Operator:

Good day, and thank you for standing by. Welcome to the Philip Morris International Inc. 2024 Second Quarter Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that, today's conference is being recorded. I would now like to hand the conference over to your speaker today, James Bushnell, Vice President of Investor Relations and Financial Communication. Please go ahead.

Emmanuel Babeau:

Thank you, James, and welcome everyone. Our business delivered another outstanding performance in the second quarter of 2024. Our categories were strong across the board to deliver a record H1 on organic top-line growth and on organic OI growth, excluding the pandemic recovery year of 2021. The strong underlying momentum of IQOS continued in Q2, with shipment and adjusted IMS volume growth above or in line with our expectations. This reflects another quarter of strong progress in Japan and robust fundamentals in Europe, despite the volatility of the characterizing flavor ban. With pricing, manufacturing efficiencies and scale benefits, the expanding profit contribution of IQOS is driving excellent growth for PMI. ZYN continued its impressive growth trajectory, with Q2 U.S. volumes growing by over +50% despite recent supply tensions and increased pricing. In addition to IQOS and U.S. ZYN, I am pleased to report building multicategory momentum. While still early days, VEEV has already become the closed pod leader in 5 European markets and is firmly on the path to profitability, while international nicotine pouch volumes grew over plus 60% in H1, matching U.S. growth rates. This progress of smoke-free product is reflected in a rapidly growing consumer base, with around 36.5 million estimated adult users as of June 30, and our products now available across 90 markets worldwide. Our combustible business also overdelivered, with a return to gross margin expansion ahead of plan in Q2 after two years of significant inflationary headwinds. This was driven by stable H1 volumes and category share despite robust pricing, in addition to cost efficiencies. This broad-based delivery translated into double-digit organic OI growth, with significant margin expansion. As we have outlined previously, delivering robust growth in dollar terms is a key priority and we are taking pro-active steps on pricing and cost efficiencies to mitigate currency headwinds. This is clearly evident in our H1 adjusted diluted EPS delivery of mid-single digit growth despite a currency headwind of over 12%, as essentially all of the expected full-year impact fell in the first half. Following this exceptional first half performance, we are increasing our 2024 full year forecasts on all organic dimensions, and for adjusted diluted EPS on both a currency neutral and US dollar basis. This reflects our strong H2 outlook with accelerating adjusted IMS growth for IQOS, sequentially higher ZYN volumes and a stepped-up rate of USD EPS growth, at prevailing exchange rates. Looking at our headline financials, strong total shipment volume growth of plus 2.8% drove Q2 organic net revenue growth of plus 9.6%, or plus 5.6% in dollar terms. Robust top-line growth, positive smoke-free margin mix and ongoing cost efficiencies enabled us to deliver adjusted diluted EPS of $1.59. This represents plus 10.6% growth excluding a larger-than-expected unfavorable currency variance of $0.18, which includes a small transactional impact from exchange rate volatility at quarter end. This better-than-expected ex-currency performance reflects the improving profitability of IQOS, ZYN and combustibles, which I will come back to. Looking at the first half overall, our volumes grew by plus 3.2%, and organic net revenues by plus 10.2%, our highest growth since the 2008 spin. Strong performance from both smoke-free and combustibles drove operating income growth of plus 17% with margin expansion of plus 230 basis points organically, and plus 7.1% growth in dollar terms. We expect continued robust OI growth on both a reported and an organic basis in the second half. H1 adjusted diluted EPS grew by an impressive plus 16.8% in constant currency and by plus 4.0% in dollar terms. The $0.38 unfavorable H1 currency variance includes $0.08 of non-recurring transactional impacts from Egypt and Russia. Focusing now on volume. Total shipment growth in both the quarter and H1 overall reflect smoke-free share gains in a resilient international industry, which grew by more than 1% in both periods, even excluding oral and e-vapor. Q2 HTU shipments of 35.5 billion units exceeded our prior outlook, notably driven by continued strong performance in Japan, robust underlying growth in Europe and promising growth in newer markets, such as Indonesia. In addition to underlying momentum, Q2 saw an incremental phasing impact of around 0.5 billion unit, primarily related to Red Sea disruption. Q2 HTU adjusted IMS volume grew by plus 10.2%, in line with our expectation. This includes the impact of the characterizing flavor ban in Europe, most notably in Italy this quarter. Total smoke-free adjusted in market sales volume grew plus 11.2% in Q2 and plus 13.1% in H1. This includes our oral smoke-free portfolio powered by ZYN with Q2 pouch unit volumes up by plus 20%. U.S. ZYN shipment grew by plus 50% to 135.1 million cans. This does not include the promising result of our e-vapor business where volume grew strongly to the equivalent of 0.7 billion units on a year-to-date basis. Cigarette shipments grew by plus 0.4% with notable positive contribution from Turkey and North Africa. This reflects a stable category share, excluding market mix, despite step-up pricing. With such a positive H1 volume performance, we are raising our full year forecast for total cigarette HTU and oral unit volumes to plus 1% to plus 2%, which would mark our fourth consecutive year of volume growth. The power of our multicategory smoke-free transformation and recovery in combustible are clearly illustrated on this slide, as both areas contributed strongly to double-digits organic OI growth of plus 12.5% for the Group in Q2. Smoke-free continued its excellent momentum with plus 18% organic growth in net revenue and plus 22% in gross profit, driving plus 220 basis points organic gross margin expansion. This reflects the strong performance of ZYN and the growth and scale effect of IQOS, including manufacturing productivities and an increasing all by smaller contribution from VEEV. Expanding smoke-free gross margin continued to widen the gap versus combustible gross margin, enhancing the very positive mix effect of our transformation. However, combustible gross margin expansion is also a key objective. After seven quarters of contraction, we are very pleased to report plus 50 basis point expansion and gross profit growth of plus 5.5% on an organic basis, providing a meaningful contribution to total PMI profitability. This reflects resilient volume despite very strong pricing in addition to ongoing efficiencies and reduced headwinds on our COGS, notwithstanding continued tobacco leaf inflation. We also expect convertible gross margin expansion in H2. Combined with a very strong first quarter, the year-to-date picture is even more compelling with double-digit organic net revenue, gross profit and OI growth. This is driven by the same dynamic as Q2 with an impressive plus 390 basis point gross margin expansion and plus 29% gross profit growth for our smoke-free business. Our H1 revenue performance again demonstrates the powerful drivers of our financial model with an unparalleled combination of positive volumes, robust pricing and the very favorable category mix of our smoke-free product. As mentioned, volume grew by plus 3.2%. Pricing contributed plus 6 points of growth, including plus 8.3% pricing on combustible and around plus 2% on smoke-free. Smoke-free category mix added plus 2.5 points to the top-line, reflecting the higher net revenue per unit of IQOS and ZYN. While it’s still small, VEEV also contributed positively to the overall mix. I also note that oral smoke-free product added plus 2 points to organic net revenue progression, underlying the continued accretion from the Swedish Match acquisition. As in recent quarters, geographic mix was negative. This is primarily due to combustible where volumes increasingly skew to lower margin markets, where smoke-free alternatives are small or not available, with higher margin markets over-indexed to cannibalization. We expect this dynamic to be less impactful in 2024 than last year. Now let's focus on the mechanics behind our H1 margin delivery. Gross margin increased organically by 140 basis points and by 80 basis points in dollar terms. This was driven by our higher margin smoke-free business, pricing and ongoing productivity saving across the value chain. As expected, SG&A cost growth stepped-up in Q2, increasing 9.8% organically after a very modest increment in Q1 due to planned phasing of commercial spend. The resulting 5.8% organic increase in H1 was below the rate of top-line growth, driving plus 1 percentage point of margin expansion with our successful back-office cost program able to mitigate some of the investment step up. With a range of important commercial activities in Q3, we expect SG&A to remain elevated but continue to target an organic increase below the rate of net revenue growth for the year. I’m pleased to report we delivered over $300 million in H1 growth cost efficiencies across both COGS and SG&A, as we pro-actively drive bottom-line growth. We expect an acceleration in H2 savings, notably from manufacturing, as we progress towards our $2 billion target for '24, '26 period. The combination of these factors drove a plus 230 basis point expansion in our organic operating income margin. Despite a significant H1-skewed currency headwind, adjusted OI margin were stable on a dollar basis. Moving to our smoke-free business. We estimate there were 36.5 million adult users of PMI smoke-free product as of June 30th, reflecting an addition of 3.2 million during H1. This includes an estimated 30.8 million IQOS users, 5.2 million oral users and 0.8 million VEEV users. The increase in both total and IQOS users was broad-based with notable progress in Japan, Europe and newer growth markets, such as Indonesia, in addition to ZYN’s strong traction with legal-age nicotine user in the U.S. Our smoke-free products are now present in 90 markets following recent launches of IQOS, ZYN and VEEV. Focusing now on IQOS in Europe, where fundamental dynamics are developing very well including the user growth I just mentioned. First, we see robust recoveries in markets, where the characterizing flavor ban has passed the initial adjustment phase. Second, there is continued excellent growth in markets where IQOS is already well-established such as Portugal, Hungary and Greece. Last, new growth leader markets are emerging with accelerating momentum in Germany, Spain, Bulgaria and Romania in addition to recovery in Poland, following the launch of DELIA. Our Q2 HTU share increased by 0.8 points year-on-year despite the impact of the flavor ban, due to the usual seasonal factors and the resilient combustible market, Q2 share was sequentially below Q1. HTU adjusted IMS volume demonstrated robust growth, growing by 0.8 billion units sequentially to reach 12.9 billion on a four quarter moving average. As expected, adjusted in market sales growth of plus 6.8% was lower than in Q1 due to higher comparison and the initial impact of the characterizing flavor ban, notably in Italy. Growth excluding Italy was close to 10%. The impact of the ban is progressing in line with our prior estimate in the majority of markets, though the implementation in Italy during Q2 was slightly more pronounced than anticipated. This was primarily driven by earlier sell-through of affected SKUs and concurrent pricing. It is important to note, this is a transitory dynamic and I'm pleased to report a recovery in markets such as Greece, Czech Republic, Bulgaria and Romania where the ban was implemented previously following an initial period of consumer adjustment. Indeed, despite an uncertain outlook in Ukraine, we anticipate an acceleration in Europe adjusted IMS growth in the second half. This is supported by the planned step-up in commercial activity behind IQOS, including the introduction of DELIA and LEVIA HTUs to an increasing number of markets. Another illustration of our continued progress in Europe is in our key city offtake share. Strong gains in city with already high IQOS adoption such as Budapest, Bucharest, Bratislava, Lisbon and Sofia; and historically slower growth markets such as Madrid, London and Amsterdam, highlight the enduring growth potential in the region. Japan demonstrated impressive IQOS growth in the quarter, with adjusted HTU IMS growth of plus 12.5%, representing the seventh consecutive quarter of double-digit progression. Adjusted IMS volumes continued to grow sequentially, reaching 10.5 billion units on a four-quarter moving average. Total tobacco share for our HTU brand increased by 3.1 points year-on-year to 29.4% with national offtake share exceeding the impressive milestone of 30% in June. We also maintained offtake share of over 35% in Tokyo despite seasonal factors, where the overall category continued to track at over 50% of total offtake and grow sequentially, demonstrating the continued potential in this important market. Our continuous innovation is a key driver of this growth, with Q2 seeing a strong step-up in user acquisition following the launch of ILUMA i, and further innovative TEREA variants such as capsule consumables. Taking a more global view, we continue to see very promising IQOS growth across a broad range of geographies, including low and middle income market as highlighted by key city offtake shares. Accelerating growth in Indonesia, the world's largest cigarette market by volume excluding China, leads the way with increasing geographic reach and Clove HTU innovation. Markets across North Africa and the Middle East are also a growing weight and source of growth. We show Saudi Arabia, Lebanon, Morocco and Tunisia here in addition to Egypt where performance in Cairo remains robust despite recent pricing and a recovery in the combustible market. I am also pleased to report very good progress in the UAE and Jordan. Following the recent launch of ILUMA, growth in Mexico City is very promising and the East Asian market of South Korea and Malaysia continue to perform well. Also worth highlighting is the successful contribution of Duty Free, where we are increasingly leveraging our multi-category portfolio to expand share in a growing market as travel recovers in Asia. Our fundamental HTU growth outlook for the year has not changed. H1 adjusted IMS growth of plus 11.4% reflects the strong dynamic I described across Japan, Europe, and global markets, partly offset by the transitory impact of the EU flavor ban. Indeed, growth excluding Europe accelerated compared to the last year and we expect this to continue. However, we see an incremental headwind of around 2 billion units to our full year adjusted IMS forecasts, the majority of which is driven by the ongoing delay in approval for commercialization in Taiwan, which was previously expected around the midpoint of the year. We also factor in an impact of a few hundred million units for a slower recovery from the characterizing flavor ban in Europe, principally in Italy. I would note that our revised full year forecast for adjusted IMS growth of around 13% represents the same absolute volume increase as 2023 despite the EU headwind. We accordingly forecast full year HTU shipment volume of around 140 billion units with shipment as usual expected to be a few billion units higher than adjusted IMS given continued offtake and user growth. Importantly, we expect a very strong H2 delivery in adjusted IMS on both sequential and year-on-year basis to between plus 14% and plus 15% growth. This is supported by a notable step-up in commercial activity, continued momentum in Japan and increasingly dynamic global markets. These include the markets I just mentioned and the ongoing acceleration in Duty Free. For Europe, the broadening of growth acceleration in Germany, Spain, the UK, & Romania adds to the ongoing momentum in geographies such as Portugal and Greece. H2 should also see several markets start to rebound from initial flavor ban impact, including a gradual recovery in Italy. Turning now to ZYN, where very good U.S. progress continued in Q2 with close to plus 70% growth in 12-months rolling shipments. As we shared earlier in the year, strong demand dynamics have created short-term supply chain constraints, which has impacted volume growth. As shown on this slide, this has resulted in a temporary slowdown of the category. ZYN's premium positioning and superior brand equity remained strong, with ZYN maintaining very robust category volume and value share, despite these availability challenges and the recent price increase. We also remain highly-focused on marketing ZYN responsibly to prevent unintended use. We are making good progress on expanding production and continue to expect a gradual improvement through Q3, with sequentially higher volume and for production volumes to meet expected consumer demand during the course of Q4. We expect the ongoing expansion of the existing facility in Kentucky to provide around 900 million cans of capacity for 2025. We also recently announced a planned investment in a new plant in Colorado, which is due to begin preliminary operation by the end of next year. Together, these plans support our U.S. growth ambitions for the coming years. For 2024, we are now forecasting a U.S. shipment range of 560 million to 580 million cans, to reflect strongly increasing demand from adult nicotine user and the progress made on increasing our production capacity. I will now take a moment to update you on the international expansion of our smoke-free business. Our multicategory approach is gaining momentum, as we unlock new horizon of growth with increasing commercialization of IQOS, ZYN and VEEV across markets. Our focused strategy for VEEV is showing very good early results. In Europe, closed pods are accelerating within the dynamic e-vapor category. We are seeing strong traction of our VEEV ONE product, achieving a number one closed pod position in five markets within the first year of launch including Italy, the Czech Republic and Romania. We continue to observe good repeat purchase and conversion rate, which is often a challenge for this category. We continue to expect good production and conversion rate which is often challenge for this category. We expect continued volume momentum in H2, supported by ongoing geographic expansion and to reach profitability in Q3. For ZYN, there is a large opportunity outside of the U.S., which we are working to capture. Our international nicotine pot volume, including the Nordics, grew by over plus 60% in H1, matching U.S. ZYN growth. We see promising results in a number of markets, including Mexico, South Africa, Pakistan and the important UK market where we have seen strong traction with only limited distribution so far. Our expansion of the IQOS portfolio remains active as we innovate to broaden and enhance our offer for both existing user and switching other smokers. Further market launches are planned in H2 including DELIA and LEVIA HTUs and the new ILUMA i device range which is currently only available in Japan. We also continue with our preparation for IQOS ILUMA in the U. S. And we are underway with consumer engagement for our first city pilot in Austin, Texas with the IQOS 3 system, which we expect to start in Q4. As mentioned previously, the commercialization will be initially limited in scope and focused on direct activation of select legal edge smokers in a few cities, allowing us to experiment with different elements of the commercial model. The main purpose is to fine tune our approach and readiness in anticipation of the at scale launch of ILUMA. We continue to assume an authorization from the FDA in the second half of 2025. Focusing now on combustibles. Our portfolio delivered robust organic net revenue growth and a very positive profit contribution as I covered earlier. This reflects resilient volume despite very strong Q2 pricing of plus 8.7% including our proactive action to maximize growth. It is worth noting the large majority of our pricing is derived from regular pricing action unrelated to significant currency devaluation. Factoring the strong H1 and favorable outlook, we now forecast an increased fully combustible price variance of plus 7% to plus 8%. Our cigarette category share was stable in H1 and down 0.2 in Q2, or stable excluding market mix impact. Lower share in Egypt and Indonesia was offset by positive contribution from Turkey, India and the Europe region, again despite strong pricing. Our global brand grew category share in the quarter with Marlboro gaining plus 0.3 points to 10.1%. On a global basis, our leadership in combustible is a critical enabler to maximize switching to smoke-free product, and we target a stable category share over time. As mentioned previously, we evaluate our strategy on a market-by-market basis and have the flexibility to adapt our approach where smoke-free products have already reached critical mass. Taking a more holistic view on the business. Our transformation and smoke-free journey are backed by a strategy that seeks to embed sustainability in all that we do. We are making strong progress towards our product transformation targets. Our smoke-free products are now available in 90 markets, placing us on-track for our aspiration of 100 by 2025. We are also moving nicely towards our objective for low and middle income countries to comprise over 50% of smoke-free product market. The rapid growth of our estimated SFP user base, which now stands at around 36.5 million adult users, as previously described, is further testament to this progress. With regard to our operation, decarbonization is an important focus area and we are very pleased to have been awarded the top spot on the Forbes’ 2024 Net Zero Leaders list, which highlights the 100 U.S. public companies best positioned to reduce their greenhouse gas emission. It also follows the announcement earlier this year of CDP awarding us a triple-A rating for our disclosure and efforts on climate change, forest and water security. This recognition reflects our continued focus on our sustainability performance and robust reporting, as we continue to work towards a smoke-free future. This bring me to our outlook for 2024. Following an excellent H1 performance and strong business momentum, as we start the second half, we are raising our full year currency neutral and U.S. dollar growth forecast. This is supported by accelerated total volume growth and pricing and reflects the very strong outlook for ZYN, despite short-term supply constraint and the increasing profitability of IQOS due to operating leverage, manufacturing efficiencies and pricing. We continue to target close to $15 billion in smoke-free net revenue for the year. Taking these factors into account and robust combustible performance, we are increasing our organic net revenue growth forecast to a range of plus 7.5% to plus 9%. In addition to strong top-line growth, the positive smoke-free mix effect, combustible recovery and further cost efficiency enable healthy margin expansion. We are accordingly raising our organic operating income growth forecast to plus 11% to plus 13% for the year. We continue to target adjusted gross margin expansion for both smoke-free product and combustible, and adjusted OI margin expansion for total PMI, all in both organic and dollar terms. Consequently, and also factoring a lower forecast net financing cost, we are raising our forecast for currency-neutral adjusted diluted EPS growth to plus 11% to plus 13%. This translates into a range of $6.33 to $6.45 including an unfavorable currency impact of $0.34 for the year at prevailing rates. The increased currency headwind versus prior guidance is primarily due to the Q2 impact already described. As shown by the increase in our forecast U.S. EPS growth to plus 5% to plus 7%, the underlying strength of our business and proactive mitigating actions have allowed us to more-than-compensate for this, and we expect to deliver on our objective of strong growth in dollar terms. Focusing on the second half in more detail. We expect another strong performance driven by excellent IQOS adjusted IMS growth, the progressive improvement in ZYN volume and continued positive impact from our actions to drive bottom-line growth. For Q3, we forecast a record high quarterly adjusted diluted EPS of $1.77 to $1.82 despite a significant step-up in commercial spending and an unfavorable currency impact of $0.02 at prevailing rates. This is in contrast to a forecast currency tailwind of $0.04 for H2 overall, which enables us to target accelerated U. S. dollar adjusted diluted EPS growth. We include a table of estimated currency impact by quarter in the appendix. This Q3 forecast notably reflects another quarter of dynamic growth with HTU shipment of 34 billion to 35 billion units and an acceleration in HTU adjusted IMS growth. Given expectation for a strong full year profit delivery, we are forecasting operating cash flow of around $11 billion which is at the upper end of our previous forecast range at prevailing exchange rate and subject to year-end working capital requirement. We expect this improvement to more than offset an increase in capital expenditure to around $1.3 billion to $1.4 billion as we further accelerate ZYN capacity expansion. Last, we continue to target 0.3x to 0.5x improvement in our net debt to adjusted EBITDA ratio in 2024, driven by profit growth and strong cash flow generation. As of June 30, we have already improved a ratio of 3x on a 12-month trailing basis as compared to 3.2x at the end of 2023. This represents good progress towards our target of around 2x by the end of 2026. We intend to reconsider share repurchase subject to board approval once we are within sight of this goal. I will now conclude today's presentation with some closing remarks. The powerful combination of strong underlying business momentum and our own proactive steps enable us to generate best-in-class growth across key metrics. Our strategy is delivering on volumes, pricing, cash flow and dollar earnings despite ongoing currency headwinds. The success of our smoke free transformation is reflected in our remarkable first half performance with excellent underlying IQOS and ZYN growth, very robust pricing, positive category mix and stepped-up cost efficiencies. This puts us firmly on track for an exceptional 2024 with accelerated top line growth and margin expansion. Our momentum is broadening across the business with exciting multi-category growth opportunity to further support the delivery of our 2024-2026 growth targets. We remain highly focused on delivering performance in dollar. And as shown in H1, we are taking measures to mitigate currency headwinds. Finally, we are steadfastly committed to returning cash to our shareholders. Our growth outlook and strong cash flow generation underpins our capital allocation priorities to reinvest behind our rapidly transforming business alongside our progressive dividend policy. Thank you, and we are now very happy to answer your questions.

Gaurav Jain:

So 2 questions from me. One is just on the cigarette pricing algorithm that you have. So if I look at your market share gains, clearly quite impressive, even excluding modern oral. And if I add that, then you are gaining almost 80 basis points share right now per annum. So isn't that level of market share gain excessive and suggest that you are not monetizing your cigarette business as much as we should be? And that would mean that increased the pricing growth in cigarettes from 7% to 8% to, let's say, to 10%? And then I have a follow-up.

Gaurav Jain:

You mentioned that ZYN capacity will increase to 900 million cans next year. So does it mean that by Q4 of this year, it will be 225 million cans per quarter?

Operator:

[Operator Instructions] Our next question will be coming from Bonnie Herzog of Goldman Sachs.

Emmanuel Babeau:

Sure, Bonnie. Thank you for maybe giving me the opportunity to further clarify the dynamic and the good dynamics that we are seeing behind IQOS. So we are indeed revising, first of all, our objective of adjusted in-market sales by around 2 billion. I've been clarifying that the majority of that is coming from Taiwan, okay? So in fact, it's really the fact that we were expecting Taiwan to start more than 6 months this year. And it's -- at the end of the day, today, we are making here the assumption that at the end of the day, it's going to be zero volume in Taiwan. We thought it was a reasonable assumption. Remember the law allowing for heated tobacco product was passed now 15 months ago. So we thought that during this period of time, there was this capacity to get the approval from the regulator. And there is an administrative process, asking question, you have Q&A. It's just taking much more time than what we thought. But first and foremost, the reason for this 2 billion revision on adjusted IMS is Taiwan. Then in addition to that, we have this a few hundred million that is coming from Europe. So that's really all you should understand, the 2 billion. And because of Taiwan, we are indeed saying when we were expecting to be above 140 billion in terms of shipments. We are now expecting to be around 140 billion. Again, that's the way you should understand the revision on the guidance. But let me take 2 minutes to explain the dynamic because I want to make sure that things are very clear. What we've been seeing in H1 is, in fact, an acceleration of the IQOS business outside Europe. So if you look at the adjusted in-market sales outside Europe, and we talk about 60% of the business, the adjusted IMS were growing around 14% versus around 13% last year. So we've been growing faster in percentage. So you can imagine in terms of volume, of course, that means a significant acceleration. And indeed, what is beyond this very nice dynamism is Japan. You have other developed markets such as South Korea, but we've been seeing a number of new contributor to this growth. We mentioned Indonesia. We mentioned a number of markets in Middle East. Mexico is also accelerating, and we enjoy also a nice performance in duty-free. So that's really what we are seeing outside Europe. Then Europe, absolutely as expected. I mean, we are going through what is a significant transition. We are moving away from flavor. It's still growing. Outside Italy, we have adjusted in-market sales growing close to double-digits. So very strong in dynamism despite the fact that many of the country are going through this transition. And as we flagged, it is true that it's really great to see, at the same time, our champion market, like we mentioned in Portugal, Hungary that continue to do very well. We have new markets that are really confirming their status of growth driver for the future. We mentioned Germany, Spain, Romania, Bulgaria. So it's important to have this new growth provider, if you want. And then a number of markets exiting, I would say, as expected, the turmoil or the disruption, I would say, of a few weeks that is coming with -- with the implementation of the flavor ban. And here, we can mention Greece, we can mention Romania, we can mention Bulgaria, we can mention Czech Republic. So a number of markets where things are happening absolutely as expected. And then you have Italy, where we've been, in fact, not evaluating well the level of flavored products available with distributor and with retail, and there was less than what we thought. And therefore, the consumer offtake has been impacted quicker than what we were anticipating by the absence of a flavor product after the implementation of the flavor ban, and that has had some impact on the growth. And at the same time, no doubt that the 2 accumulating have had some impact. We've been increasing price by $0.30 on our consumables. And that has not been followed only very marginally by the competition with some impact on our market share as it happens when we increase price in a meaningful manner, widening the gap with competition and the competition not following. So that is really the picture. And now when we are looking at the second half, so we expect outside Europe situation to continue to do well. I'm not going to name again all these very great country where we are performing extremely well. We have the launch of LEVIA and DELIA in a number of countries. And we expect Europe to accelerate as we are transitioning out of this phase of adjustment to the flavor ban. And Italy will be part of the market where we expect improvement. But I would say, globally, we expect more acceleration on all the markets that have been going through the flavor ban. So I think this is really the complete picture, Bonnie. I hope it is helpful in answering your question.

Emmanuel Babeau:

Sure, Bonnie. So you're right. ILUMA i, so the latest generation of IQOS ILUMA. So it does not change the fundamental technology, but the -- the device is offering a number of additional functionalities, is, for the time being, only present in Japan. There was the launch in a few other countries that is planned for H2. And it's always difficult to say what this new product is triggering, but we've been seeing clearly a new acquisition of IQOS user. We've been seeing consumer sentiment going up with some very good reaction to this product. So I would say we continue to have more ammunition to convert smokers to IQOS, to improve the experience, to improve customer satisfaction that is triggering of course, more loyalty that can have some impact on the average daily consumption, so a number of positive effects. That's what we have seen in Japan. Difficult for me to tell you exactly by how much this has been further accelerating the growth in Japan, but now that was a positive for the market.

Matt Smith:

Could you provide a little more detail on the growth in oral pouches in international markets? You highlighted some early success in several markets. Are you continuing to expand distribution there? Are there any capacity constraints for those international markets outside of the U.S.?

Matt Smith:

And just a quick follow-up. Is there any capacity limitation on that international business? Or is that capacity not constrained like what you're seeing in the U.S.?

Operator:

[Operator Instructions] Our next question will be coming from Faham Baig of UBS.

Emmanuel Babeau:

Sure. And you want to ask a question on ZYN now? Or you want to come back on ZYN after?

Emmanuel Babeau:

Okay. So on the vaping category, I think what we are seeing is that with what we've always been saying, the vaping category is a legitimate category to be an alternative to people who would otherwise smoke. And therefore, that is a category that is growing, not necessarily faster than burnt, not faster than nicotine pouch for sure. But of course, the basis for nicotine pouch is smaller. And we know that the vaping category is more appealing for people legal age and above that want to start consuming nicotine and it's much more difficult to convert smokers. And that's clearly what IQOS and the heat-not-burn category is doing much better. So yes, the vaping can be appealing for some legal age and above nicotine user. More difficult to convert smokers, very clearly. We haven't seen any meaningful report of people moving to vaping and a change of kind of dynamic in the category following the implementation of the flavor ban in Europe. Of course, we are monitoring that. But as I said, there is nothing that we can obviously report on that trend, which probably could confirm that we talk about people that are probably with different profile, but that's something that we will have to keep monitoring, of course. So we've always been saying that the concern with the vaping category is that if the products are not properly developed and marketed. If there is an unreasonable appeal to flavor, what that can trigger unintended usage, and that is a problem for the category. And we are very happy with our growth because we do that in a very responsible manner, both in terms of development of our product, development of our marketing activity. And we are developing this responsible approach, very much based on our commercial strength and a great product. I think VEEV ONE is a great product, and strong partnership with the trade that is giving this very good start as we mentioned, the number 1 position in five countries for close pods. That's really what I can share with you at that stage.

Emmanuel Babeau:

Look, on ZYN, I think we mentioned the fact that we are clearly with some restrictions. So I'm not sure that what you read in the Nielsen, which corresponds to the availability is going a view on the trend and the consumer demand, we are gradually improving, and we expect to see that in the coming months, the availability. Today, we clarify that we are working with a target of around 900 million can capacity for next year. So we are creating very nice headroom for growth for the coming quarters. And we think it's really important. I'm not going to be able to tell you because, frankly, it's impossible to say what would have been the growth rate without the limitation. Please bear in mind that there were some competitors move in term of pricing last year that triggered an acceleration in our market share, and that the effect is now behind us. So it is also having some impact on the year-on-year comparison. So that's what we can say on ZYN.

Emmanuel Babeau:

Yes, I know, there is nothing new. We keep working and fully cooperating, of course, with the Attorney General. And at that stage, it's impossible to say how long the work will take or what will be the conclusion. And there is nothing new today.

Owen Bennett:

I hope you are well. I just had a couple of questions on the U.S. pouch dynamics. So first -- and I would assume this is due to certain retailers trying to fill the supply gap. I have been seeing some Scandinavian ZYN available in certain stores. So I was wondering how you can get on top of this to make sure that's not happening. And then second, I'm also now seeing over more than oral brands appearing, I assume do not have a PMTA submitted. So how do you see the risk we could see a similar scenario developing in pouches in the U.S. and to what we're seeing in vape with the legal products?

Owen Bennett:

In retail, the distributors are buying them online from Scandinavia to try and fill the supply gap. Just wondering how you can get on top of that to make sure that's not happening?

Owen Bennett:

Yes. I'm starting to see brands that I'm assuming do not have the MTS. Just wondering how you see the risk around that?

Operator:

[Operator Instructions] Our next question will come from Callum Elliott of Bernstein.

Emmanuel Babeau:

Thank you, Callum. Look, again, I don't have any data on what you're saying. So it's very difficult for me to report. I think we know whether the product that benefit from the situation and the positioning in 2016 in the market and that, therefore, are legally being commercialized. As you can imagine, I'm going to repeat only what I said. We are doing everything we can to control the flows. I don't have information today saying that you have these flows of product. If we knew, we would certainly tackle that, and we would try to understand where it's coming from. And what I can certainly repeat is that our objective is to do our utmost, everything we can to be compliant with the regulation. And there is nothing else I can say, really.

Emmanuel Babeau:

Look, Callum, this is obviously coming from a mix of consumer demand perception that we have. And we believe that if we can produce them, there is a space to get to 580 million can shipments. That's the first element. And that's what our senses are telling us about, what consumer would be happy to buy if it was available. And at the same time, of course, our measures to increase production capacity, where, as I said, I'm not going to elaborate on the various levers, but we're pulling a number of levers to progressively increase the capacity for ZYN production in the U.S. So that's really the combination of the 2.

Priya Ohri-Gupta:

Emmanuel, I was wondering if you could give us a little bit more color on the IQOS ILUMA tests that you're planning for the U.S. It sounds like just a few cities. Will those be sort of diverse geographically across the U.S.? And what are some of the learnings that you're hoping to, I think, unlock? And how could this be different than what we saw initially several years ago with some of the stand-alone stores that were put in place? And then I have a follow-up.

Priya Ohri-Gupta:

That's really helpful. And I guess just a follow-on to that is you talked a lot about the development of IQOS VEEV outside the U.S. Maybe broad strokes, how do you think that product could play out in the U.S.? And at what point would think about filing PMTAs and then broaden the availability of that in the U.S.?

Priya Ohri-Gupta:

Just 1 final, I think, housekeeping item. You talked about your interest expense being at the low end of your prior range, $1.3 billion. Does that reflect, I guess, the issuance you've done to date? And should we anticipate that there wouldn't be any incremental interest expense headwinds, i.e., potential scope for any other refinancing or pre-financing that you might consider?

Operator:

I would now like to hand the call back to James Bushnell for closing remarks.

Emmanuel Babeau:

Thank you.

Operator:

Good day, and thank you for standing by. Welcome to the Philip Morris International 2024 First Quarter Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, James Bushnell, Vice President of Investor Relations. Please go ahead.

Emmanuel Babeau:

Thank you, James, and welcome, everyone. In Q1, we delivered outstanding performance that exceeded our expectations with double-digit growth in organic net revenue and operating income, as well as currency-neutral adjusted diluted earnings per share, all supported by robust volume growth. Excellent smoke- free business momentum continues with plus 25% organic growth in net revenues and plus 38% in gross profit, as IQOS operating leverage and ZYN mix contribute positively. IQOS continues to advance rapidly, with growth of 13% in adjusted in market sales volumes and plus 21% in shipments. IQOS ILUMA is a key driver of this progress and is now available in 64 markets, representing nearly 100% of IQOS volumes outside Russia. ZYN also continued its considerable growth in Q1, with U.S. volumes up plus 80%. Importantly, this top-line performance translated into strong operating income growth and margin expansion, both organically and in dollar terms. This was notably driven by accelerating profitability in both our IQOS and ZYN businesses, in addition to improving combustible performance. We faced higher-than-expected currency headwinds in the quarter, primarily due to the devaluation of the Egyptian pound. We are taking mitigating actions including additional pricing and accelerated cost initiatives, which allowed us to deliver Q1 adjusted diluted EPS above our prior expectation, despite these pressures. While the prior year quarter was favorable for certain growth comparisons, this exceptional start to the year sets the stage for us to deliver significantly better-than- expected 2024 currency-neutral growth, and robust growth in U.S. dollar at prevailing rates. Turning to the headline numbers, very good shipment volume growth of plus 3.6% supported organic top-line growth of plus 11.0%, or plus 8.6% including currency. This reflects continued excellent IQOS and ZYN momentum as well as strong combustible pricing. Operating income grew by plus 22.2% organically versus a softer prior-year quarter, notably driven by gross margin expansion and a deceleration in SG&A growth. As a result, our organic OI margins expanded by plus 3.7 percentage points. In dollar terms, adjusted OI grew by plus 11.3% and adjusted OI margins expanded by 90 basis points. We outperformed our Q1 adjusted EPS outlook due to three main factors. The first is the net revenue and profit impact of better volumes following the industry-leading performance of ZYN, the strong shipment growth of IQOS HTUs including some higher-than-expected timing benefits, and a resilient combustible delivery. Second is the benefit of our pricing actions to mitigate currency headwinds and third is on cost including some timing benefit and a stepped-up focus on manufacturing and back office efficiencies to prioritize growth investments. The majority of the outperformance was driven by underlying business dynamics, which bodes well for the remainder of the year. Indeed, we delivered adjusted diluted earnings per share of $1.50, representing plus 23.2% growth excluding an unfavorable currency impact of $0.20. This includes $0.09 from the devaluation of the Egyptian pound, including a transactional impact of $0.06 primarily related to the balance sheet remeasurement of foreign currency payables. With increased liquidity in the Egyptian pounds, we are now reducing our balance sheet exposure, and this should be complete in the coming weeks. Focusing now on volumes, our Q1 HTU shipments of 33.1 billion units exceeded our outlook, with robust underlying growth across geographies and a higher-than- anticipated timing impact of shipments to Japan. The incremental phasing impact was around 1 billion units and was primarily related to Red Sea disruption. While uncertain, we assume this will normalize in the second half of the year. As mentioned previously, we believe the best indicator of underlying HTU growth is adjusted in market sales, as the closest metric to consumer offtake. Adjusted IMS volume grew nicely by plus 12.5%, including the expected impact from the characterizing flavor ban in Europe. We continue to see strong IQOS momentum, with excellent growth in Japan, robust underlying fundamentals in Europe, and a growing contribution from newer markets such as Indonesia. We continue to target plus 14% to plus 16% adjusted IMS growth for the year, with around plus 10% growth in Q2 followed by an H2 acceleration driven by the timing of commercial programs, ILUMA uptake, newer markets and a less demanding prior year comparison. Total smoke-free volume growth of plus 22% includes the impressive expansion of our oral smoke-free portfolio powered by ZYN, with pouch equivalent shipment volumes up by plus 35.8%. U.S. ZYN shipments grew by plus 80% to 132 million cans. Cigarette shipments declined by a modest 0.4% in the first quarter, with a notable positive contribution from Turkey as we increased share in a strong overall market. Let me now walk through the drivers of our Q1 net revenues. As I mentioned, volumes grew by a remarkable 3.6%, including oral. Pricing contributed plus 5.5 points of growth primarily from combustibles, as well as pricing of around plus 3% on HTUs. Smoke-free category mix added plus 3.1 percentage points to the top-line, reflecting the higher net revenue per unit of IQOS and, to an even greater extent, ZYN. Oral smoke-free product overall boosted our organic net revenue growth by plus 2.2 points, showcasing its role as a meaningful accelerator. To report a positive contribution from our VEEV e-vapor business which, while still small in the context of the group, delivered good revenue growth. As in 2023, there was a negative geographic mix within our combustible business as lower margin markets, often without smoke-free products, grew faster; and smoke-free products accelerated cigarette declines elsewhere. The positive category mix impact of smoke-free products, overall volume growth, and pricing are the three enduring engines of our transformation and growth. Focusing now on the key dynamics of our Q1 profit delivery, smoke-free gross profit grew by an impressive plus 38% organically, on top-line growth of 25%. This reflects the very strong performance of U.S. ZYN and the growth and scale effects of IQOS, including manufacturing productivities. This strong underlying acceleration was amplified by only a few percentage points due to HTU shipment phasing. Gross margins expanded substantially for both heat-not-burn and oral nicotine, and by a striking plus 600 basis points organically for smoke-free overall, which made up close to 39% of total gross profit, an increase of plus 6 percentage points versus prior year. Combustible organic gross profit growth was notably improved and exceeded our expectation at plus 2.3%. Gross margins were also better-than-anticipated, leading to an improved full year outlook. Resilient volumes, strong pricing and manufacturing productivities more than offset the continued cost pressures in the category, geographic mix, and the impact of IQOS cannibalization. As previously flagged, cost increases in leaf, wages and certain other inputs carried over into 2024, and these should ease next year. We were also impacted by around $30 million of costs from implementation of the EU Single-Use Plastics Directive, primarily on cigarettes. A key feature of Q1 was strong operating income margin expansion. Gross margins increased organically by 150 basis points and by 80 basis points including currency. This reflects excellent expansion within smoke-free products, their growing weight within our business at higher margins, and the better-than-expected evolution of combustibles. These factors, combined with productivity savings, significantly outweighed the unfavorable technical dilutive impact of third-party manufacturing in Indonesia, which equated to 30 basis points in the quarter. For SG&A costs, currency-neutral growth of only plus 1.4% drove 220 basis points of organic margin expansion. This benefitted from our resource allocation and prioritization programs, including the delivery of approximately $160 million in gross cost efficiencies across COGS and SG&A towards our $2 billion target for 2024-2026. Although the Q1 margin impact of SG&A cost evolution including currency was small due notably to Egyptian Pound transactional currency, we continue to target SG&A progression below top-line growth for the year. We expect higher organic SG&A increases in the remainder of 2024, notably reflecting investment spend phasing, which was favorable in Q1. The combination of these factors powered a remarkable plus 370 basis point expansion in our organic operating income margins, and plus 90 basis points including currency. This exceeded our expectation and we are now raising our full-year operating income growth outlook, as I will come back to. Taking another lens on adjusted operating income margins by geography, we see broad-based global momentum with all regions delivering strong organic progress. In dollar terms, margins expanded in every region except the South and Southeast Asia, CIS, and Middle East Africa region, mainly reflecting the transactional currency impact of the Egyptian pound and the technical dilution in Indonesia. Indeed, excluding these factors, this region grew margins at a very similar rate to the group. Moving to IQOS. With ILUMA now widely launched, PMI HTUs continue to strengthen their position as the second largest nicotine 'brand' in markets where IQOS is present. PMI HTUs now exceed the 10% market share milestone on the prior basis excluding Indonesia, which we now include following broader commercialization in the market. Our HTUs are the number on nicotine 'brand' in 11 markets, and as shown at CAGNY, IQOS net revenues have surpassed those of Marlboro. Focusing on IQOS in Europe, Q1 HTU share increased by plus 0.9 points, also crossing the 10% regional share milestone for the first time. While still early in many markets, the growing availability and uptake of ILUMA is a key driver and we are seeing a strong acceleration in a number of historically slower-growth markets. Adjusted IMS volumes continue to exhibit robust sequential growth and reached a record high of 12.6 billion units on a four-quarter moving average. This reflects year-on-year progression of plus 9.4% in Q1, with excellent growth in Greece, Portugal, Germany, Spain, UK and the Netherlands. Growth was slower in certain Central European markets such as Poland and Czech Republic, where increased economic pressures and price-sensitivity are visible. We continue to evolve our portfolio in these markets under the recently-launched ILUMA system to drive further growth. Excluding Ukraine, where growth was absent, adjusted in market sales grew double-digit. As anticipated, the 11 markets so far affected by EU characterizing flavor restrictions saw an impact in line with our total region estimate of around 2 billion sticks for the year. Consistent with similar past situations, we observe an initial consumer adjustment followed by a reversion of growth rates to previous levels. We have not seen meaningful shifts towards e-vapor or competitor heat-not-burn products, and we expect the structural growth of IQOS to fuel continued HTU progression over the rest of the year. The strong fundamental progress in the region is highlighted by the expansion in key city offtake shares. Very strong gains in cities with already high IQOS adoption, such as Lisbon, Rome, Athens and Budapest, demonstrate the potential for further growth at the national level. The recent acceleration in London, Madrid, Munich and Amsterdam is also very promising for the IQOS brand in these markets and for Europe overall. In Japan, the adjusted total tobacco share for our HTU brands increased by an excellent plus 3.1 points to 29.3%. Adjusted IMS volumes increased by plus 13%, maintaining the rapid progress of recent quarters. Such impressive growth in a market with already-high category penetration is a clear testament to the sustainable growth potential of IQOS around the world. In connection with IQOS' strong brand equity and commercial footprint, we are fostering growth through continued innovation on both devices and consumables. In March, we launched the latest IQOS device ILUMA i in direct channels, with national expansion ongoing. We remain laser focused on innovation. Our innovation in consumables has included a number of new variants and taste experiences on the premium TEREA brand. As shown by the offtake data on this chart, this has helped TEREA to continue growing Japan share at the same time as mainstream-priced SENTIA. This successful strategy of broadening consumer appeal with different price tiers while reinforcing and growing the premium line-up is a good illustration of how our IQOS business is evolving across markets as the category continues to grow. The potential of the category is clearly demonstrated by the performance in Tokyo. As shared at CAGNY, heat-not-burn category volumes surpassed combustibles in January and have continued to grow since then. Led by Japan and Korea, the East Asia & Australia region reached almost two-thirds smoke-free net revenues in Q1. While somewhat flattered by shipment timing, this clearly demonstrates the path forward for the broader company as we strive towards our ambition of becoming substantially smoke-free, surpassing two-thirds by 2030. Outside of Japan and Europe, we continue to see very promising IQOS growth across the globe, including low and middle-income markets, as highlighted by key city offtake shares. A notable call-out is Indonesia, where we have expanded commercialization to targeted areas in new cities and introduced TEREA clove variants catering to kretek taste preferences. We have witnessed an uplift in user growth, and now have over 150,000 estimated IQOS users in the country. Our city offtake share in Urban Jakarta is one indicator of this, with plus 1.6 percentage point growth to 3.4% in a growing total industry. We are also pleased to report the reacceleration of IQOS growth in South Korea following the introduction of ILUMA. TEREA recently became the number one HTU brand as measured by national c-store offtake, and in Seoul IQOS market share grew by 1.8 points to 12.8%. Egypt continues to stand out with Cairo offtake share up 1.3 points to 9.1% despite recent pricing, and we also see promising results in Malaysia, Morocco, Lebanon and the Balkans. While not shown on this slide, Saudi Arabia also had a promising restart with Q1 national offtake share of 1.3% following the resumption of IQOS commercialization in late 2023. In a similar vein to some of our European markets, the November launch of ILUMA in Canada has coincided with an acceleration in key city growth, as shown here by Toronto. While still early days for ILUMA and in a very restrictive regulatory environment, this is clearly a positive development. Moving now to ZYN, where excellent U.S progress continued in Q1 with 70% sequential growth in 12-month rolling shipments. Impressively, category volume share grew for the fourth consecutive quarter to 74.3%, an increase of plus 6.9 points year-on-year and 1.3 points sequentially despite a $0.15 cent per can price increase in March. Retail value share also grew to 79.3%, highlighting ZYN's premium positioning and superior brand equity. This accelerated growth again reflects a broad step-up in nationwide store velocities and gradual distribution expansion as the category gains strong traction with adult nicotine users. As outlined at CAGNY, we remain focused on marketing ZYN responsibly to prevent unintended use. We support the FDA's efforts to ensure only consumers over 21 have access to nicotine products. Swedish Match follows a robust U.S. marketing code that prohibits using social media influencers, age-gates digital platforms to 21-plus and includes partnering with WeCard to help ensure retail sales only to legal-age adults. I'd like to spend a moment now on combustibles, where our portfolio delivered robust organic net revenue growth of plus 3.7% in Q1. This primarily reflects better-than-expected pricing of plus 7.9%, with a notable contribution from Germany, and stepped-up pricing in Egypt. The pricing environment remains favorable, and we now forecast a full-year increase of 6% to 7%, with annualization effects lessening in H2. Our cigarette category share grew by plus 0.3 points in Q1. This includes positive contributions from Algeria, Poland, and Turkey, resulting in only a modest volume decline in a total cigarette industry which fell by 0.6%. Our global brands gained category share during the quarter, with Marlboro gaining plus 0.4 points. As previously flagged, our 2023 share of segment was flattered by competitor supply constraints in Egypt which may normalize this year. As I already mentioned, strong pricing in Q1 coupled with accelerated manufacturing productivities also resulted in a better-than-expected margin evolution. Now, let me provide an update on our latest innovation and expansion plans as we further accelerate our smoke-free transformation. As I covered earlier, we recently launched IQOS ILUMA i, our most innovative offering to-date, in Japan. The ILUMA i portfolio consists of three devices offering a range of adaptable new features. This includes the new touch screen on the device's holder which allows users to see experience-relevant information quickly and easily, as well as a pause mode so users can pause and resume their smoke-free moment where they left off. Initial consumer feedback has been very positive. Japan was the first market to launch ILUMA in H2, 2021 and we plan to gradually roll-out ILUMA i to more geographies over time. As shown in our Japan and Indonesia performance, consumable innovation on the ILUMA platform is also critical, as we broaden offerings across markets. LEVIA HTUs, which contain nicotine but no tobacco leaf, were launched nationwide in the Czech Republic and Romania in Q1 with promising initial results. More markets are planned later this year. DELIA, our new mainstream-price brand for HTUs, was rolled out in Switzerland, Hungary, and Lithuania. In the U.S., we continue to prepare for the first consumer pilots in select cities with the IQOS 3 system. As mentioned previously, the commercialization will be initially limited in scope and will be focused on direct activation of select legal-age nicotine users in a few cities, allowing us to experiment with different elements of the commercial model. The main purpose of these consumer activations is to fine-tune our approach in anticipation of the at-scale launch of IQOS ILUMA, following authorization from the FDA. The international expansion of nicotine pouches remains a key focus, notably for ZYN as the world's leading brand. We have launched or relaunched in 11 markets so far, with more planned later this year. In e-vapor, our focused strategy for VEEV is showing very good early results. Positive consumer feedback is translating into promising repeat-purchase and conversion rates, and we are on a path to profitability in H2. This brings me to our outlook for 2024. With unparalleled smoke-free volume momentum, best-in-class pricing and expanding margins we are raising our full year currency-neutral growth forecasts. This strong pricing, combined with positive smoke- free mix and efficient cost allocation also helps us to mitigate currency headwinds and should allow us, at prevailing rates, to deliver on our objective of robust growth in dollar terms. Given continued ZYN volume progress, we are increasing our U.S. shipment forecast to around 560 million cans. We have further accelerated our capacity expansion plans to support this additional step-up. We continue to target strong growth in both adjusted IMS and shipments of IQOS HTUs, and to reach close to $15 billion in 2024 smoke-free net revenues at prevailing exchange rates. Factoring the increased ZYN shipment forecast and a strong pricing outlook on both combustibles and smoke-free products, we are increasing our organic net revenue growth forecast to plus 7% to plus 8.5%. In addition to higher revenue growth, we expect accelerated organic margin expansion. This is strongly driven by a significant expected uplift in our smoke-free gross margin due to IQOS scale effects, ZYN mix and accelerated manufacturing productivities. It also includes organic gross margin expansion in combustibles, where we had previously assumed a negative development. In addition, we are focused on delivering further SG&A efficiencies while continuing to invest in smoke-free growth. As a result, we are raising our organic operating income growth forecast to plus 10% to plus 12%. Accordingly, we are raising our forecast currency-neutral adjusted diluted EPS growth to plus 9% to plus 11%. This translates into an adjusted diluted EPS range of $6.19 to $6.31, including an unfavorable currency impact of $0.36, at prevailing rates. The increased forecast headwind is primarily explained by the devaluation of the Egyptian pound and recent weakness in the Japanese Yen. As I mentioned, we are taking pro-active actions to mitigate the incremental impact. We expect full-year gross and OI margin expansion, in both organic and dollar terms, at prevailing exchange rates. This includes organic expansion in both H1 and H2. After the excellent Q1 performance, we expect a strong H1 overall with organic net revenue and OI growth around the high end of our full year ranges. For Q2 specifically, we assume HTU shipment volumes of 34 billion to 35 billion and continued strong volume growth from ZYN. We forecast currency-neutral adjusted diluted EPS of $1.50 to $1.55, including an unfavorable currency variance of $0.14, at prevailing rates. With regard to our balance sheet, deleveraging remains a key priority. We continue to target a 0.3x to 0.5x improvement in our net debt to adjusted EBITDA ratio in 2024, driven by profit growth and strong cash flow generation. We also continue to target reaching around 2x by the end of 2026 and will consider buybacks once confirmed we are on-track. Now switching gear. As this quarter coincides with the publication of our 2023 Integrated Report, I would like to welcome Jennifer Motles, PMI Chief Sustainability Officer, to share an update on our sustainability progress. Jennifer, over to you.

Emmanuel Babeau:

Thank you, Jennifer. I will conclude today's presentation with some key messages. Our excellent IQOS and ZYN volume momentum, best-in-class pricing, positive category mix and stepped-up cost efficiencies put us on track for a strong 2024, with accelerated top-line growth and margin expansion. Following an exceptional and better-than-expected start to the year, we have raised our full year currency-neutral growth forecasts. Critically, we are also focused on delivering performance in dollars. We are taking measures to mitigate currency headwinds through pricing, accelerated manufacturing productivities and judicious resource allocation to prioritize growth investments. Our 2024 outlook places us firmly on track to deliver our 2024-2026 CAGR targets. Beyond 2026, we have further exciting opportunities to grow our smoke-free business as we progress towards our ambition of being substantially smoke-free by 2030. Finally and importantly, our strong growth outlook and highly cash generative business underpins our ability to deleverage while maintaining a steadfast commitment to our progressive dividend policy. We look forward to further rewarding our shareholders as our transformation delivers sustainable growth. Thank you and we are now very happy to answer your questions.

Matt Smith:

If we start, the first quarter, it was a strong start to the year. You noted a better revenue and margin performance supporting your ability to raise the outlook for both organic revenue and constant currency EPS. From a high level on a constant currency basis, the first quarter EPS was about $0.20 ahead of your 1Q guidance, and you raised the full year outlook somewhat below that. Can you talk about unique benefits in the first quarter that may have changed the timing through the year? Or how are you viewing the rest of the year different now in terms of the fundamental environment or investment level?

Operator:

Our next question comes from Bonnie Herzog with Goldman Sachs. Your line is now open.

Emmanuel Babeau:

Sure, Bonnie. Happy to share our view and what we're doing on that one. So we said it at the beginning of the year and then we're at CAGNY, we want to deliver performance in dollar terms. And therefore, that means that even when we have another significant ForEx headwind and, you know, some of that, I mean, we have in Q1 actually $0.06 coming from the Egyptian pound that won't be there next year. So that's not something that's going to stay with us. So it's a kind of one-off negative impact. But we want to deliver robust growth in dollar terms. So in order to deliver that, we have two big levers, I would say. One is on price. And to be clear, when we talk about price, it's, of course, in the countries where we can see some devaluation, but not only. It's really across the board. How can we push the boundaries and push, to the maximum of the limit, the price increase? Well, we think that we're doing in a way that is not necessarily taking a big risk on market share. But we are clearly here and notably on combustible pushing on price increase. So that's something that we can do. That is taking into account a certain economic environment. And in the current environment, we are doing what we think is optimized and the best we can. Of course, if there was some more depreciation, more devaluation, we would reconsider whether more action can be done. And then on productivity and on cost efficiency, that means really accelerating everything we can do on productivity. And we are working across the board. It's, of course, on procurement. It's on optimizing the manufacturing footprints. It's on logistic. I mean, it's on everything where we can generate extra saving and playing with this environment of a strong dollar. And then on cost allocation. I mean, of course, we are working permanently as part of our 2 billion saving program on plans to be simpler, to generate efficiency, to work in a more efficient manner. So we do that. We try to accelerate that. Here again, we're trying to do things faster. And we are also making sure that when it comes to investment allocation, we really prioritize on what is having the biggest and strongest and I would say clearest return, which is allowing us to also generate some profitability improvement to partially offset the negative ForEx. So that's really everything that all the action that we are doing. We're not saying we can offset any kind, of course, of ForEx environment. But I think our Q1 numbers and the outlook for the year is showing that we have some good capacity to mitigate to a very significant extent the ForEx impact.

Emmanuel Babeau:

Thank you, Bonnie. This is very much the latter. I mean, you can imagine when a business is growing 80% and we are growing 80%. That is indeed creating some tensions on the supply chain without any doubt. I'm not sure that out of stock is still the proper word, given where we are today. I think that, maybe sometime a reference is not going to be available. Not everything is going to be is going to be is going to be fully available in the range at a certain point in time. But look at what, the Nielsen are telling us on Q1 and our volume. I mean, we seem to be growing fast and it's difficult to see any kind of impact coming from restriction on availability. As we said, we are working very hard to maximize our capacity in this fast-growing environment for ZYN. We are comfortable, of course, with our capacity to deliver around our 560 million can. That is not the limit that we are putting, of course, in terms of production capacity. But we are in this phase of adaptation to this strong growth and fast-raising demand. I think so far, maybe with some tension, but with limited impact on volumes.

Owen Bennett:

First question on heated. Can you maybe talk a bit more about the contribution from newer markets? Is this trending in line with expectations or do you see potential for upside here? Because some of the trends you called out sound very encouraging. I'd also love an update on bonds in the latest with this, if possible. Thank you.

Owen Bennett:

Thank you. Very helpful. And I just add one more. I want to talk a bit more about Vape. And what sort of volumes do you think you can do here for the year? And if I heard you right, you said you'll be profitable already in H2, which would suggest volumes have been really healthy already. And just any kind of commentary on which markets you're seeing the strongest traction so far?

Operator:

Our next question comes from Faham Baig with UBS. Your line is open.

Emmanuel Babeau:

Thank you for the question. So, first of all, on the German situation, I mean, yes, they've been asking for the view from the European Court of Justice. But it's a purely German question whether the way they've been implementing their extra tax was according to EU law or not. So there is no consequences for other countries. It's really a German question due to how they implemented this increase in the tax. So that's what it is. On the final decision, because as of today, that would be the decision from the German court. I have to say, I don't know when we will know more, I guess in the coming months, obviously. But I'm not going to be able to be more specific on the timing of the Dusseldorf court to make the decision. There are a number of steps still needs to be taken before they get there. So that will be for the coming months. But given where we are today, I'm not able to tell you when they will make the decision. Regarding your second question on price versus volume. So we said, and I'm going to stick to that. Yes, we believe that we can increase price more low single digits or not at the level of combustible on is not burn. Again, I think we are very clear on the very positive impact coming from the growth in volume from heat-not-burn our business. They're coming with a much higher per stick revenue. They're coming now with a higher gross margin rate, even at the level of just the consumable. It's significantly higher than for combustible as an average for the group. So that means that's really growing volumes is the name of the game for us. That's where it makes sense. Now, on top of it, given the very strong franchise of IQOS and the attractiveness of the brand, we are able to increase price without putting in danger the volume. But that's really the way you should be looking at it for us today. It's very much a play on maximizing the volumes.

Gaurav Jain:

So two questions from me. So one is, just conceptually. So, let's take a city like Tokyo where the heated tobacco category share is now 50% plus. So one can argue that by increasing the premium cigarette prices, which haven't increased now in two years, you can accelerate the down trading to IQOS. This will accelerate IQOS volume growth. This will also accelerate your dollar EPS growth out of Japan. So why wouldn't you do something like this in cities and countries where heated tobacco and IQOS becomes the dominant form factor?

Gaurav Jain:

Sure. And my second question is on Russia. So, IQOS volumes in Russia grew, which is surprising, given that you do not invest in IQOS there anymore. So how should we -- so first of all, can you just remind us the contribution of Russia on your EPS? And how should we think of Russia IQOS shipments for this year?

Operator:

Thank you. Our final question comes from Callum Elliott with Barclays (sic) [Bernstein]. Your line is now open.

Emmanuel Babeau:

Thank you for your question. Well, first of all, I guess you are assuming that the ForEx headwind will persist in the coming years, which I think nobody can really say. We know that currency can be facing cycles and that it's true that the last 10 years have been about a strengthening of the dollar. We've been knowing other cycles where the dollar was more weakening versus at least other hard currency. So nobody knows what's going to happen. I think what we are saying and thank you for giving me the opportunity to maybe repeat and clarify that we are today in a position to put together very strong growth before ForEx. And I think you are seeing with the guidance for '24 that we are obviously coming still with a very dynamic top line, very much accelerating operating income growth. We are targeting a double-digit before currency impact now in 2024. And on top of that, we are going to price and in an environment that today we see positive for pricing, certainly with the fact that pricing on combustible is something that we can use now very tactically. We know that CC is not our future, so we can certainly use pricing very tactically in order to boost performance. We also are coming with some price increase at the level of HTU. We have some price increase on ZYN as well. So we have globally a pricing environment that looks attractive to us in the future. And then, when it comes to our cost, it is true that we've been investing a lot in the past years, and we've been reporting on all the action that we were having on investment across the board, in terms of innovation, in terms of science, in terms of R&D, in terms of manufacturing. Now is the time where, of course, we are reaching critical mass on smoke-free products. There are a number of things that we are doing that we can do more efficiently, a number of things that we've been learning and that we're going to implement in the continuation of our journey. So all that we believe is also giving us some very good ammunition and capacity to generate efficiency at a very high level in the future. So that's all the -- and they are quite important, quite numerous, all the levers that we own to deliver performance in dollar terms in the future.

Emmanuel Babeau:

Well, can I answer you that your question is highly speculative because you asked me to compare with other businesses that are obviously very different in, I guess, the way they invest, their outlook, what they have to do. We are building here a business that has a tremendous growth potential, so we're not going to, of course, limit all the initiative, all the investment that we must do in order to keep growing the business and extract the full potential that we have with our smoke-free portfolio. Maybe that's different versus the paper business you were mentioning. I frankly have no clue because I don't know what you are referring to and the specific situation. But I think it's difficult to probably compare businesses that are facing different potential, different trajectories. That would be my answer.

James Bushnell:

Thank you for joining us. That concludes our call today. If you have any follow-up questions, please contact the Investor Relations team. Thank you again and have a nice day.

Operator:

This concludes today's conference call. Thank you for participating. You may now disconnect.

Operator:

Good day, everyone and welcome to the Philip Morris International Fourth Quarter 2024 and Full Year 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. [Operator Instructions] As a reminder today's call is being recorded. I will now turn the call over to James Bushnell, Vice President of Investor Relations and Financial Communications. Please go ahead, sir.

Jacek Olczak:

Thank you, James, and welcome everyone. PMI delivered another strong operating performance in 2023. We achieved our third consecutive year of positive volumes and high single-digit organic top line growth, driven by smoke-free products. Smoke-free products delivered accelerated accretion to profitability in the fourth quarter, as our IQOS business delivered meaningful 2023 operating leverage, mitigating a significant drag from combustibles. I am also very pleased to report the continued outstanding growth of ZYN, which was not included in organic metrics until mid-November. Importantly, smoke-free products reached nearly 40% of total PMI net revenues in the fourth quarter and over 40% of gross profit. For the year, smoke-free gross profit increased by 19% organically and we expect smoke-free organic growth to accelerate for both net revenues and gross profit in 2024. ZYN delivered exceptional growth in its first year within PMI with U.S. pro forma volumes up by over 60% for the year and over 75% in the quarter four. Oral smoke-free is accretive to both our smoke-free business and the overall group, with Swedish Match contributing 50 basis points organic uplift to Q4 OI margins from only 50 days of the period. Our IQOS business continues to deliver excellent results with 15% adjusted in-market sales growth for heated tobacco units reflecting broad-based momentum in Europe, Japan, and emerging markets. The rollout of IQOS ILUMA is substantially complete, now present in 51 markets representing over 95% of IQOS geographies by volume excluding Russia and Ukraine. The superior experience and design of ILUMA combined with the strong premium brand equity of IQOS and our unrivalled commercial infrastructure enabled IQOS to outgrow the heat-not-burn category, despite holding a category share of over 75%. Importantly, as we have seen in Japan, the launch of ILUMA is a multiyear growth driver consistent with past IQOS innovations. Our 2023 combustible performance was margin dilutive despite strong commercial results, with very good pricing and higher category share. This reflects the significant cost pressures in the category, geographic mix from volume growth in lower margin markets without smoke-free products, and the impact of IQOS cannibalization. This was also compounded by the technical impact of third-party manufacturing in Indonesia and Ukraine. While cost and currency headwinds impacted our earnings in 2023, the strengthening growth and margin profile of smoke-free products set us up well to deliver sustainable growth and returns including currency in 2024 and beyond. We reached a number of key transformation milestones in Q4. First, IQOS net revenues surpassed Marlboro to become the number one international nicotine brand on this measure. This demonstrates the power of innovative smoke-free alternatives to switch adult smokers away from cigarettes, and to address the societal issue of combustible tobacco. It is also testament to our organization’s ability to build strong and sustainable brand equity. This also applies to ZYN, the fastest growing U.S. smoke-free brand with another outstanding performance in Q4, marked by an increase in category volume share, retail value share, and overall volumes. We are also proud to have reached 25 markets where smoke-free products exceed 50% of our top line for both Q4 and the full year. We aim to reach 60 markets by 2030, driving our ambition to exceed two-thirds of group net revenues. Last, as I already mentioned, over 40% of our total gross profit was generated by smoke-free products with the adjusted gross margin rate on smoke-free surpassing combustibles for both the quarter and year. We are encouraged by the increasing number of governments adopting tobacco harm reduction policies to encourage reduced risk nicotine consumption instead of smoking, which is ultimately more sustainable for society. Nevertheless, a considerable amount of work remains. Sustainable growth requires a sustainable business, and we continue to garner increasing recognition for our sustainability performance across the key product and operational topics for our company. PMI was included in the Dow Jones Sustainability World Index for the first time, and for the fourth year in a row DJSI North America. In addition, PMI was awarded carbon disposal projects Triple A rating for the fourth consecutive year. I will now hand it over to Emmanuel to discuss our results and outlook in more detail.

Jacek Olczak:

Thank you, Emmanuel. Let me now take a moment to cover our key strategic priorities for 2024. First is supporting the sustained growth momentum of IQOS through continuous innovation. This includes leveraging the rollout of ILUMA to maximize user growth, while innovating further on both devices and consumables. Second is to continue the strong U.S. growth of ZYN, supported by targeted commercial investment, long-term capacity expansion and organizational infrastructure, which will also support IQOS. Outside the U.S., we intend to continue developing our integrated multi-category offering to adult nicotine users with further launches of ZYN and, where relevant, our VEEV e-vapor portfolio. Of course, 2024 will be a landmark year for IQOS in the U.S. While the ultimate launch of IQOS ILUMA is the main priority, we continue to prepare for the first city tests of the IQOS 3 blade product starting in Q2 this year. These small-scale pilot launches will allow us to experiment with different aspects of commercialization and support our drive for at-scale commercial success once ILUMA is authorized. While we have no update on the expected PMTA timeline, the patent settlement agreement announced last week allows for commercialization of both blade and induction products while mitigating risks of patent-related disruption and enables us to leverage the scale, optimized cost and flexibility of our global supply chain. In combustibles, we continue to target a stable category share over time despite the impact of IQOS cannibalization, while taking judicious pricing actions to drive a positive profit contribution. Our capital allocation priorities are crystal clear. We will continue to invest in the growth of smoke-free products, and our commitment to the dividend remains steadfast. Following the acquisition of Swedish Match, deleveraging remains our key balance sheet objective. We aim to continue our excellent progress on sustainability initiatives, including those related to product impact such as youth access prevention and post-consumer waste. Finally, and importantly, we remain committed to transforming the tobacco harm reduction landscape by providing superior alternatives to adult smokers who would otherwise continue smoking and advocating for science-based regulations. We will be expanding further on many of these topics at the CAGNY conference in two weeks’ time. Let me now conclude today’s presentation. Overall, our business delivered a strong 2023 performance in the face of notable cost headwinds, driven by structural smoke-free momentum. The continued excellent performance of IQOS and remarkable growth of ZYN strengthened their positions as leading brands with excellent equity. Combined with our unrivalled commercial and innovative capabilities, we have a powerful platform to expedite our smoke-free future as we broaden our portfolio and reach to adult smokers. We expect 2024 to be a year of accelerated growth for smoke-free products and remain confident in our 2024-2026 growth targets. We have exciting opportunities in the U.S. and internationally, which we are fully dedicated to capture as we progress towards our ambition of being sustainably smoke-free by 2030. Finally and importantly, our strong growth outlook and highly cash-generative business underpins our ability to deleverage while returning cash to shareholders. Thank you. And Emmanuel and I are now happy to answer your questions.

Bonnie Herzog:

Hi, everyone. I actually wanted to ask a high-level question on the year. You originally guided FX-neutral EPS growth in '23 of 7% to 9%. Yet, you really did finish out the year a lot stronger, reporting 11% currency-neutral EPS growth. So as you look back, what were some of the key areas of outperformance versus your initial expectations? And then as you think about this year, you're initially guiding to 7% to 9% FX-neutral EPS growth again. So just trying to understand how conservative this may be, especially considering your 9% to 11% midterm growth target?

Bonnie Herzog:

Okay. Thank you. That was helpful. And then I did want to ask a little bit more on margins. Just hoping for a little bit more color on your margins in Q4, especially in Americas, where they were actually negative. I'm assuming, I think you called this out, a key driver of this is your investments ahead of the IQOS relaunch in the U.S. in May. So in the context of this, how should we think about operating income growth in Americas this year? Will it continue to be negative? And then for the full year of '24 year, just total company, your guidance is for FX-neutral revenue growth and operating income growth does imply operating margin expansion. So could you maybe touch on your expectations for gross margin and OpEx in the context of that?

Emmanuel Babeau:

Yes, just to complement -- to answer your question, Bonnie, and complement what Jacek was saying on what is behind the higher-than-expected performance for '23. Clearly, as I described, a very strong dynamic on the volume on the commercial dimension, if you want. But we've been very pleased as well with the development of our margin on our smoke-free product. And we are today seeing the margin both on IQOS and on ZYN being above the average margin on CC. We are making progress on the profitability of the IQOS product and we have some price increase in Q4 overall. So that was the planned dynamic, but it is happening maybe even a bit better than what we're expecting, and we expect that to continue in Q4. And in that perspective, I mean, clearly, the U.S. is a fantastic market. We've described the fact that the margin of ZYN in the U.S. is best-in-class among our portfolio of products. And therefore, make no mistake, even if indeed, we're going to continue to invest in the U.S., the U.S. is going to be super nicely accretive in all parameters of our P&L at the level of the, of course, revenue growth but also at the level of the margin evolution and at the level of the operating income. And we reflect the fact that we talk about double-digit growth and very strong double-digit growth. U.S. is a very powerful contributor to our financial performance.

Jacek Olczak:

Yes. We do absolutely, Bonnie. Yes.

Operator:

We'll go next to Gaurav Jain with Barclays.

Jacek Olczak:

Look, of course, we cannot speculate on any further devaluation of the peso. The reality is that the amount in dollar terms has been significantly reduced by the last devaluation. So a further devaluation would impact to a much lower amount. Now I don't know whether more devaluation could come. Frankly, we're not able to anticipate this kind of thing. What you have to take into account is that the basis has been -- in fact, as basically with the devaluation in December. So any further devaluation would apply to a lower base in Argentinian peso.

Jacek Olczak:

Yes. So we observed over the last few weeks, I heard a lot of conversations around Brazil in social media and generally Internet and media. I think, look, ZYN is in the U.S. market for 10 years, okay? And if you look at the numbers, CDC latest data on the underage usage, et cetera, it stays very below. I think it's 50% which is the lowest from any product nicotine and also other products where there's some major restrictions applied. I think we know what about the Swedish Match marketing practices, and we were taking this very seriously during the acquisition of the (inaudible). We have said that the alignment with Service Match was not only that they were pursuing the smoke-free trajectory, but also that they have a very responsible and a disciplined approach to the marketing as we are on -- with IQOS, with heat-not-burn and the international. We have reached out to the few people who have been the most vocal too in these conversations with general consumer, but also to FDA and I think the facts are different than sometimes it is being -- trying to be the positions in the media. So the product is helping adult smokers with very strict with the age verifications. Obviously, when it comes to the conversations among the adults in the social media, that's going a little -- well, going anticipating, frankly speaking, in the territories we wouldn't have a control. ZYN is not using any paid ambassadors or whatever this is being called in the social media. So we think what we're doing is put the right product from the potential of the reduction of the harm where the product is based on science position and the risk reduction continuum, frankly speaking, it is the best nicotine alternative to any another nicotine product, very much obviously versus the cigarette. We have a pending PMTA with FDA and feel the science is very strong and very conclusive on the site. So I feel very confident. From the very beginning of our transformation, solid Swedish Match, we put the marketing team and very much the protection of the youth very, very high on our agenda. So I think it gives me the confidence that, as I said earlier to Bonnie's question, we have a progress, phenomenal growth on the products, which are delivered in a very sustainable manner to adult smoker.

Pamela Kaufman:

Good morning. I have a question about ZYN as well. It's seen phenomenal growth in the U.S. Can you talk about what's driving the acceleration in growth in ZYN in the U.S.? And are there any particular regions where you're seeing stronger growth? And just on the ZYN guidance, it implies about 35% growth in U.S. shipments, but that seems conservative given the strength that we've seen. So is there anything that would temper ZYN's growth outlook relative to what we're observing?

Jacek Olczak:

Yes. And Pam, to clarify the guidance here, we are coming with a growth year-on-year that would be similar than the one we've been experiencing in terms of total volume growth and not in a big percentage year versus '23 and '22. So these are similar volume growth. It's related to a reduction in the growth rate. We'll see whether your -- we have still going even higher than what we are forecasting for the time being.

Jacek Olczak:

Well, it actually allows us now to also connect IQOS in the U.S. to the supply chain, which is on the international supply chain from day 1, which is operating with all the benefits of economies of scale, et cetera. So obviously, as the mitigating type of a strategy we have been implementing in parallel the alternative manufacturing in the U.S., but that obviously is the first factory, first volumes. We would obviously result in the increased or elevated cost both on the devices and the HeatSticks and it will take a while until U.S., on a stand-alone basis, would close at the same level of the benefits of the cost, if you like, as we had on international. So for us, it clears the path for IQOS, top blend and ILUMA. So we're bringing a lot of -- or removing that, I should say, uncertainty from today and going forward. And IQOS because it is U.S., it's just another market which we added to the geographical family of IQOS presence from a day one, will have an access as I said to the pipeline of the products and its economic cost benefits as an international market. So for us, actually, is clarity and acceleration which we gain through this agreement. And obviously, as we all know, the patent litigation territory has a high degree of uncertainty. And we're running a very sizable business and we plan to have even more sizable business with the addition now of U.S. and that clarity and the visibility going forward is very important which I believe is also important for investors too.

Mirza Faham Ali Baig:

Hi, guys. Good afternoon. Thank you for the questions. I have a couple as well, please. Firstly, you're guiding for another impressive year of mid-teens heated tobacco in-market sales growth. You've highlighted Europe will be within that range. Historically, Europe has done slightly better. What markets make up the sort of difference to help you to still get to the mid-teens growth? If you could allude to the larger markets. And within that, are you assuming any contribution from Taiwan, Saudi Arabia, you mentioned? And what should we expect for the U.S. as well, please?

Mirza Faham Ali Baig:

Thank you. And then just one other question, please. So you're expecting a smoke-free acceleration in 2024, but that's not translating into group net revenue growth acceleration in 2024. Are you expecting a softer performance in combustibles in '24? Is that the discrepancy?

Emmanuel Babeau:

Just to add to what Jacek has just been saying. I mean indeed, it's taking into account that 2023 was exceptional when it comes to price increase with close to 9% on the combustible portfolio and we don't intend to repeat that. We are guiding to a mid-single-digit price increase for 2024. So of course, that will have an impact and make a difference on the growth of our revenue on the combustible business.

Callum Elliott:

Hi, good morning. Thank you for the questions, guys. I just wanted to start with disposable vaping products. We've obviously seen these products have huge success in the U.S. in 2023 and the U.K. also driving us a steeper volume decline for commutable cigarettes in those markets. Obviously, your combustible cigarette business in those two markets is not huge, if nonexistent, obviously, in the U.S. So not a huge impact on your business so far. But my question is why do you think we haven't seen equivalent success for these products in the markets that are big markets for your business and the EU in particular? And do you think this could be a threat to your business in 2024?

Callum Elliott:

I guess I understand that, yes. But why hasn't that -- it seems like in the U.S. and the U.K., that hasn't been an impediment to these products' success over the past 12, 18 months.

Callum Elliott:

Okay. And I have a follow-up that is related but maybe a slightly more philosophical question. In a number of markets and especially the U.S. related to some of these disposable vaping products, we've been seeing this formation of -- I would describe it as like a dual-tiered market that's been forming with big legacy players such as yourselves who are forced to play by the rules and hold themselves to a certain set of standards, marketing only to existing nicotine users and all of us will have seen your video on ZYN last week, I would imagine. But at the same time, we also have a secondary set of smaller new businesses who seem to be doing basically whatever they want and often illegally, but having great success within the marketplace and attracting lots of consumers. And so I guess my question is, do you think that this dual-tiered structure that seems to be forming in a number of markets, structurally impairs the attractiveness of your business and your brands when it seems like you're just being forced to play on a playing field which is not level?

Callum Elliott:

Okay, thanks, Jacek.

Operator:

Our final question will come from Matt Smith with Stifel.

Jacek Olczak:

Yes. So a lot depends, obviously, we target adjusted the live growth above on the revenue growth. So obviously, we are assuming some improvement in the margins. But on the other hand, I think we will have enough of the resources to support that revenue growth. So it is -- if we were to completely stop investing, obviously, the expansions on a wide growth would be much more significant, margin expansions will be much more significant, but we are -- it is not what we see in our strategy. So I think once we operate it at scale and we build, like the consumer has there, so the scale in the U.S., the revenue is very substantial over there, at least by the market standard. And the revenue, which we generate from a small crew, but also combustibles on international with that sort of a revenue growth rate, I think we have a room to provide for the investments to support today's and tomorrow's growth while also allowing for driving the margin expansion. We also have provided here some inflationary pressure. And I think, especially on the combustible, I -- we assume that the 2024 is sort of the last year of this extra ordinary life of inflation under pressure. And as of 2025, in other words, we should start seeing easing when the COGS pressures, and this is about delivering some other materials. And I think every incremental IQOS and every incremental ZYN is obviously requires proportionally less of the investment with the first IQOS and the first ZYN. So, I mean, the scale offer is going forward, there's opportunity for supporting the margin.

Jacek Olczak:

Thank you, Matt.

Jacek Olczak:

Thank you, all. Speak to you soon.

Operator:

That concludes today's call. Thank you for your participation. You may disconnect at this time.

Operator:

Good day and welcome to the Philip Morris International Third Quarter 2023 Earnings Conference Call. Today's call is scheduled to last about 1 hour, including remarks by Philip Morris International Management and the question-and-answer session. [Operator Instructions] Media representatives on the call will also be invited to ask questions at the conclusion of questions from the investment community. I will now turn the call over to Mr. James Bushnell, Vice President of Investor Relations and Financial Communications. Please go ahead, sir.

Emmanuel Babeau:

Thank you, James, and welcome, everyone. We delivered very strong and better than expected performance in Q3, driven by IQOS and ZYN. Adjusted Diluted EPS grew by an excellent plus 20% in currency neutral terms to reach a record quarterly high of $1.67, despite a significant adverse currency impact in the period. Once again, our total volumes were positive, with the Q3 progression of over plus 2% positioning us to deliver our third straight year of growth. While not yet in our organic metrics, ZYN continued its exceptional growth with US volumes up by plus 66% in Q3 and over plus 50% year-to-date with a substantial increase in category share. Importantly, our IQOS business delivered another strong quarter with HTU shipment growing plus 18%, in line with the year-to-day trend. As covered at our recent Investor Day, HTU volumes have excellent unique economics relative to cigarettes, and the plus 16.5% organic net revenue growth from smoke-free product was a key driver in both our high single digit organic top line and double digit organic operating income growth. Smoke-free products made up over 36% of total net revenue in the quarter as we drive toward our new ambition of over two-thirds by 2030, making us substantially smoke-free. In combustibles, we delivered very robust performance with plus 6% growth in organic net revenues, strong pricing and higher category share despite the impact of adult smokers moving to smoke-free product. Our impressive operating income growth drove organic year-on-year margin expansion and a sequential improvement compared to the second quarter. This includes [healthy] (ph) expansion in the gross margin of our IQOS business, which surpassed combustible in the period and lower than expected commercial costs. Overall, we are pleased to report another strong quarter and we look forward with confidence to the remainder of the year and beyond. Turning now to the headline numbers. We surpassed $9 billion in quarterly net revenues for the first time as strong positive volume and continued excellent IQOS momentum supported organic net revenue growth of plus 9.3%. This organic growth does not include the impressive plus 22% adjusted ex-currency top line growth of Swedish Match led by ZYN. Our organic net revenue per unit grew by plus 7%, driven by the increasing proportion of IQOS HTUs in our sales mix and very firm combustible pricing of plus 9%. This positive top line and mixed performance drove very strong organic operating income growth of plus 11.3% and organic margin expansion of plus 70 basis points. Again, this excludes the exceptional performance of Swedish Match, which is included in our adjusted diluted EPS. We delivered adjusted diluted earning per share growth of plus 20.3% excluding an unfavorable currency impact of $0.17 notably due to the Russian ruble and the balance sheet related currency impact in Argentina, as disclosed at our recent Investor Day. Sequentially, lower net financing costs were broadly offset by a higher tax rate. Our excellent third quarter combined with the robust H1 resulted in strong delivery year-to-date. I want to highlight our volume growth of plus 1.5% and organic net revenue growth of plus 7.7%, again, reflecting continued dynamic IQOS performance and combustible pricing. In addition, Swedish Match currency neutral net revenues increased by plus 18%, excluding accounting reclassifications. Year-to-date, operating income grew by plus 2.4 organically, despite accentuated margin headwinds and notable OI decline in the first quarter due to the headwinds covered previously, which are now starting to subside. Combined with outstanding ZYN performance, this resulted in year-to-date currency neutral adjusted diluted EPS growth of plus 10.7% to $4.65. This is an excellent performance. Turning now to the full year outlook. I am pleased to share that following this very strong year-to-date delivery, we are raising our volume, organic sales growth and currency neutral adjusted bottom line growth forecast. First to volumes, where we increase our outlook to plus 1%, to plus 1.5% total shipment growth for cigarettes and HTUs, despite a lower expectation for the total industry. Within this, we expect to deliver HTU shipment volume within the lower half of our prior 125 billion to 130 billion range. While IQOS fundamentals remain strong, this narrowing reflects a further delay to the expected market launch in Taiwan, limited underlying growth in Russia and Ukraine, as well as some uncertainty related to inventory level in the EU as trade partner adjusts to the upcoming HTU flavor ban. For combustible, the resilience of our portfolio is reflected in an updated forecast of a 1% to 2% cigarette volume decline. ZYN continues to perform exceptionally with strong adult consumer traction. Following a further step up in the US volume run rate, we are now increasing our full year nicotine pouch forecast range to 390 million to 410 million cans. Combining the improved volume outlook with robust pricing and continued positive mix, we are narrowing our organic net revenue growth forecast to around plus 8%, the midpoint of our previous range. As I will come back to shortly, we expect excellent organic OI growth over the second half of the year. Combining this strong profit performance with the continuation of ZYN’s phenomenal growth and diligent cost management allows us to raise our currency neutral adjusted diluted EPS growth forecast to plus 10% to plus 10.5%. This means we now expect double digit growth for the third year running and translate into a full-year range of $6.05 to $6.08, including an estimated unfavorable currency impact of $0.53 at prevailing rates. Last, despite increased currency headwinds, we continue to expect operating cash flow of around $10 billion for the year. This sets us up nicely as we focus on deleveraging towards our target of around 2 times adjusted net debt to EBITDA in 2026. Now, let me provide a different view of our forecasted results. As you can see, 2023 has very much been a year of two halves with a number of accentuated headwinds in H1, as explained in prior quarters, including steep cost inflation. H2 is a different story, and we believe it is more reflective of the underlying trajectory of our business. First, we expect an accelerated H2 top line with organic growth of around plus 9%. Second, we expect a significant re-acceleration in profit growth. We continue to expect organic operating income margin expansion in H2, and we are well on track after delivering another quarter of sequential adjusted OI margin improvement in Q3, with margins also expanding organically year-on-year. In H2, we expect strong organic operating income growth of around 10%. For the full-year, our expectation remains that organic margin evolution will be towards the lower-end of our minus 50 basis point to minus 150 basis point range, including the expected technical margin impact of around 40 basis points from third-party arrangement in Indonesia and Ukraine. For Q4, we expect strong operating income growth with broadly stable year-on-year organic margin provision. This includes the expectation of higher device sales as we accelerate our ILUMA rollout to reach around 50 markets by year end, complemented by further ILUMA device innovation. This very positive organic OI trajectory in H2 naturally translate into an acceleration in currency-neutral adjusted diluted EPS growth posted by Swedish Match. Now turning back to our results, our total shipment volume increased by plus 2.2% for Q3 and plus 1.5% year-to-date, putting us comfortably on track to deliver our third sequential year of growth. HTU shipment volumes grew by plus 18% in Q3 to reach 32.5 billion units, driven by continued strong performance in Europe and Japan. Adjusting for inventory movement, including the transition back to sea freight, Q3 adjusted IMS grew by plus 14.4%. This includes Europe at plus 16% despite heightened competitive activity, notably in Poland. And a more normalized growth rate in Japan of plus 12%. Excluding Russia and Ukraine where growth remains limited, our adjusted IMS advanced by a very robust plus 16%. These growth rates exclude the excellent development of oral nicotine for which shipment volume grew by plus 19% in Q3 and plus 14% year-to-date on a pro-forma basis, including the US growth of ZYN of plus 66% and plus 56%, respectively. If we were to add the growth of nicotine pouches on a unit basis, our Q3 proforma smoke-free volume grew by plus 19.5% and our total volumes by plus 2.5%. Cigarette volumes declined by a modest 0.5% in Q3 with strong performance in Turkey and Egypt and by 1.3% year-to-date, reflecting solid category share performance in a resilient category, despite robust pricing. I will now walk through the mechanics of our Q3 net revenues. In addition to plus 2.2% volume growth, pricing contributed plus 6.2 points of growth as combustibles remain strong and the negative impact on HTU pricing of the annualization of excise tax increases in Japan and Germany, notably moderated. The increasing proportion of HTUs in our business continues to be a consistent top-line driver, reflecting higher net revenue per unit. The positive mix impact of HTU's overall volume growth and pricing are powerful drivers of our transformation and growth. We expect ZYN to enhance this further as it starts to be included in our organic metrics from mid-Q4. Looking now at adjusted operating income, where the $3.7 billion delivered in Q3 is also a record-high. I am pleased to report that following peak margin headwind in Q1, our organic growth has accelerated nicely as inflation, supply-chain disruption and ILUMA related factors continue to moderate. And the underlying dynamics of our transformation bear fruits. The Q3 progression is slightly above our 2024, 2026 CAGR target of plus 8% to plus 10% organic operating income growth. And as I covered earlier, we expect our overall H2 OI growth to be around the top of this range. This strong operating income growth in excess of an already healthy topline performance drove a better-than-expected organic margin expansion of plus 70 basis-points in the quarter. This was also the first-quarter this year, where gross margin expanded organically, notably, due to lower shipping costs, ILUMA margin improvement and lower device sales compared to the prior year. SG&A cost were also organically lower as a percentage of net revenue reflecting a good cost performance and some phasing between the third and fourth quarter. We delivered a further $120 million in gross cost efficiencies in Q3, now surpassing our $2 billion target for 2021-2023. We aim to continue this run rate, as reflected in our 2024-2026 target of an incremental $2 billion in gross savings. The Q3 margin currency variance include a 0.6 points impact from the Argentina balance sheet related item I mentioned earlier. By its nature, this does not carry-forward to future periods. Now moving to Swedish Match which is meaningfully accelerating our smoke-free growth trajectory as we progress towards becoming substantially smoke-free by 2030. Swedish Match business delivered excellent adjusted currency-neutral net revenue growth of plus 22% in Q3 and plus 18% year-to-date. This means that our adjusted pro forma year-to-date topline growth was 60 basis points higher at plus 8.3%. Swedish Match strong profitability also enhanced our year-to-date adjusted operating income margin by plus 70 basis-points. As we covered at Investor Day, Swedish Match smoke-free portfolio has excellent economic and is already at significant size compared to total PMI with its product contribution or operating profit before G&A to be clear, approaching one quarter of our total smoke-free business year-to-date. ZYN remains the key performance driver as it delivered another remarkable US performance with plus 66% volume growth, reflecting positive momentum across the country. Elsewhere in smoke-free recent trends of share gain in US moist snuff, as well as category mix headwinds in Scandinavia broadly continued. We continue to be very pleased with the positive impact of Swedish Match on our company and I would like to thank the team for delivering such a great performance. Now, let's examine ZYN's recent US performance in more detail. Exceptional progress continued in Q3 with an increase in 12 months rolling shipment volume growth of plus 62% compared to Q3 2022 and plus 14% sequentially. Impressively, ZYN Q3 category volume share grew to 70.8%, which is plus 4.7 points higher year-on year and plus 2.4 point -- 2.5 point sequentially. Retail value share remained strong at around 76%, highlighting ZYN's premium positioning and superior brand equity. This accelerated growth reflect progressive increase in distribution and a further broad step up in nationwide store velocity as the category gains strong traction with adult nicotine users for its convenience and pleasurable experience. Now focusing on IQOS starting with user groups. We estimate there were 27.4 million IQOS users as of September 30th, this represent an increase of 3.7 million user versus one year-ago and 0.2 million compared to Q2 2023. As shown on the right-hand side of the slide, the third-quarter of each year typically experiences slower user growth due to the seasonal influences in the calculation. Both new user registration and devices to legal age smokers continue to advance strongly and at levels broadly in line with Q2 when users grew by 1.4 million sequentially. Also, as in prior years, we expect a substantial acceleration in user growth in the fourth quarter. Moving now to IQOS in the Europe region, where our third quarter HTU share increased by plus 1.3 points to 8.6% of total cigarette and HTU industry volume. Continued share gains include the growing take-up of ILUMA, which is available to over 80% of IQOS users in the region. In addition to Q3 launches in Denmark and the UK, ILUMA was launched in Poland, which, like Japan, is a market with high competitive activity. We look forward to driving its performance here over the coming quarters. While sequential share is, as usual, optically affected by the seasonality of the cigarette category, adjusted IMS volumes continue to exhibit robust sequential growth and reached a record high on the four quarter moving average. This reflects strong year-on-year growth of plus 16% in Q3, despite limited growth in Ukraine. We expect strong IMS volume growth to continue in Q4, with a corresponding increase in market share. In the EU, the majority of member states have transposed a delegated directive withdrawing the heated tobacco product exemption from the characterizing flavor ban international law. The ban in this market will be effective as of October 23rd and the remaining markets are expected to adopt in 2024. As previously mentioned, we are adjusting our HTU portfolio as required in line with this transposition, and while short-term volatility is possible, including in year-end trend inventories. We do not expect significant change in the structural growth of the category. In Japan, IQOS ILUMA celebrated its second anniversary of the national launch in September and continues to exhibit strong growth due to excellent conversion, consumer satisfaction, and retention rates. Adjusted total tobacco share for our HTU brands increased by plus 3 points in Q3 year-over-year to 26.6%. Importantly, adjusted in market sales volume again grew sequentially on the four-quarter moving average, reaching over 10 billion units for the first time in Q3 2023, as IQOA outgrew the heat-not-burn category. In addition to this excellent consumer trend, our Q3 shipment to Japan also benefited from further switching back to sea freight during the quarter. This shift is now substantially progressed and we expect a more normalized rate of HTU shipment in Q4. Our premium-priced TEREA HTUs and mainstream priced SENTIA HTUs continued to grow individually and in aggregate, reaching Q3 offtake shares of around 18% and 8%, respectively, despite the impact of seasonality. Our Japan city shares also continue to progress with a number reaching over 30%. We continue to see a long runway of growth in Japan over the coming quarters. In addition to strong IQOS gains in developed countries, we continue to see very promising growth in low and middle income markets. This slide highlights a selection of Q3 key cities offtake share across markets in Eastern Europe, Africa, Asia, and Latin America. We see notable ongoing success in Egypt with Cairo offtake share of plus 3.5 points to almost 9%. And in Santo Domingo our leading Latin America city, with offtake share around 8%. Most promising is a 3.1% offtake share in [Urban] (ph) Jakarta, where IQOS is only available via the IQOS Club Members program. We continue to see robust offtake volume growth across this important future market, despite seasonal effect on sequential share metrics. I'd like to spend a moment now on combustibles, where our portfolio delivered strong organic net revenue growth of plus 6.2% in Q3 and plus 5.6% year-to-date. This reflect another strong quarter of pricing with notable contribution from Germany and Indonesia. With better-than-expected pricing in Q3 of plus 9% and plus 8.6% year-to-date, we now forecast a full-year increase of plus 8% to plus 8.5%. Our cigarette category share grew by plus 0.6 point in Q3 and plus 0.3 points year-to-date. This reflects notable contribution from Egypt, Poland and Turkey, resulting in only modest volume decline. Our leadership in combustibles helps to maximize switching to smoke-free product and we have fully achieved our ongoing objective of stable category share over the last two years, despite the impact of IQOS cannibalization. This combustible share performance combined with the structural growth of IQOS supports robust overall market-share gains. We captured plus 0.9 point of international cigarette and HTU share in Q3. And plus 0.7 points year-to-date. As covered at Investor Day, our superior share of smoke-free product give us a formidable platform for sustainable market-share gains with superior unique economics. Now let me update you briefly on our exciting innovation and expansion activities, which will be critical as we aim to reach over two-third smoke-free net revenue by 2030, including 60 markets over 50% and 40 markets of over 75%. As we covered at Investor Day, the global rollout of IQOS ILUMA continues. We launched ILUMA in four markets in Q3 reaching 27 markets in total, which represent around 75% of our IQOS business by volume. ILUMA continues to generate excellent growth with upgrades from existing user and new user acquisition. With a further six market launch already this month, we expect ILUMA to be present in around 50 market by year-end and to essentially complete the rollout next year. As also mentioned during Investor Day, superior tobacco taste is critical to our ongoing success, and we are further exploring complex and new test spaces to enhance our tobacco flavor experience. On the other end of the consumer preference spectrum, we will be offering zero tobacco consumable for non-tobacco flavored discovery under the LEVIA brand. Just as nicotine pouches are an evolution from snus to make the oral category relevant to more adult smokers, LEVIA is a similar non tobacco evolution for IQOS, as we broaden our offering to increase switching away from combustibles. The US represents the most significant opportunity to drive accelerated smoke-free growth at both the top and bottom line. We are continuing to invest behind ZYN and readying our organizational and commercial capabilities for the launch of IQOS in Q2 2024 and a scaled-up rollout with ILUMA once authorized. We remain on track to file for IQOS ILUMA's PMTA and MRTPA this months. The international expansion of nicotine pouches remain a key mid to long-term focus, notably for ZYN as the world's leading brand. During the third-quarter, we relaunched ZYN in Switzerland and following positive regulatory developments rolled out ZYN in Finland. Moving now to sustainability. Addressing the product health impact of combustible product by switching adult smoker to smoke-free product, which are designed and marketed for adult-use remains our most critical priority. This transformation is at the core of our strategy as we become a more sustainable business with accelerated growth and returns over time. With regard to tackling climate change, I am delighted to report that the Science Based Target initiative validated our forest land and agriculture emission reduction target, a recognition achieved by very few companies. We pledge to reduce this absolute Scope 3 emission by 33% by 2030, which is significant given that Scope 3 remain the most challenging aspect of any company decarbonization strategy. In September, almost 20,000 employees in over 60 countries participated in World Cleanup Day, showcasing our commitment to raising awareness around littering as part of our wider strategy to reduce post-consumer waste. We have long expressed our support for more rigor in sustainability related reporting and welcome recent moves towards greater consistency in standard under strong governance framework. As part of our ongoing work, we provided responses to consultation request from the International Sustainability Standard Board to have shared the development of their work plan, an update to the [SASB] standards. PMI continues to be recognized by [indiscernible] such as the World Business Council for Sustainable Development as the leader in non-financial reporting. We have much more to share on our sustainability effort and transformation. [indiscernible] will be presenting at the CECP CEO Investor Forum in New York on November 14th, and the event is open to all those who would like to attend. To conclude today's presentation, we continue to deliver sustainable growth through our transformation. The powerful trajectory of our smoke-free business give us confidence in strong full-year results, built on volume growth, positive mix, pricing and cost management. Considering the headwinds faced, notably in the first part of the year. We believe this speaks strongly to the fundamentals of our growth model. Notably, the outstanding performance of IQOS and ZYN continues, further enhancing our position as the global smoke-free champion. We have exciting plans to accelerate our smoke-free future in both the US. The largest smoke-free market and internationally. We are confident in our 2024-2026 CAGR target of plus 6% to plus 8% organic topline growth, plus 8% to plus 10% organic operating income growth and plus 9% to plus 11% currency-neutral adjusted EPS growth. We also as a clear guiding objective with our new ambition to be substantially smoke-free by net revenue in 2030 as another key milestone on our journey toward the smoke-free future. And finally with our latest dividend raise in September, we have delivered 16 years of continuous dividend increase since our 2008 spin, despite the ups and downs of economic and currency cycle. This translate to cumulative 183% increase and CAGR of 77.2% since 2008 with an annualized dividend of $5.20. As these demonstrate our commitment to shareholder return through a progressive dividend remain steadfast. Thank you very much. And we are now extremely happy to answer your questions.

Vivien Azer:

Hi, good morning.

Vivien Azer:

So I'd like to start with ZYN, please. Clearly, a very impressive result with continued acceleration in the top line. Emmanuel, you talked about distribution gains. So, I was hoping you could just level set how much more runway do you see from a distribution standpoint? Certainly, this remains a velocity-driven story, I would think. So that would be question one. And then the follow-up will just be on the margins, which came in way ahead of expectations. You've called out very strong cost management. That's clearly apparent. I'd love to hear your perspective on the durability of the current margin level for ZYN, please. Thank you.

Vivien Azer:

Thank you.

Operator:

Thank you. Our next question will come from Bonnie Herzog with Goldman Sachs.

Emmanuel Babeau:

Good morning, Bonnie.

Emmanuel Babeau:

Yes, Bonnie. So I think it's, of course, something on which we will be able to elaborate once we have been landing the year after the ban put in place on where the country are implementing it at the end of October [indiscernible] in all countries. One of the questions we have is, as with some reduction with some SKUs, does it mean that they are globally going to reduce the level of inventory and can this impact the level of shipment toward the year-end? So I think we're flying that because, of course, we continue to be with a view that this ban should not ultimately bring major disruption, and we've been elaborating on many occasions on why we think that this ban is not going to ultimately change the dynamic in the category. But it's so that we have some question mark on the landing for the reason I've just been describing on the level of inventory. That's why we are -- I mentioned we need to make sure that we are as clear as possible on the possible, I would say, temporary effect that this could generate. Now when I look at our shipments for the year. So we are clarifying the lending area. When I look at the 2023 performance versus 2022 performance, that will mean even in the low end of the bracket, an acceleration in terms of growth versus the growth that we experienced in 2022 in terms of incremental billion of [indiscernible] being sold. And of course, shipments are, as we know, what we are selling, what is probably more important is the consumer offtake. And here, frankly, we see the momentum continuing with no change. And I think the Q3 number where we have seasonality. But when we look at Q3, what we expect for Q4, we are very much with the same strong 15% to 16% IMS growth. And we are in line with what we have experienced last year. So that shows -- and by the way, it's a percentage on a higher base. So in fact, in volume, that means that the volume growth is higher. So we don't see any change in the momentum. We see a lot of strength in the growth, and that's visible in the volume and the market share that we are reporting today for Q3.

Emmanuel Babeau:

Sure, Bonnie. So actually, last year, we were flat in terms of user acquisition. So we're doing better this year than last year in terms of user evolution. And I think we are in line with what we experienced in 2021, if I remember well, I think we've been sharing the numbers. So that's a typical pattern for Q3 which is due to the mythology on how we calculate the user growth. And I think we have today the -- as I said, the element of the momentum that we are seeing on people buying the device and people registering that is pointing to the fact that we see the same momentum, there is no change. And last year, we finished the year with a strong user growth, and we target to do the same this year. So I have to say it's remarkably stable in the strength, if I can use this expression. And as I said, we could be at the end of the day, in fact, growing in shipments and in IMS volume more than last year. So the percentage is about the same. Again, the basis being higher, it means that we're going to increase in terms of volume differential year-on-year.

Emmanuel Babeau:

Thank you.

Gaurav Jain:

Hi, good morning.

Gaurav Jain:

So I have a question on the U.S. cigar side of things. So clearly, the FDA stand as rule-making process to ban flavored cigars to the [OMB] (ph). So first, how will you address that? And secondly, if I look at the reported numbers on cigars, it seems that the revenue had a pretty steep decline this quarter. Can you help us understand what's happening there?

Gaurav Jain:

Sure. Thank you. And then my second question is on FY 2024 EPS and what's the base we should use to project that? Because I heard a comment that the Argentinian balance sheet revaluation impact, which is about $0.06 that will not recur in FY 2024. So we should add back to FY 2023 EPS? And then could you also just comment on Russia exposure and the [CLCPS] (ph)?

Gaurav Jain:

Thank you so much.

Operator:

Thank you. Our next question comes from Pamela Kaufman with Morgan Stanley. Please go ahead.

Emmanuel Babeau:

Hi, Pam. Good morning.

Emmanuel Babeau:

Sure, Pam. Happy to do that. So yes, combustible is being resilient. We have a decline, but it's a modest decline in Q3. Let's be clear, this is driven by a few market where we see a nice share gain. One is Turkey, the other one is Egypt. As you can imagine, they are not market with great profitability per stick. So let's be very clear. We have a nice performance on combustible on volume, to some extent on revenue. All the great work that we are doing now on increasing OI and growing margin is first and foremost driven by our smoke-free product, IQOS first, ZYN second and [indiscernible]. So yes, great performance when it comes to volumes, greater performance versus the decline that we have seen in the past few years. Good impact on revenue. We've been doing good on price increase as well. But remember, that's a category on which we've seen a lot of inflation on our cost and part of the growth is generated by market with low profitability.

Emmanuel Babeau:

Look, we discussed that three weeks ago and there is nothing new on the PMTA. We don't know what's going to be the time line. It's at the discretion of the FDA, and we see that a lot of things are taking significant time to be -- decision to be taken. Let me make a couple of comments on this PMTA process, nevertheless. The first one is that, we have with our snuff product, [indiscernible] an MRTPA of Level 1. So the FDA has been recognized that this product are representing a reduced risk versus combustible cigarettes and we're very clear as benefit claim. We believe that by nature, this product should be considered as equally good, if not better. And we believe that they have the potential to really convince million of smokers to move away from combustible cigarettes to have a better way of consuming nicotine. So we are really helpful that -- hopeful that the FDA will really take that as a very important element and that it's important to make this product available for nicotine users in the U.S. Now on the flavor, because I think that was probably one of your questions. For the same reason, we believe it is important that the consumer has the choice of flavor, if it is a reason for them to move away from combustible cigarettes to this better product. Having said that, we have the example of a ban on flavor in California. And the reality is that, there was an adjustment during a couple of months, and then the [rules] (ph) resumed without flavor in California and we are today very, very significantly, I think we are close to 30% above the pre-ban level in California. So it shows that these products are extremely attractive and resonate with the nicotine user, with the smokers and with other nicotine users beyond the flavor, which is very good news.

Emmanuel Babeau:

Thank you, Pam.

Matthew Smith:

Hi, good morning, Emmanuel.

Matthew Smith:

If we take the full year organic profit margin guidance, the down 150 basis points or so and the year-to-date performance, along with your commentary around kind of a flattish year-over-year performance in the fourth quarter, can you talk about some of the factors in the fourth quarter. I understand there's a lot of crosswinds here, but you get the benefit of Swedish Match rolling into the organic base. And then you mentioned you've completed the shift to -- back to sea freight for HTU consumables in Japan. So can you talk about some of the headwinds to margin in the fourth quarter? Maybe some detail around your expectations around the incremental ILUMA launches or any other factors would be helpful.

Matthew Smith:

Thank you for that. And just as a follow-up, when you talk about investments in the fourth quarter, should we think of that as a sequential step-up in investment relative to the level in the third quarter? Or is that more of a year-over-year higher investment compared to the fourth quarter of 2023. And I'll leave it there.

Matthew Smith:

Thank you for that.

Operator:

Thank you. Our next question comes from Owen Bennett with Jefferies.

Emmanuel Babeau:

Good morning, Owen.

Emmanuel Babeau:

Thank you. Yes. So we have this situation in Scandinavia on nicotine pouch where the product is already present, mainly in Sweden, where it's a nicely growing market. That's not where we enjoyed the biggest market share. So we are globally year-to-date, growing on nicotine pouch in Sweden, but are not -- we're not talking about big volumes here as we have our strong leadership in Sweden on snus. Outside Scandinavia, we are just at the beginning. So yes, we are launching. So we explained that we've been launching in Switzerland, Finland as well, even in the Nordics. There will be more market to come. Now it's going to be hopefully nice, but it's going to be small versus what we see in the U.S. You see what I mean. So it's going to be difficult to see given the strength that we are seeing in the U.S. to see volume outside the U.S. showing their strengths. Now yes, it's going to add very nicely additional numbers. But again, it's not going to be huge compared to the U.S. We'll see with TPD if there is any decision taken around nicotine pouch. Of course, if there is anything decided that will -- in that respect, which we don't know today that may influence the way we invest on this category in the EU. But frankly, at that stage, it's too early to say because we don't know what's going to be discussed, if anything on that one. And therefore, we'll see.

Operator:

Thank you. Our last question will come from Andrei Condrea with UBS.

Emmanuel Babeau:

Frankly, I mean, I've been hearing things about that. I mean I know what the assumption is everybody going to be under GLP-1, and therefore, they're going to drive massive change in consumer behavior. And I'm not even able to tell you what would be the impact for somebody who is a nicotine user and is going to take GLP-1. I'm not sure we have any serious study on human behavior on that that is going to say that. So first of all, I don't know how broad the usage of this medicine as drug is going to be. Second, I don't know what's going to be the potential impact. So I'm not sure that today we can say anything relevant and that makes sense on that topic.

Emmanuel Babeau:

Thank you.

James Bushnell:

Hi. This is James Bushnell, Vice President of Investor Relations. That concludes our call today. Thank you again for joining us. If you have any follow-up questions, please contact the Investor Relations team. Thank you again, and have a great day.

Operator:

This does conclude today's call. We thank you for your participation. You may disconnect at any time.

Operator:

Good day, everyone, and welcome to the Philip Morris International Second Quarter 2023 Earnings Conference Call. Today's call is scheduled to last about one hour, including remarks by Philip Morris International management and a question-and-answer session. [Operator Instructions] I will now turn the call over to Mr. James Bushnell, Vice President of Investor Relations and Financial Communications. Please go ahead, sir.

Emmanuel Babeau:

Thank you, James, and welcome everyone. Our business delivered outstanding performance in the second quarter of 2023, exceeding our expectations to reach a record high quarterly adjusted diluted EPS of $1.60. This was driven by impressive ZYN and IQOS growth, coupled with strong combustible results. We delivered total cigarette and HTU shipment volume growth of 3.3%, putting us well on track for our third consecutive year of positive volumes. This excellent result underpinned double-digit organic topline growth and high-teens currency-neutral adjusted diluted EPS growth. We also expanded our leadership in smoke-free products in the period. Firstly, IQOS’ strong momentum continued, with adjusted in-market sales volumes, led by plus 16%, and shipments up by plus 27%. This reflects very good user growth of plus 1.4 million in the quarter and continued strong traction across the world. This is increasingly driven by IQOS ILUMA, which is now available in 23 markets, representing around two thirds of our IQOS business by volume. Secondly, and now two full quarters after the Swedish Match acquisition, ZYN is delivering an exceptional acceleration to our smoke-free business. US volumes grew by over plus 50%, including a notable step-up in June. We are delighted with this performance. Our combustible business also delivered better-than-expected results with over plus 7% organic net revenue growth after a very robust quarter for pricing and resilient volumes. This was a key contributor to the strong plus 7% organic operating income growth, with a plus 210 basis points sequential improvement in our adjusted operating income margin. Turning to the headline numbers, positive volumes supported very strong organic topline growth of plus 10.5%, with continued excellent IQOS momentum and a further acceleration in combustible pricing. This does not include the remarkable plus 19% pro forma ex-currency topline growth of Swedish Match, led by ZYN, with combined pro forma ex-currency net revenues increasing by plus 11.1%. Our total reported currency-neutral net revenues grew by plus 19%. Our organic net revenue per unit grew by plus 7.0%, driven by the increasing proportion of IQOS HTUs in our sales mix and combustible pricing. Due to these positive factors, adjusted operating income grew by a very robust plus 7% organically despite continued inflationary headwinds. This excludes the tremendous growth of ZYN, and starting in Q4, our organic results will include Swedish Match. Adjusted OI margins improved 210 basis points sequentially, and while still organically lower year-on-year by 140 basis points, this better-than-expected performance was notably supported by combustible strength and favorable timing of certain costs. We also increased our participation in the below Tier 1 segment in Indonesia, which now represents close to 40% of its industry volumes, and is slightly dilutive to our margins. This organic delivery, including the favorable timing of costs, combined with exceptional June ZYN volumes, and a lower tax rate, allowed us to outperform our most recent Q2 forecast. We delivered adjusted diluted EPS of $1.60, representing 16.9% growth, excluding an unfavorable currency impact of $0.13, notably due to the Japanese yen. While the first quarter of the year contained some exceptional headwinds and distortions due to timing and comparison effects, our business delivered a strong first half, including volume growth of 1.1%. Organic net revenues grew by 6.8%, with Swedish Match’s excellent ex-currency pro forma net revenue growth of 17% for H1, demonstrating its growth accretion to our business. Combined pro forma currency-neutral net revenues increased by around 7.5%. Following peak margin headwinds and a notable operating income decline in the first quarter, the strong improvement in Q2 narrowed the H1 organic decline to minus 2%. As in Q2, this excludes Swedish Match, which delivered an excellent profit performance and made a significant contribution to our adjusted OI margins. We expect continued strong reported and organic operating income growth in the second half. Despite these headwinds, we delivered 5.9% growth in currency-neutral adjusted diluted EPS to $2.98 in H1, providing a strong platform for the second half of 2023 and beyond. Let me now walk through the mechanics of our Q2 net revenues. While not included in our reported shipment volume growth of 3.3%, Swedish Match’s smoke-free volumes grew by 15%, providing impressive accretion to our overall growth profile. Combustible and HTU pricing contributed plus 6 points of growth. This primarily reflects combustible strength, partly benefitting from timing effects. As in Q1, HTU pricing was impacted in Japan and Germany by the annualization of 2022 excise tax increases, and in the case of Japan, the transition to ILUMA. These factors will have less impact in the second half as annualization recedes. We also continue to expect greater visibility on the likely outcome of the court ruling related to the German tax surcharge toward the end of the year. The increasing proportion of HTUs in our business again contributed positively, reflecting higher net revenue per unit, partially offset by unfavorable geographic mix. The positive mix impact of HTUs, overall volume growth, and pricing, are powerful drivers of our transformation and growth. Let’s now turn to gross margins. While the year-on-year trajectory remained negative, we saw improvement versus the first quarter, driven by strong growth fundamentals. Indeed, we achieved sequential improvement of 1.2 percentage points despite increased inflationary pressures, as topline growth accelerated and supply chain disruptions and ILUMA-related factors started to dissipate in the quarter. In addition, cost phasing and the geographic mix of inventory movements, notably for HTUs in Europe, increasingly normalized after an adversely affected Q1. Our IQOS business contributed positively to our gross margin in Q2, and we expect this to continue, partly mitigating combustibles. We expect further improvement in our year-on-year gross margin trajectory in H2 as headwinds continue to subside, ZYN’s outstanding growth continues, and the underlying drivers of our transformation accelerate. As expected, SG&A growth was much closer to net revenue growth in Q2, and at a more normalized growth rate with regard to our full year expectations. Indeed, with such a strong topline in Q2, SG&A costs were lower as a percentage of net revenues. While we continue to invest in IQOS and ZYN, our successful cost efficiency programs continue to deliver, helping to finance growth investments and mitigate inflation, which remains a headwind. With $1.9 billion of gross savings realized to date, including $820 million from SG&A, we are on track to achieve our 2021-23 $2 billion target ahead of plan. Turning now to the 2023 outlook, we are raising our currency-neutral top and bottom-line growth forecasts. We aim to be a growth company starting with volumes. In 2023, we expect to grow total volumes for the third year in a row, even before factoring in the excellent progress of Swedish Match’s portfolio. As part of this growth, we are reiterating our targeted HTU shipment range of $125 billion to $132 billion, while we expect a cigarette volume decline of 1.5% to 2.5%. We are increasing our organic net revenue growth forecast to 7.5% to 8.5%, reflecting the continued momentum of IQOS, the resilience of our combustible business, and the ongoing excellent growth of ZYN, which we expect to contribute positively in Q4. We expect strong organic operating income growth in the remainder of the year to support H2 margin expansion despite the headwinds previously mentioned and certain technical impacts. These relate to the increased use of third-party manufacturing in a few markets, such as Indonesia and Ukraine, and the related growth of the below Tier 1 segment in Indonesia I already mentioned. The full year estimated impact of these factors is around 40 basis points on our adjusted OI margin, and without this impact, we would expect to be broadly in the middle of our forecast organic margin range. On top of this organic evolution, we expect Swedish Match to add around 50 basis points of accretion. Our strong topline and OI outlook allows us to raise our forecast for currency-neutral adjusted diluted EPS growth to 8% to 9.5%. This translates to a revised range of $6.13 to $6.22, including $0.33 from unfavorable currency at prevailing exchange rates, notably due to the Japanese yen and Russian ruble. This forecast continues to assume around $150 million for incremental investments in the US, and our Wellness and Healthcare business. It also assumes around $1.2 billion in net finance costs, which includes higher interest on variable debt, partly offset by better returns on cash deposits. As previously mentioned, our forecasts do not assume any contribution from a potential favorable ruling on the Germany tax surcharge. Focusing on the second half in more detail, we expect strong performance on all key metrics as smoke-free products deliver an increasingly positive impact. In Q3, we forecast high single-digit organic topline growth, with HTU shipments of 31 billion to 33 billion units, and adjusted diluted EPS of $1.60 to $1.65, including $0.06 of unfavorable currency at prevailing exchange rates. Looking ahead to Q4, we expect notably strong reported and organic OI growth as certain inflationary impacts are annualized, and we increasingly benefit from an optimized ILUMA supply chain and consumables. As I mentioned, Swedish Match will also be included in our organic figures during the quarter. The exceptional growth of ZYN is clearly margin-accretive, as visible in our adjusted H1 figures. Turning back to our results, our total shipment volumes increased by 3.3% for Q2, and 1.1% year-to-date. HTU shipment volumes grew by 26.6% in Q2 to reach 31.4 billion units, notably driven by continued strong performance in Europe and Japan. In addition to fundamental strength, HTU shipments to Japan were boosted in Q2 by around 2 billion units as we increased sea freight, with corresponding increases in inventory levels. As I mentioned earlier, total PMI adjusted in-market sales volumes of HTUs increased by 16% in Q2, continuing the excellent trend seen in Q1. H1 shipment volumes grew by 18.5%. Notably, this does not include the excellent growth prospects of oral nicotine, for which shipment volumes grew by 14% in Q2 and 12% in H1 on a pro forma basis. Cigarette volumes declined by a modest 0.4% in Q2, with notable support from Turkey and Egypt, and by 1.7% for H1, reflecting a solid category share performance in a resilient category, despite stepped-up pricing. Our smoke-free transformation continues to progress rapidly. Due to the continued impressive performance of IQOS, heated tobacco units comprised 16.4% of our total shipment volume in H1 as compared to 14% in the first half of 2022, despite a resilient cigarette category. Including oral smoke-free products, this would be close to 18%. Powered by IQOS and ZYN, smoke-free products made up 35% of our adjusted net revenues in H1, compared to 30.9% for the same period in 2022. IQOS devices accounted for approximately 4.5% of our H1 inhalable smoke-free net revenues. Focusing now on combustibles, our portfolio delivered strong organic net revenue growth of 7.4% in Q2 and 5.2% in H1. This reflects strong Q2 pricing, with a notable contribution from Indonesia and the Philippines. While we don’t expect the exceptionally strong Q2 pricing of 9.4%, which benefitted from timing factors, to be fully replicated in H2, we now forecast a full-year increase of 7% to 8%. Our cigarette category share grew by 0.7 points in Q2 on a year-over-year basis, including contributions from Duty Free, Egypt, and Turkey, and by 0.1 point in H1, resulting in only modest volume declines. Our leadership in combustibles helps to maximize switching to smoke-free products, and we have fully achieved our ongoing objective of stable category share over the last 18 months, despite the impact of IQOS cannibalization. The combination of our stable share in combustibles and the continued growth of our leading smoke-free brands, positions us to deliver total market share growth over time. We captured 1.1 points of international cigarette and HTU share in Q2, and 0.5 points in H1, with notable contributions from Turkey and Japan. Impressively, despite increasing competition in many markets, our volume share of the growing heat-not-burn category remains stable at around 75%. This is supported by ongoing ILUMA market launches and increasing focus on our two-tier HTU portfolio, providing adult smokers with an expanding range of innovative and high-quality alternatives to cigarettes. PMI HTUs again strengthened their position as the second largest nicotine brand in markets where IQOS is present, with a sequential share gain in Q2 of 0.2 points to a record 9.2% share. We estimate there were 27.2 million IQOS users as of June 30th. This reflects excellent growth of 1.4 million adult users in Q2, with notable progress in Japan and Europe, in addition to a broad range of other geographies. While fundamentals remain very strong, I remind you that Q3 user growth can often be below the average for the year due to the seasonal factors evident in prior years. I will now turn to IQOS in the Europe Region, where we are approaching a milestone of 12 million users. This reflects the further roll-out of ILUMA, which is now available to around 70% of IQOS users in the region, and the expansion of our two-tier portfolio. As an illustration of its progress, TEREA is already close to 100% of our HTU in-market sales volumes in the first launch markets of Spain and Switzerland. Our second quarter HTU share increased by 1.6 points year-over-year to 9.0% of total cigarette and HTU industry volume. While sequential share is, as usual, optically affected by the seasonality of the cigarette category, adjusted in-market sales volumes continue to exhibit robust sequential growth, and reached a record high on a four-quarter moving average. This reflects strong year-on-year growth of 20% in Q2, outstripping the 11% growth in HTU shipments, which were affected by some residual effects from the inventory dynamics seen in Q1. We expect robust growth in HTU shipments, adjusted in-market sales, and overall region organic net revenues in the second half. We continue to be encouraged by the increasing number of European countries adopting multi-year excise tax plans, with clear differentiation of smoke-free products. Over half of EU member states have now passed multi-year plans. Also in the EU, a number of member states are currently transposing the Delegated Directive, withdrawing the heated tobacco product exemption from the flavor ban into national legislations. The ban is scheduled to come into effect on October 23rd, and we will be adjusting our HTU portfolio as required, in line with this transposition. While short-term volatility is possible, we do not expect a significant change in the structural growth of the category. To give some further color on our continued progress in the region, this slide shows a selection of the latest key city offtake shares. The success of IQOS continues across a diverse range of geographies from Western, Southern, Central, and Eastern Europe, including markets with and without ILUMA. Despite the denominator effects of the combustible category I just mentioned, share results remain very strong. We are very pleased with trends in Rome, showing a sequential step-up to 28% share following the ILUMA launch. Robust progress in London and Munich also bodes well for these two key markets. While the Q2 2022 comparison for share in Vilnius was helped by the popularity of certain bundle offers, the share of over 40% remains impressive, and underlying offtake continues to grow. In Japan, IQOS ILUMA continues to drive impressive growth momentum. Smoke-free products made up over 75% of our Japan net revenues in H1, clearly showing the path for the broader company. Adjusted total tobacco share for our HTU brands increased by 3.4 points in Q2 to 26.3%, further strengthening TEREA and SENTIA’s positions as the clear number one and two heat-not-burn brands, despite intensified price competition for mid and low-price offerings. Importantly, adjusted in-market sales volumes again grew sequentially, reaching a record high of 9.3 billion units on a four-quarter moving average, as IQOS outgrew the heat-not-burn category. In addition to this excellent consumer trend, our Q2 shipments to Japan also benefitted from progressively switching back to sea freight during the quarter. In addition to strong IQOS gains in developed countries, we continue to see very promising growth in low and middle-income markets. This slide highlights a selection of Q2 key city offtake shares across markets in Eastern Europe, Africa, Asia, and Latin America. Notable ongoing successes include Egypt, with Cairo offtake share surpassing 8.5%, and Bulgaria, with offtake share in Sofia exceeding 15%, despite the usual impact of seasonality that I mentioned. We continue to see robust offtake volume growth across these important future markets. Now moving to Swedish Match, which is meaningfully accelerating our smoke-free growth trajectory. As covered earlier, the business delivered outstanding currency-neutral net revenue growth of 19% in Q2 and 17% in H1. This means that in the first half of the year, Swedish Match has added 70 basis points of currency-neutral growth to our pro forma topline, and 60 basis points to our adjusted OI margin. In the US, ZYN delivered another exceptional quarter, with volume growth of over 50%, reflecting positive momentum across the country. Elsewhere in smoke-free, recent trends of share gains in US moist snuff, as well as category mix headwinds in Scandinavia, broadly continued. The cigar business performed well, with Q2 organic net revenue growth of 16%. This reflects ongoing share gains despite being an early mover on category pricing. I would like to again congratulate and thank all the Swedish Match employees for continuing to deliver terrific results as we thoughtfully integrate our activities, which is progressing very well. Looking at ZYN’s US performance in more detail, exceptional year-over-year volume growth in cans of 53%, also reflects a 22% sequential increase versus Q1, 2023. This accelerated growth reflects progressive increases in distribution and a broad nationwide step-up in store velocities as the category gains strong traction with adult nicotine users for its convenience and pleasurable experience. This includes California, which implemented a statewide flavor ban in December. While such elevated rates of growth may not continue indefinitely, the structural indicators remain very encouraging. Impressively, ZYN category volume share grew 2.2 points compared to prior year and 1 point sequentially, despite continued discounting from less premium offerings. Retail value share also grew to 76.8%, highlighting its premium positioning and superior brand equity. Now, let me provide an update on our innovation and expansion plans as we further accelerate our smoke-free transformation. First and foremost, the global roll-out of IQOS ILUMA continues to be a top priority. We launched ILUMA in six markets in Q2, and with HTU manufacturing constraints now normalized, we aim to be present in around 50 markets by the end of the year. The most significant opportunity to drive accelerated growth is in the US We are investing behind ZYN and readying our organizational and commercial capabilities for the launch of IQOS in Q2 next year. As mentioned in today’s release, we are also on track for IQOS ILUMA PMTA and supplemental MRTPA submissions in Q4 2023. Our philosophy on the US remains unchanged. We will seek to accelerate our topline with IQOS and ZYN, supported by disciplined investment and leveraging both our extensive experience in smoke-free products and Swedish Match’s infrastructure and knowledge, while continuing to deliver strong bottom-line growth for PMI. Our pilot city launches for BONDS in the Philippines and Colombia continue to progress well. The learnings from these markets will be integrated as we roll out more broadly, starting next year. The international expansion of nicotine pouches remains a key medium-term opportunity, notably for ZYN as the world’s leading brand. We are now preparing for the launch of - re-launch of ZYN in several markets. In e-vapor, our refocused approach in select markets is progressing with VEEV ONE, our newly designed pod-based system introduced in four markets, and VEEV NOW, our disposable product, in six markets. Now let me discuss our Wellness and Healthcare segment, starting with its first clinical trial results for our inhalable aspirin product. While it was observed that the experimental product had a rapid onset of effect, which is the key medical advantage sought, there was significant variability in inhaled dose among subjects. The study was therefore deemed unsuccessful, and as a result, product design improvements are required. Our plan was to file this product with the FDA later this year. However, additional time is now required, and the outcome is therefore less certain. In addition, the CDMO business has been facing slower-than-anticipated development, including cost-related challenges. Consequently, we recorded a non-cash goodwill impairment from our annual assessment, as detailed in today’s release. While these elements will postpone the achievement of our 2025 aspiration to reach over $1 billion of net revenues from Wellness and Healthcare products, they will result in a corresponding decrease in the level of investment in 2024. Our ambitions to build and monetize our product pipeline are unchanged. As in the early days of developing IQOS, certain headwinds are to be expected, and the 2021 acquisitions in this segment have provided us with unique and enabling R&D capabilities. We remain committed to developing our Wellness & Healthcare business and continue to see attractive mid and long-term growth potential on many fronts such as inhalable drugs, NRT, and consumer wellness products, including non-recreational cannabinoids, in line with applicable regulatory requirements. We also aim to accelerate Vectura’s growth, and will be exploring potential partnerships to enhance its CDMO business. We plan to discuss all these topics, including our plans for IQOS in the US and a full update on our Wellness & Healthcare business at our Investor Day on the 28th of September in Lausanne, Switzerland. Moving now to sustainability. Addressing the product health impact of combustible products by switching adult smokers to smoke-free products, such as IQOS and ZYN, remains our most critical priority. This transformation is at the core of our strategy, driving accelerated growth and returns over time from a more sustainable business. In addition, we remain committed to delivering best-in-class progress in other key sustainability areas. With our extensive agricultural and manufacturing supply chain, human rights are a very important responsibility for our company. We released our first dedicated report on the topic last month, detailing our strategy to promote, respect, and protect human rights, and the progress to date in implementing our human rights commitment. Our performance on human rights is included in the 19 KPIs of our Sustainability Index, which comprises 30% of executive long-term equity compensation, weighted towards our product transformation. Our goal is to conduct comprehensive human rights impact assessments in our 10 highest risk markets by the end of 2025. These help us better understand and address our impacts, and we are making excellent progress, with seven completed to date. Addressing climate change is another priority for us, and I’m pleased to share that PMI was included in Forbes' first ever Net Zero Leaders List, ranking seventh overall for all US public companies, higher than any other consumer products or services company. To conclude today’s presentation, we delivered a very strong first-half despite a number of headwinds, putting us on track for the third consecutive year of positive volumes and organic net revenue growth of over 7%. The powerful trajectory of our smoke-free business gives us confidence in a strong full year performance, with excellent operating income growth. Outstanding momentum continues for IQOS and ZYN, the world-leading heat-not-burn and oral nicotine brands, and we have exciting plans to further grow oral nicotine pouches in the US and internationally, along with the US commercialization of IQOS next year. Importantly, we remain steadfast in our commitment to generously reward our shareholders, including through our progressive dividend policy. In short, our smoke-free transformation continues to deliver sustainable growth. We look forward to sharing more with you on the next phase of our transformation at our Investor Day on September 28. Thank you very much, and we are now delighted to answer your questions.

Pamela Kaufman:

Hi. Good morning. I wanted to ask about your full year guidance. You exceeded your own Q2 guidance by at least $0.13, but did not flow through the EPS to the full-year outlook, even when factoring the greater FX headwind. What's tempering the flow-through of Q2 upside, and how much does this reflect conservatism around the balance of the year versus a more cautious outlook on the second half or higher investments? Thanks.

Pamela Kaufman:

Okay, thanks. And then just on operating margins, you pointed to operating margins closer to the lower end of your initial guidance range of down 50 to 150 basis points for the year. Can you discuss the puts and takes impacting your margin performance in the second half?

Pamela Kaufman:

Thank you. That's very helpful.

Vivien Azer:

Hi, good morning. I wanted to follow up on the commentary on ZYN, certainly consistent with the very robust trends that we're seeing in the Nielsen scanner data, accelerating growth, strong market share gains. You've spoken in the past about the opportunity to offer some incremental investment for that business unit to expand the sales force, improve distribution and drive velocity. Can you just talk to us about where you are in that assessment time horizon for ZYN, please? Thank you.

Vivien Azer:

That's really helpful. Thank you for that. And then just moving to the Wellness and Healthcare segment for my second question, please, understanding some of the challenges around the clinical trial, I was wondering if you could just comment on your aspiration to delever the balance sheet post the Swedish Match transaction versus the potential need for incremental M&A as you think about an ultimate $1 billion revenue target, understanding that you pushed out the date for that. Thank you.

Vivien Azer:

Thank you.

Gaurav Jain:

Hi. Good morning. So, I have a question on ZYN in the US. So, the volumes are coming in much ahead of where I think consensus is where we were. We also know that US cigarette volumes have persisted at very weak rates despite easy comps. So, what do you think is the cannibalization rate of ZYN on US cigarettes today? And as you project out IQOS growth over the next seven years, if ZYN's cannibalization is higher than what is thought of, then does it mean that the cigarette universe is smaller, which implies that the IQOS opportunity is smaller?

Gaurav Jain:

Sure. Thank you. And the second question I have is on this EU heated tobacco flavor ban. And you mentioned that there could be some volatility. Now, the experience in California has been pretty bad for - post the menthol cigarette ban, and that only 70% of the menthol smoker seems to have been retained in the cigarette market. So, like, what is the precedence? Is there any precedence of a flavored heated tobacco ban anywhere which helps you form the view that the impact will be quite minimal?

Gaurav Jain:

Okay, sure. Thank you so much.

Bonnie Herzog:

All right, thank you. Hi, Emmanuel. I wanted to circle back to your guidance with just maybe a quick follow-on question. Your full-year guidance implies, I guess, more riding on Q4. So, just hoping you could help us understand maybe your level of conviction and or visibility that your business really will strengthen so much later this year. And then, I know it’s early, and I don't expect you to guide next year, but is there anything we should think about that you’re investing in this year that really could position you for even greater growth next year and beyond?

Bonnie Herzog:

Okay. That all makes sense and helpful. And then I just for my second question, I was hoping for some more color on Japan, and it looks like your shipment volume was really strong in the quarter and then your market shares increased nicely. So, could you talk through key drivers of this? And then I believe BAT is cutting their prices on glo Hyper starting in August. So, could you talk through the current competitive environment and then maybe how you expect it might change in light of these actions, as well as how you may need to respond, if at all. Thank you.

Bonnie Herzog:

All right. Thank you again.

Matt Smith:

Hi, thank you for taking my question. I wanted to ask about the pacing of the rollout of ILUMA to 50 markets from the 23 markets where it's available today. Do you expect that to be fairly evenly spread across the second half? And could you talk about the rollout or the expansion, the impact on your operating margin in the second half, as well as your gross margin?

Matt Smith:

That you for that. And if I could ask just a follow-up question on the combustible performance. It's been stronger in terms of both volume and organic revenue contribution, and you made a couple of comments about the demand environment holding up better than your expectation relative to the elevated pricing. Can you talk about the factors that are allowing the consumers to hold up elasticity better than your expectations? Do you expect that to continue now that you're going to lap some pricing action?

Matt Smith:

Thank you for that, Emmanuel. I'll pass it on.

Owen Bennett:

Afternoon, Emmanuel. Hope you are well. So, related to heated competitive dynamics, so all three of your major tobacco peers now appear to be in a better spot, at least versus the past with regard to product offerings at least, and money they're investing into this. I was just wondering if you could comment on IQOS trends in some of the more competitive heated markets where all three of your major peers now have a presence. So, like (indiscernible) for example. So, how is IQOS share holding or ILUMA having less traction in these markets than others? Are you seeing trial of other brands and consumers coming back to IQOS? Thank you.

Owen Bennett:

Cool. Thank you, sir. I appreciate it.

Jared Dinges:

Yes. Hi guys. So, you talked about the ability to use sea freight finally to supply Japan as you progress throughout Q2. Would you be able to confirm that you're no longer capacity-constrained on the TEREA sticks?

Jared Dinges:

Got it. And maybe just to follow up on that, so you guys did call out Europe with IQOS, saw some further negative inventory move in Q2. Should we expect that to reverse in H2? Because actually it's been - on the whole, in H1 it's been somewhat sizable, the negative inventory.

Jared Dinges:

That's clear. And if I can just follow up just one last one. On Russia, given the news last week or this week, just can you give an update on if that business is fully ringfenced at this point?

Jared Dinges:

Got it. Maybe just in terms of supply, like Russia's not supplying any neighboring markets at this point, right?

Jared Dinges:

Perfect. Thank you.

James Bushnell:

Thank you. That concludes our call today. Thank you again for joining us. If you have any follow-up questions, please contact the Investor Relations team. Have a great day.

Operator:

This does conclude today’s program. Thank you for your participation. You may disconnect at any time, and have a wonderful day.

Operator:

Good day, and welcome to the Philip Morris International First Quarter 2023 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. [Operator Instructions] I will now turn the call over to Mr. James Bushnell, Vice President of Investor Relations and Financial Communications. Please go ahead, sir.

Emmanuel Babeau:

Thank you, James, and welcome everyone. I am pleased to report that Q1 performance exceeded our expectations, with strong underlying momentum from IQOS, ZYN and our combustible business. As mentioned at our full-year earnings in February, we expected this quarter to be the weakest of the year due to a confluence of transitory factors impacting our top- and bottom-line. In this context, our business delivered robust results and we look forward with confidence to the remainder of the year. Smoke-free net revenues made up almost 35% of total PMI, despite the impact of adverse timing factors on HTU shipments, with an increasing number of markets crossing the 50% threshold. IQOS continues to deliver strong share and user growth across its geographies, both with the blade version and ILUMA. Where launched, ILUMA’s excellent traction with both existing IQOS users and legal-age smokers is boosting growth, demonstrating the dynamism and importance of our ongoing innovation. ILUMA’s progress is especially notable in the first launch market of Japan, where share growth has accelerated in recent quarters. In combustibles, accelerated pricing across a range of markets helped to deliver robust organic net revenue growth. Swedish Match delivered impressive results, with a stand-out performance from ZYN’s 47% U.S. shipment volume growth compared to the first quarter of 2022. Following an encouraging start to the year, we are well set up to deliver strong performance in 2023 including excellent top- and bottom-line growth for the remainder of the year. Turning to the headline numbers, our Q1 organic net revenues saw robust growth of 3.2% against a very strong prior year quarter with organic growth of 9%. This reflects the continued strength of IQOS and a step-up in pricing but was partially offset by expected HTU inventory movements, which I will come back to. This organic figure does not include the excellent 14% ex-currency top-line growth of Swedish Match, led by ZYN. Our total reported currency-neutral net revenues grew by 9.6%, with combined pro forma adjusted net revenues increasing by around 4%, also excluding currency. Our total organic net revenue per unit grew by 4.4% with strong combustible pricing of 7.4% partially offset by HTU dynamics in Japan and Germany, which I will come back to momentarily. We delivered Q1 adjusted diluted EPS of $1.38, well above our previous expectations. This reflects a strong underlying delivery from our existing operations, excellent Swedish Match performance, and favorable phasing on interest costs. Compared to a record high prior year quarter, and with a number of one-off or accentuated margin headwinds from inflation, supply chain inefficiencies and timing factors as flagged previously, our adjusted diluted EPS contracted by 4.4%. Let me now walk through the mechanics of our Q1 net revenues. We delivered overall adjusted net revenue growth of 4.6% on an organic shipment volume decline of 1.1%. While not included in this number, Swedish Match’s smoke-free volumes grew by an excellent 10% – adding impressive accretion to our overall growth profile. Combustible and HTU pricing, excluding Germany and Japan HTUs, contributed 5.3 points of growth, including positive HTU pricing in a number of markets. This was partly offset by a negative 1.3 point HTU impact from Germany and Japan. The larger of the two was Germany, reflecting a full quarter of the 2022 excise tax increase for which we await a court ruling later this year. In Japan, the October 2022 excise tax increase and transition to ILUMA were also a drag on our top-line, and we expect some of this impact to phase out in the second half. While the increasing mix of HTUs in our business, at higher net revenue per unit, continues to positively impact our performance, lower shipments in Europe this quarter due to wholesaler and distributor inventory movements limited the benefit. This was also the main driver for the difference between our smoke-free organic net revenue growth and HTU shipment volume growth. We expect this positive mix shift to accelerate as both smoke-free organic net revenue growth and HTU shipment growth align more closely with offtake trends for the year, as they also did in 2022. The positive mix impact of HTUs, overall volume growth, and pricing are powerful drivers of our transformation and growth. As expected, the first quarter was impacted by peak margin headwinds at both the gross margin and adjusted operating income level. Our gross margin contracted by 0.6 percentage points due to the net impact of COGS inflation, pricing, volume, mix and productivity savings. We expect the positive elements of pricing, productivities and favorable HTU category mix to increasingly compensate and ultimately outweigh inflation as we progress through the year. Supply chain disruption and the accelerated transition of consumers and our business to ILUMA accounted for a further 0.6 percentage points impact. We anticipate these items to abate as we progress with ILUMA launches and gain efficiencies in our supply chain, including a return to sea freight. In addition, specific cost phasing and the geographic mix of inventory movements, notably for HTUs in Europe, impacted our gross margin by 1.8 percentage points in the quarter. Despite these exceptional Q1 dynamics, we continue to forecast the full-year 2023 margin impact of our heat-not-burn business to be favorable as inventory movements and ILUMA-related factors dissipate. Therefore, and as explained previously, we expect a progressive improvement in our gross profit and OI margins, notably weighted towards H2 as headwinds subside and the underlying drivers of our transformation accelerate. At around 26% of adjusted net revenues, our Q1 SG&A costs are at a similar ratio to the full-year 2022. However, as expected there was a notable increase compared to Q1, 2022 given lower commercial spend at the beginning of last year, the inflationary environment, cost phasing, and front-loaded commercial investments. Our successful cost efficiencies program continues to deliver, enabling ongoing investment and helping to mitigate inflation, with $150 million of gross savings realized in Q1 of which almost $50 million were from SG&A. Importantly, we expect a significant slow-down in SG&A growth to a level below the rate of net revenue growth for the remainder of the year -- which will support OI margin improvement. This brings me to the outlook for 2023. Our robust Q1 performance supports visibility on strong full year growth. We continue to expect 7% to 8.5% organic top-line progression, with a targeted acceleration in HTU shipment volume growth versus 2022. As detailed in this morning’s press release, our other operating assumptions remain unchanged, and we remind you that our organic metrics do not include the contribution from Swedish Match for the large majority of the year. Our updated full year adjusted diluted EPS forecast of $6.10 to $6.22 includes an estimated unfavorable currency impact of 30 cents. Positive estimated impacts from the Euro and a number of other currencies are outweighed mainly by the weakness of the Japanese Yen, as well as the significant depreciation of the Russian Ruble and the Egyptian Pound. This range continues to reflect 7% to 9% currency-neutral growth and does not include any contribution from a potential favorable excise tax ruling in Germany, which we would expect to add around 3 points to our adjusted diluted EPS related to 2023 tax payments. We continue to expect Swedish Match to be low single-digit accretive to our 2023 adjusted diluted EPS after financing, and for an increase of around $200 million in our non-acquisition related interest costs, despite a relatively modest increment in Q1. As discussed at full-year earnings in February, this year’s bottom-line results are expected to be notably H2-weighted. However, we expect our organic net revenue growth to already accelerate in the second quarter into the high single-digits. We forecast second quarter HTU shipment volumes of between 30 and 32 billion, with adjusted diluted EPS in the range of $1.42 to $1.47, including an estimated unfavorable currency impact of 13 cents. Looking ahead to the second half of the year, we expect close to double-digit organic top-line growth and a return to margin expansion. Looking at our full-year forecast through a different lens, after the temporary headwinds in Q1 we expect very strong performance for the remainder of the year. Despite ongoing margin headwinds and investments, we expect organic top-line growth of 8% to 10%, improving margins with expansion in H2 and currency-neutral adjusted diluted EPS growth of 10% to 13%. This reflects the strong underlying drivers of our transformation, with IQOS and ZYN driving volumes at a higher net revenue per unit, combined with stepped-up pricing on combustibles. Turning back to our Q1 results, our HTU adjusted IMS volumes grew by an estimated 16%, demonstrating continued strong growth momentum. HTU shipment volumes of 27.4 billion units were toward the higher end of our forecast range, with growth of 10.4%, which was well below actual offtake trends as anticipated, due to distributor and wholesaler inventory movements. As implied by our full-year HTU shipment forecast, we expect the rate of shipment growth to accelerate for the rest of the year as shipments converge with consumer offtake, and to grow at a faster pace in 2023 than in 2022. Before detailing these inventory impacts, it's important to note that in certain markets, such as Germany, IMS sales volumes are not measured at the point of distributor sales to the retail trade, as the data is not available. In these cases we instead use our shipments as the proxy. This means that shipment fluctuations can impact both IMS volumes and reported market share, and may not be representative of offtake dynamics. Given the volatility seen over this quarter and from now on, where there is a significant difference between estimated offtake performance and IMS data, we may choose to provide market share metrics based on adjusted IMS to better reflect offtake, where adjustments reflect the total estimated impact of distributor and wholesaler inventory movements. As you may note in the appendix to today’s earnings release this is the case for Germany this quarter, where we also provide historical figures. Coming back to Q1, HTU shipment volumes in several European markets were below consumer offtake. This is explained by the reversal of some inventory build-ups at the end of Q4, 2022 to meet the needs of ILUMA launches, as mentioned at our full-year results in February, and also to create some safety stock to mitigate the risk of production and distribution constraints due to energy shortages. As anticipated, we were able to adjust this safety stock in Q1 as the risk receded. We also decreased the level of IQOS blade HTU inventories in several markets to reduce the risk of obsolete stock given the rapid transition to ILUMA. Notably impacted markets include Italy and Germany, where underlying market share and offtake trends remained strong. Italian Q1 IMS volumes grew by 21% compared to the prior year, with market share increasing from 15.4% in Q4 to 17.4% in Q1. In Germany, adjusted Q1 IMS volumes increased over 30% from the prior year with adjusted market share up from 4.7% in Q4 to 5.3% in Q1. Now turning back to the overall picture, while total Q1 cigarette and HTU shipment volumes declined by 1.1%, our total IMS volumes were essentially stable and grew excluding total estimated inventory movements. Our cigarette shipments declined by 3.1%, with resilient trends in many markets. The decline includes a notable impact from a high prior year comparison in Japan and the introduction of an abrupt excise tax increase in Pakistan, resulting in an increase in illicit trade and an industry contraction of over 30%. Volumes also declined in the Philippines following industry pricing, with consumer purchasing power facing ongoing pressure. We continue to target stable to positive combined cigarette and HTU shipment volumes for the year, following growth in 2021 and 2022. This notably does not include the excellent growth prospects of oral nicotine, for which shipment volumes grew by 10% in Q1. Most importantly, the exciting growth combination of IQOS and ZYN presents an unrivalled platform for growth over the coming years. Focusing now on combustibles, our portfolio delivered robust Q1 organic net revenue growth of 3%. This reflects strong pricing of 7.4% with a step-up across many markets including Germany, Indonesia, and the Philippines. With over 80% of planned 2023 combustible pricing implemented or announced, we have good visibility on the full year delivery, although some of the positive Q1 variance reflects earlier pricing compared to 2022. We now forecast a full-year variance of 6% to 7%. Our cigarette category share declined by 0.3 percentage points in Q1, which was essentially all attributable to geographic mix as the total industry declined in large volume markets such as the Philippines and Pakistan. The impact of share movements within markets was neutral, with gains including Egypt, Poland, and Turkey offset by declines in markets such as Ukraine, the Philippines, and Iraq. Importantly, we continue to target a stable category share in 2023 and over time, despite the impact of IQOS cannibalization. Moving now to our smoke-free products, we estimate there were 25.8 million IQOS users as of March 31st. This represents growth of close to 1 million adult users since December with notable progress in Japan and Europe, in addition to a broad range of other geographies. IQOS ILUMA has been a positive catalyst for volume and share growth across a broad range of launch markets, both supporting our strong position in the heat-not-burn category with a superior user experience, and fostering further category growth. For existing IQOS users, ILUMA drives an accelerated upgrade cycle. This enhances retention and full conversion for the future, with a temporary margin impact from concentrated device sales. Indeed, we are now approaching an estimated 10 million ILUMA users with ILUMA taking over 85% of HTU volumes in the first launch markets of Japan, Switzerland, and Spain. ILUMA is also enabling better acquisition and conversion of legal-age smokers, with market share acceleration visible in both earlier and more recently launched markets such as Italy and Korea. Since the introduction in these two markets in Q4, we are seeing encouraging trends in initial launch areas and expect this to be increasingly visible at the national level over time as it is in Japan and Greece, after a seasonal inflection in the latter. Our main focus in Q1 was on ensuring the success of ILUMA in the 16 markets launched by the end of 2022, which cover over half of our IQOS business by volumes. In addition, we launched ILUMA on a limited basis in Indonesia in February via our IQOS club members program. The IQOS club was introduced in 2019 and now has over 100 thousand estimated users across 10 cities, with a notable boost from the launch of ILUMA. We expect to progressively launch ILUMA in more markets this year. With ILUMA accelerating IQOS growth where launched, PMI HTUs continue to strengthen their position as the second largest nicotine 'brand' in markets where IQOS is present with a record high share of 9.0% in Q1. Impressively, as of Q1 PMI HTUs are now the number one nicotine brand in 10 markets with the addition of Italy and Greece during the quarter. Focusing now on Europe, which under our new regional structure includes additional markets such as Ukraine. Our first quarter HTU share increased by 1.7 points to reach 9.2% of total cigarette and HTU industry volume, adjusted for estimated wholesaler and distributor inventory movements, such as those I mentioned earlier in Germany and Italy. On the same adjusted basis, IMS volumes continued to grow sequentially and reached a record high of 11.1 billion units on a four-quarter moving average. This reflects strong progress across the region. We expect our Europe HTU volumes to grow strongly in the remainder of the year while, as in the past, our quarterly HTU share of market can be impacted by seasonality of cigarette consumption during Q2 and Q3. To give some further color on our outstanding progress in the region, slide 16 shows a selection of the latest key city offtake shares. The success of IQOS continues across a diverse range of geographies from Western, Southern, Central and Eastern Europe including markets with and without ILUMA. Notable stand-outs include Budapest with over 35% offtake share as well as Rome and Athens reaching the high twenties. To my earlier comments, we are very pleased with performance in Germany, where offtake share in Munich surpassed 10% for the first time. We are also encouraged by recent positive regulatory developments in Greece where the Ministry of Health approved differentiated health claims for heated tobacco products. Greece is the first country outside of the United States that permitted healthrelated statements following a robust scientific assessment. In Japan, the heat-not-burn category now represents over 35% of total tobacco with IQOS driving category growth. The acceleration seen in recent quarters continued in Q1. Adjusted total tobacco share for our HTU brands increased by 3.4 points to 26.2% with offtake share surpassing 32% in Tokyo and 30% in Sendai. Adjusted IMS volumes again grew sequentially, reaching a record high of 9.0 billion units on a four-quarter moving average. Strong performance in Japan further highlights the importance of continuous innovation and a broad consumable portfolio. Our premium-priced TEREA HTUs and mainstream priced SENTIA HTUs continued to grow through Q1, strengthening their position as the two largest heat-not-burn brands. We are delighted with the progress in Japan and as we look forward to further robust volume growth in the coming quarters, we would also like to remind you of the seasonality impact on quarterly share metrics. In addition to strong IQOS gains in developed countries, we continue to see very promising growth in Low and Middle-Income markets which are now approaching 30% of our total HTU volumes. This slide highlights a selection of Q1 key city offtake shares across markets in Eastern Europe, the Middle East, Asia and Latin America. Notable successes include Bulgaria with Sofia offtake share of over 16% and Egypt, where offtake share in Cairo reached 7.5%. We also continue to see robust offtake volume growth across these important future markets. Now moving on to Swedish Match’s business, which delivered an excellent Q1 performance with currency-neutral net revenue growth of 14% and smoke-free products comprising 77% of total net revenues. Most impressive was the continued outstanding performance of ZYN in the U.S. with 47% volume growth to 73 million cans. While volume growth benefited from inventory movements, including restocking in California following the December flavor ban, underlying growth in volumes was very strong, estimated well above 30%. We are also pleased with the Q1 performance in other U.S smoke-free categories, including moist snuff which gained 0.8 percentage points category share and delivered shipment volume growth of 3%. The smoke-free category in Scandinavia continued to grow driven by nicotine pouches, albeit at a slower rate following January snus excise tax increases in Sweden and Norway, with destocking accentuating the volume decline for Swedish Match’s premium-skewed snus portfolio. In cigars, the business delivered positive pricing and robust shipment volume growth of 4% in a declining category driven by the strong development of natural leaf varieties. Finally, I would like to congratulate Swedish Match’s employees for continuing to deliver excellent results as we thoughtfully integrate our activities. The integration is progressing very well and we look forward to sharing more on our combined growth plans later this year. Now let’s examine ZYN’s recent U.S. performance in more detail. Superb progress continues with a record increase in 12-month rolling shipment volumes of 23 million cans, which equates to 40% growth. Category volume share remained essentially stable despite continued heavy competitive discounting from less premium offerings. Importantly, retail value share for ZYN also remains strong at 75.6%, highlighting its premium positioning and superior brand equity. There are two key engines driving the U.S. growth of ZYN, as covered at CAGNY. First is the progressive increase in distribution, with the number of stores 13% higher than Q1, 2022 at around 140,000. There remains ample opportunity to further increase this over time. Second are velocities, or the number of cans sold per store per week. ZYN velocities continue to grow sequentially and by an impressive 21% compared to prior year as the brand continues to resonate with adult nicotine users. Now, let me update you on our exciting plans to further accelerate our smoke-free journey. As previously mentioned, the full global roll-out of IQOS ILUMA is a major priority. We are on track to make substantial progress this year as HTU manufacturing constraints continue to ease. We continue to work on our IQOS U.S. commercialization plans for launch in Q2 2024, in line with the principles outlined at the recent CAGNY conference. With the benefit of the expertise and commercial tools from launching IQOS successfully in over 70 international markets, and a U.S. market with a clear regulatory framework and the ability to communicate with adult smokers, we remain very positive about the opportunity. Importantly, we believe we can make the necessary investments in the U.S. business, generating additional top-line performance while continuing to deliver strong bottom-line growth for PMI during the investment period. In addition to our premium offerings, we are continuing to focus on BONDS, our latest heat-not-burn innovation that is especially relevant for Low and Middle-Income consumers. Pilot launches in the Philippines and Colombia are progressing well and we intend to continue taking the learnings from these markets before deploying on a wider scale. Another key mid-term opportunity from the Swedish Match combination is the international expansion of nicotine pouches, notably with ZYN -- the world’s leading brand. At CAGNY I mentioned we are targeting up to ten launches or relaunches this year as we look to develop the category with adult smokers who value the convenience, specific use occasions, taste, and satisfaction. We expect this to commence in a few markets this summer, including both developed and emerging countries. While staying clearly focused on the heat-not-burn and nicotine pouch categories, which present the largest and most accretive growth opportunities, we are adjusting our VEEV e-vapor portfolio and approach. We intend to focus on commercializing in select markets and prioritizing profitability given the known category challenges. VEEV ONE is a new pod-based system providing an enhanced user experience with fully outsourced manufacturing of devices and consumables to optimize costs. VEEV ONE will replace the current VEEV product and, as a result, we no longer intend to file a PMTA for the former technology. Instead, we will focus our near-term FDA engagements on IQOS and ZYN. We will come back on future e-vapor FDA authorizations in due course. For disposables, the fastest growing e-vapor segment, we are rebranding VEEBA to VEEV NOW. All of our e-vapor products will now be under the single, recognizable brand VEEV for a seamless consumer experience. We will introduce the new VEEV ONE platform in Canada later this month and will apply an agile and disciplined approach for further VEEV roll-outs later this year. Moving to sustainability, I want to first draw your attention to our 2022 Integrated Report published earlier this month, which outlines the progress we are making towards achieving our purpose and smoke-free future. The report provides a comprehensive run-through of all our most material sustainability topics. This includes those in focus for investors such as post-consumer waste, youth access prevention, decarbonization, and our resource allocation towards advancing our smoke-free transformation. In conjunction with the Integrated Report, we also published an updated ESG KPI Protocol providing even more robust criteria on how we define success and measure ESG performance. It focuses on the KPIs included in our Sustainability Index, which as outlined in our 2023 proxy statement continue to represent 30% of our long-term performance-based equity executive compensation. I am also proud to announce that we released our first TCFD Report yesterday, which updates and compiles our previous disclosures on how we are implementing the recommendations of the Task Force on Climate-related Financial Disclosures in one document. This will be an important topic for many companies as reporting regulations evolve. Lastly, we are also pleased that, following CDP’s triple A recognition, PMI was again included in CDP’s supplier engagement leaderboard, contributing towards achieving our scope 3 ambitions. To conclude today’s presentation, we are on track for strong performance in 2023 despite margin headwinds. Our underlying growth fundamentals remain strong, and we expect these headwinds to progressively ease through the year. Indeed, we delivered higher-than-expected Q1 results which put us on-track for the third consecutive year of high single-digit organic net revenue growth. Continued excellent IQOS and ZYN performance further enhances our position as the global smoke-free champion with leadership positions in the largest category of heat-not-burn and the fastest growing category of oral nicotine. We are taking action through pricing in combustibles and our cost savings initiatives to recover cost inflation, as we progress rapidly toward our ambition to become a majority smoke-free business. Finally, we remain a highly cash generative business with an unwavering commitment to our progressive dividend policy. We look forward to further rewarding our shareholders as our transformation delivers sustainable growth. Thank you. We are now happy to answer your questions.

Bonnie Herzog:

Thank you. Hi, everyone.

Bonnie Herzog:

Hi. I guess, I have a question on your guidance as it relates to Q2, it does now seem to be a bit lighter implying a lot more of the growth is now expected to be in the back half. So just trying to get a sense of how conservative your Q2 guide might be? And then really, Emmanuel, how much visibility and confidence you have that your business really can accelerate and outperform the second half? Maybe you could highlight for us some of the key puts and takes that give you this confidence and maybe where you see the greatest potential upside and also just color on [Indiscernible]

Bonnie Herzog:

No. That's super helpful and just sounds like you've got some pretty good visibility. So that's yes definitely helpful. And then, I guess, just maybe a quick high level question on the health of the consumer in, sort of, your key markets. If you could kind of touch on that for us? And then in the context of that, you've certainly been putting in a stronger combustible cig pricing. So just love to hear a little more color on how the consumer has been responding to those actions and really how confident you are that you're going to be able to continue to push through that pricing for the remainder of the year? Thanks.

Bonnie Herzog:

All right. Thanks for that color, Emmanuel. I appreciate it.

Operator:

We’ll take our next question from Gaurav Jain with Barclays. Please go ahead.

Emmanuel Babeau:

Good morning, Gaurav.

Emmanuel Babeau:

Yes, Gaurav. So I think you rightly pointed to the ruble actually, if you are not going to disclose currency by currency, but if you look at the ruble, just the ruble is more than the net impact of $0.30 that today we are anticipating for the year. So I think it shows a very strong impact of the ruble. And the Egyptian pound continue to devaluate after January. So it's -- I'm not sure we had the full impact of the Egyptian pound. And actually, if you accumulate ruble and the Egyptian pound, you have 80% of the net impact of $0.30, it’s a net impact. Don't get me wrong because you have also the yen that is quite negative. And then you have the euro and a number of other categories that is positive. But I think with the ruble and the Egyptian pound, you have a pretty good explanation of the net impact. I hope it's helpful.

Emmanuel Babeau:

Gaurav, I cannot -- and I will have to consider that I'm not the greatest specialist of the U.S. consumer for combustible cigarettes. So I wonder myself to given an analysis. I think it's in line with my previous comment on the fact that so far, we have been a pretty good resistance from the consumer to same price increase and coping with inflation in Europe. I'm not able to tell you why there is a difference here. We know that the social model in Europe is different. You may have some more protection, some more safety needs that are playing and maybe limiting the impact of inflation. There was maybe more compensation given from various government on trying to fight again energy price increase and sometimes compensating of agricultural product inflation across a number of geographies. So that can be one element to explain why the European consumer is resisting better. But I'm not going to pretend that I have the perfect answer to your question.

Emmanuel Babeau:

Thank you.

Pamela Kaufman:

Hi, good morning.

Pamela Kaufman:

I was hoping that you could elaborate a bit more on your SG&A investment for this year? What are the key areas that you are investing behind and the step up in that investment in Q1? I guess how much of this reflects structural increases in inflation driving higher costs versus incremental investment that you're making behind ILUMA and your Health and Wellness and Swedish Match businesses?

Pamela Kaufman:

Okay. Thank you. And then can you talk about your change in your e-cig strategy? What prompted your strategy towards IQOS view? And how are you thinking about the category over the long-term and your participation in it?

Pamela Kaufman:

Thanks. That’s very helpful.

Operator:

And we'll take our next question from Vivien Azer with TD Cowen. Please go ahead.

Emmanuel Babeau:

Good morning, Vivien.

Emmanuel Babeau:

So it does not because, of course, we don't have any idea of what it could be, when it could happen. So these are really an average that we take on the spot in the day before the announcement and not taking any kind of forward-looking or whatever consensus for currency evolution. You have a lot of people today that believe that the euro is set for a nice wide against the dollar in the coming months. Frankly, we're not betting on any kind of possible evolution, but really just working on the spot.

Emmanuel Babeau:

Well, Vivien, I think what I can share with you is that I believe Q1 is just the bright confirmation of what we said, i.e., Swedish Match is coming with a very nicely accretive impact to the PMI growth. It is true for the volume, it is true for the revenue, and it is true for the profitability. So indeed, ZYN growing in the U.S. very nicely, and I don't come back on this north of 30% growth without the impact of California. That is driving a business that is nicely profitable, that is itself accretive to the Swedish Match average business. And therefore, of course, to PMI. And it is just very good news to have this engine for growth. Frankly, I mean, I don't want to repeat myself, but IQOS and ZYN together, that just a very exciting pair, and ZYN is coming as a very nice top line and margin enhancement role, and we expect that to continue.

Emmanuel Babeau:

Thank you.

Andrei Condrea:

Hi, Emmanuel, thanks for taking my question.

Andrei Condrea:

Hi have -- two from me, please, if you don't mind. Firstly, on the input cost inflation side of things. Obviously, your ILUMA margins will have efficiencies coming online later this year. But in terms of the other headwinds you flagged, leaf and acetate tow is there any color what you can give on just how big these headwinds are?

Andrei Condrea:

That's very clear. Thank you. And my second question is a bit more long-term. Obviously, we saw one of your peers come out with a new product at the Investor Day for the nicotine pouch space for the U.S. And at the same time, your other peers bringing the European product in. Is there a scope for a similar innovation for ZYN, given the criticism -- well, rather than drawback it has -- it being of a much drier product versus the -- yes.

Andrei Condrea:

Fantastic. Thank you very much.

Operator:

And we'll take our next question from Matt Smith of Stifel. Please go ahead.

Emmanuel Babeau:

Hi, Matt.

Emmanuel Babeau:

Thank you. So yes, we are close to 1 million additional IQOS user in Q1. It's a nice number. It's not something that we can beat. I think that there is opportunity to further accelerate as we continue in Q2 and beyond. But first of all, I would like to have a few words of cautiousness. It's not a scientific number, that's an estimate, and that can have some variation depending on the number of elements. But I think, directionally, it is correct, and I think it shows the very strong momentum of IQOS. It is confirmed, of course, by the consumer offtake that we've been describing. It is clear that ILUMA is helping this conversion. So what we see with ILUMA is a higher capacity to convince smokers, because it is a more seamless experience. There is no cleaning. It is even closer the ritual of the combustible cigarettes. The overall experience is more satisfying. So the abandonment rate is lower. And of course, we talk about net user acquisition, so that is also helping. We have very nice progression of the consumer satisfaction in all countries. That is -- I guess, probably supporting the lower abandonment. So it is clear that the more we go for ILUMA, the more we are in the capacity to accelerate conversion. Japan, I think -- I mean, we're coming with a number in Japan and you can build the history. I think Japan is providing a lot of interesting information, because it took some time. I mean the acceleration that we have since Q3 in Japan is quite spectacular, frankly, and probably goes beyond our expectation. But it shows that ILUMA is probably -- gradually getting traction with, I don't know, it's a word of mouth. And -- but the consumer is realizing that this is making a big impact. And frankly, the acceleration of the market share to north of 26%, and I'm not talking about Tokyo, but average Japanese market share is a significant acceleration. It started in Q4, but it accelerated, and it's one year after the launch. So it shows that not everything is happening in the first quarter of the launch. I think we're showing a number of chart here showing that. And that bodes well for a nice ramp up in the coming quarters as not only do we have to start to launch ILUMA in a number of countries, but we know that this positive effect will spread over the coming quarters. So we take that as a nice driver for user acquisition growth in the coming quarters.

Emmanuel Babeau:

Yes. Well, that's the additional investment. But of course, we are already starting with some investment in the U.S. We'll come at the time of the Investor Day in September with detailed plan on how we intend to grow IQOS in the U.S. And at that time, of course, we share much more color on the level of investment that we believe is going to be necessary. I think the important message, because we have a lot of questions here is the fact that, yes, of course, in order to express what we think is a great potential of IQOS in the U.S., investment will be needed. By the way, we've been investing to build this phenomenal business for IQOS in Japan and Europe. I mean we've been investing. It didn't come by chance. So we will invest in the U.S. But what we are seeing is that, given the growth momentum that we have in the business, we think that investing in the U.S. behind IQOS will, first of all, provide even more momentum on the top line and that we can absorb this investment, while continuing to grow the bottom line very nicely. We're not ready to compromise on bottom line growth because of investment that we need to make in the U.S. If I want to repeat something that I said already, I think the question mark will be, what is the differential that we can generate between top line growth and bottom line growth? Remember, the last algorithm was 5% and 9%, above 5%, above 9%. Well, if we increase more than 5% the gross rate perspective, it doesn't mean that we're going to keep a 4 points of difference between top line growth and bottom line growth. That's the sense of the comments. I hope it's helpful.

Emmanuel Babeau:

Thank you.

Jared Dinges:

Yes. Hi, guys. I want to ask about ZYN growth in the U.S., which seemed to actually accelerate in the offtake data, despite the base continuing to grow, and it's actually pretty sizable now. Do you think there's any benefit there from the investments that you started to make as part of your IQOS preparation in terms of building out maybe a sales network? Are you also increasing SG&A investments in ZYN alone? I'm just thinking of this in the context of the brand is getting bigger, we're seeing the cigarette data has clearly been very weak, but yet the trend continues to do very well. So just trying to understand what's really driving that?

Jared Dinges:

Perfect. Thank you.

Operator:

And we'll take our final question from Priya Ohri-Gupta with Barclays. Please go ahead.

Emmanuel Babeau:

Yes, absolutely. So indeed, Q1 has not been great in terms of cash flow performance. But that was, again, expected. That is linked with the timing of shipments, excise duty payment and some of the working capital. And there was nothing surprising. I mean, I would prefer to see higher operating cash generation in Q1, but that was expected. And we are absolutely confirming the objective for the year of an operating cash flow between $10 billion to $11 billion.

Emmanuel Babeau:

No, I don't think it was in the release. I don't know whether we'll communicate that. But I mean, you can come to it. I'm not sure to understand fully what your question I think you have the data to calculate things, but you can come back to us and we'll see whether we can show where the information is available.

Emmanuel Babeau:

No, I think you're alluding to the fact that we concluded 2022 saying, well, we are around 2.9 times, but of course, that would be lower and significantly lower. And maybe about what you are seeing here, if you were to take the full-year of Swedish Match.

Emmanuel Babeau:

You’re most welcome.

James Bushnell:

Thank you all for joining today. That concludes our call. If you have any follow-up questions, please contact the Investor Relations team. Thank you again, and have a great day.

Operator:

Thank you. And this does conclude today's program. Thank you for your participation. You may disconnect at any time.

Operator:

Good day, and welcome to the Philip Morris International Fourth Quarter 2022 and Full Year 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. [Operator Instructions] I will now turn the call over to Mr. James Bushnell, Vice President of Investor Relations and Financial Communications. Please go ahead, sir.

Jacek Olczak:

Thank you, James and welcome everyone. We had a remarkable year for our smoke-free transformation in 2022. Despite the exceptional challenges of the war in Ukraine, severe supply-chain disruptions and global inflation, we delivered very strong financial performance and took two major strategic strides towards a smoke-free future. I would like to express my deepest thanks to all my colleagues who spared no effort to drive excellent business results during these unprecedented times. Our thoughts also continue to be with those affected by the war in Ukraine and the recent tragedy in Turkey and Syria. In 2022, PMI delivered its second consecutive year of total volume growth, reflecting continued IQOS progress and broadly stable cigarette volumes. Full-year smoke-free net revenues reached almost one third of total PMI and over 50% in 17 markets. This is impressive progress towards our ambition of becoming a predominantly smoke-free company by net revenues in 2025. IQOS outstanding results continued with over 21% full-year growth in both shipment volumes and in market sales excluding Russia and Ukraine. This reflects broad-based momentum in the European Union Region, Japan and emerging markets. IQOS ILUMA continues to generate excellent growth in its launch markets with upgrades from existing users and new user acquisition outperforming our initial expectations. The success is supported by the increasing deployment of a two-tier heated tobacco units portfolio providing adult smokers with an expanding range of innovative and high quality alternatives to cigarettes. In combustibles, we delivered a robust performance with a 3.7% growth in organic net revenues and 0.3 percentage points higher share of segment excluding Russia and Ukraine despite the impact of adult smokers moving to smoke-free products. We also achieved two critical strategic milestones this year, reaching an agreement to take full control of IQOS in the U.S. in 2024 and successfully completing the acquisition of Swedish Match. These achievements will accelerate our smoke-free journey and further position us to lead the transformation of the wider industry. Clearly currency headwinds were extremely strong and weighed on our U.S.s dollar performance but although volatility remains, I am pleased that they seem to significantly abate in 2023. Overall, 2022 was a pivotal year and we look forward with confidence to 2023 and beyond. Let me now take a moment to cover our key strategic priorities for the coming year. With the acquisition of Swedish Match and securing the rights to IQOS in the U.S., we are now a global smoke-free champion. The addition of the world's biggest market and the leading nicotine pouch brand ZYN alongside IQOS provides us with significant untapped opportunities to further accelerate the growth of smoke-free products. As the strength of our IQOS business continues to grow rapidly, the full global rollout of IQOS ILUMA is a major priority and we expect to make substantial progress on this in 2023. The success of ILUMA in launch market so far demonstrates the importance of groundbreaking consumer-centric innovation and we continue to broaden our portfolio with new science backed offerings. This includes BONDS by IQOS, our latest heat-not-burn device aimed at low and middle-income adult smokers. Pilot city launches in Colombia and the Philippines in the last quarter of last year show encouraging early results and we intend to take the learnings from these markets before deploying on a wider scale. Following a successful first three years of partnership with KT&G, we also recently extended our long-term s their innovative smoke-free portfolio outside South Korea. I am very pleased to welcome Swedish Match to the PMI family. In particular, the fast-growing potential of ZYN is an incredibly exciting addition to our company. We are focused on supporting the Swedish Match team to continue and accelerate ZYN's outstanding success in the U.S. while also leveraging PMI commercial capabilities to prepare for the international expansion of nicotine pouches. IQOS and ZYN are premium brands, leading the global categories. In the U.S., ZYN is helping the American smokers leave cigarettes behind and offers great growth prospects. For IQOS, the world's biggest smoke-free market is a fully untapped opportunity and our plans are well underway in anticipation of our commercialization in the second-quarter of 2024. We will be leveraging the sales and distribution capabilities of Swedish Match and deploying our commercial model digital engine organization and infrastructure for a successful rollout. We continue to expect to file an FDA application for ILUMA in the second half of 2023. Logically, the international expansion of pouches, U.S. IQOS preparation and the replacement of IQOS 3 with ILUMA entail additional investments this year, which combined with inflationary pressures will weigh temporarily on our margins. Indeed, many of the ILUMA related costs are one-off in nature as Emmanuel will explain shortly. In combustibles, we continue to target a stable category share over time, despite the impact of IQOS cannibalization, while taking judicious pricing actions. As we have explained previously, maintaining our leadership in combustibles helps us maximize switching to smoke-free products through the connection to adult smokers and the retail trade. In terms of our financials, the strength of our business provides a robust operating cash flow, which we intend to maximize to provide reinvestment in our smoke-free business, deleveraging and growing the dividend. Finally and importantly, shaping tobacco harm reduction by providing better alternative to smokers and advocating for science-based regulation is critical to accelerate the end of smoking. Harm reduction is also at the core of our transformation, as we lead on sustainability to achieve a positive impact. We will be expanding on some of these topics at the CAGNY conference on February 22nd and we also plan to host an Investor Day in September this year, where we will go into greater detail on our strategies and future vision particularly with regard to --with regards to the U.S. Now, I will hand it over to Emmanuel, to discuss our results in 2023 and outlook in more detail.

Jacek Olczak:

Thank you, Emmanuel. Overall, our business delivered both a strong fourth quarter and full-year performance despite many challenging headwinds. We achieved excellent top and bottomline growth with double-digit currency-neutral adjusted diluted EPS growth and almost $6 of adjusted EPS for total PMI. The consistent quality and sustainability of our organic top and bottomline delivery has been clearly demonstrated over the last three years. Most impressive was the continued outstanding performance of IQOS, which is now complemented by the remarkable growth of ZYN. Combined with Swedish Match we will have a comprehensive global smoke-free portfolio with leadership positions in heat-not-burn and the fastest-growing category of oral nicotine. We expect 2023 to be a landmark year for our smoke-free transformation with smoke-free net revenues of around $13.5 billion at constant currency, approaching 40% of our company. We have exciting opportunities for growing nicotine pouches in the U.S. and internationally, along with the U.S. commercialization of IQOS next year. We expect margin headwinds will persist in 2023 before improving in 2024. However, our underlying growth fundamentals remain strong and we look forward with - and we look forward with confidence. With an excellent performance over the past two years and our strong 2023 outlook, we expect to comfortably exceed our three year minimum CAGR targets of more than 5% organic net revenue growth, more than 9% in currency-neutral adjusted diluted EPS growth and broadly stable shipment volumes. Finally, our strong growth outlook and highly cash-generative business enables us to deleverage while maintaining our steadfast commitment to our progressive dividend policy. Thank you for your attention, Emmanuel, and I will be happy now to answer your questions.

Chris Growe:

Hi, good morning.

Emmanuel Babeau:

Hi, Chris.

Jacek Olczak:

So maybe I start and Emmanuel will chip in, I guess. Yes, it's a 115 between the U.S., $115 million between the U.S. and the wellness healthcare, almost evenly spread between the two. Now, you have the air freight and this is more of the thing, which I think, we should start seeing some improvement in 2023 and especially as we go towards the second half of the year. I think, we should start normalize the use of the air freight, which will then obviously continue with the 2024. Now you have the inflationary pressure on the COGS, I think Emmanuel mentioned in his remarks, the leaf. Leaf, obviously is - due to our duration of inventories of the leaf and the way the leaf prices are rolling through the P&L is something which last usually longer right you have a three years above the duration of inventory. So, on a moving average, valuations I mean the spreads over the period of time you have energy, which is obviously the big hit across the number of directly or indirectly through the materials. Now we start seeing energy prices easing at least at this stage, but also you bind it by some contractual arrangements, et cetera. So I don't think that's helping '23, but I remain cautiously optimistic that as of '24, we should start seeing reversal of those. Obviously, you have a cost of the IQOS ILUMA roll out because we are at the year end, we've been at the 16 markets out of 73 markets total IQOS. So there is a bulk of a market in front of us in '23 and we don't want to stop or slow down the rollout of ILUMA. So obviously, you have a pressure on the margin coming from the extra sales of the devices, right, which obviously had a drag on the margins, and which essentially accelerating replacement of the devices at the existing consumers level, but with the very clear view now, that we have a very nice paper going forward with the accelerated acquisition, better consumption, better conversion rates. And that's the key items. So Emmanuel, did I miss something important.

Chris Growe:

That was sure exhaustive. Thank you for that. It was very, very helpful. I had just one quick follow-up, which will be that, you have heated tobacco unit growth expectation of that 15% to 19%. I just want to get an understanding on two specs of that, is Russia, Ukraine down likely in 2023, given you're not investing there. And then, just to what degree, its capacity limited today? If you had more ILUMA capacity, could that grow even faster? Thank you for your time.

Chris Growe:

That makes sense. Thank you.

Bonnie Herzog:

All right, thanks, hi.

Jacek Olczak:

Hi Bonnie.

Emmanuel Babeau:

I'm please to take that one, Bonnie. So I think, on the U.S., we've been clear on the fact that we expect something like half of around $150 million, of course it's a rounding of extra investment in the U.S. as we prepare the launch of IQOS in the U.S. that is for 2023. When we have a plan for the coming years and of course, with more detail, we will of course come to you and elaborate and detail that. Now for the rest of the business, I think we are and that was the sense of my comment on SG&A evolution. On a relatively regular basis, we are investing an extra few $100 million in ILUMA to be more specific, because, of course, very sensitive information behind the acceleration of IQOS and it's going to come, of course, behind IQOS ILUMA in 2023. So the growth, when we say, we expect SG&A to grow broadly in line with topline, there is a huge impact of inflation. I mean, I don't need to explain that inflation is in most country around high single digit and we need to reflect that on salary increase. We have efficiency on cost in front of that and that is enabling us to on top of the inflation impact to keep investing on the growth of the business and we do that in a rather consistent manner, of course, very much focus behind ILUMA in 2023.

Jacek Olczak:

Yes, so I maybe take the ILUMA conversion rates in the markets at this stage, [technical difficulty] run-rate conversion rates before an IQOS blade will be somewhere up in the range of a 10 percentage points. Okay, so obviously, different markets, there is some difference between the markets, but as a rule of thumb is about the 10 percentage point, which essentially means, the way we measure conversion at 10% of the devices sold through acquisition of new users, AG Snus and they should, and they are generating the recurring demand for the consumables. So this also has the - there's a better productivity on the user acquisitions and devices sold. I want to just bridge back to the - your previous question, Bonnie, if you allow me. When we look at the U.S. investment, we've highlighted, including the wellness and healthcare, about $150 million. But we shouldn't just look at the investment from the lenses of IQOS, because part of the investments, which we already started, once we committed to make this year, I believe will also benefit further growth opportunity for ZYN, okay, for Swedish Match. So it's not that we're really running business - two separate type of a businesses. We try to look at this from the leveraging and further enhancing the capabilities of Swedish Match and I believe the opportunities for ZYN in the U.S., they had a spectacular or phenomenal growth, depends which adjective you like better. But I think, there is more to come on this one. So the way we're looking at allocating the results is that, it is not just going to prepare us for the IQOS stake back in '24, but also in the meantime, can further - can be a further boost to the ZYN. Now, to your question also about the future rollout of the IQOS alone in the U.S., I think September when we meet, I hope during the Investors Day, we will be in a positions to give a more precise plan. So we obviously taking considerations the expected timelines vis a vis from FDA. We said that we're going to file IQOS ILUMA which is our - the best flagship and the best propositions we have today. And obviously, our objective - prime objective would be to enter markets, U.S. markets with a very big momentum coming from international on the best what we have, but I think, by September, this year, we should have more details and more visibility about this.

Emmanuel Babeau:

Thank you, Bonnie.

Operator:

We'll take our next question from Gaurav Jain with Barclays.

Jacek Olczak:

Japan, you pretty good single out Japan in this case, right, this is the biggest pricing from the unknow, right and it's difficult to make any assumptions in Japan, but we have already this year working pretty well with the good results on the - reversing the pricing trend in Indonesia. As you may recall, and I believe we're really turning the corner in Indonesia which always due to volume underlying size of the and the weight of the business to us is very important. I think, we have a stronger Philippines, plus the European markets also come with a strong pricing. So that 6%, which we assume in the - for this year is just the reflection of this. Now depends what's happened in Japan. I mean, all of these things will be coming on the top, but actually Japan from the large geographies is the under market when visibility for obvious reason is very limited to.

Jacek Olczak:

I mean, it's one of the events which nobody ever experienced. We have a - some sort of similarities with the flavor bans including menthol on the combustible cigarettes you may recall few years ago. And frankly speaking, that has not had any material sort of a impact on the cigarette volume, so I think here - okay we will see, what's going to happen. We think, it's going to be manageable.

Jacek Olczak:

Thank you, Gaurav.

Pamela Kaufman:

Hi, good morning.

Jacek Olczak:

Good morning, Pam.

Jacek Olczak:

So obviously, you know the focus is to continue and enhance the spectacular momentum of pouches, ZYN growth in the U.S. I mentioned this before answering another question that part of the investments we are allocating to U.S., I believe also will benefit the current business of Swedish Match. I think, there should be a bigger, better pricing, especially on the cigar business, although it is not really our strategic focus, but still obviously helps the overall business performance. And the strategy in terms of long-term, the big question obviously is how we will approach IQOS commercialization, the moment when we fully take it back in that in 2024. And we know what sort of actually capabilities are missing at the Swedish Match level. So we adding them. But the real big commercial spend, I mean, it will depend on the timing and the dense and the intensity of our rollout plans, which we will share, I guess, around September, during the Investors - September this year, around the Investors Day. When it comes to the pouches, on international, I think Swedish Match and us now together have a plans, how to start addressing some share pressure especially in the Nordics, okay but on the bigger international scale, we have quite a few markets, which we will start rolling out the pouches this year but for obvious reasons, I will not mention which markets. But that was the whole purpose of acquisition of Swedish Match, as you recall, leveraged the base and our growth opportunity in the U.S., is the - is a huge relief in a sense of preparedness for IQOS but also I believe the category has the - quite a potential in there or in the regions of this product space on international basis. We will have infrastructure in most of the markets, it's - I'm not releasing really - disclosing any strategic confidential matters, obviously IQOS is present in 70 plus markets. This is where the developed infrastructure is most developed and very likely, the markets for ZYN products will be - which in the list of this markets.

Jacek Olczak:

Yes. I mean it's a broader rollout of the bonds is more the - we've more strategically planned for the 2024, so the next year. We will have some volume, but nothing compared to be very frank to what we have about the IQOS and ILUMA product. This is by far the prime focus. But I think, the early results, which we get from the Philippines and Colombia, I mean, they are very strong, actually they are very strong, obviously our expectations after a seven or so years of experience with IQOS products are much higher than we ever had. So BONDS have to come and meet that expectations as well. The proposition essentially, we knew that the moment when we will be going more into the emerging markets, lower-income, when the afford - consumer affordability might be at a bottleneck in achieving our smoke-free ambitions. We had to also come up with a technology both on a consumables and on the device which somehow adjust the cost of the propositions to the potential pricing we can offer to the market. So obviously, the focus will be on the emerging markets, but I do believe that that proposition also nicely will help in some developed economies because across the spectrum of the smoker's audience, obviously, they also group of people who, for whom the affordability might create some constraint. So that will be a very nice complement - complementary propositions in our portfolio. And essentially it also help IQOS to continue on its extremely successful history of occupying this premium or medium plus space. This is - this mega brand, which we're trying to build, while preparing our self that one billion plus smokers in the world, I mean they are going across the different various price segments from the premium, mid, low, super-low et cetera and we need to provide the relevant propositions there. So I think, bonds is on the track and this is how we are going to play strategically in the portfolio.

Jacek Olczak:

Thank you, Pam. Thank you.

Vivien Azer:

Thank you, good morning.

Vivien Azer:

Hi. I was hoping to talk about the IQOS outlook, please, in terms of the stakes and in particular, what impact is the removal of characterizing flavors on HTUs in the EU, impacting your outlook. How are you accounting for that? And what's the expected timing of that, please. Thank you.

Vivien Azer:

Thank you for that. And I apologize if I missed this, but is there any way that you can provide an update on kind of the infrastructure build-out for IQOS in the U.S. ahead of your reacquiring the commercial rights to that proposition, both in terms of the consumables as well as the devices? Thank you.

Vivien Azer:

Okay, thank you.

Operator:

We'll take our next question from Owen Bennett with Jefferies.

Jacek Olczak:

Good afternoon, Owen.

Jacek Olczak:

Yes, so I start with the last one. We plan to submit the IQOS ILUMA to PMTA to FDA in the second half of this year. Now with regards to the - to potential, look, we think that an IQOS strength, which is really if you go to the core of the smokers today, when they really enjoy this pure unaffected by any flavors et cetera, tobacco flavor and so on is undisputed. Every market you go, IQOS exactly delivers on the flavor, taste expectations to this audience. And that's also I believe a critical factor in IQOS high conversion rate. And how many people fully adopt the IQOS and not only that they are leaving cigarettes fully behind them, they don't even attempt it on occasional basis to go back to cigarettes, okay, so that's the core and I believe for the audience which with the smoking audience, which you have in the U.S., IQOS perfectly fitting into this whole thing obviously the other platforms, which offer you the different ritual, different experience, the e-cigarettes and the pouches. The e-cigarettes usually more driven by the flavors, and obviously absence the pure tobacco natural type of a flavor, it's - that's the challenge, which partially in our opinion is behind more of the dual consumption that the full conversion, but also the products are under development and they're getting better. And pouch is actually on the risk continuum of the product. I mean, it's an average important offering for the consumers, who really want to reduce significantly exposure and potentially the harm by - while enjoying the product. So I think, there is this complementary, there is this complementary role of each of these platforms with, you know, also that we're working on our platform forward because technically which is Leaf and the Viva products, the electronic cigarette segments going through this own dynamics, is this mix of the flavors, disposable et cetera, it's not necessarily great for the economics, but partially also because of the slower conversion rate compared to the other platforms. So we have said it from the very beginning of our transformation, if you follow us seven, eight years ago, I recall that the - one of the first investors conferences, when we announced the purpose of that we want to go smoke free, we have said that there is the room for every platform at the different moments for different consumers and our job is at the right time to deploy this platforms and the leverage, the opportunities and the benefit to the smokers.

Jacek Olczak:

Yes as I think, we're also thinking about the 2023, but now having also the ZYN and knowing what ILUMA can do and knowing that before we also need to make sure that we have a right PMTA submission strategy, right, it was an effort behind each of them and we need to prioritize, but the - I mean the way we are thinking, we are - sorry thinking, is more than a thinking, we are working on bringing our P4 to the U.S. as well.

Jacek Olczak:

Thank you, Owen.

Andrei Condrea:

Hi everyone, thank you for taking my question, just one from me.

Andrei Condrea:

Sticking to – hi, sticking to U.S. IQOS. We know that the U.S. menthol ban from the FDA proposed standards allows - potentially will allow for some exceptions to it. And thinking that your IQOS has the MRTP designation, which is rather unique versus all its peers, would -- were you factoring this in when you set out your ambition of I believe 10% market share by 2030 if I'm not mistaken?

Andrei Condrea:

I see very clear. Thank you.

Operator:

We'll take our last question from Jared Dinges with JPMorgan.

Jacek Olczak:

Thank you, hi.

Emmanuel Babeau:

Look I think, you should expect us of course to accompany the growth we are growing volume within more capacities, so the CapEx will reflect that. There is certainly, when it comes to ILUMA, a moment where we build the capacity for ILUMA and that is translating into a significant investment. So you see that in the 1.3. I would say, we are going to certainly regularly invest on the capacity for the Swedish Match overall business, so I'm not able to get at that stage. I'm not giving guidance on '24. I certainly believe that there is this transition moment where we are building the capacity on ILUMA then of course that will be accompanying the growth of ILUMA and - and we are very ambitious, as you know, on growing overall product. So that will come with investment, but, of course, they are not of the same magnitude as the one that we've been making in order to be the capacity on IQOS, smaller volume, smaller base. So notwithstanding back on the long-term anyway.

Jacek Olczak:

Yes I mean, look, they obviously, been very clear about this from the very beginning, I mean, in order to develop and bring to the market of a couple of the programs and products, which we have it in mind, I mean we have to go for the investments, we talked about us prefer also have a very promising investment in the medical of - in the medical space be cannabinoids et cetera. So all of this programs that they agree to establish milestones in terms of the - the development of these products including the series of clinicals and meeting of different regulatory expectation, so that's about what's going to be. We have said historically our ambitious target of achieving this $1 billion revenue by 2025, there is a pipeline of the product but the more interesting actually, what's going to happen with that business beyond '25, because it's the longer-term, longer-term investment. Obviously, when we allocate the capital, we look first with - we allocate the capital behind the -- those things, which are in the near and mid-term for us and it's obviously heat-not-burn and IQOS, ILUMA expansions to the US, and I can go through the long list of an opportunities but they're keeping also denied. This businesses have a quite - wellness and healthcare offers us a very interesting opportunities in the longer run, when we very well leverage both our scientific life science expertise capabilities combined with the commercial et cetera. So, this is how I would look on this thing. I think when we meet on the - in September of this year for the Investors Day, we will start, obviously opening a much more longer-term horizon, how the management, how we see the future of PMI not just in the next year or two, but with the longer time of a perspective. And this is the moment when, I guess, we will share more details, by the way, also I think we'll be able to answer more precisely your first questions to Emmanuel, about the CapEx, because obviously, we open a 10 years horizon for Philip Morris, we will have to touch upon that capital allocation component as well.

Emmanuel Babeau:

Thank you.

Operator:

It appears, we have no further questions at this time. I will now turn the program back over to management for any additional or closing remarks.

Jacek Olczak:

Thank you. Talk to you soon.

Operator:

That concludes today's teleconference. Thank you for your participation, you may now disconnect.

Operator:

Good day, and welcome to the Philip Morris International Third Quarter 2022 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. [Operator Instructions] I will now turn the call over to Mr. James Bushnell, Vice President of Investor Relations and Financial Communications. Please go ahead.

Emmanuel Babeau:

Thank you, James, and welcome everyone. Today marks a historic day in our journey towards a smoke-free future, with the certainty that we will have full control of IQOS, the world’s leading smoke-free product in the United States, the world’s largest smoke-free market from April 30, 2024. Indeed, today’s agreement with Altria removes the potential of a protracted legal process to regain the U.S. rights to IQOS which Altria previously held, subject to performance milestones, until 2029. We have ambitious plans for the full-scale launch and rapid expansion of IQOS in the U.S. market as soon as we take over and efficient time during the transition period to put our commercial model and related organization and infrastructure in place using our wealth of experience from international markets. We see IQOS as the primary vector for establishing a leadership position in the U.S. smoke-free industry and it will be followed by the other products in our smoke-free portfolio. In this context, Swedish Match offers an immediate position in the oral segment, and mutually beneficial synergies at sales force level. However, should the offer fail, we can certainly build a robust sales force as part of our commercial deployment engine during the transition period. Under both scenarios we see an accelerated path to profitability with an attractive payback period on our IQOS investment, given superior U.S. unit economics and the absence of a legacy cigarette business. I will cover this in more detail later. With regard to Swedish Match, we announced this morning an update to our offer with our best and final price of SEK 116. Our updated offer retains a 90% acceptance condition, which is critical to allow us to capture the full potential of the combination. Now that we are close to the end of the offer period, the increased offer is primarily intended to fairly reflect the higher net value to us of the portion of Swedish Match’s cash flows which are in U.S. dollars given currency movements since our initial offer was announced in May. Equity markets, the global economy and interest rates have also moved unfavorably since then. As such, we believe the updated price, with a premium of 52.5% to the undisturbed share price prior to the initial offer, strengthens the attractiveness yet further for Swedish Match shareholders while maintaining strong value creation for PMI shareholders. This is our best and final price and we hope to complete the transaction next month to achieve full ownership. Turning now to our Q3 earnings, we delivered another very strong performance this quarter, with HTU volumes ahead of our forecast, and robust growth in total volumes, market share and combustible net revenues. With adjusted operating income margins in line with expectations, this resulted in total Q3 adjusted diluted EPS of $1.53, close to our all-time quarterly high despite notable currency headwinds. IQOS’ excellent performance continued, with plus 22% growth in pro forma HTU shipment volumes, a testament to the continued strengthening of our heat-not-burn portfolio and broad-based growth across key regions. IQOS ILUMA continues to drive growth in its launch markets. In combustibles, we delivered robust performance with Q3 organic pro forma net revenue growth exceeding plus 4%, driven by accelerated pricing of almost plus 5%. Cigarette shipment volumes were essentially stable and category share grew, supported by Marlboro, showcasing the resilience of the brand despite current economic conditions. Turning now to the headline numbers, our Q3 volumes grew by 2.3% on a pro forma basis, and by 0.6% in total, including Russia and Ukraine. Pro forma net revenues grew organically by plus 6.9% and by plus 6.7% for total PMI. Our total organic net revenue per unit grew by plus 4.5% on a pro forma basis and by plus 6.1% in total despite lower device revenues. This reflects the increasing weight of IQOS in our sales mix and a step up in combustible pricing. Our Q3 adjusted operating income margin declined organically by 100 basis points on a pro forma basis and by 90 basis points in total, consistent with our expectations. As previously communicated, this reflects the recovery in device volumes, the investments in launching ILUMA including initially higher unit costs, the impact of supply chain disruption, notably due to the war in Ukraine and increasing global inflationary pressures. Despite these headwinds, our strong top-line growth and ongoing cost efficiencies enabled us to outperform our previous currency-neutral guidance to deliver adjusted diluted pro forma EPS of $1.33, including unfavorable currency of $0.23, representing 8.3% currency-neutral growth. Including Russia and Ukraine, we delivered adjusted diluted EPS of $1.53. Our strong third quarter, combined with a robust H1, supported an excellent delivery for the year-to-date. I would highlight our strong pro forma volume growth of plus 3.4% and organic net revenue growth of plus 7.7%, again reflecting continued strong IQOS performance, pricing, and the recovery of the combustible business in many markets against a pandemic-affected comparison. Smoke-free net revenues made up around 30% of our year-to-date pro forma total, putting us on track to reach our ambition of over 50% by 2025. Our year-to-date operating income margin contracted organically by 110 basis points on a pro forma basis, driven by the factors mentioned previously. We remain on track to deliver cost savings of $2 billion over 2021-2023. $1.5 billion of gross savings have already been delivered, including over $200 million in Q3. This allows us to reinvest in the business and mitigate increasing inflationary pressures. Year-to-date currency-neutral adjusted diluted EPS grew by plus 9.7% to $4.11 on a pro forma basis and by plus 8.8% in total to $4.59; an excellent performance. Now, let’s turn to the pro forma full year outlook. Given the continued growth of IQOS and robust trends in combustibles, we are revising our top-line forecasts upwards to 2% to 3% growth in total shipment volumes, and 6.5% to 8% growth in organic net revenues. While our top-line outlook remains very strong, like many other global companies we are facing significant inflationary forces in the world economy, and this is reflected in our updated adjusted OI margin forecast. Inflation in our cost of goods remained mid-single-digit in the third quarter. However, inflationary pressures are growing as we renew pricing arrangements, notably for certain direct materials, wages, energy, and transportation costs. In addition, the very strong growth of ILUMA in Japan and other launch markets has an initial negative margin impact, given the higher weight of the consumables and increased cost of both the device and consumables, in the first 12 to 18 months of activation. As mentioned previously, the combination of strong demand, global supply chain disruption and the impact of cancelling induction HTU production in Russia, means our supply chain is not fully optimized. This has resulted in reduced productivity and a number of additional costs, including an approximate $300 million impact from a significant increase in the use of air freight. As a result, while we continue to expect a rebound in our Q4 adjusted OI margin, partly reflecting higher commercial investments in the prior year, we are now forecasting less expansion than previously expected, with pro forma adjusted organic operating income margin flat to slightly negative for the full year. Despite this change to margin expectations, our top-line momentum is strong and we continue to forecast pro forma adjusted diluted EPS growth of 10% to 12% for 2022. This translates into a pro forma adjusted diluted EPS forecast of $5.22 to $5.33, including an estimated unfavorable currency impact of $0.87 at prevailing rates, notably due to the euro and Japanese yen. There is a slide in the appendix with further detail on the estimated exchange rate impact. For total PMI, which assumes a full year contribution from Russia and Ukraine, we expect adjusted diluted EPS of almost $6, including an estimated $0.80 unfavorable currency impact. Lastly, given the continued success of ILUMA and the cancellation of TEREA production in Russia I just referenced, we are working to further accelerate our production of induction consumables. As we convert and transition capacity from blade to induction, we incur certain inefficiencies and limits on the availability of ILUMA HTUs. We are optimizing our inventory levels where possible to minimize any impact on consumer availability. However, these factors are a constraint on our shipments and we are updating our HTU shipment volume forecast to 89 billion to 91 billion units for the year. Importantly, this is a short-term supply dynamic. Consumer offtake trends remain strong and HTU in-market sales volumes are expected to further accelerate their growth to over 25% in Q4, while also growing sequentially compared to Q3. The cash generation capacity of our business remains exceptional, as shown through the challenges of recent years. Our balance sheet and cash flow remain strong. We delivered operating cash flow of $7.7 billion year-to-date, representing growth of 6.5% on a currency-neutral basis. Today we reconfirm our forecast of around $10.5 billion in operating cash flow for the full year, despite an estimated currency headwind of around $1.3 billion. This means we expect to deliver an excellent $22.5 billion over 2021 and 2022. Cash flow was flattered somewhat in 2021 by $0.5 billion from one-off impacts and the timing factors of certain cash flows which benefitted 2021 at the expense of 2022; and by a further $0.5 billion of working capital improvements. However, our 2022 forecast demonstrates underlying growth against this exceptional year. I would also like to highlight that U.S. dollar strength has a positive impact on our net debt, given that more than 60% of our financing is in euros, including derivative overlays. This serves to offset the impact on our earnings and, combined with strong cash generation, contributed to a $1.5 billion reduction in our net debt since December 2021, which is now below 1.6 times adjusted EBITDA on a 12-month rolling basis. This delivery highlights our ability to maintain a strong balance sheet, pay down debt, and invest in the growth of our business. In addition, we recently increased our annualized dividend for the 15th consecutive year, in line with our long-term commitment to return cash to shareholders. Turning back to our results. Our total pro forma shipment volumes increased by 2.3% for Q3 and 3.4% year-to-date, putting us comfortably on track to deliver total volume growth for the second consecutive year on both a pro forma and total PMI basis. Pro forma HTU shipment volumes grew by 21.9% for the third quarter and 15.8% year-to-date. While our shipments have been more volatile this year reflecting the current supply chain dynamics, HTU IMS growth has been consistently strong with 18.2% growth in Q3 and 19.2% year-to-date, with robust performance in the EU Region, Japan, and Low and Middle-Income markets. As I mentioned, we expect a further acceleration of IMS growth in Q4. Focusing now on combustibles, our portfolio delivered robust pro forma organic net revenue growth of 4.1% in Q3 and essentially stable pro forma shipment volume. Our pro forma pricing accelerated to 4.9% in Q3 as we progressively adjust to the inflationary environment. This reflects notable contributions from Australia, Germany, and the Philippines, and a positive quarterly variance from Indonesia for the first time since Q4 2019. We now expect full year pricing to be around 4%. Our pro forma share of the cigarette category increased by 0.2 points year-to-date. This was supported by Marlboro, where volumes grew by almost 4% for total PMI. With a premium position in a challenging consumer environment, this represents an impressive performance from the world’s leading cigarette brand. Our leadership in combustibles helps to maximize switching to smoke-free products and we continue to target a stable category share over time, despite the impact of IQOS cannibalization. The positive combination of stable share in combustibles and the continued growth of IQOS positions us to deliver total market share growth over time. We captured 0.5 points of pro forma share gains in Q3 and 0.6 points year-to-date, with notable contributions from Italy, Indonesia, Japan, and Poland. Despite increasing competition in many markets, our leading share of the growing heat-not-burn category has remained stable since the start of the year at around 75% and grew sequentially in the third quarter. This remarkable achievement is supported by the increasing deployment of a 2-tier HTU portfolio, providing adult smokers with an expanding range of innovative and high-quality alternatives to cigarettes. PMI HTUs again strengthened their position as the second largest nicotine brand in markets where IQOS is present, with a sequential share gain in Q3 of 0.2 points to a record 7.7% share, excluding Russia and Ukraine. Focusing now on IQOS performance, we estimate there were approximately 19.5 million IQOS users as of September 30th, excluding Russia and Ukraine. This reflects growth of around 0.5 million users in Q3 and 2.7 million year-to-date. As shown on the right-hand side of this slide, the third quarter of each year typically experiences slower pro forma user growth due to seasonal factors. The growth of 0.5 million this quarter was very robust in a historical context, noting that the high growth in Q3 2020 benefited from a catch-up effect following the relaxation of COVID restrictions on retail locations and mobility. Importantly, we expect a strong acceleration in user growth in the fourth quarter of 2022. In the EU Region, smoke-free net revenues comprised almost 40% of regional net revenues year-to-date, with a number of markets well above 50%. This performance clearly shows the way towards our ambition to be predominantly smoke-free by 2025. Our EU third quarter HTU share increased by 2.0 points compared to Q3 last year to reach 7.3% of total cigarette and HTU industry volume. I would also highlight the 0.2-point sequential increase, which is a notably strong performance given the usual seasonality of the combustible market. Most importantly, adjusted IMS volumes continued to grow sequentially and reached a record high of 8.7 billion units on a four-quarter moving average. We expect IMS volume growth to continue in Q4, with a corresponding increase in market share. Please refer to the appendix for additional key city and market share data. With regard to regulation in the EU, we are encouraged by the increasing number of countries adopting multi-year fiscal frameworks with clear differentiation of smoke-free products, such as the recent legislation in Romania. We expect the proposal on the EU Tobacco Excise Directive to be published by year-end and hope for a similar approach. As a reminder, the Tobacco Excise Directive will require unanimous support for approval by all 27 EU member states. Now, let’s focus on the performance of ILUMA in the EU region. ILUMA continues to drive user acquisition, the switching of existing users and accelerated category growth in both Spain and Switzerland. In Q3 both markets experienced another quarter of strong sequential IMS volume growth, with offtake exit volume of TEREA now the clear majority of HTU sales in both markets. We also launched ILUMA in Greece at the end of June with promising initial results and introduced the product to Portugal earlier this month. In Japan, the adjusted total tobacco share for our HTU brands increased by 2.8 points versus the prior year quarter to 23.6%. As in the EU, Q3 last year saw an optical sequential share decline due to combustible seasonality, making the 0.7-point sequential increase this quarter a notable achievement. IMS again grew sequentially to reach a record high of 8.3 billion units on a four-quarter moving average. This was driven by the impressive performance of IQOS ILUMA and the continued growth in key cities such as Tokyo. The heat-not-burn category now represents over one-third of total tobacco in Japan, with IQOS increasingly driving this year’s growth. IQOS ILUMA celebrated its first anniversary of the Japan national launch in September and continues to exhibit strong growth due to excellent conversion, consumer satisfaction, and retention rates. Our premium-priced TEREA HTUs continued to grow strongly in Q3 and strengthened their position as both the second largest nicotine brand and largest RRP brand in Japan, reaching an exit offtake share of 14.9%. Encouragingly, SENTIA HTUs have also grown rapidly since the initial launch in April and national expansion in mid-July, driving consumer acquisition in the mainstream price segment. We exited Q3 with over 25% HTU offtake share, a record high, and continue to see a long runway of growth in Japan over the coming quarters. In addition to strong IQOS gains in developed countries, we continue to see very promising growth in Low and Middle-Income markets which drove around 30% of the Company’s pro forma HTU growth in Q3. Given the large size of these markets, the premium positioning of the existing IQOS portfolio and the relatively early stage of commercialization, this represents outstanding progress. Strong growth in IMS volumes continued, and the pro forma share of our HTU brands grew 0.9 points versus the prior year quarter to 2.8% in Q3, a robust performance, considering the impact of seasonality. This reflects success across many markets, with notable progress in Lebanon, where Q3 offtake share in Beirut increased by 7 points to 18%, and Egypt, where offtake share in Cairo is approaching 6%. Further key city data can be found in the appendix. We are also encouraged by recent positive regulatory developments in the Philippines where the government passed a new law clearly differentiating combustible and noncombustible tobacco products. Smoke-free products will be regulated separately, with different health warnings, permitted product testing or guided trials, and rules to be established for product communication and point of sale activities that will support the switching of adult smokers to better alternatives. In addition, the latest development from our smoke-free innovation pipeline is a new heat-not-burn device that is especially relevant for low- and middle-income markets. It is a simple, convenient, and affordable proposition, which can cater to local taste preferences without compromising on the reduced risk profile of the product. We are planning pilot city launches in Colombia and the Philippines during the fourth quarter, as we further expand our portfolio of smoke-free products to serve different consumer needs. As we continue to innovate, it’s critical to integrate sustainability through eco-design principles, circularity, and efforts to minimize and manage post-consumer waste. Addressing the environmental impact of our products is a key pillar of our sustainability strategy, which is reflected in our sustainability index and forms part of our executive compensation scheme. Our approach to reduce waste related to cigarettes, RRP consumables, devices and packaging is covered in a report, case studies and campaign published last month and available via a dedicated microsite on pmi.com. For example, we are progressing well towards our 2025 aspirations of having at least 80% of our shipment volumes covered by markets with anti-littering programs in place for cigarettes and for over 1 million cumulative smoke-free devices to be refreshed or repaired. Moreover, during September more than 10,000 stakeholders from more than 60 markets joined cleanup initiatives around the world. I am proud of our ESG performance which continues to be recognized worldwide. Our 2021 Low-Carbon Transition Plan and our Business Transformation Strategy were recently nominated for sustainability prizes, and our Chief Sustainability Officer, Jennifer Motles, was nominated for CSO of the year at the World Sustainability Awards. Moving now to perhaps the most impactful news of today, we are delighted to announce that we will soon have full control of IQOS, the world’s leading smoke-free product, in the United States, the world’s largest smoke-free market. As previously communicated, following the ITC decision last year prohibiting the import of IQOS into the U.S., we have been in discussions with Altria to find the best path forward. PMI’s priority has always been to find a solution that best positions IQOS to realize its full potential in the U.S., as quickly as possible. I am excited to report that we have now reached an outcome that achieves this goal. Let me start by briefly summarizing the key terms of the agreement. From April 30, 2024, PMI will have full control over the commercialization of IQOS in the U.S., allowing us to distribute and sell the product, and critically engage directly with adult tobacco users. As part of the agreement, we will pay a total cash consideration of around $2.7 billion to Altria. We believe this agreement represents excellent value to our shareholders, as with the previous agreement potentially stretching to 2029, this solution provides certainty by avoiding what could have been a protracted and uncertain legal process that would have severely held back the development of IQOS. It provides a clear near-term path to commercializing at scale in the U.S., with the unencumbered backing of PMI’s full strategic and financial commitment to the product’s success. IQOS is the world’s leading smoke-free product, with remarkable and rapid growth achieved across a wide range of international markets. From a standing start in 2015, IQOS is already a $9 billion annual net revenue business, having created the attractive heat-not-burn category and driving its growth. The U.S. is the world’s biggest accessible nicotine market by retail value. The estimated retail value of its growing smoke-free market is already around 60% of all international markets combined, excluding China. We have spoken before about our plans to bring a leading portfolio to the U.S. and we expect IQOS to be at the very core of our U.S. smoke-free future, just as it already is elsewhere. The U.S. opportunity for IQOS is particularly encouraging given the clear demand from American adult smokers for credible smoke-free alternatives to cigarettes. Moreover, current smoke-free products have had limited success in fully switching adult smokers away from cigarettes. In the U.S. there are ample opportunities to build adult smoker awareness and understanding of smoke-free product offers, something that is particularly true for IQOS given our MRTP authorizations. We are ready to invest behind IQOS to bring it to market at scale across the U.S., starting with full-scale launches in key cities and regions, with a plan to progress rapidly to national penetration. IQOS remains the only inhalable smoke-free nicotine product to have received a Modified Risk Tobacco Product Authorization from the U.S. Food and Drug Administration. We know from our experience in over 65 markets worldwide that IQOS’s appeal to adult smokers who have tried the product is strong, as demonstrated by high full switching rates. We have a strong commitment to build awareness and invest behind the category to drive product trial among American smokers. The true potential for IQOS in the U.S. is substantial, as illustrated by the double-digit national shares achieved in just a few years across a number of Asian, European, and other markets, all with varying demographic profiles and adult smoker taste preferences. We believe a volume share of 10% of cigarettes and HTUs by 2030 is very achievable, with potential to go much further. Importantly, the return on investment for IQOS in the highly profitable U.S. tobacco market is compelling. We estimate the total U.S. industry profit pool at over $20 billion, and with average unit margins on U.S. cigarettes more than 3 times greater than for the PMI average, the payback over the next few years on the consideration paid to Altria looks very attractive. As we do not have a legacy cigarette business in the U.S., the opportunity is purely incremental. This also reflects a current excise tax system with no differentiation for heated tobacco products versus cigarettes at the federal level, and differentials on a limited basis in only a handful of states, thus presenting a clear additional opportunity over time. We are already advanced in our plans for IQOS in the U.S., as we prepare for domestic manufacturing and for important regulatory submissions, including for IQOS ILUMA where we plan to file a PMTA in H2 2023. As mentioned previously, we target the first half of next year for the resumption of IQOS domestic supply, which will be available to Altria under our current arrangement up until PMI assumes full commercial responsibility in April 2024. Our proposed combination with Swedish Match would provide certain U.S. sales and distribution capabilities. However, in the case of failure we have a clear path forward for IQOS and the rest of our smoke-free portfolio. Indeed, the most critical parts of the IQOS commercial model center on converting adult smokers, rather than distribution. In addition, the U.S. has an established distribution and retail landscape, with a clear route-to-market. We therefore also have concrete plans to proceed autonomously in building fully controlled and managed U.S. sales and distribution capabilities over the next 18 months leading up to April 2024, in order to ensure a successful IQOS roll-out and the introduction of other smoke-free products should our Swedish Match offer fail. Indeed, we believe today’s agreement is fundamental to unlock the U.S. smoke-free market. As we have shared previously, we expect the heated tobacco category to remain the largest and fastest growing in dollar terms internationally. While the e-vapor and, to a lesser extent, nicotine pouch categories have paved the way for smoke-free products in the U.S., we know that heated tobacco comes closest to replicating the experience that smokers enjoy, with higher conversion and very low unintended use. To conclude today’s presentation, our business delivered strong third-quarter and year-to-date performance, despite some challenging headwinds, and we expect to deliver another excellent year of double-digit adjusted diluted EPS growth on a pro forma currency-neutral basis. Most impressive was the continued excellent IQOS performance, with strong shipment volume and IMS growth reflecting broad-based momentum in the EU region, Japan, and emerging markets. We remain excited by the promising results of IQOS ILUMA, our rich pipeline of smoke-free innovation, and plans for further launches of both ILUMA and VEEBA in the fourth quarter and in 2023. We continue to accelerate investment in our commercial programs, digital engine, and R&D for long-term growth, as well as behind a number of growth opportunities across categories and geographies. The return from such investments remains compelling, as demonstrated by the exceptional top- and bottom-line growth delivered over recent years. In addition to growth in smoke-free products, our combustible business continues to perform well, with organic net revenue growth and essentially stable pro forma shipment volumes. Despite accelerated pricing in the current inflationary environment, temporary margin pressure from inflation and supply chain inefficiencies is likely to continue in the coming quarters. Importantly, our underlying growth fundamentals remain strong and we look forward with confidence. We have secured our near-term access to the substantial U.S. opportunity for IQOS, also forming the backbone for introducing our broader smoke-free portfolio. We are now advancing on our plans to launch at scale with or without Swedish Match. And finally, we have increased the dividend every year as a public company, through the ups and downs of economic and currency cycles. We continue to be steadfastly committed to returning cash to shareholders, as we advance towards our ambition to become predominantly smoke-free by 2025. Thank you. And before we start the question-and-answer session, please note that we are not able to comment on our offer for Swedish Match beyond what has been announced. All materials related to the offer can be found on the website, smokefreeoffer.com. And Jacek and I, we are now more than happy to answer your questions.

Chris Growe:

I wanted to ask first, if I could, in relation to the operating margin. And I think it was up, if I have my numbers right, about a -- little over 100 basis points if I exclude foreign exchange and acquisitions year-to-date. And I just want to get a sense when you look at the operating margin now, your expectation being down a little bit for the year. Does that incorporate a weaker fourth quarter operating margin? And I guess to understand what’s behind that, if I have my numbers correct here.

Chris Growe:

Okay. Thank you. And then just a second question would be, in relation to -- you took your volume estimate up for the year, which is very encouraging. You had a very strong performance year-to-date. There’s been a lot of concerns about trade down activity, the concerns of consumers -- having discretionary spending in particular in Europe and particularly as we move forward, as energy costs continue to remain so high. Are you seeing any signs of that, any break down activity, or anything you could share that would help us get a better feeling for the performance of some of your premium brands? Thank you.

Operator:

Thank you. Our next question will come from Pamela Kaufman with Morgan Stanley.

Jacek Olczak:

So -- I mean what stands behind the success of IQOS is really the front-end consumer interface, right? That’s the commercialization aspect, which makes -- is one of the key elements of IQOS success, which we measure as the highest in the industry rates of conversion and adoption of IQOS and therefore, switching from cigarettes. Swedish Match doesn’t have it, right? Swedish Match is the component of the sales force, which is essentially in store execution, but IQOS success hinges on that business-to-consumer component. So, in above scenario, obviously, that’s the investment, which is front of us, but vis-à-vis a great -- the market size and the profitability pool -- and the profitability pool. So, Swedish Match adds the component of the sales force, which is the in-store execution. Obviously, it would be nice to have them, but this is not something which is unique in a sense that -- you cannot make it or attain it organically, for example, right, or other options can be at the table as well. The uniqueness of an IQOS is again is the commercial engine, commercial activations. If you follow us closer, we have spent enormous effort in behind the consumer journey and automating, digitalizing all touch points with the consumers. And that’s the value which we will be bringing. We’ll have to invest, but the know-how is on our side.

Jacek Olczak:

Well, we have asked for some understanding, not getting the questions on the Swedish Match deal, like the fact of life is, it is SEK 116 and the 90% acceptance level, okay? And this is where we see the value of Swedish Match, the maximum of the value to Swedish Match today, and I will not comment beyond this whole fact. I think, it is a fair market price, fair valuation of the company for the both, group of the shareholders, PMI shareholders, Swedish Match shareholders, both long term and short term, and we will not comment beyond this one.

Gaurav Jain:

A couple of questions from me. So, first is on the entire plan around IQOS commercialization in the U.S., and let’s assume you are doing it standalone. So, you will have to hire, and I’m looking at some of your competitors, which have a 10% share in the U.S. like Imperial. So, they have a few thousand employees. So, if you have to hire a few thousand employees and then you incur marketing investments, so should we model in like a few-hundred-million-dollar of losses in the first few years before you scale up IQOS to a big enough volume where it starts generating incremental EBIT? Much like you had when you commercialize IQOS around the world, I remember like between ‘15 and ‘17, you had like a few -- like $700 million or $1 billion kind of loss that you had identified at that time. So, is that something similar we should do as you commercialize U.S.?

Gaurav Jain:

And a follow-up question on the BAT litigation at ITC, which they won, the patent dispute. So, -- look, so that prevents you from importing IQOS devices, which is why you are now setting up the domestic manufacturing facilities. But, can’t BAT use those patent wins, because clearly, they have established, they have some strength in their patent, and go to a domestic U.S. court and also get injunctions against your selling of IQOS devices in the domestic market? So, I’m trying to understand how do you frame this entire patent litigation even around your domestic IQOS manufacturing and commercialization sort of strategy.

Gaurav Jain:

Okay. And if I could just ask 1 follow-up on what you just said, the IQOS ILUMA device, does it bypass all these patents, which are under dispute?

Operator:

Our next question will come from Bonnie Herzog with Goldman Sachs.

Emmanuel Babeau:

Yes, Bonnie. So no, there is nothing to do with the device in the guidance. You’re right. We have slightly been moving the bracket for the HTUs volume, not massively, were 90% to 92%, and we are now 89% to 91%. So they are still part of the bracket that is the same. Clearly, we see some compensation at the level of a very robust combustible business. I think, I’ve been flagging that in detail in the presentation. And that is giving us this visibility on higher growth in volume than what we were anticipating so far, and we are raising the guidance to plus 2% to 3%. We have been raising the guidance for revenue as well with the low end of the bracket that has been raised to plus 6.5%. And then, we have the same adjusted EPS, notably because we see costs that are probably potentially a bit higher than what we anticipated a few weeks ago. So, that is giving us the same bracket for adjusted EPS. But in a nutshell, that is how the guidance is evolving.

Jacek Olczak:

Yes. So, with regards to the confidence, Bonnie, is that -- look, this confidence beyond -- or behind IQOS is growing every year, every quarter. I mean, you see the results on the international markets and we have the markets when we -- slower markets, when we faster. But the potential for IQOS, the heat-not-burn is there, okay? So, if we look at the U.S., I don’t think -- I cannot find the reasons why in the U.S. we cannot replicate to come close to the success of international. And the 10%, if you like, the first double-digit number, which we are obtaining after six years in any other geographies and taking into considerations that U.S. starting with IQOS 3 that we will be also working to bring faster the IQOS ILUMA to the U.S. and our international success has been built on IQOS 2.4, 2.4-plus. So, the U.S. is starting the journey with IQOS, the much better moment from a product perspective of our capability perspective, understanding this entire category that we’ve been in our international markets. So, this is what the confidence is coming from. And the second question with regards to the Marlboro, IQOS TEREA in Japan is now by X factor bigger than the HeatSticks Marlboro. And this was the last market, which we still have been using a Marlboro trademark of our heat-not-burn consumables. And as you know, at the very beginning, six or so years ago in a few markets, I recall it was Switzerland and Italy, we started with Marlboro and very early in the journey, we have almost overnight, we branded that thing and we dropped the Marlboro from the brand, from the proposition. And I actually believe that we have a Marlboro in international, and this is a great brand, but on cigarettes. And I have no doubt today that we are on the path that we can make IQOS as iconic brand on a global basis as in the past we have made Marlboro. So, I don’t see this as an impediment or bottleneck in our strategy in the U.S.

Priya Ohri-Gupta:

First, I just had a quick administrative question. What is the U.S. dollar equivalent for the revised Swedish Match offer? Should we just use the current exchange rate, or would there be an adjustment for any hedging that might have previously been put in place? And then I have another follow-up.

Priya Ohri-Gupta:

It was just whether -- so when you announced the transaction, the dollar amount would have been $16 billion. And you’re still sort of close to that just given the FX move, but was there any incremental hedging that was put in place?

Priya Ohri-Gupta:

That’s helpful. And then, as we think about sort of the 10% share that you’ve discussed getting to by 2030 in the U.S. market, how much of that includes contribution from ILUMA? I guess, as you put PMTA or submit the PMTA in the latter half of next year, what sort of time line are you assuming around that getting to market and getting nationalized?

Priya Ohri-Gupta:

Okay. That’s very helpful. And then, just final question for me. I think, as you discussed the inflationary pressure ramping from some of the contract renewals that you’re going through right now on the input side, how should we think about that headwind? Is it fair to think of that sort of mid-single-digit rising to the high-single-digits? And then, in terms of cadence, is it fair to assume sort of the greatest effect of that being on the first half of calendar ‘23 and then sort of moderating into the back half as you start to lap some of that? Thank you.

Operator:

Thank you. This does conclude today’s Q&A portion. I would now like to turn the program back over to management for any additional or closing remarks.

Emmanuel Babeau:

Thank you. Talk to you soon.

Operator:

Thank you. Ladies and gentlemen, this concludes today’s event. You may now disconnect.

Operator:

Good day, and welcome to the Philip Morris International Second Quarter 2022 Earnings Conference Call. Today's call is scheduled to last about one hour, including remarks by Philip Morris International management sessions, and the question and answer session. [Operator Instructions] Media representatives on the call will also be invited to ask questions at the conclusion of the question-and-answer from the investment community. I would now like to turn the call over to Mr. James Bushnell, Vice President of Investor Relations and Financial Communications. Please go ahead, sir.

Emmanuel Babeau:

Thank you, James. Welcome to you in your new role, and welcome, everyone. Before I begin, I want to reiterate our focus on supporting our employees and their families affected by the war in Ukraine and above all on the safety of our people. We continue to deploy pledge humanitarian support and additional benefits for our Ukraine employees. As previously announced, we intend to exit the Russian market in an orderly manner, as the complexities of continuing to operate in Russia increase such as supply chain challenges and financial and banking sector restriction. We continue to actively work on options for doing so in the context of an increasingly complex and rapidly changing regulatory and operating environment, including the requirement to obtain certain governmental approval for any transaction. Turning to our business. We demonstrated strong underlying momentum in the second quarter of 2022 with another quarter of positive volume supporting better-than-expected top and bottom line growth. Most impressive was the continued excellent IQOS performance and strong Q2 pro forma user growth of more than 1.1 million, demonstrating further sequential acceleration compared to Q1 as device limitation and COVID restrictions continue to ease. This reflects strong momentum in the EU region, Japan and developing market. Q2 RP pro forma net revenues grew by plus 11% despite the adverse shipment timing impact due to supply chain constraints highlighted last quarter, while HTU IMS volumes grew by plus 20%. IQOS ILUMA delivered further impressive results in its first three markets of Japan, Switzerland and Spain. The acceleration in category growth in these diverse geographies highlight the exciting future growth opportunity across the world, including in the latest launch market of Greece. In combustible, robust Q2 pro forma volume growth of plus 2.4% and organic net revenue growth of plus 4.2% were driven by Marlboro share gains stronger pricing and the continued recovery of the market. Maintaining leadership of the cigarette category allows us to maximize the switching of adult smokers to smoke-free alternatives and accelerate our transformation into a predominantly smoke-free business by 2025. We expect the strong underlying momentum of our business in H1 to continue, and we are from an organic growth outlook for the year. We are now well on track to deliver two consecutive years of volume growth, confirming our status as a growth company in terms of volumes, organic net revenues and margins. Despite a substantial currency headwind in 2022, we expect to deliver full year adjusted diluted EPS of around $6, including Russia and Ukraine. The proposed addition of Swedish Match would further boost our future financial profile. This is a value-creating offer for both set of shareholders with a compelling strategic and cultural fit, providing an additional opportunity to accelerate our smoke-free future. Turning to the headline numbers. Our Q2 volumes grew by plus 3% on a pro forma basis and by plus 1.1% in total, including Russia and Ukraine. Pro forma net revenues grew organically by plus 6.2% and by plus 5.3% for total PMI, reflecting both the continued strong growth of IQOS and the ongoing recovery of the combustible business in many markets against a pandemic affected comparison. As we anticipated and indicated previously, less unfavorable timing of cigarette shipment also played a role, notably due to replenishment of duty-free inventories. Our total organic net revenue per unit grew by plus 3% on a pro forma basis and by plus 4.1% in total despite the expected delay of HTU shipments to Japan as we manage through global supply chain disruption. This incorporates combustible pricing of plus 3.5% on a pro forma basis or almost plus 5% excluding Indonesia. Our Q2 adjusted operating income margin declined organically by 190 basis points on a pro forma basis and by 150 basis points in total. As expected and communicated in our Q1 quarterly results, this reflects four main factors

Pamela Kaufman:

I wanted to get a sense for what's contributing to the strong IQOS new user momentum that you've experienced in the last two quarters. Is there anything that you're doing differently? And where are you adding these users geographically? How much is driven by ILUMA versus prior IQOS devices? And then related to that, what do you estimate new user growth would be if you were not constrained by production capacity?

Pamela Kaufman:

That's very helpful. I also wanted to get a sense for how you would characterize your current appetite for additional acquisitions in the near-term in light of the Swedish Match transaction. There are additional assets for sale in the U.S. market. Are you in a position to consider more acquisitions?

Operator:

We will take our next question from Bonnie Herzog with Goldman Sachs. Your line is open.

Emmanuel Babeau:

Yes. Thanks, Bonnie for the question. So I mean, that's true that in H1, we've seen a number of headwinds on the margin. Needless to say that inflation, of course, is one. And we said that we are seeing around 4% inflation on our input cost. So I guess it's probably lower than inflation that we see in many countries, but that's significant. Obviously, we have costs that are coming from the disruption in the supply chain, notably coming from the war in Ukraine. We have a dramatic acceleration of air freight that is, of course, temporary. We're not going to keep air shipping on the long term. But during a period of time, we need to do that, and it's very costly at the time where the cost of freight is globally, not only for air but globally going up. So we are obviously being impacted. So that is having an impact here. And then there is a launch of ILUMA at the beginning, notably in Japan, where we had a very, very strong investment, which was really important to make on the device. And we have two devices now offering -- three device, actually, three models in Japan, and the strong volume in device has an impact on the margin level. On top of that, we said it since the beginning, we don't start the launch of ILUMA with optimized cost and weight on TEREA and on SENTIA. And that is coming at the beginning with a negative impact on margin which something that is temporary as well. So we expect in the course of 2023 seems to gradually improve. So inflation is not temporary. I think for the rest, a lot of the headwinds that we are seeing in H1 are temporary, and there will be a recovery in the future. I'm not able at that stage and we do that, of course, as we are gaining visibility to phase it in the coming quarter, but that's certainly what we that's what we are expecting. And then clearly, for H2, we are expecting an improvement on the margin. Certainly, that would be skewed to a large extent to Q4, but already the deterioration in Q3 on the gross margin would be lower, but there will be more investment as we know we are just following the growth, and we are putting the right level of investment to cope with the growth. Q4, we'll be clearly seeing a better improvement with the better mix. Remember, we've been impacted also on the margin by the fact that the volume that we should have been shipping and it should have been the P&L to Japan, and that are having a very nice margin are not in the P&L. And so of course, it's another one-off that was impacting H1, but we will have the compensation in H2. So, yes, difficult beginning of the year, it doesn't mean that everything will be back to normal in H2. That will be still with some headwind. But clearly, most of what we are facing is temporary, and they will be over time, a recovery on the margin.

Emmanuel Babeau:

Thank you, Bonnie. What I can tell you on Swedish Match is, first of all, to repeat that we have cleared the U.S. requisite in terms of regulatory approval. So that is behind us. For the rest, the processes are still ongoing in several jurisdictions according to plan. And we are confirming the fact that we expect what we said in beginning closing in Q4, of course, subject to Swedish Match shareholder acceptance. And here, I would like to reiterate the fact that we believe that this is a very compelling offer for Swedish Match shareholder. Can I remind everybody that we offered a 40% for the premium at the time of the announcement in May, since then, the markets have been quite volatile, most of them going down, and that this offer has been approved by the Board of Swedish Match, which was confirming the fact that they thought it was compelling for their shareholders. So that's what I have to say on Swedish Match. And I have no other comment to make.

Chris Growe:

I just had a question for you first on the timing of shipments across the second half. You've talked about the -- just over 2 billion sticks that shifted to the second half of the year. Does that shift mostly to the fourth quarter as we're thinking about your guidance for IQOS shipments in 3Q versus what's implied for the fourth quarter?

Chris Growe:

Okay. And just one other question on relation to device sales. They've been a little elevated here as you had more availability. Does that remain elevated even in, say, the first half of '23 as you continue to build your availability of devices? And is that the right time line to think about the point where you'll have, let's call it, full availability of devices is in the first half of '23 based on the chip shortage?

Operator:

We will take our next question from Vivien Azer with Cowen. Your line is now open.

Emmanuel Babeau:

Look, I'm not sure we disclosed the component of menthol. Of course, that's a minority of our business. What I can say about that is that we have to understand that this is a move in application from the TPD in Europe. So it's not a decision. It's an application based on the TPD of 2014, which in certain circumstances was planning for a kind of automatic ban to be implemented. Now this still needs to be approved by the parliament and by the European Council that will be in front of these two bodies later on in 2022, and we'll see what is the final decision. To be very clear, it already has happened on a combustible business with almost no impact or very limited impact. So, the consumer reorganize their taste and they switch to other products, but very limited impact. And therefore, it isn't clear that this will have a meaningful impact if it happens on our heat-not-burn business. In addition to that, we believe that we have superiority in our tobacco taste versus competition, and that's the superiority of our technology with IQOS versus the technology of the competition. So that will mean if we are left with tobacco taste that our product will look great versus competition for people who may decide to go for new product, if they have to abandon on flavor. So we are, of course, waiting to see what are the development. But as you can hear, I guess, from my comments, we have limited concern on that matter.

Emmanuel Babeau:

Yes. We expect to be in a position to introduce IQOS in H1 of 2023. I cannot be more precise at this stage. We continue to work on the plan to be able to do that. And of course, we'll keep you posted when we have more clarity and more precise reintroduction date.

Gaurav Jain:

So a couple of questions from me. One is on Russia. So, the way you're now guiding, you are including Russia for the full year and earlier, you had included Russia just for Q1. So can you still export devices into Russia, IQOS devices because you still have IQOS shipments there? And also, can you take cash out of Russia to pay the dividends, which you are paying in USD?

Gaurav Jain:

Okay. And my second question is on the Canadian market. So clearly, you do not consolidate Canada, but you give the volume numbers. So the market is down 16% in 1H '22 and 19% in Q2. And the retail pricing, I think, is 6% to 7%, which is not out of ordinary. And then you have mentioned in the e-cigarette cannibalization and you have launched Viva, the disposable device in Canada. So what's exactly happening in Canada? Is it that e-cigarettes are now growing very fast and cannibalizing the market? Could you just help us understand that?

Operator:

I would now like to turn the program back over to management for any additional or closing remarks.

James Bushnell:

That concludes our call today. Thank you again for joining us. If you have any follow-up questions, please contact the Investor Relations team. Thank you again, and have a nice day.

Operator:

Good day, and welcome to the Philip Morris International First Quarter and 2021 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. [Operator Instructions] Media representatives on the call will also be invited to ask questions at the conclusion of the question-and-answer from the investment community. I would now like to turn the call over to Mr. Nick Rolli, Vice President of Investor Relations and Financial Communications. Please go ahead, sir.

Jacek Olczak:

Thank you, Nick, and welcome everyone. I hope you are all safe and well. Recent months have been extremely challenging for many of us given the tragic events related to the war in Ukraine. I would like to express our sadness and solidarity for the people of Ukraine. Our primary concern is for our employees and their families and we have been doing everything we can to support them, with three priorities. First, evacuating our colleagues, we have evacuated over 1,000 colleagues and family members from the country and supported more than 2,700 others to move from conflict zones to locations away from the heaviest fighting. Second, we are delivering critical aid to people that cannot leave or who decided to remain in Ukraine. And third, we are providing accommodation, immediate assistance and a path forward to those who left the country. In addition, we have already contributed around $10 million in funds and donated essential items across the country, directly to humanitarian organizations and through our own employee-led initiative, Projects With a Heart. This includes providing medicine, food, clothes, and a variety of other items to our colleagues and to the broader population, the purchase of 25 ambulances and the set-up of a mobile hospital. Based on our current visibility, we estimate an additional cost of around $25 million for additional support to employees this year. Our colleagues in neighboring countries continue to provide vital support to all people arriving from Ukraine to seek refuge. Our heartfelt gratitude goes to everyone involved in these generous efforts to help at such a difficult time. In terms of the impact on our business operations, production at our Ukraine manufacturing facility in Kharkiv remains suspended. While business activities in Eastern Ukraine have been mostly heavily impacted, we have seen some resumption in areas where conditions allow as we seek to maximize product availability and service to consumers, using existing inventories on hand. We are also now planning to import products from other manufacturing locations, although this may involve higher costs. We continue to pay salaries to all our Ukrainian employees and to provide substantial in-kind support to them and their families. As communicated in our March 24 press release, PMI’s board of directors and senior executive team are working on options to exit the Russian market in an orderly manner in the context of a complex and rapidly changing regulatory and operating environment. This is no easy task in view of recently introduced complex legislation, but we are committed to seeking a viable path to exit the market while supporting our employees in Russia throughout this period. It is also clear that we cannot continue business as usual in light of regulatory and supply chain disruption, which has already impacted the Russian business in Q1. We have taken concrete steps to scale back our operations, such as the cancellation of all new investments and product launches, including IQOS ILUMA and IQOS VEEV. We are delisting 25% of our cigarette products, including Marlboro and Parliament SKUs. We have also canceled the $150 million investment in capacity to ultimately manufacture more than 20 billion TEREA sticks for IQOS ILUMA in our Russian factory. Clearly, the impact of the conflict has also created disruption in global supply chains and exacerbated inflationary pressures in certain materials and services. However, the Q1 performance and outlook for our business excluding Russia and Ukraine remains strong. On a reported basis our outlook conservatively assumes no further contribution from Russia or Ukraine from April 1. To provide a consistent view, given the uncertainty and volatility of these two markets, we will now also provide adjusted results and guidance on a pro forma basis excluding Russia and Ukraine from both the prior and full current year. I will now hand over to Emmanuel to cover this in more detail.

Jacek Olczak:

Thank you Emmanuel. Despite the challenges in Russia and Ukraine, we have delivered an excellent start to the year with a strong recovery in IQOS user growth, and exceptional initial results from the groundbreaking innovation of IQOS ILUMA. As we covered recently at CAGNY, we have a rich pipeline of further smoke-free innovations to expand and grow across new and existing categories and geographies. Our combustible business is now stabilizing category share, despite the impact of IQOS cannabilization, which allows us to accelerate further switching of smokers to better alternatives. We also continue to invest for long-term growth through the development of innovative wellness and healthcare products, which seek to deliver a net positive impact on society. Our 2022 fundamentals are strong, with a pro forma expectation of 4.5% to 6.5% organic net revenue growth and 9% to 11% currency-neutral adjusted diluted EPS growth. Despite the significant inflationary pressures and disruption in global supply chains affecting first half and the full year, we also expect our organic operating income margin to expand to up by 100 basis points. In addition, we have taken the conservative assumption in our reported guidance of no further contribution from Russia or Ukraine from April 1. Overall, we are very confident in the near and mid-term growth outlook and remain committed to sustainably rewarding shareholders over time as we continue our transformation. Thank you. And we are now happy to answer your questions.

Chris Growe:

Hi, good morning.

Emmanuel Babeau:

Hi, Chris.

Jacek Olczak:

That’s correct. We’re just talking for the entire year the volumes from Russia and Ukraine. But then, obviously, for the Q1 we recognize what have been sold in both geographies, which is 5 billion. Therefore, on a pro forma for the full year excluding Russia and Ukraine looking into 88 billion to 92 billion. But if you add back the 5 billion, which we already sold during the first period, the first quarter, that directly translates to 93 billion-97 billion, which would assume or is assuming that there is no further sales of IQOS as of April 1 in neither Russia nor Ukraine.

Jacek Olczak:

Yes. Okay. So the first quarter shipments of the devices on the one hand, yes, you’re absolutely right, it contributes to the better help to the global revenue, but remember that the devices are putting a pressure on the margins, right. So that’s started between the devices and the impact on the one hand on the revenue and the margins. The big impact which we expect to have in Q2 is on the supply of the shipments of the consumables. So the heat sticks and TEREA. And as a result, among other constraints on the supply chain of stopping the investment in Russia, we need to resource that missing capacity to our locations and it will take us a while. And therefore, we expect that we will go lower with the inventories in Japan, mainly Japan in order to ensure that on the manufacturing side, the proper resourcing we will have when we expect quite a robust growth on IMS, and the market share. And I think, Emmanuel, on the slide have indicated that we should think we’re aiming at 24% – around 24% market share for the quarter in Japan. So it’s nothing on the consumer level on the offtake level, but we need to do this operations through the inventories in order to resume to the normal course of shipments in the Q3 and Q4. And hence, this will drive the better performance and stronger performance in the second half than the first half, which will be what we estimate to be impacted by the Q2 difference in the shipments. Now with regards to the devices, I mean, there is this continuous sale of the devices in the excluded geographies, right. So it’s not that we stopped selling, we stopped recognizing this whole thing due to the visibility and the other factors, what is happening in Russia and Ukraine. But in reality, we need to keep at least the replacement devices, right. So it’s not that you can take the volume out of Russia and Ukraine and to redirect them to other locations. We do have actually getting better and better, but not perfect visibility with regards to the device supplies. And remember, we’ve been very cautious about second half of last year. And the moment when we had the better order fulfillment and also better visibility with regards to the future orders for this year, we feel more confident about how we can realize the – fully realize the opportunity of IQOS. So that looks okay it’s not perfect, but I don’t want to misled anybody it’s not perfect, but it’s better than say at the beginning of the year. And you saw it at the moment that we have regained some, have almost full-fledged availability of devices how IQOS could accelerate its growth for the user acquisition and the market share progression in Q1. So we know that we have it, but everything hinges on a continually and undisturbed uninterrupted supplies of the both devices and heat sticks.

Chris Growe:

That was great color. Thanks so much.

Pamela Kaufman:

Hi, good morning.

Pamela Kaufman:

I have a question on the 2023 outlook and how you’re thinking about your targets for next year, particularly on the HTU side, should we assume a similar reduction to your heated tobacco target as the guidance reduction for this year of about 20%? And given Russia’s significant contribution to the overall IQOS business, how are you adjusting your strategy for achieving your target for 50% of revenue coming from smoke free products by 2025? Thank you.

Emmanuel Babeau:

And Pamela, on your question on how do we get to more than 50% in 2025. I’m sure you’ve seen that in Q1, on a pro forma basis excluding Russia and Ukraine we are a bit below the full perimeter of the Group, but not that much below. So we are at 30% versus around 31%. So, yes, there is a bit more ground to cover to get to 50%. But given the dynamism that we see in our IQOS business and the opportunity we’ve been clearly showing in low-and middle-income country, we think we can catch up and deliver this more than 50%.

Jacek Olczak:

Yes, I think your question was, sorry, because we all cut half the sentence. Your question was can we expect the same dynamics of the user acquisition right going forward?

Jacek Olczak:

Okay. So look, I mean, above 1 million acquisition this quarter, which show the growth sequentially above close to 1 million acquisition, the Q4. I mean that directly correlated to our availability of devices and a full portfolio of devices. As you know, we also play now the different price segments game, we have more expensive devices, mid-price devices, lower-price devices. So as long as we have availability of devices, I actually think that number, we should repeat the same sort of the rate, if not actually higher, because you could see from the conversion perspective and the consumer liking measured by NPS and other parameters what we’re offering today that is meeting the consumer expectations. So there’s also bridging somehow to the before questions that once we see the visibility on the devices, right, in the next quarter or so and all the dynamics, which we can achieve outside the Russia and Ukraine then we would be in a positions to revise what actually we will deliver in a year from now in terms of the total IQOS volume.

Emmanuel Babeau:

Thank you.

Vivien Azer:

Hi, good morning.

Vivien Azer:

So I wanted to follow up on Japan, I’m just having a hard time reconciling two comments that you guys made. Number one that there was negative device mix in the quarter, but that you had device growth from ILUMA, because last quarter, I thought the launch of ILUMA was mix accretive in Japan, so am I misunderstanding something or did something change? Thanks.

Emmanuel Babeau:

Yeah, Vivien if I may, Emmanuel speaking. It’s a positive in the mix within the device, because it come at a higher price. But any growth in device is negative to the mix in term of gross margin, because it’s coming with of course a much reduced gross margin versus the consumables. So the more device we sell, you have some impact on the revenue, which is positive, but it has a dilutive impact on the gross margin rate to be very clear.

Jacek Olczak:

No, this again comes so we had post price increase, post price change environment in Germany, the one thing. And second is, again, I mean the Germany start benefiting from not the restricted access to the devices. So this again follows the same story that we have a continuous broad range availability of the devices. We can go into the portfolio again and hence the performance. And this is one additional comment I would make here Vivien is that Germany is still running on the IQOS free one version, which is a blade version and the reasons why we went for example to Switzerland with IQOS ILUMA before opening the larger market, which obviously will take a lot of volume of the device is how IQOS ILUMA would to performing in the similar sort of a geography. So I am very pleased with the success so far of IQOS ILUMA in Switzerland, especially the German speaking part, because I used this as a – we could use this as the proxy for German on acceleration of the – further acceleration of the growth in Germany. Now, nothing is certain in life. But I think this is as far as we can read through the consumer reactions in Switzerland.

Operator:

We will take our next question from Bonnie Herzog with Goldman Sachs. Your line is now open.

Jacek Olczak:

Bonnie, Jacek here. Judging just by the number of details, you mentioned in that question you will appreciate how complex the situation is in Russia. So one by one. Russia in terms of the so far production and export allocation was not really that significant. We had a much more significant plans of expanding Russia is that one of the key suppliers of new IQOS ILUMA and hence our decision to immediately stop that investment as a result of that we created a temporary halt for the rest of the market. Partially for Russia launch of ILUMA, which we also canceled, but also that Russia was supposed to contribute to the supply of the ILUMA consumables that are HeatSticks into other markets, including in Japan. So our first priority is how we can resource that capacity there. Obviously, that capacity means that we have an equipment installed in Russia. And we can’t – so we don’t use this equipment today. What will happen to that equipment going forward? We are also working on a certain plans, but I would stop here, I will not go into more details. Now to exit Russia in the orderly manner for us that we need to reconcile the interest first of all of our shareholders, the employees in Russia. And you know that the ever-evolving legislation in Russia puts the significant risk or constraints of our ability to adhere. And this is only in the context of the very evolving regulatory environment, both on the international, it’s obviously the sanctions, but also the legislations or legislation in Russia. So if we want to, we have a significant presence in Russia, as we all know it. We’re in the market, organically built the business over the last 30 years. This is 100% business of PMI International. We don’t have any partners contributing to the core business. We obviously are connected with the local supply chains and wholesale and distribution components. But PM Izhora and Philip Morris sales and distribution is 100% Philip Morris business. We have some shareholding in addition to this, we have a key distributor in the market together along with our major tobacco company. And to unwind in orderly manner all the strengths, which we have in Russia is a complex endeavor, but we are committed to do so. Hence, in our guidance and the decisions to look at the PMI as the rest of the business, which is doing absolutely great despite all of the headwinds, which we have and so on rather than have polluted with something which we have limited visibility and ability to act accordingly. So I know that my answer have not gave you more clarity, but that is the best which we can say at this moment. I mean, we’re working on exit, but presumably, one of the most complicated transactions in the terms of the history of the group, which we’re drawing from the board.

Jacek Olczak:

Well, we rather not delay beyond what is necessary as long as we satisfy all the teams or the groups if you like. And again I repeat it, I mean our – we have a responsibility to shareholders. But we also have responsibility to employees in Russia. And overall, broad group of stakeholders with the various expectations and try to resolve that equation to the satisfaction of everyone that’s becoming complex exercise. But we are working relentlessly of how to move forward. I mean I would appreciate that if this was any other size of the business and presence in the market things could have looked differently. But this was a very big business for us.

Jacek Olczak:

Yes. Thank you. So obviously we need to make some or making some assumptions on the supply chain, as I said earlier. We don’t live today in a perfect visibility for all the remaining quarters of this year. But I think we have enough of the confidence to come up with this pro forma estimate or this pro forma guidance. Now, look, you see that continuous trajectory of IQOS growth in essentially in all geographies, including the geographies that historically were a bit tougher for us, where yet we had the progress, but they were not really growing at the group level of the growth and now we see that Japan, with that ILUMA and a few other locations with ILUMA already having a massive acceleration of the growth. We know what we have in our plans for this thereafter with ILUMA. We also know that IQOS [indiscernible] which is the currently the mostly sold device also continues to be very attractive. And this is continuously despite the fact that we offering our portfolio both of the devices and the consummables at a significant premium to any other market propositions. I think we’re getting this confidence that IQOS continue to grow and we’re looking forward also to the moment when it will accelerate its growth. Will IQOS in a near term excluding Russia and Ukraine, sorry, the rest of the geographies compensate the lack of Russia and Ukraine? I think over a longer period of time, we once notice, but in shorter period of time it might a bit challenging, okay. We’re not making any promises at this stage.

Jacek Olczak:

Thank you.

Gaurav Jain:

[Technical Difficulty]

Gaurav Jain:

Sure. Is this better?

Gaurav Jain:

Sorry about that. So my first question is your guidance on industry volume and your own volume ex-Russia and Ukraine. So it seems to have become better. And if I look, especially at your European volumes, they are quite strong. So we have this sort of the macro pressure on consumers and inflationary pressure and Europe might be in recession, not in recession oil price impact. So my question is that why are you seeing stronger volumes? And is it that when cigarette prices historically used to be up 4 in Europe and wage growth was 1, so cigarettes are becoming less affordable and right now cigarette pricing is still 4 while wage inflation is probably 4 or 5, so cigarettes are actually becoming more affordable and that’s why you are seeing better volume trends?

Gaurav Jain:

Sure. And coming to the EPS guidance and the dividend. So your dividend payout ratio will now be north of 90%. So how does that impact, how you’re thinking about share repurchases? And we keep seeing the cycles with PM every three years, you have massive adverse FX and we go back 10 years, euro used to be €150, yen was JPY70, then we had one cycle in 2014 and 2017. Now we have another cycle of FX. And clearly a lot of your costs are in Swiss franc and dollar. So is there something you can do so that the cost mismatch, the transaction FX mismatch is lesser? And we again get into the situation where dividend payout ratio is becoming very tight.

Gaurav Jain:

Sure. Thanks a lot.

Operator:

We will take our next question from Owen Bennett with Jefferies. Your line is now open.

Operator:

And it appears Mr. Bennett has dropped. We will go ahead and take our next question from Jared Dinges with JPMorgan. Your line is open.

Jacek Olczak:

We’re taking a price increase and a price variance. So the opening of the – came in be better than we initially thought. We will see what the remaining part of the year and especially the second half will bring. When we look at the inflation, I mean, we also have to look of what is the inflation of the material. So like the cost of living and what is the inflation of the income, right? Because we haven’t yet seen the inflation on the income level at the concept level. So we have to find the right spot at the right balance where do we get into this. But in most of the geographies I mean the pricing environment, I would characterize it is getting positive. I mean, Emmanuel, talk about the Indonesia. On the other hand, we have a very strong rebound in volumes in Indonesia. And hopefully also Indonesia, which used to be quite important a significant contributor to the pricing will hopefully towards the end of this year or definitely 2023 will resume this pricing contribution. We had a price increase in Germany flowing through the market, the Philippines, Turkey, okay. Now Turkey goes to the hyper-inflationary accounting. We’re trying to price it widely, looking at the inflation as the pressure. But as I said, at the beginning of the year we already started with the ahead of our own expectations pricing variance. So let’s see how that this will continue through the year.

Jacek Olczak:

Well, there is this continuous – remember this is the part of the world, which is still not out of the woods with regards to COVID unfortunately, right? So the situation is not really didn’t get back to the pre-COVID side. I believe there is some underlying growth opportunities just by the fact that if they continue to recover from the COVID situation, we should start seeing the continuously better volume. And as I said, I mean we took the price increase in, Philippines, we’re taking some pricing in, we’re taking the pricing a little bit accelerated in Indonesia, but on the other hand, we are still in the – as you remember, Indonesia take a couple of around steps of a price increase to pass on the beginning of the excise increase. So we still need a bit of time to go into the net margin improvement territory. But it’s very much hinges essentially to keep it short on continuous recovery and no further surprises with regards of the COVID situation.

Jared Dinges:

That’s correct. Thanks, guys.

Nick Rolli:

Thank you. That was the last question, operator.

Nick Rolli:

I think Jacek had some closing remarks.

Nick Rolli:

Thank you, Jacek. Thank you, Emmanuel. Congratulations, James. Thank you all on the call because I know we had some long relationships with many of you and I value that relationship and thank you very much. That concludes the call. And we apologize for the technical difficulties on my last call. But we’ll will resolve everything and look forward to dealing with your follow-up questions. Thank you very much.

Operator:

This does conclude today’s program. Thank you for your participation. You may disconnect at any time.

Operator:

Good day, and welcome to the Philip Morris International Fourth Quarter 2021 Year-End 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. Media representatives on the call will also be invited to ask questions at the conclusion of questions from the investment community. I will now turn the call over to Mr. Nick Rolli, Vice President of Investor Relations and Financial Communications. Please go ahead, sir.

Jacek Olczak:

Thank you, Nick, and welcome, everyone. I hope you all say on well. Our business delivered an excellent performance in 2021, reaching record net revenues, adjusted diluted EPS and cash flow with growth in overall volumes, high single-digit organic net revenue growth and strong double-digit adjusted EPS growth. This illustrates the sustainable nature of our growth based on new products and innovation, as demonstrated by the continued strength of IQOS, which delivered 31% full year organic growth in RRP net revenues. Smoke-free products surpassed 30% of total net revenues in Q4, as we progress towards our ambition of becoming a predominantly smoke-free company by 2025. We were especially pleased by the reacceleration of our business in Q4 to deliver a better-than-expected result. This reacceleration was visible in organic net revenues, IQOS user growth, heated tobacco unit market shares across developed and emerging markets, innovation in devices and consumables, and commercial investments and combustible share. IQOS user growth recovered in Q4 to reach an estimated 21.2 million total users, despite ongoing tightness in device supplies in the second half of the year. Full year heated tobacco unit shipment volumes grew 25% to reach 95 billion units, with broad-based growth for both our volumes and the category across key geographies, with an especially positive rebound in the EU. The growth outlook for IQOS remains very positive, with outstanding initial results from IQOS ILUMA in Japan and Switzerland, the only two launches so far, and growing traction for IQOS VEEV in early launch markets. In combustibles, we essentially reached our goal of stable category share in the fourth quarter despite the impact of IQOS cannibalization. During the year, we laid the foundations for our long-term growth ambitions beyond nicotine in Wellness and Healthcare, including the milestone acquisitions of Fertin and Vectura, which provide essential capabilities for future product development. And last, bolstered by strong operating cash flow, we continued to prioritize returns to shareholders through a 4.2% increase in the dividend and ongoing share repurchases. Turning to the headline numbers. Our full year adjusted net revenues grew organically by 7.6% or 10.3% in dollar terms, including positive currency. This reflects the continued underlying strength of IQOS and the ongoing recovery of the combustible business in many markets compared to the pandemic affected prior year. Our net revenue per unit grew 5.3% organically driven by the increasing proportion of IQOS in our sales mix and pricing. Combustible pricing was in line with our expectations at 2.7% or around 4%, excluding Indonesia. Our adjusted operating income margin increased by 200 basis points on an organic basis, in line with our expectations, with continued positive effects from the increasing size and profitability of IQOS, pricing and productivity savings. Through first half expansion -- although strong H1 expansion was tempered in the second half by the expected initial higher unit cost of IQOS ILUMA, geographic and category expansion investment and the Q4 resumption of consumer programs in a number of markets. Our resulting adjusted diluted EPS of $6.08 represents 17.6% growth in dollar terms and 15.3% currency-neutral growth, which is well above our prior guidance as IQOS user growth, the launch of Illuma and total industry volumes exceeded our expectations. Finally, we generated operating cash flow of $12 billion, reflecting excellent underlying cash conversion in addition to strong Q4 business results and certain timing factors. Looking at our Q4 performance, net revenues grew by 8.4% organically. This reflects the sequential improvement in IQOS user acquisition the initial success of ILUMA in Japan and strong overall volumes, including a further recovery in combustibles. We delivered robust organic net revenue per unit growth of 4.1%, again reflecting our shift in business mix. We achieved this despite softer pricing on combustibles of 1.4% due to the factors flagged previously of continued pandemic-related challenges in certain markets as well as comparison effects in Germany and Australia. Our Q4 adjusted operating income margin declined by 10 basis points on an organic basis, primarily due to the same factors mentioned for the second half as accelerating business performance opened more opportunities for investment in future growth. Despite that, our currency-neutral adjusted diluted EPS, again grew strongly by 11.9%, also reflecting a lower interest cost and effective tax rate. Turning now to 2022 guidance. After the temporary slowdown in IQOS user growth in the second half of 2021, the device supply situation is gradually improving. While the situation remains fluid, we now expect a more limited impact, allowing us to gradually return to prior rates of user progression over the coming quarters. With the remarkable success of ILUMA in its first market, a number of other innovations planned and promising growth for IQOS in low and middle income markets, our 2022 growth fundamentals are strong, and we look forward to an exciting year. We note that the slower user growth in the second half of 2021, particularly in the third quarter, will have an estimated carryover effect on our growth this year of around 4 billion to 5 billion cubic tobacco units. This is reflected in our 2022 expectations of 113 million to 118 billion H2 shipment volume. Given this continued growth, we expect our full year H2 shipments to again be ahead of IMS volumes. We expect to deliver between 4% and 6% organic net revenue growth keeping us well on track to deliver our 2021 -- 2021, 2023 compound annual growth rate target of more than 5%. This range prudently incorporates the continuing uncertainty on full device availability and the pace of the ongoing pandemic recovery. For Duty Free, we assume no meaningful pickup in Asian travel, but a continued gradual recovery in other geographies. We expect our adjusted operating income margin to expand between 50 and 150 basis points as the positive effects of our product transformation continues, despite the expectation of a moderately lower gross margin. This is essentially attributable to temporary ILUMA related factors such as the higher initial weight and cost of TEREA consumables and the cost of devices, which we expect to decrease over the 18 to 24 months post-launch as we have experienced in previous -- with previous major innovations. We also account for higher logistic costs, where the tremendous uptake of ILUMA in Japan has led to increased use of air freight investments to grow capacity across our smoke-free platforms and inflation in certain supply chain elements. Operating income margin expansion and continued growth opportunities and in wellness and healthcare R&D will again be supported by our ongoing efficiency programs. We remain on track to deliver around $2 billion in gross savings by 2023. Accordingly, we forecast currency-neutral adjusted diluted EPS growth of 8% to 11%. This translates into an adjusted diluted EPS range of $6.12 to $6.30, including an estimated unfavorable currency impact of around $0.45 at prevailing rates. This is primarily due to translation effects, and this currency impact reflects notably the appreciation of the euro, Japanese yen and Turkish lira versus the dollar. This guidance includes the impact of $785 million of share repurchases made in 2021, which were somewhat restricted by blackout periods. It does not reflect the impact of repurchases in 2022 as we continue to take an opportunistic approach within our target of between $5 billion to $7 billion over three years. Our guidance also reflects the impact of acquired businesses, which we expect to generate underlying operating income in line with our business plan, but with an operating loss of around $150 million or approximately 1% of adjusted diluted EPS, which we'll come back to explain later. As outlined in today's release, there are a number of other assumptions underpinning our outlook. We expect the total industry volume of cigarettes and to cubic tobacco units, excluding the U.S. and China to decline between minus 1% and minus 2%. Given our leadership in smoke-free product, the structural growth of the category and its growing proportion in our business, we expect to gain share a target broadly stable total PMI shipment volumes within the range of minus 1% to plus 1%. We assume full year combustible pricing of 3% to 4% with a softer first half and a stronger second half of the year. And this is clearly above 2021 levels. The pricing environment is improving but still challenging central markets with ongoing pandemic related impacts. Our balance sheet is strong. We delivered excellent operating cash flow of $12 billion in 2021, reflecting robust underlying cash conversion in addition to favorable timing and one-off impact of around $0.5 billion. With further strong organic profit growth expected in 2022, we expect to generate around $11 billion of operating cash flow, subject to year-end working capital requirements and after accounting for the reversal of timing benefits and using prevailing exchange rates. As a result, we raised our 2021 to '23 operating cash flow target communicated at the February 2021 Investor Day at $35 billion to the range of $36 billion to $37 billion. We also expect full year capital expenditures of around $1 billion, reflecting increased capacity investments behind our smoke-free platforms, including ILUMA and enhancing our digital commercial engine in addition to certain projects, which were delayed due to the pandemic. Lastly, looking specifically to the first quarter of 2022, we expect adjusted diluted EPS of $1.50 to $1.55, including $0.15 of unfavorable currency at prevailing rates. We expect robust organic top line growth and operating margins comparisons, which reflect above the very strong prior year quarter, which benefited from a high level of productivity savings and relatively low levels of investment and the Q1 of 2022 dynamics of commercial investments, ILUMA related costs and increases in some inputs such as freight. Let me now hand over to Emmanuel, who will give you more details of our performance in 2021.

Jacek Olczak:

Thank you, Emmanuel. Overall, we are very pleased to have delivered excellent growth in last year in 2021 with a strong underlying momentum for IQOS as well as the record adjusted EPS, net revenues and cash generation. In the consistent quality and sustainability of our organic top and bottom line delivery has been clearly demonstrated over the last two years, which I believe we all acknowledge with pretty to volunteers. With an improving outlook for device supply, although still were an element of agility, the exceptional initial success of ILUMA and the number of innovations and growth initiatives. We look forward to 2022 with a tremendous excitement. At the same time, we're building -- we will be building our development capabilities in wellness and healthcare for targeted investment in order to support the next driver of our long-term growth. Our balance sheet is strong, and we have increased cash returns to shareholders through a higher dividend and our share repurchase program, in line with our objective to deliver sustainable value and returns to investors as we continue our smoke-free transformation. In short, we continue to see a bright future of our business. Following a very strong 2021, we remain confident in our '21 to '23 growth targets and in our ambition to be majority smoke-free by net revenues in 2025. Thank you all for your attention. Emmanuel and myself will be happy to answer your questions.

Bonnie Herzog:

Hi, Jacek and Emmanuel. I hope you're both doing well. I have a question on your EPS guidance this year. It's quite a wide range at 8% to 11% on a currency-neutral basis. So I was hoping you could highlight some of the key assumptions or drivers that put you maybe at the low end of that range versus what needs to happen for you to get to the 11% growth? For instance, 11% is possible even if the chip shortage situation doesn't get resolved for the next few months?

Emmanuel Babeau:

I'm going to take this. So, obviously, and we've been trying it in our preliminary remarks, we are still facing a number of uncertainties. The COVID does not disappear even if things seem to be improving. We don't have full visibility on the IT shortage and on the supply chain globally. And that is obviously what is behind with some certainly cautiousness on the guidance that we are giving on the top line. And then from there, we, of course, are driving a business that is seeing a good momentum. We have the traditional driver of price increase. We're going to be very efficient on cost savings. You can see what we've been delivering in 2021, already more than $800 million of efficiency on our cost. We're going to continue in 2022. And I know that is going to drive the difference between the revenue growth and the adjusted EPS organic growth. One of the headwinds that we're going to face this year, which I think we should see as very positive because it's coming from the growth, and we are managing a very nice potential of growth is that we are investing for exciting outlook. It starts, of course, with ILUMA in Japan, but globally, the launch of ILUMA, but certainly with a big impact in Japan, where we know that when we launch a new product, this is having some impact on the cost of goods because we are not at the same level in terms of efficiency on the supply chain. The productivity is not at its maximum, and we've been explaining that in our remarks. And that is going to have some impact at the launch. We talked about air freight as well and that is to have an impact. We said it with probably what we see today is a moderate decrease of the gross margin rate. Without that, it would have been from what we see today, another year of growth of the gross margin rate. But that's really what is driving the guidance. So we have some uncertainty, but we are very excited by the potential of growth that we see with all this innovation that is coming up. We have the traditional driver of efficiency that are going to help. We have some headwind, which was absolutely planned because we are coming with innovation, and we need to invest to launch this innovation. And I should add in terms of innovation, but it's certainly the fact that we are also expanding in terms of geography, what we see in Egypt bode extremely well for the potential in emerging countries, but we need to invest, of course, to build the capacity. We need to develop our commercial tools. We need to invest on the new platform, vaping and nicotine pouches. So what I think is great in this guidance and in our ambition for 2022 is that it's a year with a lot of investment for an exciting growth, but we are still able to deliver a good dynamic top line. We are able to deliver nice margin improvement, good organic growth at a good level. And as you have seen, we are hugely cash generative, and we do that at the same time, again, while investing for the future.

Jacek Olczak:

Yes. So Bonnie, as we're working on the -- bringing the manufacturing capacity for IQOS on the U.S. territory. And that's our main mitigation plan or reaction plan to where we are today post the ITC event. As we said, we think that the summer at the beginning of the next year, we should be in a position to resume the shipments in the U.S. As we and the Altria is this close, we have some disagreements with regards whether Altria has fulfilled the certain milestones in the current contract, and we're currently in negotiations or discussions with Altria to resolve it. And so, I believe in a good faith, we should be finding some solutions. I wouldn't do know beyond speculating what other options and how we would approach the IQOS going forward in the U.S. I mean, our partner results, and I think we should see some amicable solution between both partners. Now I have said it on a number of occasions in the U.S. market is as a few other markets in which we have a very negligible and more presence of strategic importance. So obviously, you've heard us in the past, I believe that that pre-ITC ruling IQOS performance in U.S. and you know how we perform with IQOS across all essential geographies I mean it's really well below what I would expect at this stage or characterize the potential of IQOS. And if I take into this, the fact that this is then inhalable FDA authorized product, you don't really have a competition and the size of the market, et cetera, I think it's fair to say that the expectations were much beyond where we are today. But I will stop here and I believe we will find a good resolution, which will, on the one hand, enable the American smokers, cigarette smokers to have our access to that technology, and also something which will be accretive to us with the partners' results there.

Chris Growe:

I just wanted to ask, first of all, on IQOS, and you had a nice acceleration in the number of IQOS users in the fourth quarter. I just want to -- and I know you talked about an acceleration of getting back to that roughly 1 million users sequentially. Can that not happen until the second half of '22? Or will supply be sufficient to where you could start to see that level of user growth in the first half of '22? I'm just trying to get a sense of that availability of devices to understand the growth in '22.

Emmanuel Babeau:

Just to complement on your question on, can we reach 1 million. I think we are simply we see rather a ramp up today. It doesn't mean that we cannot reach 1 million in one of the quarter in H1, but it's true that we see a ramp-up and an acceleration as we go through the year.

Jacek Olczak:

Well, there it. But the whole process is -- I think it deserves separate conversations about the patent laws and the processes around this whole thing and unfortunately, we have to cope with this. I mean, every, we prevail on the invalidation of some patents, obviously, the other party, in this case, if they have a right to repeal. So the whole process is really extended in time. And by -- you need another couple of years, frankly speaking, until you have when of the parties actually can claim the full victory. Then you have to go to the ITC and establish the restrictions, if you like, which are now imposed on us. I think the fastest -- absent any other resolutions, right, the fastest route back to the U.S. is reactivating that our domestic capacity and resupplying the market from that. And then maybe that later on, we are constrained, which means that the U.S. market could be supplied from the both international and from the domestic. But I think the near-term opportunity for us is to go the route which we discussed.

Pamela Kaufman:

I have a question about your outlook for combustible pricing in 2022. Pricing in 2021 was below your historical rate of growth, given headwinds in Indonesia. But can you talk about your expectations for pricing, pricing environment in 2022? And how you're prioritizing price realization versus market share in combustibles?

Pamela Kaufman:

Right, thank you. My second question is on ILUMA uptake. And if you can provide some more color on how much of the new user growth in Japan has been driven by ILUMA for IQOS? And what observations you have around the user base and the interaction with prior versions of IQOS?

Operator:

We'll take your next question from Vivian Azer with Cowen. Please go ahead. Your line is open.

Jacek Olczak:

Well, we essentially, in most or all markets, we maintain the same sort of a positioning of IQOS today versus the cost of combustible reference point. As you know, most of the tax systems actually have that conversion mechanism baked in. So if there is a tax increase on a combustible somehow proportionally this triggers the increase on the heated tobacco units, which translates at the consumer price gaps essentially untouched. We obviously complement depend on the market situation, our portfolio, for example, KT&G, the real proposition and I think it works very nicely, especially in the geographies when IQOS reaches the levels which are above, for example, premium -- equivalent of the premium price segment in the combustible market. So we need to take affordability to the equation as well, so instead of doing something about the pricing of IQOS and the heats. We're actually expanding the portfolio to the below, but also to the above in some geographies when we think there is a bus premium versus IQOS versus heat that the opportunity. We did it very successfully in Russia in a few European markets. So I think the whole thing is that the broader we have a portfolio of horizontally from a price perspective and vertically from taste, flavor, et cetera, perspective, we're increasingly creating more attractiveness for the cigarette smokers to switch to heat-not-burn.

Jacek Olczak:

Now actually, I think that like allow me the language, it was more on the user interface rather than anything else. I don't think the past the number of the market test the proposition, the livability of the propositions in terms of the -- is the better alternative to smoking and everything goes there. The issue actually pertains to the heat pipe. As you remember, the design at the very end of the cigarette-like looking product, you have the heat size, which requires lighting, okay? And this was -- to face open this from the paper cup lighting this. And that is the question, how you extinguish the product, right, because you need to pay attention how you extinguish the product. And this was actually in our opinion, what the consumers' opinion actually, not the leading to that adoption levels, which we would wish to have an especially comparing our experience from other platforms and the mainly T1 platform. So I think we reached the moment the design of that product and this part of the technology around the heat source and operating asking the consumers, how the intern operate around this whole thing led us to the conclusion that we are seeing that design component we shut down. And I think still the proposition makes sense is understood by the consumer has the potential, but we cannot offer the product to the consumers, which they will not find convenient to use. And the convenience is either name of what the consumers want these days, and I think we need to deliver on this one, especially that our ambitions would be to also leverage the equity, which we build around the IQOS, and IQOS cannot afford product, which has this one. So I think we will come back one day to the P2. From the very beginning, you may recall our annually Investors Day when we start talking about the vision of growing smoke-free and how many platforms will be needed to compare the 1 billion small cars worldwide. This is a proposition which is more for the more conservative audience, the people who really don't want to completely walk away from the ritual experience when the combustible cigarettes are delivering. So I think in terms of our growth prospects for the item I don't think it's that much of an issue that we will be working on that by using a different approach to the design and the technology going forward, going forward. So I hope it answers your question, Vivien.

Gaurav Jain:

So I have a couple of questions. So first one is on your guidance. So your volume growth is minus 1:1. You are saying cigarette pricing will be three to four. And then category price mix in that slide that you have, it is plus three, assuming it is a three. So it should come to plus 5% to plus 8% on revenue growth for FY '22, but you are saying 4% to 6%. So that will imply that the category mix uplift will be less in FY '22 than was the case in FY '21. So can you just help us understand why that will be the case.

Gaurav Jain:

Okay. That's very helpful. And my second question is on the beyond nicotine segment where you will have $150 million of operating losses this year and you make also the comment that you will invest in it in future years so that you can hit the $1 billion revenue target. So does it mean that the losses we should expect to be higher in FY '23 than what they will be in FY '22? Or when could we expect that segment to break even?

Emmanuel Babeau:

It's not a one-off. It could go a bit higher, but I don't expect an explosion here. I think you have a good calibration of the cutout that we're going to invest over a few years.

Jared Dinges:

First, I want to touch a bit more on the nicotine pouches. How should we be thinking about the scale of that initial launch in the Nordics? And how should we think about the future market launches that you guys touched on a bit? Are you considering launching nicotine pouches in markets maybe that don't have a nicotine pouch presence today, like some of your emerging markets? And also, just looking at the potential in the U.S., would you consider a PMT application there as well?

Jared Dinges:

Got it. So just to follow up on that. So you would consider the U.S. PMT application?

Jared Dinges:

Got it. And the second one, going back towards cigarettes and IQOS. Are you guys worried at all about potential impacts of price elasticity especially with lower income consumers given the inflationary environment and where you guys are positioned in most markets, and we're usually more at the premium end. So maybe you can give a comment on that?

Operator:

And there are no further questions at this time. I will turn the call back over to the management team for any closing remarks.

Emmanuel Babeau:

Thank you all. See you soon.

Operator:

Thank you. And this does conclude today's Philip Morris International fourth quarter 2021 year-end earnings conference call. At this time, you may disconnect and have a wonderful day.

Operator:

Please stand by. Your program is about to begin. [Operator Instructions] Good day and welcome to the Philip Morris International Third Quarter 2021 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. [Operator Instructions] Media representatives on the call will also be invited to ask questions at the conclusion of questions from the investment community. I will now turn the call over to Mr. Nick Rolli, Vice President of Investor Relations and Financial Communications. Please go ahead, sir.

Emmanuel Babeau :

Thank you, Nick, and welcome ladies and gentlemen. I hope everyone listening to the call is safe and well. Our business delivered another strong performance in the third quarter of 2021, coming ahead of our expectation to achieve a record [Indiscernible] quarterly adjusted diluted EPS of $1.58. Most notable was the continued excellent growth of IQOS driving +33% Q3 organic growth in RRP net revenue, and +7.6% for total PMI. HTU shipment volumes grew +24% compared to the same quarter last year to reach 23.5 billion units with broad-based growth for both our volume and the category across key geographies. This was delivered despite ongoing tightness in device supplies, due to the global semiconductor shortage, which impact IQOS user growth rates. In combustibles, further sequential share gains supported total PMI giving growth of 2.1% in Q3. And we continue to expect total cigarette and it's [Indiscernible] goals for the year. We are firmly on track for a strong 2021 organic growth performance with an expected currency tailwind providing additional growth in the [Indiscernible]. We are also delighted to share outstanding initial result for IQOS ILUMA in Japan, and growing traction for IQOS VEEV in early launch markets. In the quarter, we made three milestone acquisition as we build our business for the long term to include product that go beyond tobacco and nicotine. Our smoke-free transformation is now also reflected in our financing with the launch of an industry for business transformation link financing framework. And we continue to prioritize return to shareholder through 4.2% increase in the dividend and ongoing share repurchases. Turning to the headline numbers, our Q3 net revenue grew by +7.6% on an organic basis or +9.1% in dollar terms. This reflects the continued strength of IQOS and the recovery of the [Indiscernible] business in many markets. We witnessed good organic growth of plus 5.4% in our net revenue per unit, driven by the increasing weight of IQOS in our sales mix and pricing on both HTUs and combustibles. Our adjusted operating income margin decreased by 10 basis points on an organic basis. This reflects the expected initial higher unit cost of IQOS ILUMA and increased commercial spend partly related to its launch, offsetting the continued positive effect from the increasing weight and profitability of IQOS, pricing, and productivity savings. Our resulting adjusted diluted EPS of $1.58 represent +8.5 organic growth, and +11.3 in the last terms, a very good performance. Looking now at year-to-date performance, our adjusted net revenues grew by almost +11% in dollar terms and by +7.3% organically. This reflect the consistent growth of IQOS where progress throughout the pandemic has been impressive. We delivered strong organic growth of nearly +6% in our net revenue per unit, again reflecting our shifting business mix and pricing with pricing on combustible at just over 3% or around 5%, excluding Indonesia. Our year-to-date adjusted operating income margin increased by 280 basis points on an organic basis, an excellent performance driven by our top-line growth and [Indiscernible] of IQOS, and pricing combined with operating leverage and productivity savings. Our adjusted diluted EPS grew plus 15.8% organically and plus 20.4% in dollar term; also -- obviously a very strong results. This brings me to guidance for 2021. We are revising our organic growth outlook for net revenues to plus 6.5% to plus 7%, representing the upper half of the previous range and reaffirming the strong outlook for organic OI margin expansion of around 200 basis points. We also confirm our currency-neutral adjusted diluted EPS growth forecast at the upper end of our previous range, reflecting +13% to +14% growth, or +16% to +17% in dollar terms. This translating to an adjusted diluted EPS range of $6.01 to $6.06, including an estimated sub variable currency impact of $0.17 at prevailing rates. Following on from our most recent comment s, as the tightness in device supplies persist, we now expect our HTU shipment volume to be around 95 billion units as we prioritize devices for user retention. Given the continued growth of HTUs and the need to maintain inventory duration, we continue to expect our full-year shipments to be slightly ahead of IMS volume s. This guidance does not include any material impact of share repurchases or acquisition. Share repurchases through October the 15th amount to around $117 million after some limitation during Q3 from blackout restriction. In term of other assumptions, we are assuming only a limited Q4 recovery in duty-free following a modest improvement in Q3 with intercontinental and Asian travels still very subdued. We continue to assume fully accomplishable pricing of +2 to +3%, with a softer expected Q4 reflecting continued pandemic-related challenges in certain markets, notably in South and Southeast Asia, as well as tough comparison in Germany and Australia. Lastly, in 2021, we continue to expect around $11 billion of operating cash flow at prevailing exchange rate subject to year-end working capital requirements. We also update our expectation for full-year capital expenditures to around $0.6 billion reflecting latest launch plans and pandemic related planning factors. Before discussing depth, I am pleased to report some recent positive regulatory development further to the shares in previous quarters. For example, Switzerland adopted a new federal law on tobacco products and in cigarettes defining dedicated product category and differentiated as warnings. In New Zealand, the government has now published new regulation for smoke-free product, which allow branded packaging to be reintroduced with a specific text as warning. In Egypt, earlier this year, smoke-free product were clearly differentiated from combustible cigarette in both Fiscal and regulatory treatment. There is a growing body of scientific and real-world evidence of the substantial risk reduction potential of non-combustible alternative compared with smoking. While fluctuations across different market are to be expected, we continue to support regulatory and Fiscal frameworks that recognize this critical [Indiscernible] reduction opportunity. Turning back now to our results, Q3 total shipment volume increased by plus 2.1% and by plus 1.5% year-to-date. This reflect continued strong growth from HTU of +24% driven by the EU region, Japan, Russia, Ukraine, and encouraging progress from recently launched markets in the Middle East. HTU shipments were around 1 billion units below IMS volume for the third quarter, primarily reflecting timing around the August ILUMA launch and the October tax driven price increase in Japan. We expect this dynamic to reverse in Q4. The minus 0.4% decline in our Q3 cigarette volumes reflect the continued sequential recovery of total industry volume and of our market share. Due to the impressive performance of IQOS, heated tobacco unit comprised 13% of our total shipment volume year-to-date as compared to 11% in full-year 2020, 8% in 2019, and 5% in 2018. Our sales mix is changing rapidly, putting us on track to achieve our aim of becoming a majority smoke-free Company by 2025. Smoke-free product made up almost 30% of our adjusted net revenue year-to-date compared to 23% for the same period in 2020, IQOS devices, accounted for over 6% of the $6.7 billion of RP net revenue. With a step-up in Q3, reflecting the IQOS into my launch, which outweighed the effects of supply constrain on other acquisitions. The plus 7.3% organic growth in year-to-date net revenues on shipment volume growth of plus 1.5% reflect the twin engines driving our top-line. The first is pricing on combustible and, in certain markets, on HTUs. Second is the increasing mix of HTU s in our business at higher net revenue per unit, which continues to deliver substantial growth and increasingly powerful driver as our transformation accelerates. Let me now go into the driver of our year-to-date margin expansion starting with growth margin which expanded by 240 basis points on an organic basis. While expansion was lower in Q3 as ILUMA devices were shipped to Japan for the launch, the multiple positive [Indiscernible] discussed in prior quarters continue. Our significant effort on manufacturing and supply chain efficiencies are also bearing fruits with around $450 million of gross productivity savings benefit. This was accompanied by robust SG&A efficiencies with our adjusted year-to-date marketing, administration, and research costs, 40 basis points lower as a percentage of adjusted net revenue on an organic basis. This reflects the ongoing digitalization and simplification of our business processes including our IQOS commercial engine and more efficient ways of working partly offset by increased commercial investment in Q3. With SG&A saving of more than $200 million before inflation and reinvestment, this mean we have generated over $650 million in overall growth efficiencies year-to-date. This is strong progress toward the combined target of $2 billion for 2021, 2023. Moving to market share, sequential gains for both our IQOS and combustible portfolios give us strong momentum going into Q4 and next year, despite an approximate [Indiscernible] 3 points year-over-year drag in Q3 from market mix. Importantly, we expect further improvement in the fourth quarter for HTU s with record shares across key IQOS geographies. For combustible, the improving total market volume backdrop includes notable recovery in Indonesia, Turkey, and Mexico, and close to stable Q3 industry volumes in the EU region. Our share of the combustible category has strongly recovered on a sequential basis, moving us one step closer to our target of stable share as our portfolio initiatives bear fruit and pandemic-linked restrictions recede in many markets. In South and Southeast Asia, renewed COVID -linked measures have somewhat dampened the recovery. Though industry volume have nonetheless improved sequentially in Indonesia and in the Philippines where the year-over-year trend is impacted by a challenging prior-year comparison. Our share in the region grew sequentially albeit less than expected, primarily given pandemic-related development in the Philippines. Let's now turn to the tightness in device supply due to the global semiconductor shortage. As we communicated in September, with demand continuing to grow, this has already affected the availability and assortment of IQOS devices in certain markets in Q3, which impact our ability to run at full commercial and competitive capacity and fulfill consumer demand. Device shipment outside Japan were limited to a 7% year-over-year increase, significantly below the growth in net sales. This resulted in slower user growth of several 100,000 in the quarter notably in Russia, given limitation on the IQOS to the 4 plus device as flagged in recent communication. At this stage, semiconductor supply forecasting remains volatile so we assume the tight supply situation will persist into the first half of 2022. We will continue to carefully prioritize necessary device replacement for existing users, followed by device sales targeted at acquisition. The successful start of IQOS ILUMA in Japan confirmed it would be a significant driver of acquisition and retention. Nonetheless, at the beginning it triggers significant upgrades from existing large IQOS user base, many of whom don't really needed to replace their devices. This is a highly desired consumer behavior in normal supply [Indiscernible], but increases constraint in the shortage. Therefore, we now assume that additional major launches would only take place in the second half of next year. Given this evolving situation, we have continued important commercial investment in key area. This include portfolio expansion and product launches such as IQOS ILUMA in Japan and IQOS VEEV, smoke-free category, understanding and awareness campaign, and a number of commercial development project. Including the investment already made in Q3, we anticipate around $300 million of incremental H2 spending compared to the first half. Overall, this is a temporary phenomenon and with demand remaining strong, we expect user growth to reaccelerate once shortages ease. We have a pipeline of exciting innovation on devices and consumable, including but not exclusive to ILUMA, and a number of new market entries plan. However, there are short-term shortage scenario under which the transitory supply impact on user growth could result in 2022 organic growth below our 2021, 2023 targeted average rate for net revenues, OI margin expansion, and adjusted diluted EPS. Nonetheless, with a strong 2021 as a base and a robust reacceleration port shortage, we confirm our confidence in our 2021-2023 growth targets. Moving now to IQOS performance, we estimate there were 20.4 million IQOS users as of September the 30th. Excluding the impact of international sanction in Belarus, this reflect growth of around 0.4 million user s in the quarter with the rate of growth subdued by the tightness of device supply and the time needed to adjust our commercial programs. As demonstrated again by the ILUMA launch in Japan, the underlying momentum of the IQOS brand remains strong. Following adjustment of our program and assortment, we expect Q4 user growth to improve by a few 100,000 compared to the growth seen in Q3. The reduce user growth for the second half should therefore be broadly consistent with the potential 2 to 3 billion HTU impact flagged in recent communications. We estimate that 73% of total user or 14.9 million adult smokers have switched to IQOS and stopped smoking with the balance in various stages of conversion. The user growth again reflect acquisition across key IQOS geography, despite device constraint. In the EU region, third quarter share for each reached 5.3% of total cigarette and HTU industry volume plus 1.4 points higher than Q3 last year. As mentioned last quarter, we expect a sequential share for HTU s to be broadly stable due to the effect of seasonality and pandemic-related fluctuation on the combustible market. Underlying IMS growth trends remain excellent. And as in the prior year, we expect a strong Q4 in both volume and market share terms. This very good performance includes strong growth across the region with Italy, Germany, and Poland as notable contributors. Robust performance continued in Russia with our Q3 HTU share by plus 1.1 point, to which 6.9%, while lower than Q2, notably due to the seasonality of the combustible market, we expect further sequential growth in IMS to deliver strong quarterly share increase in Q4 as in the prior year. We had the largest limitation on lower-priced devices and related commercial programs in Russia. And we have seen some increased consumer trial of discounted competitor offering a disposable e-vapor product. However, we continue to see high interest in the category and with both our existing price tier portfolio and future innovation supporting our clear category leadership, we see ample room for further strong growth over time. There is also [Indiscernible] H2 growth across the eastern Europe region with Ukraine, Kazakstan, and southeast Europe contributing. This slide shows the positive overall regional growth trend in adjusted IMS albeit somewhat dampened on a sequential basis by the halting of shipments to Belarus due to International sanction and timing factor in Kazakhstan. In Japan, the adjusted total tobacco share for our HTU brands increased by plus 2 points versus the prior-year quarter due to 20.8%, and adjusted IMS grew sequentially to reach a record high of 8.2 billion units, reflecting the strength of our portfolio and the launch of IQOS ILUMA. Adjusted sequential share fell by 0.2 point sequentially, reflecting volatility in the total market ahead of the October the 1st excise increase in addition to normal seasonality. While consumer pantry loading effect may wait on Q4 IMS, we expect further robust underlying growth in volume and a nice sequential improvement in market share. The overall heated tobacco category continues to grow, making up almost 30% of the adjusted total Japanese tobacco market in Q3 with IQOS maintaining a high share of segment and capturing the majority of the category's growth. In addition to strong growth in existing markets, we continue to drive the geographic expansion of our smoke-free product as we aim to be in one other market by 2025. During the quarter, we launched IQOS in Egypt, the first in Africa, and reached an off-take exit share of 2% in Europe and Cairo. We also now add Norway and Iceland, where our recent acquisition of [Indiscernible] gives us a presence in the [Indiscernible] and nicotine pouch category. This take the [Indiscernible] snooze total number of markets where PMI smoke-free product are available for sale to 70 of which 28 are in low and middle-income market, which we are introducing as more robust measure of making smoke-free product available to adult smoker in emerging countries. Again, we may have some delays in this market expansion program in the first half of 2022. Given our smoke-free leadership and global reach, let me pause and share a few words regarding the strength of our intellectual property. Across all our smoke-free product, we have strong patent and as being the clear leading innovator in the tobacco category over recent years, investing billions of dollars in the process. Despite attempts to disrupt our business through litigation by your competitor who lags behind on R&D and innovation. We have been -- you need us to be successful in defending our product against IP challenges in all 11 ruling outside of the U.S. Including the UK high court and at the European Patent Office. The U.S.A. -- the U.S. ITC is a federal agency which, among other things, deals with import, trained to ensure domestic industry of U.S. intellectual property rights. We also note the two paths I mentioned in the ITC final determination were both drafted after IQOS had been launched. The FDA, fulfilling the exclusive [Indiscernible] interest mandate given to it by Congress for tobacco product, has already found that IQOS is appropriate for the promotion of public health and expected to benefit the health of the population as a whole. We are hopeful in the current presidential review period that the U.S. Trade Representative will consider the impact on current American IQOS users and the many more that would be denied access. In the scenario where the ITC determination is upheld, where the financial impact of this time is in material, given the early stage of the U.S. IQOS fallout, this would unfortunately meaning that U.S. consumers would be unable to buy IQOS for a bit of time. Meanwhile, our contingency plans are underway and include domestic manufacturing. The U.S. patent office is also reviewing certain claim of the patents in question with initial ruling expected in 2022, and by subject to an appeal process. While the ITC ruling may cause near-term disruption to the U.S. availability of IQOS, we continue to see a large opportunity for IQOS in the United States over the coming years. The global IQOS innovation story took a historic step forward in August with the launch of two ILUMA devices and a range of [Indiscernible] HTUs in Japan. Building on the success of IQOS 3 Dual, we believe the simple and intuitive device will support easier switching and higher conversion for [Indiscernible] edge smoker using SmartCore internal induction heating technology. While -- with the national roll -out taking place at the start of September, initial results were outstanding with device sales well ahead of all comparable past launches at the same stage despite some limitation on device availability and the proportion of new users growing to 18%. [Indiscernible] purchases are growing rapidly, exiting the quarter at over 10% of total PMI HTU of tech volume. Consumer feedback has also been very positive, with meetings increases in the net [Indiscernible]. Following the success, we plan to launch in our second market of Switzerland next month and look forward to additional major launches in 2022 when circumstances allow. We continue to commercialize IQOS VEEV with good progress in the first group of markets, where we started in our own channels with a limited range of taste variants and nicotine levels. IQOS VEEV is a premium product, providing a superior experience. And the commercial infrastructure of IQOS allows it to deploy efficiently and at scale through a bespoke route-to-market approach. As we start to expand distribution and the consumable offering, we see sign of increased uptake and clear positive consumer feedback related to competitive products. We see encouraging early success in Italy where VEEV reached an estimated 7% national exit volume of tech share of crude system product -- system put, sorry, despite not yet being available nationally. And in the Czech Republic with an estimated 8% national volume of tech exit share. We also launched in Croatia in Q3, Canada in October, and plan to launch in Ukraine before year-end. We also continue preparations to apply for a PMTA from the U.S. FDA in the second half of 2022. Turning now to our strategy to moving to new business areas beyond tobacco and nicotine, which focuses on leveraging and complementing our existing capabilities in the health care and wellness space. We see significant opportunity in adjacent area with our two focused corridors of self-care wellness, including botanicals and inhaled therapeutics, expected to have an addressable market of around $65 billion by 2025. The acquisitions of Fertin Pharma, Otitopic, and Vectura enabled us to more rapidly expand our development capabilities with over 250 scientists, infrastructure, technology, and expertise in innovative enameled and oral product formulation while continuing to grow CDMO activities. As shown on this slide, this opens up a number of highly complementary opportunities and new focus areas. This acquisition will fully leverage PMI 's existing capability like science, product innovation, and clinical expertise related to innovation. We look forward to updating you more in the future on our plans and progress in these exciting new areas. Moving to sustainability and our ESG priorities, we continue to make good progress throughout our [Indiscernible] through advancing our transformation and addressing our most material impact on society. We broaden access to our smoke-free product by increasing the availability to adult smoker around the world with new product launches across the growing range of market and smoke-free categories. In addition, our recent acquisition build our human intellectual and social capital, adding smoke-free capabilities and laying the foundation for a strong business in areas beyond tobacco and nicotine, as we strive to develop commercially successful product that seek to have a net positive impact on society. I am proud to highlight the recent publication of our business transformation linked financing framework. And subsequent refinancing of our revolving credit facility. The framework which follows ICMA principal and receive a second party opinion from S&P, links our financing to [Indiscernible] targets in our transformation. Last, we remain on track to achieve carbon neutrality of our direct operation by 2025, five-years ahead of our 2030 target. In addition, with the United Nations Climate Change Conference approaching, we plan to publish a robust, low carbon transition plan and white paper on climate justice, which highlight the connectivity between environmental and social issues. Overall, we are on track for excellent top and bottom-line growth performance in 2021 with strong underlying momentum for IQOS and robust cash generation. We are investing in the broadening of our smoke-free product portfolio and geographic reach. This is critical as we seek to accelerate the number of adult smokers who switched to better alternative with the growing positive impact on society. In addition, we are investing in the capabilities of tomorrow as illustrated by our three recently announced acquisitions, which provide a comprehensive development platform in safe care wellness and in health therapeutic, and strengthen our position in modern oral nicotine. We have increased cash return to shareholders in Q3 through higher dividend and our share repurchase program in line with our objective to deliver sustainable value and return to investors as we continue our journey towards becoming a majority smoke-free Company. For 2022, we have a pipeline of exciting innovation for both devices and consumable. And we expect IQOS user growth to reaccelerate when device shortages ease. We continue to see a strong future for our business and remain confident in our 2021-2023 organic growth targets. Thank you very much, and I'm now happy to answer your questions.

Gaurav Jain :

Hi, good morning. Thank you for taking my questions.

Gaurav Jain :

[Indiscernible]. My first question is on the -- unit 2022 comments around growth rate being lower than the range you have given for 2021-2023 because of the issues around device supply. Now, if device supply is lower and your IQOS acquisition is lower, then doesn't it imply that your commercial investments are also lower and so it should be beneficial to your EPS, or is that a correct way -- incorrect way of thinking about things?