Good morning, ladies and gentlemen, and welcome to Polymeris International's 2019 Annual Meeting of Shareholders. The meeting is now called to order. I am Louis Camilleri, Chairman of the Board. I would like to extend my warmest welcome to shareholders and employees who have joined us on our webcast as well as those of you who are here in person today. It is my privilege to welcome our Board of Directors who are sitting in the front row.
On stage with me are Andrei Kalantzopoulos, our Chief Executive Officer and Jerry Whitson, our Deputy General Counsel and Corporate Secretary. In addition, I would like to introduce Chad Mello of PricewaterhouseCoopers, our auditors. He is in the audience and will be available to answer questions after the meeting. It is our intention to proceed in accordance with the agenda and the rules for the meeting that have been placed on your seats. Our remarks today contain forward looking statements and accordingly I direct your attention to the forward looking and cautionary statement section of today's presentation.
A glossary of terms, including the definition for reduced risk products or RRP, 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 website. The Secretary will now present certain formal documents. Jerry?
Thank you, Mr. Chairman. I present to the meeting together with affidavits of mailing a copy of the notice of meeting, form of proxy, proxy statement and annual report, including financial statements for the fiscal year ended December 31, 20 18. The holders of record of common stock at the close of business on March 8, 2019 are entitled to vote at this meeting. I am informed that more than 88% of Fort Morris International Inc.
Common stock is represented here today, and therefore a quorum is present for the transaction of business.
Thank you, Jerry. Will you please file the documents with the records of the meeting? I appoint as inspectors of election, Amelia Reagan and Peter Duggan of Computershare, the transfer agent for PMI's common stock. The inspectors are instructed to execute the oath and to take custodies of all proxies and of the certified list of holders of common stock as of the close of business on March 8, 2019. The list contains the names and addresses of all holders of common stock and the number of shares held by each.
The list is available for inspection throughout the meeting. The inspectors will certify the vote on each of the matters to be presented to the meeting. Individual proxies and ballots are kept confidential with exceptions outlined in the proxy statement. It is now my pleasure to give the floor to Andre, who will review our business performance. Andre?
Thank you, Louis, and good morning, everyone. We recorded a robust financial and strategic performance in 2018, demonstrating that the underlying strength of our combustible business is increasingly complemented by the tremendous opportunity of our reduced risk products led by IQOS to accelerate business growth. While our total cigarette and heated tobacco unit shipment volume declined by 2.1%. It was flat excluding estimated net distributor inventory movements, marking our best annual performance on this basis since 2012 and comparing favorably to an estimated decline in total industry volume of 1.6%. Heated tobacco unit shipment volume increased by 14.2% to 41,400,000,000 units.
More importantly, our in market sales volume for heated tobacco units nearly doubled, reaching 44,300,000,000 units, a significant achievement driven by all IQOS launch market. Our total international share of 28.4 percent increased by 0.5 points, our highest organic growth since 2008, driven by heated tobacco units, which reached a share of 1.6%. Share grew in all 6 of the regions, underlining the strength of our combined portfolio. Importantly, our share of the international cigarette category was stable at 27.4% despite over indexed IQOS out switching and the shift of resources to heated tobacco products. Marlboro's international share of the cigarette category was also stable with share growth across a range of markets.
On a currency neutral basis, net revenues increased by 3.4%, driven by a combustible tobacco pricing variance of 7.6% and the strong volume contribution from our used risk products. Adjusted operating income was essentially flat, while adjusted operating income margin decreased by 1.3 points, primarily reflecting the impact of net incremental investment of approximately $600,000,000 behind RRPs. And adjusted diluted earnings per share increased by 10.4%, driven notably by both a lower effective tax rate and lower net interest expense. Also importantly, we are progressing against ambition for a smoke free future. In 2018, Reducer's products accounted for over 5% of our total shipment volume and nearly 14% of our total net revenues or over $4,000,000,000 This marks substantial progress since 2015.
Demonstrating our commitment to a smoke free future, our research and development and commercial expenditures behind reduced risk products reached 92% 60% over total related expenditures in 2018. Building on our robust overall financial and strategic performance last year, we are off to a promising start in 2019. Positive momentum of our combustible tobacco and smoke free product portfolios drove total volume and share growth in the Q1 of 1.1 percentage points respectively, as well as strong currency neutral adjusted financial results, including adjusted diluted earnings per share growth of 15%. While our sequential heated tobacco unit shipment volume progression in the Q1 was impacted by inventory movements, our heated tobacco unit in market sales volume increased by nearly 11% to approximately 13,000,000,000 units. In market sales volume growth versus the Q1 of last year was nearly 35%.
For the full year, we anticipate heated tobacco unit shipment volume broadly in line with our in market sales volume with any heated tobacco unit net inventory movements in individual markets, essentially offsetting on an aggregate basis. I will now cover the strong fundamental supporting our combustible tobacco business, which represents the majority of our earnings and cash flow as well as our strategy of continued category leadership. The annual decline in total industry volume, including cigarettes and heated tobacco units, has averaged 2.3% since 2014, the year we launched IQOS in pilot cities. While total industry volume in a given year can be impacted by specific factors in individual market, we see no major changes to the underlying multiyear trend going forward and anticipate a decline of 2.5% to 3 percent in 2019, which may prove to be conservative. The growth of smoke free products led by IQOS has driven a shift in the composition of industry volume, reflecting a higher decline rate for the cigarette category as adult smokers out switch to these alternatives, and we expect this to continue.
Combustible tobacco pricing also remains consistent with historical trends, largely reflecting the rational global excise tax environment and competitive landscape. Since 2008, our combustible tobacco annual pricing variance has ranged from 5.2% to 7.7%, with year to year variability that mainly reflects the timing and level of excise tax and retail selling price increases. Importantly, cigarette price elasticities have remained stable in a range of minus 0.3 to minus 0.5. The fundamental strength of our cigarette brand portfolio continues. For 2019, we anticipate the combustible tobacco pricing variance above 5%, despite a challenging comparison with 2018.
As we transition our product portfolio to reduce risk products, we are committed to maintaining our cigarette market leadership and price positioning for our cigarette brands at the top of their respective price segments. To achieve this, we have a focused innovation strategy that entails fewer, more impactful initiatives that can be deployed swiftly in any market. This strategy is complemented by portfolio rationalization largely through brand morphing and the elimination of low volume SKUs. Turning to our reduced risk product portfolio. It is our ambition to build the future on smoke free products that are a much better choice than cigarettes for the millions of adult smokers as well as for the people around them.
We offer and will continue to offer adult consumers an array of breakthrough products so that they can make the better choices they undeniably deserve. This in turn will offer our shareholders much more sustainable business growth for many years to come. I would like to reiterate the 3 strategic pillars supporting a smoke free ambition: adult consumer satisfaction, key external stakeholder engagement and organizational readiness. We're absolutely focused on executing them seamlessly. Let's begin with consumers.
Convincing them to switch out of cigarettes is not an easy task. It depends on personal preferences and beliefs, health concerns, cultural traits, regulatory environment and the point in time of their conversion journey. One type of product is unlikely to be the answer. This is the reason we adopted a portfolio approach for our smoke free products, from heated tobacco to non tobacco nicotine containing aerosol. But all these products will carry certain fundamental characteristics for our consumers.
The best taste and satisfaction in their respective category, a much better choice than smoking cigarettes for those who switch to them and the people around them. Unparalleled and transparent scientific substantiation of their harm reduction potential to build trust and understanding among consumers and regulators. Iconic design language, user experience and brand image and excellent service and care across all consumer touch points. In other words, waiting for products that are the most worthy for adult smokers' efforts to switch out of cigarettes and never go back. Our vision of a smoke free future is supported by a long established policy to ensure that our entire effort is to switch adult smokers.
These good conversion practices serve as this company's bedrock for encouraging adult smokers to switch, who are working to prevent unintended use in the countries where we sell reduced risk products. And let me be clear about our unwavering focus on preventing use from beginning to smoke or use nicotine products. We fully support legal age limits for the purchase of tobacco and nicotine products worldwide. Age limits can play an important role in further guarding against youth use of such products together with access control for age verification at retail and education that has now to expand from cigarette smoking prevention to the use of any nicotine product. However, that effort must first begin with companies themselves as technology evolves.
Smokefree product manufacturers might have the right approach, the right product and the right science, as well as robust post market surveillance programs to ensure new tobacco and nicotine technologies reach their intended audience than men and women who currently smoke. Our second strategy focuses on key external stakeholders, including regulators, the scientific community and non government organizations. We're eager to see fiscal and regulatory measures introduced that drive large scale switching as quickly as possible. In this regard, we have recently launched the Year of Unsmoke, an urgent call to action to smokers, non smokers, regulators and agents of change across the world to drive a better future for the world's 1,100,000,000 smokers and their families, loved ones and communities. The message is simple.
If you don't smoke, don't start. If you smoke, quit. If you don't quit, change to alternatives that are less harmful when continued smoking.
With regard to our products,
we have put in place a rigorous and transparent scientific pre and post market assessment program that is unmatched in the industry. This program has become a cornerstone of our external engagement in which we advocate for public health authorities and policymakers to adopt the same evidence based approach to designing regulations that foster healthier consumer behavior compared to continued smoking. In this context, we are very pleased that yesterday, the United States Food and Drug Administration confirmed that IQOS is appropriate for the protection of public health and has authorized it for sale in the United States. The FDA's decision follows its comprehensive assessment and rigorous science based review of PMI's premarket tobacco product applications filed with the agency in 2017. The FDA's decision to authorize IQOS in the United States is a historic milestone an important step forward for the approximately 40,000,000 men and women who smoke.
Some will quit, most won't. And for them IQOS offers a smoke free alternative to continue smoking. Yesterday's decision by the FDA makes this opportunity available to American adult smokers. The order sets out clear commercialization guidelines, including marketing requirements that maximize the opportunity for adults to switch from cigarettes, while minimizing unintended use. We fully support this approach.
The FDA has had a high standard and we look forward to working with them to implement the order so that IQOS is reaching the right audience, current adult smokers. We'll bring IQOS to the U. S. Market for an exclusive license agreement with Altria Group Inc, whose subsidiary Philip Morris USA has the market expertise and infrastructure to ensure a successful launch. PM USA is ready to deploy its initial lead market plans for IQOS.
We submitted a comprehensive body of scientific evidence in support of the PMTAs and of the parallel applications for IQOS as a modified risk tobacco product, which FDA continues to review. The first strategy focuses on our internal capabilities, so that our organization is always fit for purpose and at the leading edge of technology, science and user experience. This means developing or acquiring new technical skills and implementing more agile entrepreneurial structures and practices enabled by digitalization developing new products and services, not only internally, but also through partnerships and acquisitions and driving efficiency through every level of our operations to liberate resources and reallocate them to where they will have the maximum benefit. Let me now turn my remarks specifically to IQOS, the leading international smoke free product, which is now commercially available in kid cities or nationwide in 47 markets across 5 of our 6 regions. IQOS reached a key milestone in the Q1, surpassing 10,000,000 users.
Importantly, approximately 70% of the total have stopped smoking and switched to IQOS with a balance in various stages of conversion. As announced last year, we began the global launch of our IQOS 3 devices in mid November, starting with our own retail and e commerce channels. The upgraded IQOS 3 notably provides continued superior sensorial experience, longer battery life, a more intuitive user interface and improved robustness. While the IQOS 3 Multi addresses the consumer need in certain markets of sequential use. Importantly, both devices allow for personalization through a broad portfolio of accessories.
Though still early, as full device availability and expansion to our main distribution channels only occurred during the Q1, we're very pleased by the initial consumer reaction to the new device lineup across IQOS markets. The success of IQOS is broad based as evidenced by the heated tobacco unit national market share data on this slide and reflects a range of countries with varying regulatory frameworks and adult consumer preferences. In particular, I would like to highlight the recent performance of Japan, our most successful IQOS market. Our share of HeatSticks and Heat reached 16.9% in the Q1, making our first sequential share growth since the Q3 of 2018 and the highest quarterly share that we have achieved in the market. This suggests that the range of initiatives for restoring share growth that I initially outlined last May during this very meeting and introduced during the second half of the year are indeed starting to pay off.
I would also like to highlight our Q1 offtake shares in select cities. These city level performances compare very favorably to the corresponding national shares and provide an encouraging indicator of the opportunity that can come with broader focus and support in Alco's market. I believe we have laid the foundation for strong business performance in 2019 and beyond. Thanks to significant investments in product portfolio development and organizational capabilities. As we announced in our press release today, we're reaffirming our 2019 reported diluted earnings per share guidance provided on April 18 at then prevailing exchange rates.
Excluding reporting adjustments of $0.22 per share, our guidance represents a currency neutral like for like adjusted growth rate of at least 8% and assumes net revenue growth of at least 5% and operating income margin expansion of at least 100 basis points on the same basis. As explained in detail in our Q1 earnings press release, the like for like comparison reflects the adjustment of our 2018 results for the deconsolidation of our Canadian subsidiary, Rothmans, Pensos and Hedges, Inc. Effective March 22, 2019. This forecast is consistent with the compound annual currency neutral growth targets outlined during our Investor Day last September. For net revenues and adjusted diluted earnings per share of at least 5% and 8% respectively the 2019 to 2021 period.
The strong overall performance and favorable momentum for IQOS, supported by our unmatched innovation machine, further underscores our confidence in the $90,000,000,000 to $100,000,000,000 heated tobacco unit shipment volume target for 2021 that we first provided at Investor Day last year. Before concluding my business presentation today, I would like to share a few words on the subject of sustainability. Our ambition is to make PMI a true leader in sustainable business practices. We need to excel in many areas, starting first and foremost with our products. Our sustainability strategy is a key element of PMI's overall business strategy and is structured around 4 pillars that enable our vision of a smoke free future.
These are transforming our business, driving operational excellence, managing our social impact and reducing our environmental impact. In this context, I would like to highlight 2 recent achievements. 1st, for the 5th year in a row, company is on CDP's Climate A List for our comprehensive action to reduce greenhouse gas emissions and mitigate climate change and for transparency in our reporting practices. 2nd, earlier this year, PMA became the 1st international company to achieve global equal salary certification, a key milestone on our inclusion diversity journey to creating a more gender balanced organization. Later this month, we will publish our 2018 sustainability report, which will be available on our website.
I would encourage you to read about these achievements in more detail, as well as the significant progress we're making in other important areas. To conclude my remarks, I would like to leave you with some key messages. We recorded robust overall results in 2018 and are positioned for strong business performance in 2019 and beyond. Our combustible tobacco portfolio remains the foundation of our business, supported by pricing and other industry fundamentals consistent with historical trends. IQOS continues to grow globally with an increasing number of markets making an important contribution to its success.
We are convinced that our smoke free strategy continues to provide us with the single largest opportunity to accelerate business growth. Finally, while dividends remain at the Board's discretion, we are committed to generously rewarding our shareholders over time. Thank you for your interest in our company. And I will now turn the podium back to Louis.
Thank you very much, Sandler. I will now open the meeting for questions and comments. This period will be followed by the resolution of items for voting. I would ask that we all remember that this meeting represents an opportunity for shareholders or their representatives to express their views whether favorable or otherwise. While I value highly the chance to listen to your opinions and address your questions, I do expect the process to be based on mutual respect for the differing views represented in the audience.
As noted in the agenda, each speaker is kindly asked to limit his or her comments to 2 minutes to allow everyone an opportunity to be heard. Shareholders should confine their remarks to matters relate directly to the business of the meeting. Also, please note that those who wish to speak a second time may do so only after all others who wish to speak have had their turn. I've asked Gerry to serve as our timekeeper so that everyone will have an equal amount of time. We've allowed up to 1 hour for questions.
There is a microphone in each of the two aisles. If there's not enough time for all of your questions during this morning's meeting, Please feel free to ask Anusha for a card, fill it out and return it to Anusha at the end of the meeting. We will respond to you as soon as possible. Please address all your questions or comments directly to me and be kind enough to identify yourself. Are there any questions or comments?
So, you're holding.
Thank you for
the opportunity to ask a question. Just quickly, my name is Andrew Kramer. My family has been shareholders of this company dating back to the mid-1960s. You should know that during that time, not a single share has ever been sold. Those dividends were used to support my family, my mother, when my father passed away, and she put me and paid for my education.
So I come here as a devoted shareholder. You've discussed your desire to transition this company from a company that sells cigarettes to a company that delivers nicotine through a variety of delivery systems. And although I appreciate your enthusiasm about IQOS, there are other platforms that are available. And one of those platforms that are available is the delivery of nicotine through vaporized nicotine. And that has become immensely popular and has gained significant traction in the marketplace.
And to date, Philip Morris International does not have a competitive commercially appealing product in that space. And if it is your desire to create a diversified portfolio, as you said in your presentation, because not all consumers will want the same product, It concerns me that you do not have that product. So my question is very simple. Since we don't know what will be the winning platform, will vaporize nicotine went out, will IQOS went out, will they share? Why haven't you as your partners in the United States decided to take a position in JUUL, which clearly has been the market leader and has gained significant traction in the marketplace?
Well, thank you for your question. As Andre said in his remarks, we are looking at various product platforms. One of them is actually a vaping product and it is available in various markets internationally. We feel actually that we have a technology in terms of vaping that is superior to any product on the market today. So don't forget that we don't market products in the U.
S, but internationally
morning,
Good morning.
Good morning, Mr. Chairman. My name is Stacia Brzezinski and I'm a public health advocate. Despite your corporation's claim that IQOS is a less harmful alternative to combustible cigarettes, yesterday FDA experts pointed out that while the product is cleared for sale, IQOS has not been officially approved by the FDA because all tobacco products are potentially harmful and addictive and people who do not use tobacco products should continue not to. Your company's website states that, We understand the millions of men and women who smoke cigarettes.
They're looking for less harmful, yet satisfying alternatives to smoking. We will give them that choice. But what about the billions of people who will choose not to smoke? Mr. Kalantzopoulos has just said that, we do not offer smoke free products for people who do not smoke.
So I'm curious, if Philip Morris International means what it says, then once we are in this smoke free future and there are no more combustible cigarette users to convert, where will your customers come from?
Well, we've never claimed that IQOS was safe. It contains nicotine. And what we have claimed is that it is certainly a much, much better alternative to combustible cigarettes. And I think we should be applauded for the strategy we are pursuing. The fact is that even under the World Health Organization projections, within the next 5 to 10 years, there will still be 1,000,000,000 adult smokers.
And our objective is to switch those adult smokers to better alternatives as rapidly as possible. We, of course, can't do that alone. We need civil society, regulators, governments to try to accelerate that process. So I think we're on the right path. Obviously, yesterday's announcement was very encouraging, particularly because as Andre mentioned, after a rigorous scientific review and a comprehensive assessment, the FDA deemed it appropriate to give us the authorization to launch the product in the USA for the protection of public health.
And what that means as they go on to explain is that they feel that this specific product will not attract non smokers, will not attract youth in particular or may appeal to previous smokers who could relapse. In fact, if you look at our experience elsewhere in the world, as Andre said, we are present in 47 markets and it continues to increase. If I take just Japan, which is our largest market and the first market we launched IQOS. The data there shows very powerfully that IQOS predominantly beyond 98% of sales goes to existing adult smokers. So thank you.
Madam, good morning.
Good morning. I'm Corinne Yeager and I'm here from the Public Health Group Corporate Accountability representing our members and allies globally. My question is about how Philip Morris International can promote a smoke free world while simultaneously expanding its cigarette market in the global South. It is the year of unsmoke and your corporation is seizing opportunities to profit off the growing opposition to cigarettes through making sure claims like unsmoke and smoke free are everywhere, including by marketing IQOS. And in marketing IQOS, your corporation is skirting regulations and even going as far as violating national tobacco laws.
But even if Philip Morris International's latest anti smoking rhetoric were believable, based on its actions in the Global South, it would appear your corporation is not working to end smoking, but is in fact doubling down on addiction and death. Last month, your corporation launched a new cigarette, Philip Morris Bold in Indonesia, and Bold it is. This cigarette is a high tar, high nicotine clove product, some of the most deadly. Apparently, it's only the year of unsmoke in those countries where smoking rates have already started dropping. And in Kenya, your corporation is reportedly in negotiations to expand by purchasing the country's 2nd largest tobacco corporation, Mastermind Tobacco.
Your PR machine may be trying to sell the world of delusion that you care about public health, but your actions tell the real story. Your corporation will continue selling cigarettes as long as you can turn a profit. You continue to expand your cigarette business in global south countries where you skirt and undermine laws and where business is shrinking, you now somehow care about people's health. So my question for you, Mr. Camilleri is, how can Philip Morris International both claim to be focused on ending smoking while at the very same time continue to expand and profit from smoking?
Well, thank you for your intervention. The answers are actually quite simple. Cigarettes today still account for, as Andre mentioned, the bulk of our revenues and income, but they are declining quite rapidly as they're being replaced by IQOS. You mentioned Indonesia. We just launched IQOS in Indonesia.
It's available in Jakarta. In some of these markets, let's call them emerging markets, we're trying to be as creative as possible in terms of ensuring that adults can actually afford high costs because clearly it's more expensive than cigarettes. I take offense that you keep on saying that we undermine laws. That's simply not true. We respect and are in compliance with all the laws wherever we do business.
So please stop coming out with all sorts of statements that are not based on any factual evidence. Thank you. Sir, good morning.
Good morning. Philip Berman, Portfolio Manager and Shareholder, just some brief comments. In the history of great consumer product companies, there have been just a few historic developmental transactions. 1 was the purchase by J. M.
Smucker Company of Jif Peanut Butter. The second was the buildup and second sale of and purchase of Snapple. The third is now the developmental seamless rollout of ICOS and reduced risk products by Philip Morris International. Our management, namely Luis and Andre, are simply the best in our peer group and versus all companies in the S and P index. And we look forward to their expertise in sales and marketing to roll out the new products and market them in the same manner as they marketed cigarettes years ago.
And we all should be giving them credit with a standing ovation for their great success in what they've done.
Good morning.
Good morning.
My name is Hesham Barretz Weramuni. I am from the Public Health Organization Corporate Accountability that represents hundreds of thousands of members from across the world. I'm reading this question on behalf of our ally ASH UK or Action on Smoking and Health UK. ASH UK has received a copy of an email from a public affairs agency acting for Philip Morris Limited in the United Kingdom that has been sent to local elected officials urging them to meet and collaborate with Philip Morris Limited. Such engagement would be a violation of elected officials' legal obligations under Article 5.3 of the World Health Organization Framework Convention on Tobacco Control to protect public health policy from the commercial and vested interests of the tobacco industry.
A previous attempt to engage the National Health Service by Philip Morris was branded as entirely inappropriate by the Health Minister and this is no different. On its website, Philip Morris International says acting with integrity, honesty and in full compliance with the law and our own policies is indispensable in securing a prosperous future for PMI. And I quote, we honor this commitment regardless of the challenges and pressures we face in conducting our business. Will PMI commit to ensuring that its U. S.
Subsidiary lives up to its commitment in the future and makes no further attempts to contact public officials to try to lure them into breaching their own obligations under Article 5.3 of the Framework Convention on Tobacco Control.
The usual story, 0 fact. Everybody knows, I think in the room, we don't have a U. S. Subsidiary that operates in the U. S.
So I don't know what you're talking about. Secondly, I would encourage you to go back and read Article 5.3 because we're not in violation of Article 5.3 at all. So thank you. You can give that message to Ash. This is Rowan.
Welcome back.
Good morning, Mr. Camilleri. I'm Kathy Rowan, Director of Socially Responsible Investments for Trinity Health. Here to say that, I appreciate the company's response to the shareholder proposal filed by us and other members of the Interfaith Center on Corporate Responsibility. The proposal had asked the Board to review PMI's adherence to its policies aimed at discouraging smoking among young people and to report the results of that review by this November.
Thank you, Mr. Whitson, for bringing that news to us. We filed this due to a petition from public health organizations to the Federal Trade Commission to investigate how PMI and other global tobacco companies use social media to promote smoking and tobacco use by young people. We were pleased we could reported a deal between PMI and Vice Media to create a media platform. Since Vice's target audience is 18 to 34 year olds and is known to attract younger people also, will the Board be looking at PMI's relationship with Vice as it conducts its review of marketing policies?
The Board will look at all our activities, including that one. And I think there's been a lot of distorted information about Vice Media, particularly on their program called Change Incorporated. The Change Incorporated, the first elements and it's on air in the U. K, I believe, so you should watch it if you could. You will see that they're basically attacking combustible cigarettes and promoting not any brand or any specific alternative, but clearly are helping educate adult smokers that there are better alternatives than combustible cigarettes.
And as such, it's very consistent with the authority that the FDA granted to us yesterday. So thank you. Madam, good morning.
Good morning. My name is Ann Michelle Roberts. I'm here speaking on behalf of Jaime Arcela, a tobacco control advocate in Colombia. Philip Morris International has a long track record of violating the law. This year was no different.
In India, an investigation by Reuters revealed that Philip Morris paid for India manufacturing despite a ban on foreign investment, a measurement to curb smoking. This has led to investigations into your corporation and Godfrey Phillips for the alleged violation of the law. In the UK, Philip Morris International supplied newsagents across Britain with window posters promoting IQOS. Those posters were in breach of a strict longstanding loan on advertising tobacco and tobacco related products. In Colombia, your corporation continues to promote its products through kiosks that violate national laws.
Also in Colombia, where all forms of tobacco advertising are prohibited, Your Corporation aggressively promotes new tobacco products such as IQOS and its HEETS brand to use, even while Colombian citizens have publicly denounced Philip Morris International's actions. From 2017 to 2019, we have evidence of IQOS Foods selling and advertising products throughout Colombia. This paints a picture of what could be seen as the true intention of a corporation responsible not only for the deaths of 100 of 1000 of Latin Americans, but also responsible for breaking the law and blatantly lying to the public. So our question for you, sir, is how can you credibly claim that Philip Morris International, once a smoke free world, publicly declare the year of unsmoked when the evidence shows that it continues to aggressively market tobacco products in countries like Colombia?
Very simply, you're distorting the facts. The person you're representing was here last year, came up with all sorts of attacks on Colombia. I believe he even approached the superintendent of Industry and Commerce in Colombia on various allegations. They were not followed up. The latest attack is the kiosks in Colombia.
You went as far as saying that those kiosks were available in a Santa market, only with kids, which is completely wrong. 95% of the audience was adults. Most of the kiosks were for female fashion. There was alcohol there and we had an IQOS store and we had permission to have it there. So I would encourage you to get the facts straight, number 1.
Number 2, encourage us as we transform the company to a better world where adult smokers, again, more than a 1000000000 adult smokers deserve better. Thank you.
Good morning. My name is Kelsey Vance, and I'm an organizer with Corporate Accountability, representing 100 of 1000 of our members globally. My question is related to the foundation for a smoke free world. The foundation is just the latest in a long line of empty promises and flashy PR tobacco, a deadly product that claims millions of lives every year. Your company is trying to normalize the harms of tobacco use through its corporate social responsibility programs, promoting new products like IQOS.
But a smoke free veil cannot hide that big tobacco is still the same industry, one that's determined to addict a whole new generation of people to its new generation of products. And the only way it can do that is if it interferes in the powerful policymaking happening all over the globe. The good news is that the public health community is seeing through the smoke free smoke. Global public health institutions the World Health Organization have warned against partnering with this foundation, calling it a snake in the grass. Johns Hopkins University and Harvard School of Public Health joined over a dozen higher education and public health institutions to reject funding from the foundation and have encouraged their peers to do the same.
These rejections have garnered media attention worldwide. And as of Monday, over 10,000 people have demanded your corporation shut down this foundation. Philip Morris International has profited off of the deadliest preventable epidemic on the planet and is now positioning itself as the solution to the problem it and the rest of the industry have driven in the 1st place. Given your corporation's claims to be independent from the foundation for a smoke free world, will Philip Morris International release its correspondence with and notes of discussions regarding the establishment of the foundation and commit to doing so on an ongoing basis.
Thank you. I think you have to go back to the genesis of and the creation of the foundation for a smoke free world. In our dialogues with regulators, governments and anti tobacco organizations. One of the things that consistently came back was that Philip Morris does all this expensive research and we don't have the funds to check that research. And we would like funds to try to develop other strategies in terms of regulations and restrictions, how to address supply and demand equations to accelerate the switch from combustible cigarettes to better alternatives.
So the idea behind the Smoke Free Foundation was to provide them with the funds to be able to help those institutions come up with real solutions. So I'm rather shocked that it's viewed somehow as an arm of Philip Morris. It's an independent body run by an independent Board of Directors. And I would encourage you to go to our website, which clearly defines how any Philip Morris employee can interact with the foundation and you will see that it is highly restricted. So thank you.
So good morning. Good morning.
My name is Hampton Hinton. I'm a tobacco grower in Kentucky and I represent the Council For Burley Tobacco Growers in Kentucky. As you talk about the future, one area that seems to be left out last year and this year are the growers of tobacco, which we represent. I'm a multi generational farmer. We've raised tobacco Filomars under contract for years.
The reality is that this organization through your acquisition have reduced consumption of U. S. Tobacco by the largest percentage compared to your competitors. That's a business decision and I'm not sure I can comment on whether it's right or wrong. You've also chosen 2019 to be substantially lower in price you pay for your tobacco by 8.5% from your nearest competitors.
You're buying less, you're paying less. While those are business decisions and cause us grief, one of the things that's happening that I want to draw your attention to is the acquisition. Philip Morris International used to acquire their own tobacco. It's now done off-site by another company. And I have to tell you that the ability to assure you that we're selling tobacco in that system in good agricultural practices, that we're meeting all the sustainable issues of corporate responsibility, I think have been lost in lots of ways because you don't seem to have your finger or your eyes on that acquisition process.
A lot of tobacco comes to you outside of the contractual rate relationship and it causes us additional pressure on the grower level. Again, I wish you would consider what's going on with the growers not only in this country, but the millions of growers worldwide. We are part of the future. We were part of the supply chain. You may view us now as just the food chain, but we do want to have a future and we are aggrieved about what's going on right now.
Thank you.
Well, thank you for your intervention. We attach a lot of importance to our relationship with growers in this country and elsewhere. The fact of the matter is last year was a very low crop. And tobacco growers in this country suffered from inclement weather, as you're aware, and also have been hit by the brunt of the trade tensions that are going on, particularly with China and Turkey, U. S.
Cease purchases. The U. S. Tobacco manufacturers have reduced their purchases in line with the reduction in consumption. We actually, contrary to what you just said, are not buying less.
We bought as much as we could given the low crop. But if you like if you take the recent years, we have pretty well bought the same amount. And this year, we will continue to buy the same amount. So I do want to stress that we take your position very seriously. As you mentioned, we work with 2 suppliers here in the United States of America.
We have imposed through our agricultural labor practices policies, a number of actions to ensure that there is fairness worldwide, because the ALP does not just apply to U. S. Tobacco growers, it applies to growers worldwide to ensure that there is a fair market and everybody is on the same foundation as it were. Thank you. Sir, good morning.
Good morning. My name is Michael Dajon. I'm the Associate Campaign Director at Corporate Accountability. My question is also in regards to Philip Morris International's latest attempt to infiltrate the public health community, the foundation for a smoke free world. In the short time since PMI launched the foundation in September of 2017, it's already become clear that governments, public health institutions and people around the world are seeing it for what it is, a thinly veiled attempt for Philip Morris International to cozy up to academic institutions, drive a wedge in the public health community and prevent its and present itself as the solution to the very crisis it drives.
Well, I'm proud to say PMI's attempt to defy the public health community has backfired. The World Health Organization, home of the Global Tobacco Treaty, publicly rejected the foundation's request for partnership and prominent universities and institutions have rejected its funding. And more than 100 public health organizations have taken action to condemn the foundation. Most recently, the World Health Organization's Executive Board denied partnership application from the foundation. Philip Morris continues to be the sole funder of this entity, a claim counter to assurances the foundation made 2 years ago.
It seems PMI is painting an alternate reality, one where it has not spent decades and 1,000,000,000 of dollars over that time trying to addict people to tobacco products. But in the real world, whether it's a cigarettes or IQOS, this corporation's bread and butter is selling a product, tobacco, that literally kills its users. It can't ignore that truth just like you can't un smoke something. My question is, when will you commit to stop funding the foundation for a smoke free world?
I think IQOS proves that you can un smoke something, just to say so. I don't want to repeat everything I said on the Smokefree Foundation. You'd be surprised that they actually are working with various institutions. I think it's a mistake by the WHO and others who are not willing to meet with them because in the end of the day, I think dialogue helps. We're all trying to move in the same direction.
And it's just a shame that people focus on the past and just can't move on. So why do you try to move on and think of what's important for the 1,000,000,000 and more adult smokers who will continue to smoke despite all the regulations that you can throw at them. So they need alternatives. Thank you.
Sir, good morning. Good morning. My name is Lee Wicker. I'm a former tobacco grower and I've been a proud shareholder of PMI Stock since 2,008. Currently, I'm responsible for the government affairs and farm labor compliance portfolio for more than 600 farmers throughout the state of North Carolina, many of whom grow tobacco enjoyed by PMI customers around the world.
North Carolina farmers I represent will employ over 8,000 foreign workers on H-2A visas this year and 1,000 more U. S. Workers. I'm proud to work for the best tobacco farmers and farm workers on the planet. Farmworker advocates have been coming to the shareholder meetings in recent years to talk about how widespread and bad farmworker conditions are on U.
S. Tobacco farms. I came today because I wanted to say to you and the Board and most importantly to shareholders that farmworker conditions on most U. S. Tobacco farms are good and getting better.
I wouldn't want anyone here to think that I'm saying everything is perfect every day on every farm. When you're dealing with human beings, there will always be issues, but conditions continue to improve. And I'm proud to say PMI has been engaged and leading in this space for more than a decade. PMI's commitment and supportive programs to provide training and education to farmers and farm workers has contributed to higher levels of compliance on our farms. These tobacco farm jobs are very important to our workers and I've seen with my own eyes the tremendous impact these jobs have made in the lives of our workers and their families at home in Mexico, building new homes, starting businesses, sending their kids to college and sustaining better lives.
Compliance with the numerous laws and regulations in this in place to protect farm workers is expensive and many of our farmers are struggling economically competing in the fierce international marketplace against growers with dramatically lower labor cost. But on that point, we appreciate the excellent dialogue that we've had with PMI representatives about continuous improvement and sustainability, especially with Zach Paulson and Brandy Davis. Maintaining relationships directly with growers is critical to meaningful communications, problem solving and long term solutions. Thank you most of all for continuing to buy U. S.
Tobacco. Our North Carolina farmers and farm workers appreciate that opportunity. And we hope to continue that the viability of our farms depends on. On behalf of the farmers and farm workers of North Carolina Growers Association, thank you for the good work and let's keep moving forward together.
Thank you very much. You can rest assured of our commitment. Thank you. And come back next year. Sir?
Good morning, Mr. Chairman. My name is Michael Picariello and I represent the Carpenter Union Pension Fund that holds shares in Philip Morris International. The Carpenter Pension Fund collectively have assets of $60,000,000,000 and hold 203,000 shares of the company's common stock. Mr.
Chairman, I would like to ask a question concerning the long term component of executive compensation plan. We find the overall plan includes a thoughtful combination of compensation instruments, metrics and performance timelines. As concerns the CEO pay ratio from our perspective as a labor pension fund investor, we appreciate the fact that a large portion of the company's employees are covered by collective bargaining agreements. Could you or the Compensation Committee Chair speak to the rationale for paying dividend equivalents to executives on a quarterly basis throughout the vesting restriction period. These restricted stock units are not earned until an executive meets the retention requirements.
So why is there a dividend equivalent payments before these requirements are satisfied? Thank you.
Well, the compensation committee, which is composed totally of independent directors, in their wisdom decided to give dividends to restricted stock. It's quite actually a common practice in compensation. So there's nothing really that surprises me in that. Most companies do the same thing. And it's part of the whole point of ensuring that our executives are aligned with shareholders.
So I don't really see an issue. Thank you. Sir, good morning.
Good morning, Mr. Camilleri. My name is Aaron Bernstein and I am a former employee of Philip Morris. I have two questions, but both of those questions won't take as much as 2 minutes. So don't worry.
Very short amount of time.
Take your time.
Okay. Number 1, I'd like to know about the status of the other 3 platforms that are smoke free that Philip Morris is developing. And second question is, will IQOS or any of the other three products contained be offered in a mental version or version other than pure tobacco?
Yes. They are being offered in Mentor as we speak in a lot of markets. And as you saw yesterday, with the FDA's authorization, there will be 3 products, 2 of which will be menthol, 1 menthol and 1 mit. So yes, we will have menthol products and we do have menthol products in terms of IQOS. Relative to the other platforms, we have launched in test markets, platform 2 as well as platform 3 and sorry, platform 4.
And we are going to expand those slowly but surely as we learn more and more. But today, our priority clearly is on IQOS. But we feel that particularly on Platform 4, which is the vaping product, that we have a technology that is superior to that available in the market today. Thank you. Sir, good morning.
Good morning, Mr. Chairman. I want to thank you and the Board for the opportunity to speak here today. My name is Rod Kegel, and I'm a tobacco farmer. I've been involved and led tobacco grower groups since 1987.
We're in a market of diminishing demand as far as combustible products are concerned and we're used to them being the staple for us and for the PMI in the past as you brace yourself for changes in the future. So we've heard about these changes that are upon us. They'll be here with new opportunities. The Burleyback farmers want to work with you to see how we can fit in. We fear that in the wake of this change, we could be the collateral damage.
In the market of diminishing demand, we recognize there will be less opportunity for production and our numbers will decrease even below the 5% that are left from 15 years ago. This has caused the highly competitive push to be one of the last producers standing. Recognizing this, purchasers including PMI kept prices for raw leaf low, so low that the gross price for our product is below that of 2,003. At the same time, our production costs have doubled in the last decade. In fact, PMI's contract through Universal Leaf is the lowest of any of the manufacturers that are offered to producers.
This causes a real crisis for our family farms as we farm away our infrastructure. Many producers are without health insurance or in the subsidized government pools of assistance. We understand the desire to secure raw materials at the lowest price possible. We would ask, however, that consideration for the sustainability of our family farms at a living wage. We ask you to consider your bottom rung partner in production.
Thank you.
Thank you very much. I can only reiterate that we attach a lot of importance to tobacco farmers. And with our yield product, we couldn't operate. So it is very important for us. Having said that, it is a worldwide market.
And just the way this company has suffered from dollar, so has everybody else who exports in this country. So the dollar exchange rate has effectively had an impact on price relative to the world market price. Having said that, I think that ICLOS because it includes tobacco as opposed to vaping, which are nicotine liquids, should give you some sort of sense that the future is not all bleak. So thank you.
Good morning. It's my second time up here. I hope you don't mind since it's taken me somewhere in 50 years to come to a meeting. I think we live in a very interesting world where adult accountability for their own behavior is dismissed. I walk down the streets of New York now and frankly I smell more marijuana than I do cigarettes.
And I find it fascinating that this is going to become a legal product. And yet the tobacco industry and those who dispense nicotine are the evil individuals. We sold cigarettes. We will continue to sell cigarettes. We sell products that dispense nicotine.
It is no surprise to anyone on this planet that tobacco has health effects. In the 1960s, the Surgeon General gave its warnings. Adults that choose to take up these products do so. I frankly don't see the alcohol industry taking upon its mission to discourage young adults from taking up its product. And certainly, the cannabis industry is not going to market only to the flower children of the 1960s.
I don't think we need to apologize for selling products that sell nicotine. And despite all the other individuals that came up here today, I think we need to reorient ourselves and be a little bit more proactive about defending what we do. This is what we do. We have a right to do it. And if we can produce products that are safer, that's wonderful.
But at the end of the day, adults have the right to consume products that have risk. I lost £30 I don't blame the food industry for that. It's my adult behavior. And I think the nicotine industry or the tobacco industry needs to be a little more aggressive about protecting their stance? Thank you.
Thank you very much. I told you, you got to come back. And we have our last question.
Yes. Good morning, Mr. Camilleri. My name is Howard Tanenbaum, back again.
I think I have two questions. One is
a follow-up from last year. Last year, I recommended that you do some type of investigation of all these groups that are coming after us because you owe it to not only to the 80,000 employees of this great company, but to our shareholders as well as the farmers to find out who is fronting the money for these opposition groups, which I have a hunch is probably part of the George Soros crowd, etcetera, because if we get to the bottom of it, we can combat these folks. So I'd just like to know whether we've done an investigation on these on who's fronting these opposition groups. And also as far as like to take some fund away from my previous speaker in terms of marijuana, my wife is a physician. And in terms of the marijuana, we don't hear these opposition groups say one peep bad about the cannabis industry despite the adverse effects that has been proven as mental diseases involvement in schizophrenia as well as drunk driving, as well as the fact that the overwhelming majority of the homeless folks have been alcoholics, drug addicts, etcetera.
So we don't hear a peep out of them, but they come after our industry. And my second question to you is, even though we don't sell any products here in the U. S, how is the tariff problems that President Trump has been proposing. How will has that had any effect in terms of our revenues and sales in that regard? Thank you.
Thank you very much. You're right. Marijuana gets a free pass. The trade impact so far has really affected tobacco growers, hasn't affected us per se, other than fluctuations in exchange rates. But to date, it has not affected our business.
So we'll see going forward.
Thank you for the wonderful job you've done for us.
Thank you. The credit goes to the team, all 77,000 of them. So that concludes our question and comment period, the shortest in the last 17 years. That's progress for you. We will now move on to the next stage of the meeting.
The matters set forth in the notice of meeting will be put before the meeting at this time. Comments on each matter can be made after each one has been formally presented. I would like to ask the ushers to distribute proxy cards to any shareholders who may not have returned their proxies for voting on the matters to come before the meeting. Shareholders who have already returned proxies need not submit a new proxy card. If anyone requires a proxy card, please raise your hand.
The ushers will collect these cards and deliver them to the inspectors of election and the final item of business has been presented. Before I continue, I would like to say that all of us at Philip Morris International were deeply saddened by the passing of board member Sergio Marchionne last year and former Board member Harold Brown earlier this year. Mr. Brown had retired from the Board in October of 2018. Both had served as directors with distinction since our transition to a public company in March of 2,008.
They brought invaluable business and strategic insights to our Board. And we, all of us, benefited tremendously from their dedicated service. They will be sorely missed. The first order of business is the election of 12 directors. The individuals on this slide have been nominated for election as director each to hold office until the next annual meeting of shareholders and until his or her successor shall have been duly chosen.
In accordance with the company's bylaws, no other nominations may be made at this time. If you would like to make a comment on the nominations, please proceed to a microphone. There are no comments. We will now turn to the 2nd item on the agenda that the company's shareholders approve on an advisory 2019 Annual Meeting of Shareholders. Are there any comments on this matter?
There are none. The final item is the ratification of the selection of PricewaterhouseCoopers as independent auditors of the company for the fiscal year ending December 31, 2019. Any comments? None. The matters to be voted on have now been formally presented to the meeting.
If you have not already done so, please complete your proxy card. After you have done so, raise your hand and the ushers will collect all the proxy cards and deliver them to the inspectors of election. Since all shareholders have now had time to vote, I declare the polls closed. The ushers should now have collected all the proxies and they are directed to deliver the proxies to the inspectors of election for counting. Before I ask the inspectors of election to deliver their final report, I would like to make a few closing remarks.
You heard from Andre earlier that we closed out 2018 with a robust financial and strategic performance across the business. And we believe we have laid the foundation for an even better performance in 2019 beyond. Our company is undergoing an unprecedented transformation to a smoke free future, a change that is allowing us to play a pivotal role in improving the lives of adult smokers, while securing the long term future of the company and the sustainability of our earnings and dividend growth for years to come. It is the biggest shift in our history and I am convinced that it will prove to be the right change for our consumers, our company, our shareholders and society. A change does not happen in a vacuum.
It needs architects and champions. With a Board of Directors of exceptional experience, a talented management team and some 77,000 supremely professional and dedicated employees around the world, some of whom are here, I have no doubt that we have the best people in place to make our vision a reality. It is my privilege to ask you to join me now in saluting them all. Thank you. I will now ask one of the inspectors of election to deliver their report to our secretary.
Will you kindly read the report?
Mr. Chairman, inspectors of election have completed the preliminary count of the vote, which I have now received. The preliminary voting results are as follows. Each of the nominees for Director has been elected. The advisory vote to approve executive compensation has been approved.
The selection of PricewaterhouseCoopers as independent auditors has been ratified. Mr. Chairman, that concludes the report.
Thank you, Jerry. I would now ask you to follow the records of the meeting, the inspectors report, the oath of the inspectors of election, their certificate and the proxies. Final voting will be included in a Form 8 ks that we will file with the SEC in the next couple of days. And now there being no further business to come before the meeting, I hereby declare the meeting adjourned. Thank you all very much for coming.
Thank you.