The first question is about the Philip Morris factory in Kharkiv Region. What are the prospects for restarting production at the factory?
When the war started in February, the first thing we did – we immediately stopped production at the Kharkiv factory. And the reason being the safety of our people comes first. In the specific case of Kharkiv factory, we’ve never had a bunker there, which means that bringing people back to the factory would be completely unsafe. Kharkiv Region is still the location that is subject to many rocket attacks. The lives of our people come first and therefore we need to keep the factory stalled.
Are you considering the options to relocate the PMI production in Ukraine to safer regions?
After we stopped the factory for a period of time, we supplied Ukraine from 8 of our factories abroad. But we wanted to find the solution that would allow us to produce Ukrainian product in Ukraine. That is why we signed a third-party manufacturing agreement with Imperial and we're currently producing there.
Having said that, our commitment is to launch our own alternative production where we could re-establish, our domestic production in Ukraine. And there are two reasons for that. First of all, we want to produce ourselves our product in Ukraine. And second, we want to give a signal of our commitment and the fact that even during the war we are ready to invest in Ukraine. We are looking actively into those alternatives. And I hope that we are going to be able to make an announcement on the possibility to make an investment in an alternative production facility in the nearest time while we cannot go back to Kharkiv.
Last year, PMI reduced shipments on the Ukrainian market by 30%, in the first quarter of this year – by 26,7%. What are expectations for this year?
There are two major reasons for those declines. First, they've been generated by the fact that a number of our consumers have left the country, and a number of consumers have been in the occupied territories. I think that approximately covers half of the volumes that we have lost.
And then we need to recognize that in Ukraine there is a chronic problem of illicit trade that is kind of rampant again. I think we have had productive conversations with the government on this issue. I know that the government is very active in solving this problem. But this is going to take some time to be fixed. Today the incidence of the illicit product in Ukraine according to our data is about 20%. It's a significant portion of the market. Today the government is losing over 20 billion hryvna in revenues from product that is traded illicitly. It's a very sizable business. Just to give you an idea that is pretty much the amount of taxes that we pay in Ukraine for our official product per year. But I am convinced in the engagement of Ukrainian government to attack corruption and criminal activities. The problem of illicit cigarettes should be and can be fixed in the next few years. I am sure, we will see some major improvements in this sphere.
According to our information, the Ministry of Finance of Ukraine is now thinking about raising excise taxes. There is also a hint of this in the memorandum with the IMF. What are you waiting from the Ukraine in the period of war about tax policy?
The current government some time ago made a decision to eliminate the differential treatment of such different products as cigarettes and heat-not-burn. And taxes for them were equalized. Though, today we have 1,1 million legal age users of heated tobacco products in Ukraine. When you look in percentage of the number of smokers in the country, this is one of the highest that we have anywhere. The penetration, the knowledge, the awareness of the product among the Ukrainian consumers is tremendous. The fact that this has allowed Ukraine to actually switch so many people out of smoking is fantastic. Why shouldn’t we recognize the fact that these products are not the same, they're different. And they should be taxed differently.
The last and maybe most difficult question is about Russia. What could you say Ukrainians about your position in Russian market, when could you leave this market, how you try to reduce your level of payment to Russian budget?
Thank you for this question. When the war started, our primary interest was to protect the lives of the people that we have in Ukraine. And I think practically all our efforts went into making sure that whoever we could move to a safer place, be it in Ukraine or outside of Ukraine, we would do so. We moved about 1600 our people with their families. We accommodated them. We're still paying the salaries today to all employees regardless of whether they were working or that they don't work now. We create opportunities for our employees, so they could continue to develop themselves professionally. As a responsible Ukrainian taxpayer, we have been paying large part of our taxes in advance – in order to support Ukrainian budget. And we continue to be one of the largest taxpayers in Ukraine.
Already during the first weeks of the full-scale invasion we made a series of official announcements concerning Russia. We said that we would suspend our investments in the country and scaled down our operations there. It also meant that for instance new innovations that we had already planned, we had already gotten equipment installed in the factory to manufacture "TEREA" sticks, our newest product. And we’ve said we're not going to produce it. We cancelled that launch; we stopped the equipment. Really, we have reduced operations there in terms of the innovations and in terms of the volumes of production.
At the later stage we also announced that we would exit the market. However, in the meantime, the regulatory environment in Russia changed in a way that it makes it practically difficult. It's almost impossible for any company with substantial presence and with substantial assets in the place to leave the country.
At the same time, our commitment in Ukraine is completely unchanged. I am convinced, first of all, we should focus on what we can do today for Ukraine. The moment that the opportunity in Russia will be there for us to take another move, we will do it. But in the meantime, let's focus on what can we do for Ukraine. We stand with Ukraine and we continue to work in Ukraine.
