:12I mean, on occasions, people may say it's slow.
09:15On the other hand, I think they're also diligently looking into these applications.
09:21I mean, we experience the same with, you know, Zen product.
09:24We've been waiting for a PMTA for quite a while.
09:28I think the same is why.
09:30Because I'm optimistic we'll bring Illumina into that U.S. market and we'll follow, you know, the same trajectory as
09:37Illumina has enjoyed, or ICOS has enjoyed on international.
09:41You told investors that you were going to start to have a little bit more conversations about capital allocation, including
09:47discussing the dividend, and that after that, then a buyback discussion would be in order.
09:54What do you think is, in your view, the best balance for returning cash to shareholders to raise the dividend
10:00yield, which is relatively low, or to maybe use buybacks to preserve what is already an elevated near record high
10:06stock price?
10:07Yeah, so at PMTA, our preferred way of returning the cash to shareholders is for the dividends.
10:13And I think we have demonstrated since 2008, when we've become the independent company, that, you know, dividends is for
10:21us the most important avenue of generating returns to investors.
10:27Now, obviously, it is a highly cash-generated business with the very high attractive gross margins and a net margin.
10:34So, obviously, once your balance sheet is into, you know, comfortable space, I mean, absence of other ideas of how
10:44to allocate the capital, then the buyback is, you know, becoming a point on the agenda.
10:49But, as I said, I mean, for us, the most preferred way of returning cash to shareholders for the dividend.
10:56Given the competition in this space, has there been any discussion about buying another company or partnering with another company?
11:06Well, industry as such is relatively, actually, very much consolidated from that perspective.
11:13So, I mean, you always look actively what is available and what opportunities might pop up on the market.
11:21But I think we're very much relying on our growth, very much relies on the organic growth, our own products,
11:26developments.
11:27And, you know, we now have a hand on the three categories, including e-vape, obviously pouches we talk, and
11:34iCost.
11:35And I think main focus is how to organically grow our business.
Comments