Q3 2022 Philip Morris International Inc Earnings Call

Today's call is scheduled to last about one hour, including remarks by Philip Morris International Management, and the question and answer session in order to ask a question. Please press the star key followed by the number one on your Touchtone phone at any time.

Media Representatives on the call will be also invited to ask questions at the conclusion of the 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.

Welcome and thank you for joining us.

Earlier today, we issued a press release containing detailed information on our 2000.

22 third quarter results you may access the release on PMI Dot com.

A glossary of terms, including the definition for reduced risk products or rps as well as adjustments other calculations and reconciliations to the most directly comparable U S. GAAP measures and additional smoke free volume and net revenue data or at the end of today's webcast slides, which are posted on our website.

Unless otherwise stated all references to Iqos are to our Iqos heat not burn products and all references to smoke free products onto our Rps.

Growth rates presented on an organic basis reflects currency neutral adjusted results, excluding acquisitions and disposals.

The figures and comparisons because that's it on a pro forma basis entirely exclude PMI has operations in Russia and Ukraine.

As mentioned previously starting in the second quarter of 2022 and on a comparative basis, PMI excludes amortization and impairments.

Intangibles from our adjusted results.

Today's remarks contain forward looking statements and projections of future results or 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 of forward looking statements.

I'm joined today by <unk>, Chief Executive Officer, and Emmanuel Bible, Chief Financial Officer will.

He will join us for the question and answer session.

Over to you Emmanuel.

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 worlds largest luxury market from April 30 of 2024.

Indeed, today's agreement with Altria removes the potential of a protracted legal process to regain the U S rights to Iqos, which <unk> previously held subject to performance milestone 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 a wealth of experience from international.

Markets.

We see iqos as the primary vector for establishing a leadership position in the U S smokefree industry and it could be followed by the other product in our smoke free portfolio.

In this context Swedish match offers an immediate position in the whole segment and mutually beneficial CLG at Salesforce level.

However should deal for sale, we can certainly build a robust sales force as part of our commercial deployment engine. During this 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 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 116 Swedish krona.

Our updated offer we retained 90% exit and condition, which is critical to allow us to capture the full potential of the combination.

Now that we are close to the end of your supplier. The increase offer is primarily intended to fairly reflect the net value to us of the portion of Swedish match cash flow, 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.

As such we believe the updated price with a premium of 52, 5% to the undisturbed share price prior to the initial offer strengthen the attractiveness yet further for Swedish match shoulder, while maintaining strong value creation for PMI shoulders.

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 Ht. Your volumes ahead of our forecast and robust growth in total volume market share and convertible net revenues.

With adjusted operating income margin in line with expectation. This resulted in total Q3 adjusted diluted EPS of $1 53 close to our all time high quarterly.

Despite the stable currency headwinds.

Iqos excellent performance continued with plus 22% growth in pro forma exterior shipment volume.

Testament to the continued strengthening of our <unk> portfolio and broad based growth across key regions.

I could see Newmark continued to drive growth in each launch market.

In <unk>, we delivered robust performance with Q3 organic pro forma net revenue growth exceeding 4%.

Driven by accelerated pricing of almost plus 5%.

<unk> achievements volume was 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 plus two 3% on a pro forma basis and by price point.

6% in total, including Russia and Ukraine.

Pro forma net revenues grew organically by six 9% and by plus six 7% for total PMI.

Our total organic net revenue per unit grew by plus four 5% on a pro forma basis and by plus six 1% in total despite lower device revenues.

This reflects the increasing weight of iqos in our sales mix and a step up in Congress stable 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 reflect the cover and device volume the investment in launching the newmar, including initially our 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 topline growth and ongoing cost efficiency.

Nevertheless to outperform our previous currency neutral guidance to deliver adjusted diluted pro forma EPS of $1 33, including unfavorable currency of 23.

Representing plus eight 3% currency neutral growth.

Including Russia, and Ukraine, we delivered adjusted diluted EPS of $1 53.

Our strong third quarter combined with the robust H, one supported an excellent delivery for the year to date.

Highlights of our strong pro forma volume growth of three 4% and organic net revenue growth of seven 7%.

Again, reflecting continued strong iqos performance pricing and the recovery of the convertible business in many market against the pandemic affected comparison.

Smoke free net revenue made up around 30% of our year to date pro forma total putting us on track to reach our ambition of over 50% by 2020.

Our year to date operating income margin.

<unk> 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 billion of gross savings of 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 nine 7% to $4 11 on a pro forma basis.

And by plus eight 8% in total to $4 59 and excellent performance.

Now, let's turn to the pro forma full year outlook.

Given the continued growth of Iqos and robust trends in <unk>, we are revising our topline forecast a pause to plus two two plus 3% growth in total shipment volume and plus six 5% to plus 8% growth in organic net revenues.

While our top line outlook remain 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 remain mid single digits 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 <unk>.

<unk>, Japan, another large market.

An initial negative margin impact even the higher weight of the consumable and increased cost of both the device and consumable in the first 12 to 18 months of activation.

As mentioned previously the combination of strong demand global supply chain disruption and impact of consuming induction SG production in Russia means our supply chain is not fully optimized.

This has resulted in reduced productivity and a number of additional cost.

<unk>, 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 our commercial investment 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.

10% to plus 12% for 2022.

This translate into our pro forma adjusted diluted EPS forecast of $5 22 to $5 33, including an estimated unfavorable currency impact of 87 sets 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 80.

Unfavorable currency impact.

Leslie.

Given the continued success of <unk> the constellation of carrier production in Russia, I just referenced we are working to further accelerate our prediction of injection consumable.

As we convert and transition capacity from black to injection, we incur certain inefficiencies and limits on the availability of Illumina Illumina achieved.

We are optimizing our inventory level, where possible to minimize any impact on consumer availability. However, these factors are a constraint on our shipment and we are updating our <unk> shipment volume forecast to 89 to 91 billion units for the year.

Importantly, this is a short term supply dynamic consumer.

Consumer offtake trends remain strong and <unk> in market sales volume are expected to further accelerate their growth to over plus 25% in Q4, while also growing sequentially compared to Q3.

Yeah.

The cash generation capacity of our business remains exceptional as shown through the challenges of recent kit.

Our balance sheet and cash flow remain strong.

We delivered operating cash flow of $7 7 billion dollar a year to date representing growth of plus six 5% on a currency neutral basis.

Today, we reconfirm our forecast of around $10 5 billion.

Operating cash flow for the full year, despite an estimated currency headwind of around one 3 billion thereof.

This means we expect to deliver an excellent $22 5 billion there are over 2021 and 2022.

Cash flow was flattered somewhat in 2021 by <unk> 5 billion from $1 impact and the timing factors of certain cash flow, which benefited 2021 at the expense of 2022.

And by a further zero point $5 billion of working capital improvement.

However, our 2022 forecast demonstrates underlying growth against this exceptional year.

I would also like to highlight that use our strengths as a positive impact on our net debt given that more than 60% of our financing is in Europe , including derivative overlays.

This serves to offset the impact on our earnings and combined with strong cash generation contributed to $1 $5 billion reduction in our net net debt since December 2021, which is now below one six times adjusted EBITDA on a 12 months rolling basis.

This delivery highlight our ability to maintain a strong balance sheet to 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 volume increased by plus two 3% for Q3, and plus three 4% year to date, putting us comfortably on track to deliver a total volume growth for the second consecutive year on both a pro forma.

Total PMI basis.

Pro forma <unk> shipment volumes grew by plus 21, 9% for the third quarter, and plus 15, 8% year to date.

While our shipments have been more volatile this year, reflecting the current supply chain dynamic.

<unk> growth has been consistently strong with plus 18, 2% growth in Q3, and plus 19, 2% year to date with robust performance in the region, Japan, and low and middle income market.

As I mentioned, we expect a further acceleration of <unk> growth in Q4.

Focusing now on combustibles, our portfolio delivered robust pro forma organic net revenue growth of plus four 1% in Q3, and essentially stable pro forma shipment volumes.

Our pro forma pricing accelerate accelerated to plus four 9% in Q3, as we progressively adjust to the inflationary environment.

This reflects notable contribution from Australia, Germany, and the Philippines, and a positive quarterly volumes from Indonesia for the first time since Q4 2009.

Now expect pricing to be around 4%.

Our pro forma share of the cigarette category increased by plus 0.2 points year to date.

This was supported by Bible, Marlboro, where volume grew by almost plus 4% for total PMI.

With a premium position in a challenging consumer environment. This represents an impressive performance from the worlds leading <unk> brand.

Our leadership in convertible LG to maximize switching to smoke free product and we continue to target a stable category share overtime, despite the impact of Iqos cannibalization.

The positive combination of stable share in convertible and the continued growth of heico's position us to deliver total market share growth over time.

Capture plus 0.5 points of pro forma share gains in Q3, and plus 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 eating out category.

Remain 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 two tier HTM portfolio, providing adult smokers with an expanding range of innovative and high quality alternative to cigarettes.

Peony TMI etch to use again strengthened our position as the second largest nicotine brand in markets, where Iqos is present with a sequential share gain in Q3 of plus zero point to point to a record seven 7% sure, excluding Russia and Ukraine.

Focusing now on Iqos performance.

We estimate there were approximately $19 5 million iqos user as of September 30th, excluding Russia and Ukraine.

This reflects growth of around plus 0.5 million users in Q3, and plus $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 plus 0.5 million this quarter was very robust in the east.

Still equal context, noting that the growth in Q2 2020 benefited from a catch up effect following the relaxation of COVID-19 of fiction on retail location and mobility.

Importantly, we expect a strong acceleration in user growth in the fourth quarter of 2022.

In the EU region small screen net revenue comprised almost 40% of regional niche revenue year to date.

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 <unk> share increased by plus two points compared to Q3 last year to reach seven 3% of total cigarette and hte industry volume.

I would also highlight the placebo two sequential increase which is a notably strong performance given the usual seasonality of the convertible market.

Most importantly, adjusted IMS volume continued to grow sequentially and reached a record high of $8 7 billion unit on a four quarter moving average.

We expect <unk> volume growth to continue in Q4 with a corresponding increase in market share.

Please refer to the appendix for additional capacity and market share battle.

With regard to regulation in the EU, we are encouraged by the increasing number of countries adopting multi year fiscal framework with clear differentiation of smoke free product such as the recent legislation in Romania, We expect a proposal on the EU tobacco excise directive to be.

Bleach by year end and for a similar approach.

As a remainder the reminder, the tobacco excise duties will be quite minimal support for approval by all 27 EU member States.

Now, let's focus on the performance of humor.

Origin.

We will welcome you to drive user acquisition and switching of existing user and accelerated category growth in both Spain and Switzerland.

In Q3, both bucket expense another quarter of strong sequential inventory growth with uptake exit volume of theory are now the clear majority of <unk> sales in both markets.

We also launched illumine, Greece at the end of June with promising initial results and introduce the product to Portugal earlier this month.

In Japan.

Yeah, just the total tobacco share for our <unk> brand increased by plus two eight points versus the prior year quarter to 23, 6%.

<unk> Q3 that you saw in optical sequential share decline due to convertible seasonality, making the plus 0.7 sequential increase this quarter a notable achievement.

<unk> again grew sequentially to reach a record high of $8 3 billion unique on a four quarter moving average.

This was driven by the impressive performance of Iqos Newmar and the continued growth in key cities such as Tokyo.

This category now represents over one third of total tobacco in Japan with Iqos increasingly driving vehicles.

<unk> 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 area. It's to use continued to grow strongly in Q3 and strengthened our position as both the second largest nicotine brand and largest RP brand in Japan, reaching an exit of tech share of 14, 9%.

Encouragingly Cynthia S to use of also grown rapidly since the initial launch in April and National extension in mid July driving consumer acquisition in the mainstream price segment.

We exited Q3 with over 25% <unk> offtake share recall.

And continue to see a long runway of growth in Japan over the coming quarters.

In.

<unk> two strong iqs gain in developed countries. We continue to see very promising growth in low and middle income market, which drove around 30% of the company's pro forma <unk> growth in Q3.

Given the large size of this market the premium positioning of the existing iqos portfolio in the relatively early stage of commercialization. This represents outstanding progress.

Strong growth in IMS volume continued and the pro forma share of our HQ brand group, plus 0.9 points versus the prior year quarter to two 8% in Q3.

<unk> performance, considering the impact of seasonality.

This reflects success across many market with notable progress in Lebanon, where two or three a fixture in Beirut increased by plus seven points to 18% in Egypt.

<unk> share in payroll is approaching 6%.

Further TCT that can be found in the appendix.

We are also encouraged by recent positive regulatory developments in the Philippines, where the government passed a new low clearly differentiating convertible and noncombustible tobacco product.

Smoothie products will be regulated separately with different <unk>.

Me too product this week.

All guided trials and rules to be established for product communication and point of sale activity that will support the switching of adult smoker to better alternative.

In addition, the latest development from a smooth innovation pipeline is a new <unk> device that is especially relevant for low and middle income market.

It is a simple convenient and affordable proposition, which can cater to local taste preferences with those contributing on the reduced risk profile of the product.

We are planning a pilot city launches in Columbia, and the Philippine during the fourth quarter as we further extend our portfolio of smoke free product to serve different consumer needs.

Yes.

As we continue to innovate it's critical to integrate sustainability through eco design principles secularity and efforts to minimize and manage post consumer waste.

We think the environmental impact of our product is a key pillar of our sustainability strategy, which is reflected in our sustainability index and form part of our executive compensation scheme.

Our approach to reduce waste related to cigarette RP consumable device and packaging is covered in the report case studies and campaign published last month and available via a dedicated microsite on PMI that come from.

For example, we are progressing well towards our 2025 aspiration of adding at least 80% of our shipment volumes covered by market with MTN metering program in place for cigarettes and for over $1 million community smokefree device to be refreshed or repaired.

Moreover, during September more than 10000 stakeholders for more than 60 market.

Cleanup initiative 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, where recently nominated for sustainability prizes and our Chief Sustainability Officer, Jennifer Modulus was nominated for CSO of the year at the World Sustainability Awards.

Yeah.

Moving now to perhaps most impactful news of today, we are delighted to announce that we will soon a full control of iqos.

World's leading smoothie product in the United States, the worlds largest smoke free market.

As previously communicated following the ITC decision last year for <unk> in port of Iqos into the U S. We have been in discussion with Altria to find the best path forward PMI.

Pmi's priority has always been to find a solution that best position 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 achieved this goal.

Let me start by briefly summarizing the key terms of the agreement.

From April <unk> 2020 for 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 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 switching to 2029. This solution provides certainty by avoiding what could have been the protracted and certain legal process.

Similarly, as bags of dividend of Iqos.

It provides a clear near term path to commercializing <unk> in the U S with the unencumbered backing of PMI full strategic and financial commitment to the product success.

Yes.

Iqos is the world's leading smokefree 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 niche roofing business has been created the attractive bond category and driving that growth.

The U S is the world's biggest accessible nicotine market by retail value.

The estimated resale value of is growing smokefree market is already around 60% of all international markets combined excluding China.

We have spoken before about our plan 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 smoker for critical smoke free alternative to cigarettes Mauro.

Moreover, current smokefree product have had limited success in fully switching either smoker away from cigarettes.

In the U S. There are ample.

And Paul opportunity to build adult smoker awareness.

And understanding of mostly product offers some things that is particularly true for iqos, given our MTBE authorization.

We are ready to invest Jane iqos to bring it to market at scale across the U S. Starting with full scale launches in key cities and region with a plan to progress rapidly to national penetration.

Iqos remains the only Malibu smoothly 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 market worldwide that Iqos appeal to adult smokers, who have tried the product is strong as demonstrated by eye full switching rate, we have a strong commitment to build awareness and invest behind the category to drive product trial among <unk>.

Oregon smartphone.

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.

A number of Asian European and other markets, all with varying demographic profile.

Smokey taste preferences will.

We believe the volume share of 10% of cigarettes and edge to use 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. Each company, we estimate the total U S industry profit pool at over $20 billion and with average unit margin on USC Garrett more than three 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 <unk> business in the U S. The opportunity is purely incremental.

This also reflects a current excise tax system with <unk>.

No differentiation for heated tobacco product.

SSE Garrett at the federal level and differential on a limited basis in only a handful of state. This.

Presenting a clear additional opportunity overtime.

We are already advanced in our plan for Iqos in the U S. As we prepare for domestic manufacturing and for important regulatory submissions, including for Iqos Illumina, where we plan to file a PNT eight in edge through 2023.

As mentioned previously we target the first half of next year for the resumption of Iqos domestic supply, which will be available to a two year under our current arrangement.

<unk> assumed full commercial responsibility in April 2024.

Our proposed combination with Swedish match would provide certain U S sales and distribution capability.

However, in the case of failure.

Have a clear path forward for Iqos and the rest of our smoke free portfolio.

Indeed, the most critical part of the Iqos commercial model centered on converting adult smokers rather than distribution.

In addition, the U S as an established distribution and retail landscape with a clear route to market.

We therefore also have concrete plan to proceed autonomously in building fully control and manage U S sales and distribution capabilities over the next 18 months, leading up to April 2024 in order to ensure a successful iqos rollout and the introduction of order.

Smoke free product should our Swedish match also failed.

Indeed, we believe this agreement is fundamental to and look the U S smokefree market.

As we have shared previously we expect heated tobacco category to remain the largest and fastest growing in the loft them internationally.

Internationally.

Was the E vapor and to a lesser extent nicotine pouch category has paved the way for Smokefree product in the U S. We know that heated tobacco comes closer to replicating the experience that <unk> enjoys with higher conversion and very low.

<unk> use.

Okay.

Conclude todays 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 growth.

Growth, reflecting broad based momentum in the region, Japan and emerging markets.

We remain excited by the promising results of Iqos in Lima, our rich pipeline of smooth innovation and plans for further launches of both Illumina and rebar in the fourth quarter and in 2023.

We continue to accelerate investments in our commercial program digital LNG and R&D for long term growth as well as behind a number of growth opportunities across category and geography.

Retail from such investments remain compelling as demonstrated by the exceptional top and bottom line growth delivered over recent years.

In addition to growth is mostly product our convertible business continued to perform well with organic net revenue growth and essentially stable pro forma shipments wooden.

Despite accelerated pricing in the current inflationary environment temporary margin pressure from inflation and supply chain efficiency 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 border smoke free portfolio.

We are now advancing on our plan to launch at scale with or without Swedish match.

And finally, we have increased the dividend every year as a public company to 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 a 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 smoke free offer that come and yet we are now more than happy to answer your question.

Thank you we will now conduct the question and answer portion of the conference again in order to ask a question or make a comment. Please press the star key followed by one on your Touchtone phone in the interest of fairness and time, we ask that participants keep to a minimum of two questions. Each if time allows.

Follow up questions may be taken you may rejoin the queue by again pressing star one on your Touchtone phone.

Thank you our first question will come from Chris Growe with Stifel. Your line is now open.

Hi, good morning.

Hi, Chris Hi.

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 wanted 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.

Getting margin and I guess to understand what's behind that if I have my numbers correct here.

No.

I don't think so Chris we are organically before forex.

Down for the first nine months.

With a number.

Kind of impact that we described you too.

The situation of course.

Strong disruption on the supply chain coming from from the <unk> in Ukraine, and and the situation in <unk>.

In Russia.

We have we have.

<unk>.

Some element of cost attached to the development of Iclusig in MA and that is of course, playing we have a lot of air freight that is impacting the margin. So you have a number of temporary element.

I've been with us since almost the beginning of the year and that drove the operating margin down.

I think that it will take a little bit of time for those two.

To be removed.

But we also have seen for the first nine months something that is going to obviously see obviously stay with us which is the inflation.

We are seeing an.

An inefficient level for the time being around mid single digits.

It could strengthen further because when we look at.

The number of inflation in many countries feasible this mid single digit numbers.

As we've been saying we are entering into the renewal of a number of contracts that protected us to some extent on the way you know we are buying energy and the number of components. So that mean that this part of inflation is going to stay but in Q4 actually with a more positive mix.

Maybe one off as in lower impact, we are expecting rather a better sort of situation on margin evolution versus the first nine months. So thats. The opposite we expect a Q4 that should be in terms of margin evolution better than the first nine months.

Okay. Thank you and then just a second question would be in relation to you took your volume estimate for the year, which is very encouraging and a very strong performance year to date.

There's been a lot of concerns about.

Trade down activity the concerns of consumers, we only world.

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 any trade down activity. I think you could you could share that would help us get a better feeling for the performance of some of your premium brands. Thank you.

Like Crazy and not really if you look at.

Dawn trading type of pressure.

Don't see really an acceleration of the trucks right. So obviously, we see the Indonesia, Philippines under pressure.

Not much has really changed versus what we have seen before one could argue that in some geographies that inflation because at the end of <unk>.

<unk>.

Sort of evolution.

But nothing curve today and you could see also from the shelves of Marlboro right.

We will look pretty strong.

On the on the premium the premium propositions, okay. Despite the fact that we take.

I can get pricing and there will be pricing.

Pricing to come.

<unk>.

Thank you for that I appreciate it.

Thank you.

Yes.

Thank you. Our next question will come from Pamela Kaufman with Morgan Stanley . Your line is now open.

Good morning.

Hi, Bob.

Hi.

You asked are clearly a large growth and profit opportunity for Iqos and it helps that you don't have an exact income basketball business here, how would your commercialization strategy in the U S change if you came into the U S through at Swedish match or independently.

Investors think about the required level of investment to commercialize iqos in the U S and the <unk>.

Impacting our growth algorithm.

Yeah, Hi, Paula so.

I mean, what stands behind the success of Iqos since really the front end consumer interface right, that's the commercialization aspect, which Mike.

It was one of the key element of Iqos success, which we measure as the highest in the industry range of comparison I adoption of Iqos switching from cigarettes.

Swedish match doesn't have it writes a Swedish match because the component of our sales force, which is essentially in store execution.

Success hinges on.

That business the consumer component so above scenario.

That's the investment which is front of us but these are the.

Great.

The market size and the profitability pool.

<unk> ability to port for Swedish match as a component of our sales force, which is the in store execution, obviously would be.

It's nice to have them, but this is not something which is unique in the sense that.

But generally we're kind of markets or.

Organically for example, right.

Our options can be at the table as well the uniqueness of an iqos as a guidance the commercial engine commercial Activations. If you follow us close our spend enormous effort.

Behind the consumer in Jordan.

Automating Digitalize, Inc.

Touch points with our consumers and that's the value of which we will be bringing will have to invest but now is on our side.

Yes.

Thank you.

And then I have a question about the 90% threshold for the Swedish match deal, which appears difficult to achieve in those circumstances.

Would you consider lowering the threshold in the event that you our shareholders tender.

What would be the challenges in operating the asset with our ownership stake.

While we have asked for.

Some understanding they are not getting the questions.

Swedish match deal like the fact of life.

<unk> hundred 16 site in the 90% acceptance level.

Okay, and this is where do we see the value of Swedish match, the maximum of the value of this with as much today and I will not comment beyond this contract I think it is a fair market price for value.

Elevation of the components of the above grew both of the shareholders Eni's shareholders Swedish match shareholders, both long term and short term and we will not comment on this one.

Yes.

Understood. Thank you.

Thank you Tom.

Thank you.

Thank you. Our next question will come from Gaurav Jain with Barclays. Your line is now open.

Hi, good morning.

Good morning.

Hi.

<unk> 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 to 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 in periods. 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 be modeling like a few hundred million dollars of losses in the first few years.

Before you scale up high cost too.

A big enough volume, where it started generating incremental EBIT.

Sure.

Much like you had when you commercialize iqos around the world I remember like between 15 and 17.

A few like $700 million 1 billion kind of loss that you had.

Identified at that time, so is that something similar we should do.

As you commercialize the U S.

Yes.

Directionally, you're right I mean, obviously building the infrastructure of roofing from ascribes requires several hundreds of thousands of employees now in the scheme of the.

The government in place, which PMI has.

No. It's not the first time that we're building another graduation from.

From scratch.

Absolutely right.

Initial years couple of years, whether it be on the.

On the on the laws as frankly speaking, we've had where vehicles.

In every country to which we enter and.

Following us closely you know that.

Have achieved.

Water cuts.

The faster path to the breakeven that have occurred in the year of one or two of the four.

Our smoke for Jordan, you versus what we're achieving today so.

Kind of learnings as a tremendous learning and capability in the organization.

As I called internal know, how and the systems et cetera, which we don't have to reinvent again.

Our print to us the blueprint to a lot of things have been attested et cetera. So the U S market.

Enjoy your leverage that's sort of the things that will come.

Summer next year will come with the motor visibility journal, probably see the spending in the past I think in the release with upside the most logical based on our experience in the taxes on international.

Logical milestone near retirement, or let's say 'twenty priorities.

Several points of the market, which if we see where we are in other places and what we achieved six years after our year to date versus now six years plus minus for the current <unk> therapy, 10% I think over legacy accordingly.

We have a pneumonia will increase.

<unk> makes it very clear will fully stand behind including monetary and human resources.

Deliver the success.

As well over the success of Iqos in the U S.

Sure.

A follow up question on the bat litigation at ITC, which they run the Bakken dispute. So looks at that prevents you from importing iqos devices, which is where you are now setting up the domestic manufacturing facilities, but.

<unk> gone back to use those that influence because clearly they have established they have some strength in the patent.

Go to a domestic U S. CT and also get injunctions against you or selling of Iqos devices and the domestic market. So I'm trying to understand how do you frame this entire patent litigation.

Around your domestic manufacturing and commercialization sort of strategy.

Well go on that one we have to clarify one thing the ITC process, where indeed, there was a decision from ITC.

But otherwise.

On the federal.

Second I would say for the time being.

Rather success on our side and one of the.

Family of patents they've been claimed by <unk>.

On that case with the ITC was actually.

<unk>.

I recognize there is no value in front of.

The U S court. So I don't think that you can draw a parallel between what happened in the ITC and what is happening.

<unk>.

On the federal level in the U S.

And we believe that the domestic manufacturing is giving us.

PFS and the capacity to reenter.

The U S market.

Okay. If I could just ask one follow up on what you just said the iqos and luma device.

Does it by pass all of these patents, which are under dispute.

The case, which we have with that.

The ITC case with.

We started to buy beauty is with regards to diagnose footprint zero.

Sean Thank you.

Illumina is in a completely different path.

Thank you.

Thank you.

Thank you. Our next question will come from Bonnie Herzog with Goldman Sachs. Your line is now open.

Alright, Thank you hi, everyone.

Hi, My first question is on your guidance here. Your Q3 came in better than expected and you know you took up your full year currency neutral revenue guidance, but I guess I'm trying to reconcile this with your lower guidance on Iqos I guess this implies you now expect stronger results in your capacity of our business.

Possibly greater device sales so could you walk through this for us, especially on device sales expectations in the second half, possibly ramping and you know if theres a risk of retail inventory building that could potentially impact results next year.

Yes brain. So no there is nothing to do with with the device in the guidance you are right we have slightly been moving.

Bracket for the.

<unk> volume not massive you are 90% to 92 enrollment and we are now 89 to 91 so.

We are still part of the bracket that is the same.

Clearly, we see some compensation that the level of a very robust comp.

Compatible business I think <unk> been flagging that.

In detail in the presentation and that is giving us this visibility.

<unk> ability on.

Here growth in volume than what we were anticipating so far and we're raising the guidance to plus 2% to two three we have been raising the guidance for revenue as well with the low end of the bracket that has been raised to plus six 5% and then we have the same adjusted EPS, notably because we see that.

Probably potentially a bit higher than what we anticipated a few in a few weeks ago.

So that is giving us the same bracket for adjusted EPS, but in a nutshell that is of the guidance is evolving.

Okay. Thanks for that and then just my second question.

Sorry, I have a follow up question about the agreement you reached with Altria, maybe asked a little differently I guess I'm trying to get a sense of how you got comfortable with the $2 7 billion payment to Altria, which is quite a large some lump sum of money.

Is to get your exclusive rights to Iqos back in the U S. So how confident are you that youre going to be able to reach this tension in the U S market by 2030, especially since it does feel like the ramp will now likely be slower. If you have to go it alone or even with Swedish match.

And finally as it relates to this how do you think about not being able to give us the Marvel brand name in the U S. Now.

Yes, I do have regardless of the confidence Bonnie is that.

Local this confidence beyond behind the Iqos.

But all we can cover a year ago quarter and Youll see the results in the international markets.

We have the markets when we slow early markets when we faster.

Time charter for Iqos heat not burn is there okay. So.

We look at the <unk>.

U S I don't think.

Women cannot find the reasons why in the U S.

Replicate so come close to the success of international.

The 10% if you like the first double digit number which we are obtaining after six years and an average geographies and they are taking into considerations that you guys have started to inquire if iqos free but we will be also working to bring faster the iqos earmark for west.

Our international success has been built on Iqos 2424, plus.

So the U S starting with.

The chartering of the vehicles of the much better more months from a product perspective of our capability perspective understanding this entire category.

In our international markets. So this is what the confidence is coming from.

And the second question regarding to the Marlborough.

Iqos in Japan is now buy X factor bigger than the heat sticks model.

And this was the last market, which we still have been using in the Marlboro trademark.

Our heat not burn consumables and as you know at the very beginning fixed sylvio's ago in a few markets by recall over Switzerland, and Italy. We started the remodel brand very early in the journey, we have almost overnight to rebrand the good thing and we dropped the Marlboro from.

From.

From the brand from the trade from the proposition.

I actually believe that we.

Mulder on international and this is a great brand, but on cigarettes.

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 with Us My Marlborough.

I don't see this as an.

And probably even a bottleneck of our.

In our strategy in the U S.

Okay. Thank you.

Thank you.

Thank you. Our next question will come from Priya <unk> Gupta with Barclays. Your line is now open.

Hey, Thank you so much for taking my question first I just had a quick administrative question.

What is the U S dollar equivalent.

The revised Swedish match offer.

Should we just use the current exchange rate or would there be any adjustment for any hedging that might have previously put in place and then I have another follow up.

I'm not sure to understand your question.

Yes.

For instance finished chrome will patients for this call now.

<unk> been reporting and the fact that the.

Price increase that we are offering today.

Respond to the impact of the currency fluctuation since the day of the announcement in May.

Between the dollar and the.

Swedish krona.

Meeting that.

A significant portion of the cash flow generated by Swedish match is in.

But that's it so I'm not sure I understand your question.

It was just weather.

So when you announced the transaction the dollar amount would have been 16 billion and you're still sort of.

Most to that just given the FX moves, but was there any incremental change we can with them.

We can make your calculation, we can provide you with the number of shares of traditional agenda.

And you can make the calculation so in the Lockdown I think that the amount is slightly lower but again. Please take into account. The fact that it is mentioned in that 100% generating cash room at all.

Okay. So you cannot just take the dollar amount.

100% the ratio.

That's helpful and then as we think about.

10% sure that you've discussed getting to by 2030 in the U S market how much of that includes contribution from Illumina I guess as you put the PMT a or submit the PMT a in the latter half of next year.

What sort of timeline are you assuming around that getting to market and.

Getting nationalized.

Well I mean, we're planning to file for.

PMT with Illumina to FDA.

Next year or so.

We've seen recently.

The.

Factoring in the timing of.

Of outcome of delinquents idea is a little bit of a challenge but.

There will be a low modestly in this 10% I won't give you the number now how much of the 10% second Jim Granuloma, but let's take the gain differently.

A few market very successful, but still very few markets.

For plays the role today in our portfolio.

And two.

If you look for example for the European Union almost entirely.

Success of newer six years.

In the commercialization of Iqos is built on the Iqos 242.

Four plus three three points.

So those are the products, which are.

We have a relatively clear path to grow in the U S. So there will be a low mark but.

It's too early now to say how much of the 10% will be though obviously for us is.

Illinois for benefits even further then.

Ben.

The blade technology.

<unk> technology. This is where we are today six years in PMI.

I think while we don't have to solve that equation today.

Okay. That's very helpful. And then just final question for me.

U S.

You discussed the inflationary pressure ramping from some of the contracts renewals that you are going through right now on the input side.

How should we think about that.

That headwind is it is it fair to think of that sort of mid single digit rising 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 'twenty three and then moderating into the back half as you start to lap some of that thank you.

Look on the inflationary pressure of course very difficult to give kind of definitive answer because this is a very fluid situation and with significant evolution.

Today, if we assume that.

At certain points in time, the inflation that we are facing.

We'll be in line with efficiently that is seen in many countries, yes that would probably mean that the mid single digit could go to two high single digit.

It can be a bit more complex than that because of course, it depends on which kind of.

Element of AV inefficient, we're exposed to that.

Thats.

That could be.

In some areas and evolution for next year, frankly, too early to say and also too early to say.

Glenn is going to be the climax of that is it going to be at the end of this year in terms of cost increases are we going to see more inflation.

Through 2023.

I think it's.

<unk>.

It's too early to say of course for us.

We will monitor the situation, but I would say energy prices energy prices here any day.

Much we can do we need to to.

By energy the answer for US is of course too.

React with price increase and I think you have seen in our Q3 and acceleration of our price increase we are getting it at almost 5%, which is showing the capacity depending on what's going to be the environment and whatever.

It is to mitigate the impact of what we're going to see a nutritional pressure with price increase.

Great. Thank you so much.

Thank you.

Yeah.

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.

So thank you very much for your attention and we're very happy that we spend an hour with you, especially in this very important moment for us.

Our key strategy focus strategic focus over the last.

With few months, if not longer as how to find much more clear and predictable path to the U S has been achieved towards achieving.

Achieving the deal with Altria and regaining the full control of Iqos. So we're very happy that you will spend an hour with us today. Thank you. Thank you too soon.

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.

Thank you ladies and gentlemen. This concludes today's event you may now disconnect.

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