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Philip Morris International Inc. (NYSE:PM)
Q2 2018 Earnings Conference Call
July 19, 2018, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the Philip Morris International second quarter 2018 earnings conference call. Today's call is scheduled to last about one hour, including remarks by Philip Morris International management and the question and answer session. In order to ask a question, please press the * key followed by the number 1 on your touchstone phone at any time. Media representatives on the call will also be invited to ask questions at the conclusion of questions from the investment community.

I will now to turn the call over to Mr. Nick Rolli, Vice President of Investor Relations and Financial Communications. Please go ahead, sir.

Nicholas Rolli -- Vice President of Investor Relation and Financial Communications 

Welcome and thank you for joining us. Earlier today, we issued a press release containing detailed information on our 2018 second quarter results. You may access the release on www.pmi.com or the PMI Investor Relations app. A glossary of terms, including the definition for reduced-risk products or RRPs as well as adjustments, other calculations, and reconciliations for the most directly comparable US GAAP measures are at the end of today's webcast slides, which are posted on our website.

Today's remarks contain forward-looking statements and projections of future results and I direct your attention to the forward-looking and cautionary statements disclosure in today's presentation and press release for review of the various factors that could cause actual results to differ materially from projections or forward-looking statements. It's now my pleasure to introduce Martin King, our Chief Financial Officer. Martin?

Martin King -- Chief Financial Officer

Thank you, Nick, and welcome, ladies and gentlemen. I will open with some brief remarks on how we currently see our business halfway through the year. For our combustible tobacco portfolio, the fundamentals are robust, reflecting a strong pricing environment and improving volume trend. This is a very positive sign, given the majority of our profits and cashflow continues to be generated by combustible tobacco products.

With regard to IQOS, we are tracking below our very high initial expectations for this year, primarily due to the current growth trajectory in Japan. However, the year on year performance across geographies remains very strong and we continue to view RRPs as our largest growth opportunity going forward.

As André explained during the annual shareholders meeting in May, RRPs will experience periods of acceleration and periods of slower growth as they expand. The related timing is very hard to predict precisely, especially at this initial stage. This is the case with virtually every new product category and IQOS will invariably go through these phases.

What is certain, in our view, is that adult smokers worldwide are looking for better alternatives to smoking. We believe that IQOS is the best alternative is the best alternative on the market today, as evidenced by the fact that an estimated 5.6 million adult consumers around the world have already stopped smoking and switched to IQOS.

Let me now take you through our second quarter results, beginning with total shipment volume, that is, cigarettes and heated tobacco units combined, which increased by 0.9% or by 0.6%, excluding inventory movements. This growth was driven by higher heated tobacco unit volume across IQOS launch markets, led by Japan and Korea, partly offset by a 1.5% decline in cigarette volume, which includes the growing impact of adult smoker out-switching to our heated tobacco products. Importantly, heated tobacco unit volume growth in the quarter was relatively balanced, with about half coming from outside the East Asia and Australia region.

This illustrates the broad-based progress of IQOS across geographies. For the first half of the year, total shipment volume declined by 0.6% and was essentially flat, excluding inventory movement. Our cigarette volume decline in the quarter was due notably to Russia, mainly reflecting the impact of price increases and higher listed trade, and Saudi Arabia, primarily due to the impact of tax-driven price increases following the June 2017 excise tax introduction.

The decline was partly offset by growth in a number of markets, most notably Pakistan and Turkey, primarily reflecting higher industry volume. We also reflected cigarette volume growth in important geographies, such as Indonesia, North Africa, and the Philippines. On a sequential basis, our cigarette volume performance in the quarter marked a significant improvement compared to the 5.3% decline of the first quarter.

Turning to our second quarter, financial results, net revenues increased by 8.3%, excluding currency, driven by strong pricing for our combustible tobacco portfolio, and higher volume of IQOS devices and heated tobacco units. Our pricing variance for combustible products in the quarter was more than 8% of second quarter 2017 combustible product net revenues, driven by Argentina, Canada, Germany, Indonesia, the Philippines, and Russia. Year to date June, our combustible pricing variance was 7.5%.

Adjusted operating income increased by 9.8%, excluding currency, reflecting the growth in net revenues coupled with lower manufacturing costs in the East Asia and Australia region, partly offset by incremental RRP investments in all IQOS launch markets. Adjusted operating income margin increased by 0.5 points, excluding currency. Currency-neutral adjusted diluted EPS increased by 20.2% in the quarter and benefited from a lower estimated full-year effective tax rate, as well as lower interest expense.

Our effective tax rate I the quarter was approximately 22%, reflects the impact of a revised full-year effective tax rate estimate of approximately 24%. The reduction compared to our prior year full-year estimate of approximately 26% is mainly attributed to further analysis, interpretation, and clarification of the scope and impact of the 2017 tax cuts and Jobs Act in the United States.

Our lower interest expense in the quarter primarily reflects the impact of our ongoing efforts to optimize our capital structure following the passage of the tax cuts and Jobs Act. This included the decision to use existing cash to repay the principal of our recently matured May 2018 10-year US bond, which had a coupon of 5.65%.

Our total international market share, excluding China and the US, increased by 0.8 points in the quarter to 28.4%. The growth was driven by our heated tobacco brands, which reached 1.6%, up by 0.9 points. To put this performance into perspective, our heated tobacco brands now enjoy an international market share, equivalent to that of Philip Morris, our fourth largest international cigarette brand, after just over two years since the initial IQOS commercial expansion in Japan. Despite the increasing impact of adult smoker out-switching to our heated tobacco products, share for our cigarette brands was stable at 26.9%.

I will now cover our performance in select geographies, beginning with an update for two markets, Russia and Saudi Arabia, that we flagged previously as potential watch-outs.

In Russia, we recorded a strong pricing variance in the quarter, mainly driven by the annualization of pricing announced in the second half of 2017 and further supported by price increases earlier this year. This built on our favorable pricing brands in the first quarter and is a welcome change from 2017, during which we recorded essentially no net pricing in the market.

Pricing in Russia was the main driver of the Eastern Europe region's 14.7% combustible pricing variance for the year to date June period. We continue to closely monitor the pricing environment in the market, particularly in the context of the excise tax increase that came into effect at the start of this month. Encouragingly since June, the industry has been progressively announcing price increases in line with the tax increase pass on of 5.00 rubles per pack. It is important to note, however, that there continue to be differences in timing between when price increases are announced and when they actually reach the consumer at retail.

Separately, I would like to highlight the favorable IQOS momentum in Russia with HEETS off-take share in Moscow of 4.4% in the quarter, up by 1.7 point sequentially versus the first quarter. This growth was supported by the successful rollout of our new digital initiatives. In Saudi Arabia, cigarette industry volumes and PM in-market sales volume remained under pressure in the quarter, declining by about 24% and 40% respectively.

However, the declines in both cases improved on a sequential basis as the excise tax-driven price increases from June 2017 were finally lapped during the quarter. We expect continued improvement in the sequential trends for both industry volume and our in-market sales over the balance of the year. Importantly, we will enter 2019 with this major drag on our profitability behind us.

These positive developments are being reinforced by strong cigarette portfolio performances in a number of key markets such as Germany, Indonesia, the Philippines, and Turkey, as highlighted on this slide.

Turning now to IQOS in Japan, we recorded HeatSticks' market share of 15.5% in the quarter, an increase of 5.5 points compared to the second quarter of 2017. While share for HeatSticks declined by 0.3 points compared to the first quarter of 2018, let me remind you that our first quarter share was favorably impacted by a low total market in January, reflecting a cigarette inventory reduction by our main competitor.

In fact, in-market sales of HeatSticks in the second quarter increased by over 5% versus the first quarter to 6.6 billion units. Remain focused on reaccelerating HeatSticks share growth, particularly as competitors expand the availability of their heated tobacco products. In this regard, we are rolling out a range of initiatives this year which do not require incremental marketing expenditures to drive further switching to IQOS, including the introduction of the next generation of IQOS devices, which will offer significant improvements that address key consumer needs, including consecutive use.

The plan launch of a stronger-tasting HeatSticks variant in order to facilitate full-flavor adult smoker switching as a well as a mainstream price product for more price-sensitive consumers. The simplification of the registration process for new users, which was a significant barrier to entry, particularly for older smokers.

The intensification of our loyalty programs and deployment of more targeted and relevant communications for our existing and prospective IQOS users and the already addressed device reliability issues in the current generation of IQOS that had caused frustration among certain consumers.

We conservatively assume today that these initiatives will have a limited favorable impact this year with the full favorable effect coming as of the beginning of 2019. We continue to observe strong consumer interest in the heated tobacco category. As of June 2018, we estimated of adult tobacco users in Japan had used the heated tobacco product in the preceding seven days, an increase of over two points since March.

This equates to around 150,000 additional users per month over the period. It is important to highlight that this general growth dynamic has not changed as a result of the presence of competitive products. However, there are different patterns of full adoption depending on the product, with IQOS having the highest exclusive use and per device heated tobacco unit consumption.

Other products appear to dilute the correlation between the number of users and the category share. Thus, the heated tobacco category's consumption share of total tobacco volume, which reached around 21% in June, is lagging behind general heated tobacco user share. As the latter reflects an expression of interest in heated tobacco products and the potential for further conversion going forward, this augurs well for both the category and IQOS.

We have previously highlighted the role that competitive churn associated with the introduction of new heated tobacco products to the market is having in Japan. In general, competitive products have the greatest impact following the initial launch, but critically [inaudible] over time as consumers recognize the benefits of IQOS.

Given the geographic expansion of competitive products in recent periods and the related impact that this has on the national share for HeatSticks, it is helpful to look at specific geographies within Japan to help gauge better the impact of competitive introductions and the related churn on IQOS's performance over time.

This slide shows heated tobacco unit offtake share trends in Fukuoka, Sendai, and Tokyo, three geographies where multiple heated tobacco products have been available the longest. As all three geographies illustrate, the longer the competitive products are in the market, the better IQOS performs. Importantly, IQOS remains the heated tobacco proposition with the highest full conversion rate, which drives recurring HeatSticks purchase, and therefore, revenue.

In Korea, HEETS market share reached 8% in the second quarter, an increase of 7.8 points versus the prior year period and 0.7 points sequentially. Over the past few months, there regrettably has been confusion among adult consumers with regard to heated tobacco category. This stems primarily from government discussions on graphic health warnings for heated tobacco products, as well as the Korean FDA's mischaracterization of the tar generated by such products, which we have vigorously refuted through compelling scientific evidence publicly and by directly informing our IQOS users.

Unfortunately, the KFDA has risked confusing millions of people into thinking that heated tobacco products are as harmful as cigarettes, contradicting its own scientific findings. In spite of this, our existing user base is staying with IQOS, demonstrating consumer confidence in the product and its benefits based on personal experience. We have comprehensive plans in place to ensure that the confusion dissipates so that the many adult smokers who are understandably hesitant at this time will resume switching from cigarettes to the heated tobacco category.

In the EU region, IQOS continues its steady growth. HEETS reached a regional share of 1% in the quarter, up by 0.8 points compared to the second quarter of 2017. This growth was supported by strong performances across IQOS launch markets, mostly notably Greece and Italy, where HEETS shares have increased by 3.1 points to 4.1% and by 1.3 points to 1.9%, respectively. As the marketing focus behind IQOS continues to be limited to select geographies within EU launch markets, the regional share, not to mention the national share for any specific market, clearly understates the success of IQOS.

It is also important to monitor the number of IQOS users, which serves as a leading indicator of heated tobacco unit consumption. Over the past 12 months, the estimated figure in the EU region has increased by more than four-fold to approximately 1.2 million. Importantly, we have maintained the overall level of quality to the IQOS userbase, as demonstrated by full and predominant conversion rates, while growing the number of users substantially.

We have also been able to increase the user registration rate, which now stands at over 80%. User registration is very important, as it enables us to follow and better service new IQOS users during their initial conversion journey, while also increasing the loyalty and retention of existing IQOS users.

Turning to our full-year 2018 outlook, we continue to anticipate a total industry volume decline of 2% to 3%, excluding China and the US. Against this backdrop, we also continue to expect a decline in our total shipment volume of approximately 2%. However, we now anticipate a change in the composition of our shipment volume, reflecting a higher cigarette volume and lower heated tobacco unit volume compared to our prior forecasts.

We expect a significant increase in our global heated tobacco in market sales volume to around 44 billion to 45 billion units, including revised or conservative assumptions regarding the impact of our product and marketing initiatives in Japan to support IQOS. We now target heated tobacco unit shipments of around 41 billion to 42 billion units. This includes an anticipated full-year net inventory reduction of approximately 3 billion units, reflecting an estimated 4 billion-unit reduction in Japan and 1 billion-unit increase in other markets. We expect the reduction in Japan to be concentrated in the third quarter.

The revised shipment target represents a total net inventory adjustment swing of 5 billion units compared to our previous communication during our annual shareholders meeting in May, when we had assumed a full-year net inventory increase of 2 billion units. Our heated tobacco unit in-market sales volume target for this year reflects growth in the second half of approximately 60%, compared to the same period in 2017, and almost 20% compared to the first six months of 2018.

We now expect net revenue growth this year of 3% to 4%, excluding currency. The revision compared to our previously disclosed estimate of approximately 8% is primarily due to lower than anticipated shipments of IQOS devices and heated tobacco units, predominately in Japan, and the impact of accounting for affiliates in Argentina as highly inflationary, effective July 2018, partly offset by the better than expect performance of our combustible tobacco portfolio.

Let me provide some additional granularity behind the revision, beginning with the devices, which account for approximately 2.5 points and mainly reflect the following -- the worldwide introduction of the next generation of IQOS devices toward the end of 2018, which I touched on earlier. This requires an adjustment to current generation device inventories, while the ramp up of new devices is expected to occur in 2019.

The fact that we are reaching out to more conservative adult smokers in Japan, who need more time and different communications to switch to heated tobacco, as well as the assumption of continued competitive churn, as consumers experiment with other heated tobacco products, thus impacting the rate of adult smokers acquisition, improved device reliability and longer lifecycle, leader to fewer IQOS replacement purchases, higher sales of second IQOS holders versus relatively higher priced full-kit purchases and the alignment of the retail selling price for all IQOS kits in Japan to the previously discounted price of approximately ¥8,000.00, independent of device registration.

Given the current unit margin structure of IQOS devices, the impact of lower device sales is felt predominately on the net revenue line with a slightly positive corresponding impact on operating income. Heated tobacco unit shipment volume accounts for further two points of the revision, mainly reflecting the anticipated full-year inventory reduction mentioned previously and the slower growth of in-market sales in Japan. A revised net revenue forecast is based on the conservative view of a very limited favorable impact from our initiatives in Japan in 2018.

The upward revision for our combustible tobacco primarily reflects better than expected cigarette performance across a range of geographies, notably Germany, the Philippines, and Turkey. We continue to anticipate a full-year combustible price variance of approximately 7% of our 2017 combustible product net revenues.

Given our year to date June 2018 currency neutral net revenue growth of 8.3%, our full-year target of 3% to 4% implies a slight decline for the second half of the year on the same basis. This is primarily due to the challenging comparison that we face in the second half of the year related to the sizable shipments of heat sticks that we made in 2017 as part of our planned inventory build in Japan.

As a reminder, in the third and fourth quarters of 2017, we recorded currency-neutral net revenue growth of around 9% and 19%, respectively. While the inventory build of approximately 13 billion heated tobacco units was appropriate at the time, given the then forecast on demand or heavy reliance on a single production center and the shift from air to sea freight, it is now resulting in lower heated tobacco unit shipments and related net revenues, especially as we adjust existing inventory levels, mainly in the third quarter.

Consequently, we forecast net revenue growth of around 1%, excluding currency in the third quarter and a decline of around 4% on the same basis in the fourth quarter. As announced this morning, we're revising our 2018 reported diluted EPS guidance and prevailing exchange rates from approximately $5.02 to $5.12.

The change primarily reflects lower anticipated heated tobacco unit shipments in Japan and the unfavorable impact of currency, partly offset by a lower estimated full-year effective tax rate of approximately 24%. We continue to target net incremental investment between RRPs of approximately $600 million for the full year.

Our guidance now includes $0.07 of unfavorable currency and prevailing exchange rates. Excluding currency, our guidance represents a growth rate of approximately 8% to 10% compared to our adjusted diluted EPS of $4.72 in 2017.

The unfavorable $0.13 change in the currency impacts on our guidance as compared to our previous guidance on May 9th is due notably to the Argentine peso and the Japanese yen. For the year, we are now targeting operating cashflow approximately $9 billion subject to currency movements and yearend working capital requirements.

We also now anticipate capital expenditures of approximately $1.5 billion, compared to the $1.7 billion that we communicated in May. The change primarily reflects lower planned spending on heated tobacco unit manufacturing equipment, driven by increased production efficiency and greater flexibility associated with dual production of our existing factories, as well as an adjustment for the revised production forecast.

In June, our board approved and increase in our quarterly dividend to an annualized rate of $4.56 per share. This marked the 11th consecutive year in which PMI has increased its dividend, representing a total increase of 147.8% or a compounded annual growth rate of 9.5% since PMI became a publicly traded company in 2008.

The timing and magnitude of the increase reflects the board's confidence in the growth outlook for our business, underpinned by the potential of our smoke-free products and underscores the company's steadfast commitment to generously reward shareholders over time.

In conclusion, the fundamentals supporting our combustible tobacco portfolio are robust, namely strong pricing and a moderate cigarette industry volume decline. While we are tracking below our very high initial expectations for IQOS this year, primarily reflecting the current growth trajectory in Japan, the year on year performance across geographies remains very strong and we are confident that RRPs constitute our largest growth opportunity.

We are implementing the right marketing and product measures to reinvigorate growth in Japan. These initiatives, which require the right sizing this year of our existing IQOS device and HeatSticks inventories, will position PMI well for a strong overall performance in 2019.

Thank you. I'm now happy to answer your questions.

Questions and Answers:

Operator

Thank you. We will now conduct the question and answer portion of the conference. Again, in order to ask a question or make a comment, please press the * key followed by the 1 on your touchstone phone.

Our first question comes from the line of Vivien Azer of Cowen.

Vivien Azer -- Cowen -- Managing Director

Hi, good morning.

Martin King -- Chief Financial Officer

Good morning, Viven.

Vivien Azer -- Cowen -- Managing Director

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

Martin King -- Chief Financial Officer

Look, we've been assessing the whole situation. We've been putting the programs in place in Japan and we gave you quite a bit of detail at the AGM on the dynamics of the consumers and some of the uncertainties involved. We gave some better color on the forecast for shipments. We decided not to give a new net revenue number because at that point in time, we were still recalculating and figuring the effects of all these pieces.

The key is we're really confident going forward in these projections. We've had time now to understand the consumer situation. Japan has put together a really good plan there and we have a great deal of confidence going forward that we will hit these numbers, including the shipment and IMS for the heated tobacco units.

Vivien Azer -- Cowen -- Managing Director

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

Martin King -- Chief Financial Officer

I think the key point with regard to the heated tobacco unit, whether it's mainstream price or premium price in Japan is these products have better margins than the cigarettes do. They're priced, including the mainstream variant, will be priced such that it's adding quite a bit of profitability even above what we get from a similar tobacco product.

In Japan, for example, our portfolio, on the conventional side, has always included Marlboro, Lark, and other brands. So, we've always had brands priced at different points within Japan. With heated tobacco units, you're going to follow a similar logic that you need more than one price point to reach a broader group of consumers. We're still going to be on average above the average price in Japan and we're going to be adding profitability very strongly with our RFP portfolio in Japan and everywhere else.

Vivien Azer -- Cowen -- Managing Director

Okay. That's really helpful. Thank you. One last one for me -- on South Korea, can you give us some color on how you're thinking about target market share for the full year, given the deceleration and the confusion in the marketplace?

Martin King -- Chief Financial Officer

Yeah. It's unfortunate that there is confusion in Korea because we've been growing tremendously well there. We are still adding consumers in Korea. Unfortunately, with the confusion, we've had a pause in the rate of speed of converting people. We're sorting through it and getting them the right information, the consumers the right information, which factually, we have a very good story to tell and all the scientific backing, including coming from other government agencies.

In fact, the KFDA itself, if you read their evidence, they understand the composition of the aerosol is much better with our products. Unfortunately, that didn't come through in their final report. So, there's some confusion, but we're clarifying it. We think that Korea will continue to grow, not as fast as what we had been on, a very good trajectory. We'll get back to those fast speeds of growth in the future and we're still going to see very good growth in the second half of the year.

Vivien Azer -- Cowen -- Managing Director

Thank you so much.

Operator

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

Bonnie Herzog -- Wells Fargo -- Managing Director

Thank you. Hi, everyone.

Martin King -- Chief Financial Officer

Hi, Bonnie.

Bonnie Herzog -- Wells Fargo -- Managing Director

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

Martin King -- Chief Financial Officer

Yeah. Our intent is to keep the premium positioning for HEETS. It's important as you're establishing a new category that it remain premium. You have to remember in Japan, we reached a market share which is very, very substantial to the point where you get kind of running out of premium smokers, if you will. You need to expand once you hit very high market shares. In other markets, we're not there yet. We will get there eventually.

Certainly, if we get well into the 15%, 16% market share, we're going to have to deal with this issue in other places, but we're still not there. We're growing very rapidly in the EU. In a number of markets, we're doing extremely well -- Italy, Greece we called out already, but there are a number of other markets that are growing.

When you look at the consumer uptake, it's really taken off in the EU and we're very pleased with the results there and looking forward to higher market shares. It will be a ways before we get to the point where we can think about introducing a second line up of SKUs.

But overall, the HeatSticks, as you point out, are very profitable in the EU. They enjoy some favorable tax positioning and it makes it quite accretive in a number of markets.

Bonnie Herzog -- Wells Fargo -- Managing Director

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

Martin King -- Chief Financial Officer

Yeah. We're still on track for the 1,600 incremental. As far as the phasing, we're about 50% already in the first quarter. So, it's pretty on track and we'll expect about the same for next second half. So, that remains intact. We are seeing some very good impacts from some of our investments -- digital, absolutely. Russia, you see the market share really popping in Moscow. It's due to a number of initiatives.

Digital is playing a role. We're getting better at finding leads and being more efficient at how we decide to approach adult smokers and it's paying off in efficiency that we hope we will see rolling across other markets toward the latter part of this year into next year. It really gives us much more leverage with our coaches, for example, where they can work on leads that are already verified and already delivered from a digital process. It also helps with follow-up during conversion and a number of other benefits.

So, the spending that we're making in digital is paying off. Our retail footprint is improving. We're getting more consistent, higher quality, getting more effectiveness of our retail spend. So, there are a number of areas where the spending is really starting to pay off and will pay off even more next year. As far as next year, when you look at that $600 million, about half of it, say, $300 million, will be in the base but will not grow any further. For specific initiatives that are being built that can handle much higher scale, so will not need to grow or have more spending behind it in order to provide the benefits to a huge number of consumers across all the markets.

The other half will scale somewhat how fast we roll out markets and how fast we have uptake in the consumer conversion piece, but it should not grow as quickly as the consumer pieces. So, we're looking at the profitability coming from the whole RRP investment to begin paying off much better next year and going forward. If you realize it, the consumables are being sold at a net-x factory price around the world that's about of our average CC.

So, we're getting very good benefits as we grow the volume and that allows us to amortize the cost of conversion and these other central initiatives over some very good profitability. We're seeing more and more markets past a point where they're accretive and they're profitable. Obviously, Japan and Korea were there. There are a number of markets in the EU that are there, obviously Italy, duty free. So, we're getting now much more benefit from all these investments and we're very hopeful going forward.

Bonnie Herzog -- Wells Fargo -- Managing Director

Okay. That's really helpful. I appreciate all that color. Maybe just one final quick one from me -- I'm just curious to hear how IQOS has been performing in markets where e-cigs are much more prevalent and really what the interaction has been? And then what are your plans for introducing e-cig technology, either organically or possibly via an acquisition? Thanks?

Martin King -- Chief Financial Officer

Yeah. We don't have as much exposure to e-cigs as other companies. Our biggest e-cig exposure or markets is in the EU. UK would be obviously the one with the highest level. We have a lower market share in the UK, a lower base to deploy our commercialization and so forth. It's hard to really say e-cigs versus IQOS -- we know that IQOS is a better product from the point of view of converting consumers, adult smokers. It has lower double usage. It has higher conversion rates within e-cigs. The taste is closer. The delivery of nicotine and the satisfaction of smokers is much closer than cigarettes.

Our confidence that IQOS is a better option for adult smokers and that we will be successful, are successful, when we go into markets with e-cigs -- one example would be like Italy where there are e-cigs in that market, obviously, IQOS is doing extremely well there.

Then from a point of view of looking at e-cigs, we think the IP and the regulation around the tobacco products of heat not burn is a different category. It's difficult to replicate the IP that we have and the scientific substantiation, whereas the e-cig category tends to be much more of a commodity. The technology is pretty much wick and coil across the industry. There aren't a lot of unique IP around it. Then the regulation as a tobacco product, we think heat not burn should be regulated differently than cigarettes. We recognize there will still be regulation around tobacco products and so forth. So, it makes it more difficult for competitors to come into the space if they don't have the experience of the tobacco regulation.

So, overall, we do believe that e-cigs have a role to play. We have a very good technology with our mesh that we've developed. We will be putting out a newer version of that soon. We think that our mesh approach has better consistency. It has better IP protection and will deliver better over the long-term and the experience of consumers.

So, we will compete in e-cigs. We'll be very successful there. But at the same time, we feel the winning product right now is actually in heat not burn. That's where we can achieve better profitability, better uniqueness, and also, better conversion of smokers. So, we're pleased to compete with these cigarettes in any market.

Bonnie Herzog -- Wells Fargo -- Managing Director

Thank you.

Operator

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

Judy Hong -- Goldman Sachs -- Analyst

Thank you. Good morning.

Martin King -- Chief Financial Officer

Hi, Judy.

Judy Hong -- Goldman Sachs -- Analyst

So, I guess first just in terms of your EPS guidance for the full year, ex-currency is now 8% to 10%, which is slightly better than the last guidance, but your tax rate has now come down by about a full 100 basis points since the beginning of the year. That should be adding something like 6 points to EPS growth. So, I guess I'm just wondering what's causing the shortfall that FX neutral guidance is actually not going up more at this point.

Martin King -- Chief Financial Officer

Yeah. It's the things we've laid out before. Obviously, the tax is coming better. Obviously, the business is being impacted by the heated tobacco units shipments, but also now the currency, the inventory, which is about a 5 billion swing from what we talked about at the annual meeting. The devices don't have much impact because of EPS and then we're getting some offset from the CC business.

So, the main impact is the difference between where we were projecting Japan versus where we are today. We're still very confident in Japan and we're taking the actions necessary. This step around inventories for both devices and for heated tobacco units is to clear the decks and prepare Japan for better growth going forward so that the initiatives we put in there, the new heated tobacco unit offerings as well as the very compelling new devices have an opportunity to blossom and do really well and drive our growth going forward.

So, we're setting the base for a better 2019 and to deliver the numbers.

Judy Hong -- Goldman Sachs -- Analyst

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

Martin King -- Chief Financial Officer

Yeah. I think that's about right. We're going to take the inventory adjustment of 3 billion to 4 billion in Japan because right now, the net is 3 billion. It includes a plus one by the end of the year coming from other areas. So, in Japan, we're looking at about a 4 billion inventory. It will come mostly in the third quarter, almost entirely in the third quarter. We're making sure we have the right inventory of the Marlboro heated tobacco units to make room for the new lineup of SKUs. Look, we have a really flexible manufacturing base now we're able to supply.

So, rather than end up with too much inventory of any one particular product, which is hard to predict how it's going to perform going forward, especially given the pricing that's coming in the market and the tax increase October 1. So, to clear the decks and have a lower inventory so we can be more flexible is what we're doing.

Judy Hong -- Goldman Sachs -- Analyst

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

Martin King -- Chief Financial Officer

Our guidance is all in. We don't carve out any particular instances. We have put in the application on conventional products in Japan. That tax increase is ¥20.00 per pack. We applied for a ¥50.00 total increase.

On the combustible side, there are some technicalities around the calculation of the RRP, the heated tobacco unit side, there are some technicalities on how the new tax based on the weight of tobacco or consumable product is calculated. That's held off a bit the timing of the applications. Obviously, the tax is coming up October 1, so, we'll need to submit new price lists as soon as we can for those products as well.

Judy Hong -- Goldman Sachs -- Analyst

Got it. Okay. Thank you.

Operator

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

Chris Growe-- Stifel Nicolaus -- Analyst

Hi, good morning.

Martin King -- Chief Financial Officer

Hi, Chris.

Chris Growe-- Stifel Nicolaus -- Analyst

I just had two questions for you. I'm curious if you look at your new initiatives you have set for Japan in the second half, some new devices, HeatSticks, pricing, that kind of thing. Do you believe that will increase the overall level of heated tobacco users in Japan? Is this what's going to hopefully draw in some of those late adopters?

If I could add to that, you had mentioned there was 35% of consumers that were using heated tobacco, about a 21% share. I think you gave a bit of an explanation. I couldn't recall what the explanation is for the gap between those two figures there, if you could help with that too.

Martin King -- Chief Financial Officer

Okay. So, first of all, the number of consumers coming into the heat not burn category is growing. We estimate it's around 150,000 per month. The 34.7% number is anybody, any smoker who's used a heat not burn product in the last seven days. It doesn't necessarily mean that they've fully converted. It doesn't necessarily mean they've bought a device, but they've tried the product. It could be also from a friend or somebody else. But it's an indication of interest. That, I think, is the starting point.

Then you get to the question of will consumers convert. This is what our initiatives around and we find that IQOS is the best at converting consumers. We find that it's the best product in the category. So, as long as the category has interest and people are coming into it -- look, we're selling over 500,000 kits and/or holders every month in Japan.

So, we're bringing people into the category. It's being hidden a bit by this churn and the fact that consumers are trying many different products. So, the number of sticks per device and consumption has come down a bit, so you don't see quite the volume and share growth that you would associate with that number of consumers, but we're convinced it's going to settle out, that IQOS will win. It's the best product on the market. We will see higher rates of growth.

Now, that's underpinned by the three buckets of things we're taking in Japan. We're improving the basics, the device quality issue and reliability, the loyalty programs for existing users to make sure they stick with IQOS and they appreciate the brand, giving the holders of the program to get people to use in the short-term, simplified pricing registration, and you've got the messaging to reach a broader consumer base.

For example, we flagged the 50+ group, which is pretty large in Japan. We're adapting our messaging to that group and focusing on smoke-free Japan, going to where they are, more suburban. There's a new campaign on the way. So, that's all-around messaging and consumer.

Then the products are a key part of it, right, the new flavor SKU, the new line up of consumables at the mainstream price and then very importantly, the new generation devices, which is a nice improved device and we're convinced it's going to do really well, even at a premium price to the existing devices, which is why we're bringing the inventory of the previous devices down, so that the new devices have room to sell.

So, all these things put together, I think, will increase the rate of people coming into the category. Over time, the churn will dissipate. It may take a while. We still have a spread of competitive products, but you see what's happening in the cities where they've already been the longest. We start to tick back up.

So, it's going to come. It's just a matter of being more conservative in our estimates about when that will happen and making the room for these initiatives to take root and be successful through the inventory side. So, that's kind of a story around Japan. We're really confident in the future. We are absolutely sure that the basics are in place, the product is right, and it's going to resume growth. We're just being more conservative about when we forecast that will happen and giving room for the initiatives to take place.

Chris Growe-- Stifel Nicolaus -- Analyst

Okay. Thank you. If I could ask one other quick one, from a high level, I guess, when you saw in Japan and Korea the product reach a 2.5 share, we started to see an exponential increase in market share from that point forward. It got a lot of consumer adoption from that point. It got to be well-known in the market. You're not seeing that quite so much in Europe.

Is that what we should expect is different than Japan or is that around the way you're spending behind the product or anything you could add to that? Just understand how the shares develop in the EU and where they can really take off from here.

Martin King -- Chief Financial Officer

Well, look, there are a couple of markets that have accelerated notably in the last few periods. You call out Europe, take Italy -- Italy is starting to take some pretty big jumps in the share quarter over quarter. We were at 1.5 share points in the first quarter. Now we're at 1.9. So, maybe it's not taking off quite as fast as Korea or Japan, but that's a noticeable acceleration in share. Russia, Moscow being the leading city for Russia -- to jump from 2.7% to 4% in one quarter, that is a serious acceleration. Also, Greece is another example.

There are some other markets. I'm not going to go through the whole list. But we are starting to see faster growth across a variety of markets. I think part of it is the efficiency of our initiatives and we're learning how to do it better. Our spending is paying off better. But it's also, I think, what you pointed out, which is word of mouth. At some point, it gets to a critical mass where people start seeing each other using it and they start reaffirming their choice and you start to see a difference in the growth rate. We are seeing that.

Obviously, in different geographies, it might be at different extremes, but it is significant growth and we're very pleased with the progress across EU, Russia, a number of different geographies as well as the great success we've had in Japan and Korea. So, it's getting very broad based now. We're very pleased with it and very confident in the future.

Chris Growe-- Stifel Nicolaus -- Analyst

Okay. Thank you for your time.

Operator

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

Adam Spielman -- Citigroup -- Managing Director

Thank you very much. My first question is really focusing around the $600 million and how you're spending it and how that's varied in the light of the slowdown in Japan and Korea. I supposed what I'm really trying to ask is this. It sounds like you are ramping your marketing investments in Japan in response to the slightly disappointing trajectory in Japan, but you're keeping the $600 million stable. Does that mean to say you're not investing as much in Europe as you would have done? That's my first question.

Martin King -- Chief Financial Officer

Okay. In Japan, we're actually spending this year what we planned to spend already at the beginning of the year. We have not increased in Japan the total spending above what we already planned. Sure, within the $600 million, there was spending across a variety of markets, including Japan, Korea, EU, a number of different geographies.

But the plans as far as how the markets are spending it are pretty much right on track. Japan is right on track with its spending. So, it's a step up from last year. That's maybe what you're seeing when you look through our earnings release, but that was already planned and it's already in the $600 million. We haven't increased either the $600 million nor have we increased its allocation to Japan.

Adam Spielman -- Citigroup -- Managing Director

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

Martin King -- Chief Financial Officer

I think we expected it to do well across the geography. It's done a little better in some, obviously, and in others, we're hoping to accelerate the growth and we're still confident it will come. One where it would pay off tremendously if it grew but is challenging is Germany. We knew because of the characteristics of the consumer and so forth, it was a little bit more of a show me-type market. It would take more effort and more incremental point.

We are growing in Germany. We're gaining consumers. We're making progress. It's going OK, but obviously, we would like to see it do better in Germany, partly because it would be extremely profitable, as well as the fact that it's a key market for us and we would like to grow it. But we're very confident it's going to happen. We are applying these new tools and the learning and getting better every day. We're always looking for more.

Adam Spielman -- Citigroup -- Managing Director

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

Martin King -- Chief Financial Officer

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

Adam Spielman -- Citigroup -- Managing Director

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

Martin King -- Chief Financial Officer

Sure. For the existing lineup of devices in Japan, we set the price now as a simple one-price as opposed to the situation before where you had discounting and most consumers having to go through a registration process to get the discount price. It also gave the impression of the device being sort of marked down. So, we simplified the registration. We also didn't require the registration to get the same price, the ¥8,000.00 price, which is where most consumers were getting to anyway, but only after some pain and suffering.

That was also in anticipation of bringing the new lineup of devices because the plan all along was when the new devices arrived to have a two-price tier system for the existing lineup and then the new and improved lineup at a higher price, not unlike you would see for other electronic product lineups. We just accelerated that, took away the pain and suffering of having to go through a long process to register and get the price you should have gotten anyway and put it there.

When the new lineup comes, it will be an improved device. It will offer better functionality, performance, design, all the great things in consecutive use too, by the way. In general, it will be priced above the older device, which would you would expect. That's not surprising.

As far as the consumables pricing, I was just referencing on October 1st, there's a tax increase in Japan for both RRP and conventional cigarettes. So, obviously, you need to have your price list in before any tax increase. We've already put our price list in for the combustible. So, we were delayed a bit by this technicality on the rest of this portfolio. So, that's what I was referring to.

Adam Spielman -- Citigroup -- Managing Director

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

Martin King -- Chief Financial Officer

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

Adam Spielman -- Citigroup -- Managing Director

One thing I did ask -- do you feel the ¥8,000.00 is right in light of ¥3,000.00 for some Glo devices?

Martin King -- Chief Financial Officer

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

Adam Spielman -- Citigroup -- Managing Director

Okay. Thank you.

Operator

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

Michael Lavery-- Piper Jaffray -- Analyst

I just wanted to touch on Russia. It's your largest cigarette market where you've launched IQOS. You've highlighted some of the momentum there. Can you help me reconcile aa of the data points you've given me? You talk about the 4.4 share in Moscow and that's close to 10% of the population in that country. You've also got almost 1 billion sticks in that region, which is primarily Russia and Ukraine.

I guess I'm just trying to reconcile that with your appendix one, where you show rounding, I suppose, to zero market share for Russia. If you look, say, half of the segment number divided by the market size, you're still looking at around 0.7 or 0.8 share. Obviously, the 4.4 at around 10% of the country would be close to 0.4 of a share. Why is there no share registering on a national basis and how should we think about tying all that together?

Martin King -- Chief Financial Officer

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

Michael Lavery-- Piper Jaffray -- Analyst

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

Martin King -- Chief Financial Officer

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

Michael Lavery-- Piper Jaffray -- Analyst

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

Martin King -- Chief Financial Officer

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

Michael Lavery-- Piper Jaffray -- Analyst

Or any sense of timing maybe is a better way to put it.

Martin King -- Chief Financial Officer

No. Not at this time.

Michael Lavery-- Piper Jaffray -- Analyst

One more on Japan -- there's the smoking ban coming into play. It looks like that applies to heated tobacco as well. How does that influence your outlook for the market there and any thoughts on what we should expect from that coming through?

Martin King -- Chief Financial Officer

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

Nicholas Rolli -- Vice President of Investor Relation and Financial Communications 

Michael, it's Nick. That ban does apply to both combustible and heat not burn. They've carved out some differences between the two. So, I think that's the good news, that they're recognizing the heat not burn category is a bit different.

Michael Lavery-- Piper Jaffray -- Analyst

Just to clarify, you said it does apply to both but there's some carveouts?

Nicholas Rolli -- Vice President of Investor Relation and Financial Communications 

There are some differences. I can get you the specifics on that after the call.

Michael Lavery-- Piper Jaffray -- Analyst

Thank you very much.

Nicholas Rolli -- Vice President of Investor Relation and Financial Communications 

In restaurants and bars and things, eating establishments, things of that nature where you can't using CC but you can use heat not burn.

Michael Lavery-- Piper Jaffray -- Analyst

Okay. Thank you very much.

Operator

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

John Leinster -- Berenberg -- Analyst

Thank you very much, guys. Just coming back to a previous question -- what plans have you got, if any, for the full commercialization of Platforms 2, 3, and 4? Where are we in that?

Martin King -- Chief Financial Officer

Okay. So, for Platform 2, which is the heat not burn product, delivers similarly to Platform 1, but it uses a carbon tip to generate the energy, that product has been launched in a limited city test in the Dominican Republic. We're gathering good consumer data and information on that, preparing to ramp up production and we'll give plans for that going forward.

Platform 4, which is the e-cigarette mesh product I referred to before, a new version of it is being finalized and it will be launched soon. It is an improved technology, we believe, and a differentiated product from others in the e-cigarette category. We have high hopes for that product and continued development of that product going forward to deliver better satisfaction to smokers. That will be put out in its market before the end of the year. Then Platform 3 is a little bit more in development and we don't have it in test market yet, but will get it into a test market as soon as we can.

John Leinster -- Berenberg -- Analyst

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

Martin King -- Chief Financial Officer

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

John Leinster -- Berenberg -- Analyst

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

Martin King -- Chief Financial Officer

Well, look, we're reevaluating our whole CapEx for RRP. The reality is we're in good shape with RRP capacity. We have better efficiency with the spend because we have better up time, we've had lower waste numbers. We've also figured out how to better use some existing facility layouts. With the new growth forecasts, we're in pretty good shape.

So, we have changed the timing on some of our spending for CapEx. That's why we have a lower CapEx number for the year. We're going to continue to evaluate the footprint for RRP going forward. We don't have any announcements on individual factories, but we're doing the assessment now and we'll give more information to the individual areas as they might be impacted or not.

From a company perspective, it's a story of us being more effective and efficient with the spend and phasing of the timing of our investment on CapEx to match the situation.

John Leinster -- Berenberg -- Analyst

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

Martin King -- Chief Financial Officer

That is not going to be case. We're not launching a higher tar and nicotine product. We said more flavorful. First of all, tar doesn't really make sense when you talk about heated tobacco units. The aerosol is dramatically different. Tar doesn't really make sense in the case of those. The nicotine level doesn't necessarily go with the flavor level. It's about the selection of tobacco and the way we make tobacco in the raw that creates a different flavor. So, we're talking about more flavorful, products that give more taste in the consumer experience in order to bridge better to full-flavor smokers. It has nothing to do with tar or nicotine.

As far as price goes, we're going to have a lineup of different flavors. We would not price according to the flavor or the nicotine amount or anything like that, nothing like that.

John Leinster -- Berenberg -- Analyst

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

Martin King -- Chief Financial Officer

Yeah. We have our investor day coming up at the end of September and we will talk about the future in much more depth there and talk about the different aspects of our growth and the very positive plans we have for the future. I think that's probably the best venue to talk about the longer-term prospects on growth for the company.

John Leinster -- Berenberg -- Analyst

Okay. Thank you very much.

Martin King -- Chief Financial Officer

Thank you.

Operator

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

Owen Bennett -- Jefferies -- Analyst

Good morning, guys. I think you may have just killed my question then talking about long-term. It was more first of all long-term question. I'm assuming you've modeled a number of scenarios internally. To that respect, you've spoken quite bullishly in the past when IQOS was continuing to grow very strongly, the double-digit organic sales growth each year was possible going forward.

My question is if IQOS growth stays at the current rate, will we increasingly see lower price variance introduced like you plan to do in Japan? Perhaps vapor becomes more prevalent on a global basis than you had expected. What sort of sales growth could we expect in that scenario?

Martin King -- Chief Financial Officer

First of all, we don't believe that scenario is reflective of what's going to happen. The heat not burn category is profitable. The products that we sell in this category are more profitable than our conventional cigarette products and we think it will stay that way. Some of it's coming from tax differential. We think we have very good arguments for maintaining tax differential.

We've been very successful around the world having these products at a lower tax then conventional cigarettes, and if you couple that that the fact that the production costs were roughly the same as cigarettes and the trade margins are the same as cigarettes, you have a much more profitable category. We think it's defensible with our IP and the regulatory situation around tobacco. We think that that conversion costs are reasonable given the higher income stream coming from the higher margins on these products and they're coming down, the conversion costs. As you amortize the central costs and the setup costs over more and more volume, the conversion costs will come down and the scale will help us with that.

We're building brand equity with IQOS. So, we have every reason to believe that the profitability of IQOS and the heat not burn category in general going forward will be very good and better than cigarettes. We are very confident in that scenario. I think the success we've had around the world and the fact that these products and these markets, even at relatively low market shares are accretive in adding profitability to the company is a testament to that.

Owen Bennett -- Jefferies -- Analyst

Just in terms of when you used to speak about double-digit organic sales growth, even given the trends we're seeing right now, do you think that is still a long-term possibility?

Martin King -- Chief Financial Officer

Look, I think at investor day, we'll talk about the further out periods. I think 2019 will be a better year for us. We're lapping some challenges around Saudi for this year. That's three EPS points. The combustible business is better. It's strong. It's improving. We've got volume. We've got shared improved on combustible. You've got pricing that's going well. Our investments going forward I already talked about are more manageable because you don't step up the infrastructure costs that you built for bigger volumes.

We're taking the inventory sizing and the initiatives in Japan that will help set the deck for 2019 and help the initiatives in Japan really take effect and get us better growth there. Then you've got tremendous growth across a bunch of geographies on IQOS this year that argues very well for the future next year. So, I can tell you 2019 we're quite confident in and very bullish about and we can talk more at investor day about the longer-term and the different elements of our growth.

Owen Bennett -- Jefferies -- Analyst

Thanks very much.

Martin King -- Chief Financial Officer

Thank you.

Operator

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

Pamela Kaufman -- Morgan Stanley -- Analyst

Hi, thanks for the question. I just wanted to ask about the combustibles business and what's driving the improved expectations there. Is it less cannibalization from IQOS? Are you reallocating some incremental investments back to the cigarette business?

Martin King -- Chief Financial Officer

No. I think the spending is the flip side of what we talked about with the $600 million on RRP. We haven't really changed greatly the investment plan behind the combustible category. Our pricing went very well this year across a broad series of geographies. So, that's helping the overall. And our share is doing better. There were a number of markets that had been dragging on us which are now turned around. You go to the Asia, South and Southeast Asia region -- Indonesia has positive share this year and doing better in the first half on volume, Philippines, we're getting great share growth in the Philippines and the profitability is improving.

From a volume perspective, Thailand and Pakistan are adding, whereas before, it wasn't as much. Turkey, the market is growing due to illicit coming back into the legal market and we're benefiting greatly from that. In Germany, our pricing and initiatives went very well this year. We had growth in the share in the second quarter. So, it's starting to deliver some good benefit. So, it's a broad range of geographies.

The brands are doing well. The pricing is a bit better and the overall market volumes in a few cases are a bit better, like I mentioned in Turkey but also in some of the geographies that had been causing us issues before. We had situations where we had volume coming back from illicit due to a number of factors, like in Pakistan, the new tax tier, etc. So, you add it all up and we have a very good picture going forward, not just for the second quarter, but going forward on the conventional products business.

Pamela Kaufman -- Morgan Stanley -- Analyst

Okay. Thanks. Then I was just wondering if you could elaborate on the commercialization strategy for the next generation IQOS device. Are you going to be rolling it out across all markets or initially just in Japan?

Martin King -- Chief Financial Officer

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

Pamela Kaufman -- Morgan Stanley -- Analyst

Okay. Can you comment on the battery life? How many uses will the device have?

Martin King -- Chief Financial Officer

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

Pamela Kaufman -- Morgan Stanley -- Analyst

Thank you.

Operator

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

Martin King -- Chief Financial Officer

Yeah. I just want to close with retiring three key points for our outlook. First of all, the base business, we've talked about it, it's doing better. We've got improved volume, the share. Marlboro is doing well and the pricing is coming in very nicely this year.

The RRP growth is substantial. Year over year, we're growing our IMS, nearly doubling it, and it's really broad-based. It's covering a number of geographies, not just Asia now with Japan and Korea, which are great success stories, but also EU, Russia, other markets are starting to kick in with significant additions to our volume growth.

The last point is that we've taken some decisive action to improve our growth going forward in Japan in particular, the initiatives we put in place in right-sizing these inventories. We're doing that in order to give us better results going forward, not only let the initiatives have better impact, but also prepare the decks for 2019. So, we're very confident about the future. We look forward to giving more detail at investor day and we look forward to improved results going forward. So, thanks very much, everyone.

Operator

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

Duration: 77 minutes

Call participants:

Nicholas Rolli -- Vice President of Investor Relation and Financial Communications 

Martin King -- Chief Financial Officer

Vivien Azer -- Cowen -- Managing Director

Bonnie Herzog -- Wells Fargo -- Managing Director

Judy Hong -- Goldman Sachs -- Analyst

Chris Growe-- Stifel Nicolaus -- Analyst

Adam Spielman -- Citigroup -- Managing Director

Michael Lavery-- Piper Jaffray -- Analyst

John Leinster -- Berenberg -- Analyst

Owen Bennett -- Jefferies -- Analyst

Pamela Kaufman -- Morgan Stanley -- Analyst

More PM analysis

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