Philip Morris International Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 19, 2023

There are 10 speakers on the call.

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. Followed by the number 1 on your telephone keypad at any time. Media representatives on the call will also be invited to ask questions at the conclusion of questions from the investment community. I will now turn the call over to Mr.

Operator

James Bushnell, Vice President of Investor Relations and Financial Communications. Please go ahead, sir.

Speaker 1

Welcome. Thank you for joining us. Earlier today, we issued a press release containing detailed information on our 2023 Q3 The press release is available on our website at pmi.com. A glossary of terms, including the definition for smoke as well as adjustments, other calculations and reconciliations to the most directly comparable U. S.

Speaker 1

GAAP measures for non GAAP Financial measures cited in this presentation and additional net revenue data are available in Exhibit 99.2 to the company's Form 8 ks dated October 19, 2023, and on our Investor Relations website. Today's remarks contain forward looking statements and projections of future results. I direct your attention to the forward looking and cautionary statements disclosure in today's presentation and press release for a review of the various factors that could cause actual results to differ materially from projections or forward looking statements. It is now my pleasure to introduce Emmanuel Babaut, our Chief Financial Officer. Over to you, Emmanuel.

Speaker 2

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 3rd straight year of growth. While not yet in our organic metrics, ZYN continued its exceptional growth with U.

Speaker 2

S. 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 HPU shipment growing plus 18%, in line with the year to date trend. As covered at our recent Investor Day, HTU volumes have excellent unique economics relative to cigarettes and the plus 16.5 percent organic net revenue growth from Smokefree Product was a key driver in both our high single digit organic top line and double digit organic operating income growth. Smokefree Products made up over 36% of total net revenue in the quarter as we drive towards our new ambition of over 2 thirds by 2,030, making us substantially smoke free.

Speaker 2

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 the smoker moving to smoke free product. Our impressive operating income growth drove organic year on year margin expansion and a sequential improvement compared to the 2nd quarter. This includes healthy expansion in the gross margin of our AECO 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.

Speaker 2

We surpassed $9,000,000,000 in quarterly net revenues for the first time Our strong positive volume and continued excellent IQOS momentum supported organic net revenue growth of +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 in our sales mix and very firm combustible pricing of plus 9%. This positive top line and mix performance Drove very strong organic operating income growth of +11.3 percent 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.

Speaker 2

We delivered adjusted diluted earnings per share growth of plus 20.3 percent, 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 Q3 combined with a robust H1 resulted in strong delivery year to date. I want to highlight our volume growth of +1.5 percent and organic net revenue growth of +7.7 percent, again, reflecting continued dynamic IQOS performance and combustible pricing. In addition, Swedish Match Currency neutral net revenues increased by +18%, excluding accounting reclassifications.

Speaker 2

Year to date, operating income grew by +2.4 organically despite accentuated margin headwinds and a notable OI decline in the Q1 due to the headwinds covered previously, which are now starting to subdue. Combined with outstandings in performance, this resulted in year to date currency neutral adjusted diluted EPS growth of plus 10.7 percent 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 two volumes, where we increased our outlook to +1 percent to +1.5 percent total shipment growth for cigarette and HTUs despite a lower expectation for the total industry.

Speaker 2

Within this, We expect to deliver HTU shipment volume within the lower half of our prior €125,000,000,000 to €130,000,000,000 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 HDU Plaza ban. For combustible, the resilience Our portfolio is reflected in an updated forecast of 1% to 2% cigarette volume decline. ZYN continues to perform exceptionally with strong adult consumer traction. Following a further step up in the U.

Speaker 2

S. Volume run rate, we are now increasing our full year nicotine pouch forecast range to 390,000,000 to 410,000,000 cans. Combining the improved volume outlook with robust pricing And continued positive mix, we are narrowing our organic net revenue growth forecast to around +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%.

Speaker 2

This means we now expect double digit growth for the 3rd 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 $10,000,000,000 for the year. This sets us up nicely as we focus on deleveraging towards our target of around 2 time 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 2 halves with a number of Axon treated headwinds in H1, I've explained in prior quarters, including steep cost inflation.

Speaker 2

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%. 2nd, we expect a significant reacceleration 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 Why margin improvement in Q3 with margins also expanding organically year on year. In H2, we expect strong organic operating income growth of around 10%.

Speaker 2

For the full year, our expectation remains that organic margin evolution will be towards the lower end of our minus 50 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 This includes the expectation of higher devices as we accelerate our Illumina rollout to reach around 50 markets by year end, complemented by further Illumadevice innovation. This very positive organic OI trajectory in H2 naturally translate into an acceleration in Now turning back to our results. Our total shipment volumes increased by plus 2.2% for Q3 and plus 1.5% year to date, putting us comfortably on track to deliver our 3rd sequential year of growth. HTU shipment volumes grew by +18 percent in Q3 to reach 32,500,000,000 units, driven by continued strong performance in Europe and Japan.

Speaker 2

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 +12%. Excluding Russia and Ukraine, where growth remains limited, our adjusted IMS advanced by a very robust plus 16%. This growth rate excludes 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 form a basis, including the U. S.

Speaker 2

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 performance smoke free volume grew by plus 19.5% and our total volumes by plus 2.5%. Cigarette volume 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 percent volume growth, pricing contributed plus 6.2 points of growth as combustibles remained strong and the negative impact on HTU pricing of the annualization of excise tax increases in Japan and Germany notably moderated.

Speaker 2

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 HTUs, overall volume growth and pricing Our 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 $3,700,000,000 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 Illumina related factors continue to moderate and the underlying dynamics of our transformation The Q3 progression is slightly above our 2024, 2026 CAGR target of +8 plus 10 percent organic operating income growth.

Speaker 2

And as I covered earlier, we expect our overall H2OI growth to be around the top of this range. This strong operating income growth in excess of an already healthy top line performance and drove a better than expected organic margin expansion of plus 70 basis points in the quarter. This was also the Q1 this year where gross margin expanded organically, notably due to lower shipping costs, Illumina margin improvement and lower devices compared to the prior year. SG and A costs were also organically lower as a percentage of net revenue, reflecting a good cost performance and some phasing between the 3rd and 4th quarter. We delivered a further $120,000,000 in gross cost efficiencies in Q3, now surpassing our $2,000,000,000 target for 2021, 2023.

Speaker 2

We aim to Continue this run rate as reflected in our 2024, 2020 6 target of an incremental $2,000,000,000 in gross savings. The Q3 margin currency variance include a 0.6 point impact from the Argentina balance sheet 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 2,030. Swedish Match business delivered excellent Adjusted currency neutral net revenue growth of +22 percent in Q3 and +18 percent year to date.

Speaker 2

This means that our adjusted pro form a year to date top line growth was 60 basis points higher at +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 mass smoke free portfolio has excellent economic and is already at significant size compared to total With its product contribution or operating profit before G and A to be clearer, approaching 1 quarter of our total smoke free business year to date. ZYN remains the key performance driver as It delivered another remarkable U. S.

Speaker 2

Performance with plus 66% volume growth, reflecting positive momentum across the country. Elsewhere in smoke free, recent trends of share gain in U. S. Moist snuff as well as category mix headwind 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.

Speaker 2

Now let's examine ZYN's recent U. S. Performance in more detail. Exceptional progress continued in Q3 with an increase in 12 months rolling shipment volume growth of +52% compared to Q3 2022 and plus 14% sequentially. Impressively, ZYN Q3 category volume share grew and 70.8%, which is plus 4.7 points higher year on year and plus 2.5 points sequentially.

Speaker 2

Retail value share remained strong at around 76%, highlighting ZYN's premium positioning And superior brand equity. This accelerated growth reflects progressive increase in distribution and a further broad step up National One store velocity as the category gained strong traction with adult nicotine user for its convenience and pleasurable experience. Now focusing on IQOS, starting with user growth. We estimate they were 27 point 4,000,000 IQOS users as of September 30th. This represents an increase of 3,700,000 users versus 1 year ago and EUR 200,000 compared to Q2 2023.

Speaker 2

As shown on the right hand side of the slide, the Q3 of each year typically Experiences slower user growth due to the seasonal influences in the calculation. Both new user registration and devices to legal aid smokers continue to advance strongly and at levels broadly in line with Q2 when users grew by 1,400,000 sequentially. Also as in prior years, we expect a substantial acceleration in user growth in the 4th quarter. Moving now to IQOS in the Europe region, where our Q3 HTU share increased by plus 1.3 points to 8.6 percent of total cigarette and HTU industry volume. Continued share gains into the growing take up of Illumina, which is available to over 80% of IQOS users in the region.

Speaker 2

In addition to Q3 launches in Denmark and the UK, Illumina was launched in Poland, which, like Japan, It is a market with high competitive activity. We look forward to driving its performance here over the coming quarters. While Sequansol 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 4 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.

Speaker 2

In the EU, a majority of member states have transposed a delegated directive withdrawing the heated tobacco product exemption from the characterizing flavor ban into national law. The ban in those markets will be effective as of October 23, and the remaining markets are expected to adopt in 2024. As previously mentioned, we are adjusting our HD portfolio as required in line with this transposition. And while short term volatility is possible including in year end trend inventories, we We do not expect significant change in the structural growth of the category. In Japan, icosilumab celebrated its 2nd anniversary of the national launch in September and continues to exhibit Strong growth due to excellent conversion, consumer satisfaction and retention rates.

Speaker 2

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 4 quarter moving average, reaching over 10,000,000,000 units for the first time in Q3 2023 as IQOS outgrew the idmer 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 shipments in Q4. Our premium priced carrier HTUs and mainstream priced Sentia HTUs continued to grow individually and in aggregate, reaching Q3 of Tech shares of around 18% and 8%, respectively, despite the impact of seasonality.

Speaker 2

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 Strongerica's 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 of Techshare across market in Eastern Europe, Africa, Asia And Latin America, we see notable ongoing success in Egypt with Cairo of Techshare up plus 3.5 points to almost 9% And in Santo Domingo, our leading Latin America city, with Oftech share around 8%. Most promising is the 3.1 percent offtake share in Northern Jakarta, where IQOS is only available via the IQOS Club members program.

Speaker 2

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 +6.2 percent in Q3 and plus 5.6 percent year to date. This reflects another strong quarter 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 +8 percent to +8.5 percent.

Speaker 2

Our cigarette category share grew by plus 0.6 points in Q3 and plus 0.3 points year to date. This reflects notable contribution from Egypt, Poland and Turkey, resulting in only modest volume declines. 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 2 years, despite the impact of IQOS cannibalization. This convertible share performance combined with the structural growth of IQOS supports robust overall market share gains. We captured plus 0.9 points of international cigarette and HTU share in Q3 and plus 0.7 points year to date.

Speaker 2

As covered at Investor Day, our superior share of Mokli product give us a formidable platform for Now let me update you briefly on our exciting innovation and expansion activities, which will be critical as we aim to reach over 2 thirds of smoke free net revenue by 2,030, including 60 markets over 50% and 40 markets of over 75%. As we covered at Investor Day, the global rollout of IQOS Illumina continues. We launched Illumina in 4 markets in Q3, reaching 27 markets in total, which represent around 75% of our IQOS business by volume. Illumina continues to generate excellent growth with upgrades from existing user and new user acquisition. With a further 6 market launch already this month, we expect Illumat to be present in around 50 markets by year end and to essentially complete the rollout next year.

Speaker 2

I've 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 0 tobacco consumable for non tobacco flavored discovery under the Livia brand. Just as nicotine pouches are an evolution from snooze To make the overall category relevant to more adult smokers, Livia is a similar non tobacco evolution for IQOS as we broaden our offering to increase switching away from combustibles. The U. S.

Speaker 2

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 twenty 24 and a scaled up rollout with Illumina once authorized. We remain on track to file for icosidumab PMTA and MRTPA this month. The international expansion of nicotine pouches Remaining a key mid- to long term focus, notably for ZYN as the world's leading brand. During the Q3, we relaunched ZYN in Switzerland and following positive regulatory developments rolled out ZYN in Finland.

Speaker 2

Moving now to sustainability. Addressing the product health impact of combustible product by Switching adult smokers 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, recognition achieved by very few companies. We pledge to reduce this absolute Scope 3 emission by 33% by 2,030, which is significant given that Scope 3 remains the most challenging aspect of any company's decarbonization strategy.

Speaker 2

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 both consumer waste. We have long expressed our Report for more rigor in sustainability related reporting and welcome recent moves towards greater consistency in standards and a strong governance framework. As part of our ongoing work, we provided responses to consultation requests from the International Sustainability Standard Board to achieve the development of their work plan and update to the SASB standards. PMI continues to be recognized by organizations such as the World Business Council for Sustainable Development as a leader in non financial reporting. We have much more to share on our sustainability efforts and transformation.

Speaker 2

Jaap Seck will be presenting at the CECP CEO Investor Forum in New York on November 14, 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 Smokefree business give us confidence in strong full year results based on volume growth, Positive mix, pricing and cost management. Considering the headwinds faced, notably in the 1st 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.

Speaker 2

We have exciting plans to accelerate our smoke free future in both the U. S, The largest move free market and internationally. We are confident in our 2024, 2026 CAGR target of +6 percent to +8 percent organic top line growth, +8 percent to plus 10 percent organic operating income growth and plus 9% to plus 11% currency neutral adjusted EPS growth. We also have a clear guiding objective with our new ambition to be substantially smoke free by net revenue in 2,030 as another key milestone on our journey towards a 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.

Speaker 2

This translates to a cumulative 183% increase and CAGR of 77.2 percent since 2008 with an annualized dividend of 5.20 As this demonstrates, our commitment to shareholder return through progressive dividend remains steadfast. Thank you very much, and we are now extremely happy to answer your questions.

Operator

Thank you. We will now conduct The question and answer portion of the conference followed by the number 1 on your telephone keypad. In the interest of fairness and time, we ask that participants keep to a maximum of 2 questions each. If time allows, follow-up questions may be taken. Our first question will come from Vivien Azer with TD Cowen.

Operator

Please go ahead.

Speaker 3

Hi, good morning.

Speaker 2

Good morning, Vivien.

Speaker 3

So I'd like to start with, ZYN, please. Clearly, a very

Speaker 4

impressive result with continued acceleration in

Speaker 3

the top line. Emmanuel, you talked Emmanuel, you talked about distribution gains. 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 1.

Speaker 3

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.

Speaker 2

Thank you, Vivien. So on ZYN, and of course, every quarter will bring its New, I would say, load of news. And I think we have been seeing in Q3 another great quarter of Acceleration in the velocity that means that where the brand is already even nicely present, we see the consumer of tech accelerating. It just show that These products are becoming more relevant for a growing number of adult user and that's great news. There is also the geographical dimension on which We elaborated at the time of our Investor Day and which is showing that while the brand has A certain level of presence on the western part of the U.

Speaker 2

S. Doesn't mean that isn't going to grow it further, but it's, of course, bigger than the rest of the country. There seem to be a trajectory that is saying that the rest of the country is going to adopt it progressively and that is indeed giving also a nice, I would say trajectory on further growth in the coming quarters and years, of course. We talk here about probably A year of very nice growth. So it's great that we have behind ZYN 2 engine, which is really Where the brand is already the biggest presence, we don't see any decrease in the consumer adoption and we see increase what we call the velocity.

Speaker 2

And we see progressively, I think, as well quarter after quarter, This geographical momentum building up as expected. Now on the margin, Yes, it's true that this growth of ZYN is extremely positive when it comes to margin. Of course, We are going to continue to invest beyond this growth potential in the U. S. And we will put The necessary commercial resources to make sure that we maximize the growth potential.

Speaker 2

But I said it, ZYN is really Best in class in terms of gross margin for our product in at the group level. I'm talking about ZYN in the U. S, but globally nicotine pouch enjoy nice margin, but ZYN in the U. S. Is best in class.

Speaker 2

And that means, of course, that growing ZYN is an excellent news for top line, but also for bottom line. And I think that in the growth of the Adjusted earnings per share over the quarter, this is absolutely visible.

Speaker 3

Thank you.

Speaker 2

Thank you.

Operator

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

Speaker 5

Thank you. Good morning.

Speaker 2

Good morning, Bonnie.

Speaker 5

I had a question on your HTU shipment volume for the year. You mentioned you're now expecting to come in within the lower half of your guidance. And then you highlighted a few reasons for this, including the uncertainty related to Inventory levels in Europe given the upcoming flavor ban. So could you give us a sense of maybe where inventory levels are at Right now, and then maybe how many quarters you expect some of this unwind to happen? And then just thinking about the trade, is this Being offset in any way with I'm just thinking about combustible cig inventories or really how is the trade responding to this ban?

Speaker 2

Yes, Marie. 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 And where the country are implementing it at the end of October, it's not the case 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 the view that this ban should not ultimately bring major disruption, and we've been elaborating Many occasion why we think that this time is not going to ultimately change the dynamic in the category, but it's true that we have some question mark On the lending 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.

Speaker 2

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 €1,000,000,000 of steel being sold. And of course, shipments are, as we know what we are selling, what is probably more important is the consumer of tech. 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.

Speaker 2

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, in the market share that we are reporting today within Q3.

Speaker 5

Okay. That's helpful. And then just in terms of another question. I just wanted to ask On your new IQOS users in the quarter, it did come in a bit late. You highlighted that this is Normal quarterly seasonal trends.

Speaker 5

So maybe could you talk through that a bit further for us? And Maybe what other drivers might be impacting this? And essentially, how much visibility do you have in terms of Q4, you mentioned that you expect a substantial acceleration in user growth this quarter. So just kind of wanted to verify what you're So far in October gives you that confidence and is it realistic to assume a typical 1,000,000 Average quarterly run rate moving forward. Thanks.

Speaker 2

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 showing the number.

Speaker 2

So that's a typical Patent for Q3, which is due to the methodology 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 And there is no change. And last year, we finished the year with a strong user growth, and we target 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.

Speaker 2

So if 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.

Speaker 5

All right. Thank you.

Speaker 2

Thank you.

Operator

Thank you. Our next question comes from Gaurav Jain with Barclays. Please go ahead.

Speaker 2

Hi, good morning.

Speaker 6

Good morning, Gaurav. Hi. So I have a question on the U. S. Cigar side of things.

Speaker 6

So Clearly, the FDA send this rule making process to ban flavored cigars to the OMB. 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 Can you help us understand what's happening there?

Speaker 2

So on the trend, we've been increasing price And the cigar has been below a certain threshold for a bit of time, and we decided to move above This ratio, which was $1.14 And there is a time for adaptation, and that explains why on volume we are impacted this year, but I don't think it reflects what's going to happen on the long term where We continue to have very good brands and with a lot of consumer support. Frankly, on the flavor, will you allow me not to Speculate, I mean, I don't know exactly what are the plans, what it's going to mean, how long it would take, what is decided and again, nobody actually knows what could be decided, how long it's going to take to be implemented. So I'm not going to Speculate at that stage on what would be our answer and what we do, because Because I'm not going to be relevant on anything that could be seen at that stage.

Speaker 6

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 in comment that the Argentinian balance sheet revaluation impact which is about $0.06 That will not recur in FY 2024. So we should add that to FY 2023 EPS. And then could you also just Comment on Russia exposure and the COS EPS?

Speaker 2

Yes. So this is a technical comment on Argentina. Gaurav, you're absolutely right. This is a ForEx impact that is a kind of one off, if you want, because that is impacting this year. But next year, we're not starting with the base on our That is decreased by that.

Speaker 2

It's just something that you need to book on your balance sheet exposure. But what is taken, it's taken. I mean, of course, depending on the evolution of the Argentine and peso in the future. But I don't have anything to say at that stage. I think I just wanted to clarify this technical impact.

Speaker 2

On Russia, frankly, versus when we met 3 weeks ago, there is nothing new to report on the Russian situation. This is a market where, of course, we are being very significantly impacted on the profits reported in dollars because of the very strong weakening of the Russian ruble versus the dollar. That is one of the, if not the biggest Impact this year on ForEx. That is, of course, I would say, mechanically reducing our exposure to Russia in our profit. That's mechanical.

Speaker 2

And we are, As we already said, we are seeing very limited growth in Russia that is a market where, As we've been saying, we've been reducing our commercial activity and that's not a market where we're investing and that is contributing, of course, On the performance of this market.

Speaker 6

Thank you so much.

Speaker 2

Thank you, Gaurav.

Operator

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

Speaker 7

Hi, good morning.

Speaker 2

Hi, Pam. Good morning.

Speaker 7

I have a question on the combustibles business. It's been exceeding expectations And you've taken up your guidance for volumes on the combustible strength. Can you talk about what's driving the performance in this category Despite the acceleration in pricing growth.

Speaker 2

Look, I'm happy to do that. So yes, convertible 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 markets where we see a nice share gain. 1 is Turkey, the other one is Egypt. As you can imagine, there are not market with great profitability per stick.

Speaker 2

So let's be very clear. We have a nice performance on combustible and volume, to some extent, on revenue. All the great work that we are doing now on increasing OI and growing margin is, 1st and foremost, driven by our small flow product. IQOS 1st, ZYN second and not by the CC. So Yes, great performance when it comes to volumes, great performance versus the decline that we may have seen in the past few years.

Speaker 2

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.

Speaker 7

Thank you. And then on ZYN, when do you expect to hear a decision from the FDA on ZYN's PMTA application. And how are you thinking about the prospects for ZYN flavor approvals, Considering the FDA has recently issued unfavorable decisions around flavored E Fib products.

Speaker 2

Look, we have we discussed that 3 weeks ago and there is nothing new on the PMTA. We don't know what's going to be the timeline for 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 snus product and with general an MRTPA of Level 1. So The FDA has been recognized that these products are representing reduced risk This is combustible CRS, and we're very clear, as benefit claim.

Speaker 2

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 1,000,000 of smokers to move away from combustible cigarettes to have A better way of consuming nicotine. So we are really helpful that the FDA We really take that as a very important element and that it's important to make this product available for nicotine user in the U. S. Now on the flavor, because I think that was probably one of your questions.

Speaker 2

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 cigarette 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 growth Resume 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 user beyond the favor, which is very good news.

Speaker 5

Great. Thank you.

Speaker 2

Thank you, Pam.

Operator

Thank you. Our next question comes from Matt Smith with Stifel, please go ahead.

Speaker 8

Hi, good morning, Emmanuel.

Speaker 2

Good morning, Mats. If we take

Speaker 8

the full year organic Profit margin guidance to 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 Q4. Can you talk about some of the factors in the Q4? 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 4th quarter, maybe some detail around your expectations around the incremental Luma launches or any other

Speaker 2

Sure. So indeed, there are going to be some mix impact In Q4 and notably on the devices as we are rolling out Illumina in Significant number of new markets. We're also launching some new innovation in some markets on the EDUMA device. That's going to generate, I would say significantly accelerated activity on our device sales And that is having a negative impact on the margin. So that's going to be clearly one element.

Speaker 2

Then on top of that, there will be certainly some investment during the Q4 and that is having an impact on the margin. And then you can have some mix coming from geographies and other mix element. That is What is today behind this guidance of around flat? I mean, it doesn't mean that it can be a bit positive. But today, we are seeing this around stability situation for our OI margin Year on year, again, for Q4.

Speaker 8

Thank you for that. And just as a follow-up, when you talk about Investments in the Q4, should we think of that as a sequential step up in investment relative to the level in the Q3? Or is that more of a year over year higher investment compared to the Q4 of 2023. And I'll leave it there

Speaker 2

for now. Yes, I think you should expect certainly continuation of Significant level of investment as we are accompanying the growth of our Star Product, IQOS and ZYN, that should probably mean quarter on quarter, I would say, sequential increase and still a significant growth versus last year.

Speaker 8

Thank you for that.

Speaker 2

Thank you. Thank you.

Operator

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

Speaker 9

Good morning, Emmanuel. Hope you're well.

Speaker 2

Good morning, Owen.

Speaker 9

And I just wanted to ask also ZYN very, very strong in the U. S, but wanted to ask about pouches ex U. S. So volumes only flat versus 2Q for Scandi and ex Scandi. And you mentioned you also had relaunches in Switzerland And Finland during the quarter.

Speaker 9

So I was just wondering how you see the near term outlook for volumes ex U. S? Do you expect any meaningful acceleration over the next several quarters. And then a second question linked to that, there's some increasing chatter now that the EU is looking to potentially ban pouches as part of the new And TPD, does this impact how you think about investing in the space ex U. S.

Speaker 9

Near term? Thank you.

Speaker 2

Thank you, Owen. Yes. So we have this situation in Scandinavia On nicotine, Porsche, where the product is already present, mainly in Sweden, where it's nicely growing market. That's where we enjoy the Biggest market share. So we are globally year to date growing on nicotine pouch in Sweden, but they are not We're not talking about big volumes here as we have our strong leadership in Sweden on snus.

Speaker 2

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, in the Nordics, there will be more market to come. Now it's going to be, I'm hopeful, nice, but it's going to be small versus what we see in the U. S.

Speaker 2

You see what I mean? So it's going to be difficult to see Given the strengths that we are seeing in the U. S. To see Volume outside the U. S.

Speaker 2

Showing their strengths. Now yes, it's going to add Very nicely additional number, 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 on that respect, Which we don't know today.

Speaker 2

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.

Speaker 9

Okay. Thank you, sir. Appreciate it.

Operator

Thank you. Our last question

Speaker 4

Hi. Good morning, Emmanuel. Just one from me, please. And I know it's a bit of a topic du jour, but the GLP-one drug, obviously, There's been talk about it having anti addictive properties. Do you think this could be an issue for Do you mind in the long term rather?

Speaker 4

Thank you.

Speaker 2

Well, frankly, I mean, I've been hearing things about that. I mean, as always the assumption, is everybody going to be under GLP 1 and So

Speaker 9

you know that's going

Speaker 2

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 who's going to take GLP-one. I'm not sure we have any Serious study on human behavior that is going to say that. So first of all, I don't know how broad the usage of This medicine drug is going to be. 2nd, I don't know what's going to be the potential impact.

Speaker 2

So I'm not sure that today we can say anything relevant on and that makes sense on that topic, 20.

Speaker 4

No, that makes sense. Thank you very much.

Speaker 2

Thank you.

Operator

Thank you. And there are no further questions at this time. I'll turn the call back to Emmanuel for closing remarks.

Speaker 1

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.

Speaker 1

Thank you again and have a great day.

Speaker 2

Thank you. Talk to you soon. Bye bye.

Operator

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

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Earnings Conference Call
Philip Morris International Q3 2023
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