The operator welcomes participants to the Philip Morris International Third Quarter 2023 Earnings Conference Call and introduces James Bushnell, Vice President of Investor Relations and Financial Communications. Bushnell provides information on the company's third quarter results and directs listeners to the company's website for more detailed information. He also cautions listeners about forward-looking statements and introduces Emmanuel Babeau, the Chief Financial Officer, who highlights the strong performance of the company in Q3 driven by IQOS and ZYN. Despite a significant adverse currency impact, the company's Adjusted Diluted EPS grew by 20% in currency neutral terms to reach a record quarterly high of $1.67.

The third quarter saw strong performance for the company, with organic net revenue and operating income growth, as well as an increase in adjusted diluted earnings per share. Year-to-date, the company has seen growth in volume, net revenue, and operating income, and has raised its outlook for the full year. This is due to the continued success of IQOS and combustible pricing, as well as strong performance from Swedish Match and ZYN.

In the fifth paragraph, the company discusses their expectations for the second half of the year, including accelerated top line growth and significant profit growth. They also mention their plans for expanding their ILUMA device rollout and anticipate strong operating income growth in the fourth quarter. The company's total shipment volume has increased by 2.2% in Q3 and they are on track to deliver their third consecutive year of growth. HTU shipment volumes have also increased, driven by strong performance in Europe and Japan. Adjusted IMS grew by 14.4% in Q3, with Europe and Japan seeing growth rates of 16% and 12% respectively.

In the third quarter, our adjusted IMS advanced by 16%, excluding Russia and Ukraine. Oral nicotine shipment volume grew by 19% in Q3 and 14% year-to-date, including the US growth of ZYN. When including nicotine pouches, smoke-free volume grew by 19.5% and total volumes by 2.5%. Cigarette volumes declined slightly, but pricing contributed 6.2 points of growth. Adjusted operating income was a record-high of $3.7 billion, with organic growth accelerating and expected to be around the top of the target range for 2024-2026.

In the third quarter, the company saw strong growth in operating income, which led to a 70 basis-point margin expansion. This was due to lower shipping costs, improved margins, and lower device sales. The company also achieved $120 million in cost efficiencies in the quarter, surpassing their target for 2021-2023. They aim to continue this trend and have set a target of $2 billion in gross savings for 2024-2026. The smoke-free business, Swedish Match, also saw excellent growth and profitability, with a 22% increase in net revenue and a 70 basis-point increase in operating income margin. ZYN, a key product for Swedish Match, had a strong performance in the US with a 66% volume growth.

In the third quarter, Swedish Match saw a positive impact from their smoke-free products, particularly in the US moist snuff category and with ZYN. ZYN's shipment volume and category share both saw significant growth, reflecting increased distribution and consumer preference for its convenience and experience. IQOS also saw growth in user numbers, with an estimated 27.4 million users as of September 30th. In the Europe region, IQOS saw a 1.3 point increase in HTU share, driven by the popularity of ILUMA among users.

Despite seasonality, our premium-priced TEREA HTUs and mainstream priced SENTIA HTUs have continued to grow in Japan and other markets. We have also seen promising growth in low and middle income markets. Our combustibles portfolio saw strong organic net revenue growth in Q3, driven by pricing increases in Germany and Indonesia. Our cigarette category share also grew slightly, thanks to our leadership in the market. Despite cannibalization from IQOS, we have been able to maintain stable category share over the past two years.

The company's strong performance in the smoke-free product category has led to market-share gains. They are aiming to reach over two-thirds of their revenue from smoke-free products by 2030 and have already launched their new product, IQOS ILUMA, in four markets with plans for further expansion. The company is also exploring new tobacco flavors and offering a non-tobacco option, LEVIA, to attract more adult smokers. The US market presents a significant opportunity for growth with the launch of IQOS and further expansion of ILUMA.

Philip Morris International is on track to file for PMTA and MRTPA for IQOS ILUMA this month. They are also focused on expanding their nicotine pouches, particularly their brand ZYN. The company is prioritizing sustainability by promoting smoke-free products and reducing their carbon emissions. They have also participated in World Cleanup Day and are committed to reducing post-consumer waste. Philip Morris supports greater consistency in sustainability reporting and has been recognized as a leader in non-financial reporting. They plan to share more about their sustainability efforts and transformation in the future.

In conclusion, the company is committed to delivering sustainable growth through their transformation efforts. They will be presenting at the CECP CEO Investor Forum and are confident in their full-year results. Despite facing challenges, their smoke-free business continues to perform well and they have plans to accelerate its growth in the US and internationally. They have set ambitious targets for organic growth and aim to be substantially smoke-free by 2030. The company has also consistently increased their dividend for the past 16 years, demonstrating their commitment to shareholder return. The call is now open for questions.

The company's geographical momentum is building up as expected, with ZYN's growth being extremely positive for margins. The company will continue to invest in the US to maximize growth potential. ZYN is best-in-class in terms of gross margin and growing it will benefit both top and bottom line. The company's HTU shipment volume for the year is expected to be in the lower half of guidance due to uncertainty related to inventory levels in Europe and the upcoming flavor ban. The company will provide more information once the ban is implemented in all countries.

The speaker addresses concerns about a potential reduction in inventory and its impact on shipments due to a ban on certain SKUs. They clarify that this ban is not expected to significantly disrupt the category and that there may be a temporary effect on shipments. However, they expect an acceleration in growth in 2023 compared to 2022 and see no change in consumer demand. They also mention a strong 15-16% IMS growth in Q3 and report higher volume growth and market share. The speaker then mentions new IQOS users in the quarter.

The speaker addresses a question about the company's recent quarterly earnings, specifically regarding user growth and the impact of seasonal trends. They mention that user growth is on track with previous years and they expect a strong finish to the year. They also mention that the company may see an increase in volume compared to last year. The speaker then takes a question about the U.S. cigar market.

The FDA has proposed a rule to ban flavored cigars and the company's revenue has declined due to an increase in prices. The speaker does not want to speculate on the impact of the ban and mentions that the company's FY 2024 EPS should not be affected by a one-time ForEx impact in Argentina. The speaker also mentions that the company's exposure in Russia and CLCPS should not have a significant impact.

The company has seen a modest decline in combustible business in Q3, but it has been offset by strong performance in markets like Turkey and Egypt where the company has gained market share. However, these markets are not very profitable. The company has raised its guidance for combustible volume due to this performance.

Emmanuel Babeau, CFO of Philip Morris International, discusses the impact of increased device sales and investments on the company's margin. He also mentions the strong performance of IQOS and ZYN in the U.S., but notes that pouch volumes outside of the U.S. were flat in the third quarter. He expects continued growth for IQOS and ZYN, but does not anticipate a significant acceleration in pouch volumes in the near future.

Emmanuel Babeau discusses the potential impact of GLP-1 on consumer behavior and nicotine users. He acknowledges that there is not enough information to accurately predict the long-term effects and usage of GLP-1 as a drug. He concludes by stating that it is not possible to make any relevant statements on the topic at this time. The call concludes with closing remarks from James Bushnell, Vice President of Investor Relations.

This summary was generated with AI and may contain some inaccuracies.