WHEN: Today, Thursday, September 26, 2019
WHERE: CNBC's "Squawk on the Street"
The following is the unofficial transcript of a CNBC EXCLUSIVE interview with Philip Morris International CEO Andre Calantzopoulos and CNBC's David Faber on CNBC's "Squawk on the Street" (M-F 9AM – 11AM) today, Thursday, September 26th. The following is a link to video of the interview on CNBC.com: https://www.cnbc.com/video/2019/09/26/philip-morris-ceo-juuls-board-made-the-right-decision.html.
All references must be sourced to CNBC.
DAVID FABER: But right now, we're going to talk a bit more about a deal that didn't happen. I'm talking about those merger talks, of course, between Philip Morris International and Altria. They were officially concluded as of at least yesterday. Joining us in a CNBC exclusive now is the CEO of Philip Morris International, Andre Calantzopoulos. Nice to have you here—
ANDRE CALANTZOPOULOS: Thanks for having me.
DAVID FABER: --in New York City, where you have been for a couple of week. Let's start off with the deal talks. We learned about them on August 27th with a brief announcement. And they concluded without reaching an agreement, let's call it yesterday or the day prior.
ANDRE CALANTZOPOULOS: Yep.
DAVID FABER: Why were you unable to reach an agreement with Altria for a deal?
ANDRE CALANTZOPOULOS: Well, you know, as you know, we already have a relationship with Altria because of the iQOS license for distribution in the U.S. And what we looked at is if there's a better way to maximize value for shareholders, looking at the strategic rationale in terms of additional revenue, synergies, cost synergies--. In addition, more focused resources on both sides. But at the same time, clearly, like in any merger, you have to take into consideration the environment, shareholder sentiment and I would say, the effort required versus the priorities we heard just know on the market. So, we concluded that the best course of action is to end the discussions on the merger. And focus, instead, on the forthcoming iQOS--
DAVID FABER: -- iQOS partnership.
ANDRE CALANTZOPOULOS: --and the partnership going forward.
DAVID FABER: You know, my understanding had been, though, that there was a likelihood of a deal, until this vaping crisis, if we can call it that, sort of began to become something of great significance. Is that the case? Do you think you would have reached an agreement, were it not for the sudden banning of vaping products in parts of the U.S. and around the world?
ANDRE CALANTZOPOULOS: Yeah. Look, it is an evolving environment, just now in the U.S. And I think what we see is -- first of all, to look at the bigger context, okay? All tobacco-containing product, including nicotine products, are regulated by the FDA. Okay? We had an exception for a period of time for the vapor category. If I remember the conversations, because they were small companies, small entrepreneurs and it was kind of a heavy process. Now, I think the process is ongoing. It is a very emotional issue, as you know, because it involves using by teenagers and vaping. And this should be the priority by everybody to address because this is a serious issue. And I think, over time, if we take a two-year of three-year horizon, after we will be going through the vapor categories pre-market tobacco application process, say end of '21, '22, I think what we will see is a highly regulated, in terms of product, marketing and other restrictions category. But I do believe that, at the end, strong brands and companies that have size and are doing the right things, will be the ones that will be the winners. Now, forecasting exactly how this is going to happen with high precision is a bit difficult today. Everybody understand.
DAVID FABER: Is that why, given the lack of the ability to forecast right now in this immediate moment, you're unable to reach --
ANDRE CALANTZOPOULOS: I think there are many scenarios –
DAVID FABER: -- to reach a deal with Altria?
ANDRE CALANTZOPOULOS: No. That's not the case. I think we took everything in consideration. Also, investor sentiment. And I understand--
DAVID FABER: Tell me about investor sentiment, actually, because –
ANDRE CALANTZOPOULOS: Our investors were not very—
DAVID FABER: They weren't all—
ANDRE CALANTZOPOULOS: --supportive and we have to take this into consideration.
DAVID FABER: Do you think they failed to understand the strategic rationale for the deal? You weren't able to talk about it while you were talking.
ANDRE CALANTZOPOULOS: Exactly, so--
DAVID FABER: People were talking to me about the ability to bring together the two organizations, invest more in R&D, innovation, using what is a window that is open now, as a real opportunity. Did your shareholder base fail to fully appreciate why you wanted to do it?
ANDRE CALANTZOPOULOS: Shareholders, of course, have their own opinions. We couldn't explain. But this is -- it doesn't matter. I think -- this is closed. The discussions have ended for the foreseeable future. We can only focus on getting iQOS, which is the only product that has authorization by FDA on the market. I think we have a corridor of opportunity here because there will be a lot of change in the vapor market. And I think that's where the companies are going to focus.
DAVID FABER: Yeah, but I think, aren't you, in some ways, not in line with your own shareholder base? Are they not understanding some of the weakness you see in the overall business or the need to move more aggressively? Or are you failing to understand their concerns in some fashion?
ANDRE CALANTZOPOULOS: Look, I think sometimes there is a little bit of confusion amongst shareholders in general, about all of these new categories. Which is understandable because the category is new. There is discussion about decline of cigarettes. And obviously, as the new categories emerge, and consumers and smokers move from cigarettes to this alternative, that hopefully they will be proven to be better, we will have a decline in cigarettes. This is in the U.S., and this is what's happening international. If we take the example of Japan, for example. We have a 25% decline in the cigarette market. Because products that are heated–heated tobacco products like iQOS and others—have convinced consumers to switch to these products. And I think this is good for public health. So, this is what is going to happen. However, who is going to be the winner and the loser is what shareholders are worried about. I think Altria and ourselves are very well positioned, both in this market and internationally, because we have the portfolio of products for, you know, the new world. We have the first, as I said, that is approved, by the FDA. And I think we are well-positioned to be the winners in the longer term, where we hope one-day cigarettes will stop existing and better products will be used by people that will not otherwise switch. And that's how I see it. Now, I understand that anytime there is transition in industry, shareholders are worried and sometimes over worried. But I think both companies are very well-positioned for the future.
DAVID FABER: Okay.
ANDRE CALANTZOPOULOS: I think also, you know, we see very good first steps. Announced yesterday, from Juul, that has been a little bit at the center of the discussion.
DAVID FABER: Yes, it has.
ANDRE CALANTZOPOULOS: It's not the only vapor company out there—
DAVID FABER: No.
ANDRE CALANTZOPOULOS: But it's the first very good step. And I think that was the right decision from the Board of Directors. And I think, Altria, also with the experience they have from a very regulated category, have been playing a role and they have role to play going forward. As I said, we need to focus now, on getting the products through the process of the FDA, because there is a lot of emotion and a lot of overreaction sometimes, and address the youth use of nicotine. And that requires quite a lot of action. Not only strict regulations of flavors but it requires age limits, access control of retail, technology to do that, technology in the devices and education. Because we're told that children don't smoke. Now, we have to --
DAVID FABER: Right. I want to stop there, if I can, because my colleague at the New York Stock Exchange, Jim Cramer, has a question as well. Jim.
JIM CRAMER: Yeah, Andre, I have to disagree with you that you think that both companies have a good future. Altria is clearly a wasting asset. It wouldn't be at 80%. The only thing that Altria had was a renegade company called Juul. You know when I call it 'renegade'? Because you chose to go through the FDA and a very rigorous process for iQOS. Would you have advised Juul to be able to take the strategy they did or would you think that it would have been better had they gone through the FDA, rather than fool people -- I'm sorry. Rather than convince a lot of people over 21 -- I'm sorry, they used a lot of underaged people. They didn't expect that. What I'm saying to you, sir, is iQOS did it the right way. Did you really expect Juul would do the back door? And did you think that was right?
ANDRE CALANTZOPOULOS: Well, I think Juul and any other vaping product, has to go through the FDA. That's something we always advocated. Not only the U.S., but worldwide. We think a nicotine product must be regulated. And I think the FDA has the best process in the world. And I encourage governments everywhere else to adopt similar processes. Because that creates certainty for the consumers, it eliminates confusion and a level playing field. Now, we are in the process, as we know, in the U.S., as of May next year, everybody has to submit PMTA. These things take time and a lot of investment to do. But I think, the companies can do it. They have to do it. And then, I think the whole thing will be better addressed. Because pre-market the products will be reviewed and then post-market, they will be very strictly followed by the FDA. And I think, under this scenario, we will have a much better industry and the best players and the best brands will prevail. But I encourage everybody to go there as fast as possible.
JIM CRAMER: Well, then, shouldn't Juul just pull its product? Just suspend it everywhere in this country and maybe the world, until we get the data that we need? Why shouldn't Juul say, 'Full stop. Let's do this.' Wouldn't that be the right thing? And, you know, I have kids. I sure wish they would do that.
ANDRE CALANTZOPOULOS: Well, as I said, product is one thing and I think we need strict regulations of flavors. I'm not mistaken, Juul was the only company that has removed flavors from retail trade. At the end of the day -- now, I see states regulating these products and taking them out of the market. We have to be careful here not to have another exaggerated reaction. Because we need to focus on kids not putting their hands on these products. But also, take into consideration the millions of Americans today, that use a vapor product and, you know, be careful that what is going to happen to these people, if we have a blanket elimination or ban of the product. So, I think we need some moderation here. And I'm longer-term thinking. But I think once the FDA process has finished, things will become calmer and much more clear.
DAVID FABER: Well, what does that mean for the U.S. Market for the time being? And I mention that Imperial Brands slashed its growth expectations because of next generation products in the U.S., namely vaping, for example, deteriorated considerably over the last month or so given the concern. Is that your expectation? Is the market for new and replacement tobacco products going to be in flux, if not, not doing particularly well for some time?
ANDRE CALANTZOPOULOS: Well, I think, if people – if the companies do things right – and I think we did the right thing. We developed these products, we put them through a very rigorous scientific assessment internally, clinical and preclinical. And then, we submitted to the regulatory authorities, including the FDA. So, consumers get the assurance that at least they can trust the product. And what we communicate as a manufacturer is truthful and not misleading.
DAVID FABER: Right, and that's the iQOS -- we should make it clear. The heat not burn tobacco product that you're rolling out around the world, you're partnered with Altria, here in the U.S.
ANDRE CALANTZOPOULOS: Which is not a vapor product.
DAVID FABER: And it's not vapor.
ANDRE CALANTZOPOULOS: But we should not be conflating vaping in general. I think when products will go through the FDA process, and they will do the right assessment, we will also see that vapor products are better than cigarettes and more appropriate for public health.
DAVID FABER: You do? You believe that? That they will--
ANDRE CALANTZOPOULOS: But they have to go through the process.
DAVID FABER: But you believe they will be better for health than tobacco?
ANDRE CALANTZOPOULOS: Yes, I do.
DAVID FABER: Why?
ANDRE CALANTZOPOULOS: Because they have much more toxicity and exposure to chemicals, vastly lower than cigarettes. And heated tobacco products have the same. But the thing is, they have to go through the process. So, once this is done, I think the category will recover. But with the right restrictions, the right limitations, the right access controls. So, we don't have, you know, kids using nicotine products.
DAVID FABER: Right.
ANDRE CALANTZOPOULOS: And then, adults have options to switch. And I think this category is the future. And I think we are very well positioned to succeed in the category because we are the leader in this category.
DAVID FABER: And do you believe – I mean, you mentioned earlier, your goal is to ultimately replace tobacco.
ANDRE CALANTZOPOULOS: Absolutely.
DAVID FABER: Is that going to be hindered in part because of the concern, now, about vaping and, perhaps, even simply because people are concerned about these replacement products overall. Are they just going to stay with tobacco longer?
ANDRE CALANTZOPOULOS: Look, I think some of the comments made are confusing people who smoke today. Because sometimes they don't know if the products are worse than cigarettes. 50% of Americans still believe that the vapor products are worse than cigarettes. And I think that's wrong.
DAVID FABER: We've got people dying from vaping. It's kind of scary.
ANDRE CALANTZOPOULOS: Okay. First of all, it is deeply concerning that people die, irrespective of the reason. Now, from what I understand, the FDA and the CDC are investigating the health reasons for that. But my understanding is, this is not concerning traditional vaping products that contain nicotine. It concerns other substances. So, again, we should be careful not to create confusion among the millions that use vapor products. This is not traditional vaping products with nicotine. And actually, these products existed in the market.
DAVID FABER: Right.
ANDRE CALANTZOPOULOS: For so many years and we never had an issue. So, I think we have to let the authorities conduct their investigation. But the recommendations they issue make sense. Don't buy products that are not legitimate manufactures. Don't buy products from the black market. Because that's where we have an issue.
DAVID FABER: Before we end, let's get back to the deal itself. You're not talking with Altria any longer about this merger of equals, as it was described. Do you believe at some point you could re-enter those talks, when the conditions are clearer in terms of the products that you're talking about?
ANDRE CALANTZOPOULOS: Well, the talks have ended. And for the foreseeable future, we'll focus on other things that we'll do together. And there are many ways to continue our collaboration. I think coming out of these discussions, we're better aligned on many things, because we --
DAVID FABER: You do? Why are you better aligned on many things?
ANDRE CALANTZOPOULOS: Because we're spending time much more closely, you align on many things. So, it's a win-win for both companies. And I think we have enough ability, even without the merger, to further both portfolios of companies and create shareholder value for both companies. And I think that's still a very good collaboration.
DAVID FABER: Alright. Well, we look forward to checking in with you along the way and appreciate your taking some time this morning. Thank you.
ANDRE CALANTZOPOULOS: Thank you very much.
DAVID FABER: You're welcome. Andre Calantzopoulos. The CEO of Phillip Morris International. Carl, back to you.
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