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Incoming Philip Morris CEO on tobacco industry outlook

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Yahoo Finance’s Julie Hyman, Brian Sozzi, and Myles Udland speak with Incoming Philip Morris International CEO, Jacek Olczak, about company outlook and his plans for a smoke-free future.

Video Transcript

BRIAN SOZZI: Philip Morris International has a lot on its plate in 2021 as it works toward its goal of a future that doesn't include cigarettes. And leading that full plate will be incoming CEO, Jacek Olczak. He joins Yahoo Finance now. Jacek, good to speak with you again here this morning. So Philip Morris International, its business really a global business. It has not been immune to the COVID-19 pandemic. What are you seeing in the business right now? And how is the pandemic continue to influence your business?

JACEK OLCZAK: Yeah, we're not immune, and we're going for, I guess, the same challenges as many other businesses. We ended last year with a bit of softer revenues than the year before. But thanks to a number of initiatives which we have launched during the year, we managed to nicely expand our operating profit margins by 240 basis points on a bottom line on our EPS. On organic basis, we're still delivering 7% growth.

We also feel very confident how the 2021 will look for us. And the most important in our transformations for the smokefree future is that we have not lost [INAUDIBLE] from the smokefree portfolio. So the revenues coming from these new alternatives last year accounted for almost 24%. So if you consider that we are five years into this transformation, I reckon it's a pretty spectacular result.

BRIAN SOZZI: Have you seen any demand recovery in your duty-free business? Certainly, that business remains dependent on global travel.

JACEK OLCZAK: Not yet. And I guess the duty-free business will have the longest path to recovery. As we know, this crisis on the one hand is obviously a health-driven crisis, but it impacted our lives by the fact that we lost the ability to be mobile as we used to be before. And obviously, the traffic, the travel is one of the sectors which is a very heavily hit. And I don't think in the very, very near future you will have a recovery to the terms from before the COVID.

JULIE HYMAN: Jacek, this it's Julie here. I want to ask about IQOS and the growth of that product, which is a higher margin product for you. So I guess that explains part of the expansion margins you were talking about. How do you convince users that it's safe? And not only existing cigarette smokers who might be switching, but in particular, people who might be adapting or starting on these products for the first time.

JACEK OLCZAK: Well, actually in our marketing efforts, we very much focus on smokers and adult smokers. And that product is safer than the combustible cigarettes. Obviously, if you are not a smoker, our advice is, you shouldn't start any of the nicotine product. So we have to be very clear where, you know, which target audiences, which audience are we are we targeting.

But I am pleased that by the year end last year, we already have a more than a 17 million users worldwide who essentially has left the combustible smoking behind them. Otherwise, they would continue smoking, and this is exactly product for them. We launched IQOS in 64 markets. We enlarged our geographical footprint, despite the COVID challenges.

And as we had the Investors Day about the two weeks ago, we have announced that by 2025, 50% of our revenues should come from a noncombustible nicotine products and we should be in 100 markets. So it's a really transformations in Philip Morris International at the global scale, and we're working at very, very high speed

JULIE HYMAN: And so that kind of conversion that you're talking about for existing smokers to transition over to IQOS, if you are saying to potential new smokers, don't take it up at all no matter what product you're talking about, I mean, doesn't that, we're not talking about the short term, but eventually, doesn't that mean basically a collapse in the business?

JACEK OLCZAK: No, it's not really the collapse in the businesses. It's a very conscious decision which have made some years ago when we started developing the safer alternatives. I mean, the products today exist, but importantly, the science exists, so we can make the verifications whether these products are truly significantly materially safer. And we have invested enormous amount of money and effort to scientifically substantiate these products. Very much welcome to scrutiny coming from the third parties outside PMI who also confirms this product.

Technology exists today, so you can really scale up its product and make them accessible essentially in every corner of the world. So we were very happy and we're very focused that we hit the right buttons. Now if you obviously have the product which is vastly better than the other products, the combustible cigarettes, I believe it makes a lot of business sense. It also obviously, the science from other stakeholders' perspective to go and cannibalize your existing business.

I think it is not about the additional choice left to the smokers. I mean, the smokers should be very well and very clear we advise. If you don't smoke, you shouldn't start. If you smoke, you should quit. If you don't quit, I think it's high time you go and seriously consider alternatives. And a product like IQOS, even with the recent, especially with the recent authorization from FDA in the US, I mean, that's the product smokers should consider to adopt.

BRIAN SOZZI: Jacek, in our lifetime, do you think Philip Morris will simply stop making cigarettes?

JACEK OLCZAK: Absolutely, absolutely. I mean, as you know, I am stepping in into the role of the CEO of PMI. I've been at the beginning with drafting the strategies for how we will go smokefree. I think in many countries within a decade, you can leave the combustible cigarettes well behind and solve the problem of smoking once and forever. I would welcome that there is more collaborations with some regulatory bodies, governments in different countries.

But I am very optimistic that every quarter we work harder and we're proving that this is not just shop window dressing type of an activity. What we mean, these transformations, and we want to deliver on delivering combustible cigarettes behind, that more people will be on our side and jointly, we can achieve these efforts. We have markets today on the international. And the one third of our smokers already converted to the better alternative. This is an enormous benefits for them and for the public welfare on the total public health in these places.

BRIAN SOZZI: All right, well, we look forward to following your CEO journey. Jacek Olczak, incoming CEO of Philip Morris International, good to see you, stay safe.