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Operator
Conference 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 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 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. James Bushnell, Vice President of Investor Relations and Financial Communications. Please go ahead, sir.
James Bushnell
Vice President of Investor Relations and Financial Communications
Welcome. Thank you for joining us. Earlier today, we issued a press release containing detailed information on our 2023 third quarter results. The press release is available on our website at PMI.com. The glossary of terms, including the definition for smoke-free products, as well as adjustments, other calculations, and reconciliations to the most directly comparable U.S. gap measures for non-gap financial measures cited in this presentation, and additional net revenue data, are available in Exhibits 99.2 to the Company's Form 8K, 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 Babot, our Chief Financial Officer. Over to you, Emmanuel.
Emmanuel Babot
Chief Financial Officer
Thank you, James, and welcome, everyone. We delivered very strong and better-than-expected performance in Q3, driven by ICOS and ZIN. Adjustability EPS grew by an excellent plus 20% in currency-neutral terms, to reach a record quarterly high of $1.67, despite a significant adverse currency impact in the period. Once again, our total volumes were positive, with the Q3 progression of over plus 2% positioning us to deliver our third straight year of growth. While not yet in our organic metrics, Ving continued its exceptional growth with U.S. volumes up by plus 66% in Q3 and over plus 50% year-to-date with a substantial increase in category share. Importantly, our ICO business delivered another strong quarter with HTU shipment growing plus 18% in line with the year-to-date trend. As covered at our recent Investor Day, HTU volumes have excellent unit economics relative to cigarettes, and the plus 16.5% organic net revenue growth from smoke-free products was a key driver in both our high single-digit organic top line and double-digit organic operating income growth. Smoke-free products made up over 36% of total net revenue in the quarter, as we drive toward our new ambition of over two-thirds by 2030, making us substantially smoke-free. In combustibles, we delivered very robust performance with plus 6% growth in organic net revenues, strong pricing, and higher category share, despite the impact of the smoker moving to smoke-free products. Our impressive operating income growth drove organic year-on-year margin expansion and a sequential improvement compared to the second quarter. This includes healthy expansion in the gross margin of our equal business, which surpassed combustible in the period, and lower than expected commercial costs. Overall, we are pleased to report another strong quarter, and we look forward with confidence to the remainder of the year and beyond. Turning now to the headline numbers. We surpassed $9 billion in quarterly net revenues for the first time, as strong positive volume and continued excellent high-cost momentum supported organic net revenue growth of plus 9.3%. This organic growth does not include the impressive plus 22% adjusted ex-currency top-line growth of Swedish match led by Zeeb. Our organic net revenue per unit grew by plus 7%, driven by the increasing proportion of high-cost HTUs in our CESNICs and very firm combustible pricing of plus 9%. This positive top line and mixed performance drove very strong organic operating income growth of plus 11.3% and organic margin extension of plus 70 basis points. This excludes the exceptional performance of Swedish match, which is included in our adjusted deleted EPS. We delivered adjusted deleted earning pressure growth of plus 20.3%, excluding an unfavorable currency impact of 17 cents, notably due to the Russian ruble and the balance sheet-related currency impact in Argentina, as disclosed at our recent investor day. Sequentially, lower net financing costs were broadly offset by a higher tax rate. Our excellent third quarter, combined with the robust H1, resulted in strong delivery year-to-date. I want to highlight our volume growth of plus 1.5% and organic net revenue growth of plus 7.7%, again, reflecting continued dynamic high-cost performance and combustible pricing. In addition, Swedish match currency neutral net revenues increased by plus 18%, excluding accounting reclassifications. Year-to-date operating income grew by plus 2.4 organically, despite accentuated margin headwinds and the notable OI decline in the first quarter due to the headwinds covered previously, which are now starting to subside. Combined with outstanding ZIM performance, this resulted in year-to-date currency-neutral adjusted diluted EPS growth of plus 10.7% to $4.65. This is an excellent performance. Turning now to the full-year outlook, I am pleased to share that following this very strong year-to-date delivery, we are raising our volume, organic sales growth, and currency neutral adjusted bottom line growth forecast. First two volumes, where we increase our outlook to plus one, to plus 1.5% total shipment growth for cigarette and HTUs, despite a lower expectation for the total industry. Within this, we expect to deliver HTU shipment volume within the lower half of our prior 125 to $130 billion range. While ICO's 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 partners adjust to the upcoming HTV further ban. For combustible, the resilience of our portfolio is reflected in an updated forecast of a 1% to 2% cigarette volume decline. VIN continues to perform exceptionally with strong adult consumer traction. Following a further step up in the US volume run rate, we are now increasing our fully nicotine-powered forecast range to 390 to 410 million cans. Combining the improved volume outlook with robust pricing and continued positive mix we are narrowing our organic net revenue growth forecast to around plus 8%, the midpoint of our previous range. As I will come back to shortly, we expect excellent organic OI growth over the second half of the year. Combining this strong profit performance with the continuation of VIN's phenomenal growth and diligent cost management allows us, to raise our currency-neutral adjusted deleted EPS growth forecast to plus 10 to plus 10.5%. This means we now expect double-digit growth for the third year running and translate into a full year range of $6.05 to $6.08, including an estimated unfavorable currency impact of 53 cents at prevailing rates. Despite increased currency add-ins, we continue to expect operating cash flow of around $10 billion for the year. This sets us up nicely as we focus on delivering towards our target of around two times adjusted net debt to EBITDA in 2026. Now, let me provide a different view of our forecasted results. As you can see, 2023 has very much been a year of two halves with a number of accentuated headwinds in H1, as explained in prior quarters, including steep cost inflation. H2 is a different story, and we believe it is more reflective of the underlying trajectory of our business. First, we expect an accelerated H2 top line with organic growth of around plus 9%. Second, we expect a significant re-acceleration in profit growth. We continue to expect organic operating income margin expansion in H2, and we are well on track after delivering another quarter of sequential adjusted OI margin improvement in Q3, with margins also expanding organically year on year. In H2, we expect strong organic operating income growth of around 10%. For the full year, our expectation remains that organic margin evolution will be towards the lower end of our minus 50 to minus 150 basis point range, including the expected technical margin impact of around 40 basis points from third-party arrangement in Indonesia and Ukraine. For Q4, we expect strong operating income growth with broadly stable year-on-year organic margin progression. includes the expectation of higher devices as we accelerate our Illuma rollout to reach around 50 markets by year-end, complemented by further Illuma device innovation. This very positive organic OI trajectory in H2 naturally translates into an acceleration in currency-neutral adjusted diluted EPS growth, bolstered by Swedish Natch. Now turning back to our results, our total shipment volume increased by plus 2.2% for Q3 and plus 1.5% year to date, putting us comfortably on track to deliver our third sequential year of growth. HTU shipment volumes grew by plus 18% in Q3 to reach 32.5 billion units, driven by continued strong performance in Europe and Japan. Adjusting for inventory movement, including the transition back to SIF rate, Q3 adjusted IMS grew by plus 14.4%. This includes Europe at plus 16%, despite heightened competitive activity, notably in Poland, and a more normalized growth rate in Japan of plus 12%. Excluding Russia and Ukraine, where growth remains limited, our adjusted IMS advanced by a very robust plus 16%. This growth rate excludes the excellent development of oral nicotine for which shipment volume grew by plus 19% in Q3 and plus 14% here to date on a pro-pharma basis, including the U.S. growth of VIN 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 volume 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.
Moderator
Question and Answer Session Moderator
I will now walk through the mechanics of our Q3 net revenues.
Emmanuel Babot
Chief Financial Officer
In addition to plus 2.2% 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. The increasing proportion of HTUs in our business continues to be a consistent top-line driver, reflecting higher net revenue per unit. The positive mixed impact of HTUs, overall rolling growth, and pricing are powerful drivers of our transformation and growth. We expect Veeam to enhance this further as it starts to be included in our organic metrics from mid Q4. Looking now at adjusted operating income, where the $3.7 billion delivered in Q3 is also a record high. I am pleased to report that following peak margin headwind in Q1, our organic growth has accelerated nicely as inflation, supply chain disruption, and Illuma-related factors continue to moderate, and the underlying dynamics of our transformation bear fruits. The Q3 progression is slightly above our 2024-2026 CAGR target of plus 8% to plus 10% organic operating income growth. And as I covered earlier, we expect our overall H2OI growth to be around the top of this range. This strong operating income growth in excess of an already healthy top-line performance drove a better-than-expected organic margin expansion of plus 70 basis points in the quarter. This was also the first quarter of this year where growth margin expanded organically, notably due to lower shipping costs, Illuma margin improvement, and lower device sales compared to the prior year. SG&A costs were also organically lower as a percentage of net revenue, reflecting a good cost performance and some phasing between the third and fourth quarters. We delivered a further $120 million in gross cost efficiencies in Q3, now surpassing our $2 billion target for 2021-2023. We aim to continue this run rate as reflected in our 2024-2026 target of an incremental $2 billion in gross savings. The Q3 margin currency variant includes a 0.6 point impact from the Argentina balance sheet related item I mentioned earlier. By its nature, this does not carry forward to future periods. Now, moving to Swedish Match, which is meaningfully accelerating our smoke-free growth trajectory as we progress towards becoming substantially smoke-free by 2030. Swedish Match business delivered excellent adjusted currency neutral net revenue growth of plus 22% in Q3 and plus 18% year-to-date. This means that our adjusted pro forma year-to-date top-line growth was 60 basis points higher at plus 8.3%. Swedish match strong profitability also enhanced our year-to-date adjusted income margin by plus 70 basis points. As we covered at investor day, Swedish smart smoke-free portfolio has excellent economic and is already at significant size compared to total PMI with its product contribution or operating profit before GNA, to be clear, approaching one quarter of our total smoke-free business year-to-date. VIN remains the key performance driver as it delivered another remarkable U.S. performance with plus 66% volume growth reflecting positive momentum across the country. Elsewhere, in smoke-free, recent trends of share gain in U.S. moistness, as well as category mix headwinds in Scandinavia, broadly continued. We continue to be very pleased with the positive impact of Swedish Match on our company, and I would like to thank the team for delivering such a great performance. Let's examine ZIN's recent US performance in more detail. Exceptional progress continued in Q3 with an increase in 12 months rolling shipment volume growth of plus 52% compared to Q3 2022 and plus 14% sequentially. Impressively, ZIN Q3 category volume share grew to 17.8%, which is plus 4.7 points higher year on year and plus 2.4 points 2.5-point frequency. Retail value share remains strong at around 76%, highlighting Zin's premium positioning and superior brand equity. These accelerated growths reflect progressive increase in distribution and a further broad step-up in national one-star velocity as the category gains strong traction with adult nicotine users for its convenience and pleasurable experience. Now, focusing on ICOs, starting with user growth. We estimate there were 27.4 million ICOs users as of September the 30th. This represents an increase of 3.7 million users versus one year ago, and 0.2 million compared to Q2 2023. As shown on the right-hand side of the slide, the third quarter of each year typically experiences slower user growth due to the seasonal influences in the calculation. Both new user registration and devices to legal aid smokers continue to advance strongly and at levels broadly in line with Q2 when users grew by 1.4 million sequentially. Also, as in prior years, we expect a substantial acceleration in user growth in the fourth quarter. Moving now to ICOs in the Europe region, where our third quarter HTU share increased by plus 1.3 points to 8.6% of total cigarette and HTU industry volume. Continued share gain into the growing take-up of Illuma, which is available to over 80% of ICOs users in the region. In addition to Q3 launches in Denmark and the UK, Illuma was launched in Poland, which, like Japan, is a market with high competitive activity. We look forward to driving its performance here over the coming quarters. While sequential share is, as usual, optically affected by the seasonality of the cigarette category, adjusted IMS volumes continue to exhibit robust sequential growth and reach a record high on the four-quarter moving average. This reflects strong year-on-year growth of plus 16% in Q3, despite limited growth in Ukraine. We expect strong IMS volume growth to continue in Q4, with a corresponding increase in market share. In the EU, the majority of member states have transposed a delegated directive withdrawing the heated tobacco product exemption from the characterizing flavor ban international law. The ban in these markets will be effective as of October the 23rd, and the remaining markets are expected to adopt in 2024. As previously mentioned, we are adjusting our HDB portfolio as required, in line with this transposition. And while short-term volatility is possible, including in year-end trend inventories, we do not expect significant change in the structural growth of the category. In Japan, Eiko Sinuma celebrated its second anniversary of the national launch in September and continues to exhibit strong growth due to excellent conversion, consumer satisfaction, and retention rates. Adjusted total tobacco share for our HTU brands increased by plus three points in Q3 year-over-year to 26.6%. Importantly, Adjusted in-market sales volume again grew sequentially on the four-quarter moving average, reaching over 10 billion units for the first time in Q3-23, as ICOs outgrew the hit-not-done category. In addition to this excellent consumer trend, our Q3 shipment to Japan also benefited from further switching back to sea freight during the quarter. This shift is now substantially progressed, and we expect a more normalized rate of HTU shipment in Q4. Our premium price Terria HTUs and mainstream price Sentia HTUs continue to grow individually and in aggregate, reaching Q3 of tech shares of around 18% and 8% respectively, despite the impact of seasonality. Our Japan city shares also continue to progress with a number reaching over 30%. We continue to see a long runway of growth in Japan over the coming quarters. In addition to strong high-cost gains in developed countries, we continue to see very promising growth in low- and middle-income markets. slide highlights a selection of Q3 key cities of tech share across markets in Eastern Europe, Africa, Asia, and Latin America. We see notable ongoing success in Egypt, with Cairo's tech share at plus 3.5 points to almost 9%. And in Santo Domingo, our leading Latin American city, with our tech share around 8%. Most promising is the 3.1% off-tech share in Northern Jakarta, where ICOS is only available via the ICOS Club members program. We continue to see robust off-tech volume growth across this important future market, despite seasonal effects on sequential share metrics. I'd like to spend a moment now on combustibles, where our portfolio delivered strong organic net revenue growth of plus 6.2% in Q3 and plus 5.6% year to date. This reflects another strong quarter of pricing with notable contribution from Germany and Indonesia. With better than expected pricing in Q3 of plus 9% and plus 8.6% year to date, we now forecast a full year increase of plus eight to plus 8.5%. Our cigarette category share grew by plus 0.6 points in 2003 and plus 0.3 points year-to-date. This reflects notable contributions from Egypt, Poland, and Turkey, resulting in only modest volume declines. Our leadership in combustibles helps to maximize switching to smoke-free products, and we have fully achieved our ongoing objective of stable category share over the last two years, despite the impact of high-cost cannibalization This combustible share performance, combined with the structural growth of ICO, 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. As covered at Invest Today, our superior share of Smoky products give us a formidable platform for sustainable market share gains with superior unit economics. Now, let me update you briefly on our exciting innovation and extension activities, which will be critical as we aim to reach over two-thirds more free net revenue by 2030, including 60 markets over 50% and 40 markets over 75%. As we covered at Invest Today, the global rollout of high-cost Illuma continues. We launched Illuma in four markets in Q3, reaching 27 markets in total, which represents around 75% of our high-cost business by volume. Illuma continues to generate excellent growth with upgrades from existing users and new user acquisitions. With a further six-market launch already this month, we expect Illuma to be present in around 50 markets by year-end and to essentially complete the rollout next year. I've also mentioned during this today, superior tobacco taste is critical to our ongoing success. And we are further exploring complex and new test spaces to enhance our tobacco flavor experience. On the other end of the consumer preference spectrum, we will be offering zero tobacco consumable for non-tobacco flavor discovery under the Livya brand. Just as nicotine pouches are an evolution from smooth to make the oral category relevant to more adult smokers, Levia is a similar non-tobacco evolution for ICOS as we broaden our offering to increase switching away from combustibles. The U.S. represents the most significant opportunity to drive accelerated smoke-free growth at both the top and bottom line. We are continuing to invest behind ZIN and readying our organizational and commercial capabilities for the launch of ICOS in Q2 2024 and a scaled-up rollout with ILUMA once authorized. We remain on track to fight for ICOS ILUMA's PMTA and MRTPA this month. The international expansion of nicotine pouches remain a key need to long-term focus, notably for ZIN as the world's leading brand. During the third quarter, we relaunched Zyn in Switzerland, and following positive regulatory developments, rolled out Zyn in Finland. Moving now to sustainability. Addressing the product health impact of combustible products by switching adult smokers to smoke-free products, which are designed and marketed for adult use, remains our most critical priority. This transformation is at the core of our strategy as we become a more sustainable business with accelerated growth and returns over time. With regard to tackling climate change, I am delighted to report that the science-based target initiative validated our forest, land, and agriculture emission reduction target, a recognition achieved by very few companies. We pledge to reduce these absolute Scope 3 emissions by 33% by 2030, which is significant given that Scope 3 remains the most challenging aspect of any company decarbonisation strategy. In September, almost 20,000 employees in over 60 countries participated in World Cleanup Day, showcasing our commitment to raising awareness around littering as part of our wider strategy to reduce post-consumer waste. We have long expressed our support for more rigor in sustainability-related reporting and welcome recent moves towards greater consistency in standards and a strong governance framework. As part of our ongoing work, We provided responses to consultation requests from the International Sustainability Standards Board to help shape 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. Jacek will be presenting at the CECP CEO Investor Forum in New York on November 14th, and the event is open to all those who would like to attend. To conclude today's presentation, we continue to deliver sustainable growth through our transformation. The powerful trajectory of our smoke-free business gives us confidence in strong full-year results built on volume growth, positive mix, pricing, and cost management. Considering the headwinds faced, notably in the first part of the year, we believe this speaks strongly to the fundamentals of our growth model. Notably, the outstanding performance of ICOS and Veeam continues, further enhancing our position as the global smoke-free champion. We have exciting plans to accelerate our smoker future in both the US, the largest smoker market, and internationally. We are confident in our 2024-2026 CAGR target of plus 6% to plus 8% organic top-end growth, plus 8% to plus 10% 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 2030 as another key milestone on our journey toward 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 cycles. This translates to a cumulative 183% increase and CAGR of 77.2% 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
Conference Call Operator
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 star 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 two questions each. If time allows, follow-up questions may be taken. You may rejoin the queue by again pressing star 1. Our first question will come from Vivian Azur with TD Calend. Please go ahead.
Moderator
Question and Answer Session Moderator
Hi, good morning. Good morning, Vivian.
Vivian Azur
Analyst at TD Calend
So I'd like to start with Zin, please. Clearly a very impressive result with continued acceleration in the top line. Emmanuel, you talked about distribution gains. So I was hoping you could just level set, you know, how much more runway do you see from a distribution standpoint? You know, certainly this remains a velocity. driven story, I would think. So that would be question one. And then the follow-up will just be on the margins, which came in way ahead of expectations. You called out very strong cost management. That's clearly apparent. And I'd love to hear your perspective on the durability of the current margin level for Zim, please. Thank you.
Moderator
Question and Answer Session Moderator
Thank you, Vivian.
Emmanuel Babot
Chief Financial Officer
So on Zim and Of course, you know, 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, you know, where the brand is already even nicely present, we see the consumer of tech accelerating. Just show that. these products are becoming more relevant for a growing number of adult users. 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 US, doesn't mean that it isn't going to grow further, but it's of course bigger than the rest of the country. There seems 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 years of very nice growth. So it's great that we have behind Zim two engines, which is really where the brand is already with the biggest presence, We don't see any decrease in the consumer adoption and we see increase what we call the velocity. 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 the growth of VIN 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. based in class in terms of growth margin for our product at the group level. I'm talking about ZIN in the U.S., but globally, we're creating power chains on a nice margin that ZIN in the U.S. is based in class. And that means, of course, that growing ZIN is an excellent news for top line, but also for bottom line. And I think that in the growth of ZIN, Adjusted earning per share over the quarter, this is absolutely visible.
Moderator
Question and Answer Session Moderator
Thank you. Thank you. Thank you.
Operator
Conference Call Operator
Our next question will come from Bonnie Hersaw with Goldman Sachs.
Transition Speaker
Conference Call Transition
Thank you. Good morning.
Bonnie Hersaw
Analyst at Goldman Sachs
Good morning, Bonnie. I had a question on your HTU shipment volume for the year. You know, 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, you know, 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, you know, maybe how many quarters you expect some of this unwind to happen? And then, you know, just thinking about the trade, you know, is this, being offset in any way with, you know, I'm just thinking about combustible segmenters or, you know, really how is the trade responding to this ban?
Emmanuel Babot
Chief Financial Officer
Yes, Bonnie. So I think it's, of course, something on which we would be able to elaborate once we have been landing the year after the ban put in place on where the country are implementing it at the end of October. It's not the case in all countries. One of the questions we have is with some reduction, you know, with some SQs, 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 flagging 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 on many occasions why we think that this plan is not going to ultimately change the dynamics in the category. But it's true that we have some question mark on the landing for the reason I've just been describing on the level of inventory. That's why we are mentioning to make sure that we are as clear as possible on the possible temporary effect that this could generate. Now, when I look at our shipment for the year, so we are clarifying the landing area. When I look at the 23 performance versus 22 performance, that would mean even in the low end of the bracket, an acceleration in terms of growth versus the growth that we experienced in 22 in terms of incremental billion of stick 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% IMA growth. And we are in line with what we expected. I've experienced last year. So that shows, and by the way, it's a percentage on a higher base. So in fact, in volume, that means that the volume growth is higher. So we don't see any change in the momentum. We see a lot of strength in the growth, and that's visible in the volume, in the market share that we are reporting today with this history.
Bonnie Hersaw
Analyst at Goldman Sachs
Okay, that's helpful. And then just in terms of another question, I just wanted to ask, you know, on your new ICOS users in the quarter. It did come in a bit late. You know, you highlighted that this is, you know, normal quarterly seasonal trend. So maybe could you talk through that a bit further for us? And then, you know, maybe what other drivers might be impacting this and essentially how much visibility do you have you know, 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 seeing so far in October gives you that confidence and, you know, and is it realistic to assume, you know, a typical 1 million average quarterly run rate moving forward? Thanks.
Emmanuel Babot
Chief Financial Officer
Sure. So actually last year we were flat in terms of user acquisition. So we're, 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 numbers. So that's a typical pattern for Q3, which is due to the methodology on how we calculate the user growth. And I think we have today, 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 that there is no change. And last year we finished the year with a strong user growth and we target to do the same this year. So I have to say it's remarkably stable in the strengths, if I can use this expression. And as I said, we could be at the end of the day in fact growing in shipments and in IMS volume more than last year. So if the percentage is about the same, again, the basis being higher, it means that we're going to increase in terms of volume differentially on here.
Transition Speaker
Conference Call Transition
All right. Thank you.
Moderator
Question and Answer Session Moderator
Thank you.
Operator
Conference Call Operator
Thank you. Our next question comes from Gaurav Jain with Barclays. Please go ahead.
Emmanuel Babot
Chief Financial Officer
Hi, good morning. Good morning, Gaurav. Hi. So I have a question on the U.S. cigar side of things. So, you know, clearly the FDA has done this rulemaking 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 quarter. Can you help us understand what's happening there? So on the trend, we've been including price. The cigar had been below a certain threshold for a bit of time, and we decided to move above this threshold, which was $1.42. 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 a lot of consumer support. Frankly, on the flavor, will you allow me to speculate? I mean, I don't know exactly what is going to mean, how long it will take, what is decided. And again, nobody knows what could be decided. how long it's gonna take to be implemented. So I'm not going to speculate at this stage on what would be our answer and what we would do because I'm not gonna be relevant on anything that could be seen at that stage. Sure, thank you. And then my second question is on FY24 EPS and what's the base we should use to project that because I heard in common that the Argentinian, Srinivasan Parthasarathy, balance sheet evaluation and back, which is about six cents that will not recur in a 524 so we should add that to a 523 PS and then could you also just comment on Russia exposure in this year's CPS Srinivasan Parthasarathy, Yeah, so on this is a technical comment on Argentina garage. You have safety rights, you know, this is A forex impact, that is a kind of runoff, if you want, because that is impacting this year. But next year, we're not starting with a base on our profit that is decreased by that. It's just something that you need to look on your balance sheet exposure. But what is taken is taken. I mean, of course, depending on the evolution of the Argentinean peso in the future. But I don't have anything to say at this stage. I think I just wanted to clarify this technical impact. On Russia, frankly, versus when we met three 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. And we are, as we already said, we are seeing very limited growth in Russia, that is a market As we've been saying, we've been reducing our commercial activity and at the market where we're investing, and that is contributing, of course, on the performance of this market.
Moderator
Question and Answer Session Moderator
Thank you so much. Thank you, Gaurav.
Operator
Conference Call Operator
Thank you. Our next question comes from Pamela Kaufman with Morgan Stanley. Please go ahead.
Pamela Kaufman
Analyst at Morgan Stanley
Hi. Good morning.
Emmanuel Babot
Chief Financial Officer
Hi, Pam.
Operator
Conference Call Operator
Good morning.
Pamela Kaufman
Analyst at Morgan Stanley
I have a question on the combustible 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?
Emmanuel Babot
Chief Financial Officer
I'm happy to do that. So, yes, combustible is being resilient. We have a decline, but it's a moderate decline. Let's be clear, this is reasoned by a few markets where we see a nice share gain. One is Turkey, the other one is Egypt. As you can imagine, they are not markets with great profitability per stick. So let's be very clear. We have a nice performance on combustible, on volume, to some extent on revenue. All the great work that we are doing now on increasing OI and growing margin is, you know, first and foremost driven by our SME3 product. iCodes first, Zyn second, and not by the CC. So, yes, great performance when it comes to volumes, great performance versus the decline that we have seen in the past few years. Good impact on revenue. We've been doing good on price increase as well. But remember, that's a category on which we've seen a lot of inflation on our cost. And part of the growth is generated by market with low profitability.
Pamela Kaufman
Analyst at Morgan Stanley
Thank you. And then on ZIN, when do you expect to hear a decision from the FDA on ZIN's PMTA applications? And how are you thinking about the prospects for ZIN flavor approvals, considering the FDA has recently issued unfavorable decisions around flavored eFIG products?
Emmanuel Babot
Chief Financial Officer
Look, we discussed that three weeks ago, and there is nothing new on the PMTA. We don't know what's going to be the timeline for the discretion of the FDA, and we see that a lot of things are taking significant time for the 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 SMIS product on the general rule, an MRTPA of level one. So the FDA has been recognized that these products are representing reduced risk versus combustible cigarettes, and is very clear as benefit claim. We believe that by nature this product should be considered as equally good, if not better, and we believe that they have the potential to really convince a million of smokers to move away from combustible cigarettes to have a better way of consuming So we are really hopeful that the FDA will really take that as a very important element and that it's important to make this product available for nicotine users in the US. Now on the flavor, because I think that was probably one of your questions, for the same reason we believe it is important that the consumer has the choice of flavor if it is a reason for them move away from combustible cigarette to this better product having said that we have the example of a ban in on flavor in california and the reality is that there was an adjustment during a couple of months and then the rules resume without flavor in california and we are today very very significantly i think we are close to 30 percent above the pre-ban level in california so it shows that these products are extremely attractive and resonate with the nicotine user, with the smokers, and with other nicotine users beyond the flavor, which is very good news.
Moderator
Question and Answer Session Moderator
Great. Thank you. Thank you, Pam.
Operator
Conference Call Operator
Thank you. Our next question comes from Matt Smith with Spiegel. Please go ahead. Hi.
Matt Smith
Analyst at Spiegel
Good morning, Emmanuel.
Andre Candria
Analyst at UBS
Morning, Matt.
Matt Smith
Analyst at Spiegel
If we take the full year organic profit margin guidance, the down 150 basis points or so, and the year-to-date performance along with your commentary around kind of a flattish year-over-year performance in the fourth quarter, can you talk about some of the factors in the fourth quarter? I understand there's a lot of crosswinds here, but you get the benefit of Swedish match rolling into the organic base. And then you mentioned you've completed the shift back to sea freight for htu consumables in japan so can you talk about some of the headwinds to margin in the fourth quarter maybe some detail around your expectations around the incremental luma launches or any other factors would be helpful sure so indeed they're going to be some mixed impact in q4 and notably on the devices as we are
Emmanuel Babot
Chief Financial Officer
rolling out Illuma in a significant number of new markets. We're also launching some new innovation in some markets on the Illuma 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 margins. So that's going to be clearly one element. Then on top of that, there will be certainly some investment during the fourth quarter, and that is having an impact on the margin. And then you can have some mix coming from geographies and other mix elements. But that is what is today behind this guidance of urban flat. And 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 for Q4.
Matt Smith
Analyst at Spiegel
Thank you for that. And just as a follow-up, when you talk about investments in the fourth quarter, should we think of that as a sequential step-up in investment relative to the level in the third quarter, or is that more of a year-over-year higher investment compared to the fourth quarter of 2023? And I'll leave it there.
Emmanuel Babot
Chief Financial Officer
yeah i think you should expect uh certainly continuation of um you know significant level of of investment as we are accompanying the growth of our star product icos and then and and then uh that should probably mean uh a quarter on quarter with a sequential uh increase and uh still a significant growth versus uh versus last year
Moderator
Question and Answer Session Moderator
Thank you for that. Thank you. Thank you.
Operator
Conference Call Operator
Thank you. Our next question comes from Owen Bennett with Jefferies.
Owen Bennett
Analyst at Jefferies
Morning, Emmanuel. Hope all well.
Emmanuel Babot
Chief Financial Officer
Morning, Owen.
Owen Bennett
Analyst at Jefferies
I just wanted to ask also, Zinn, very, very strong in the U.S., but wanted to ask about pouches at QS, so volumes only flat versus 2Q for Scandi, Annex Scandi. And you mentioned you also had relaunches in Switzerland and Finland during the quarter. So I was just wondering how you see the near-term outlook for volumes XUS. 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 TPD. Does this impact how you think about investing in the space XUS near-term? Thank you.
Emmanuel Babot
Chief Financial Officer
Thank you, Owen. Yeah, so we have this situation in Scandinavia on nicotine pouch where the product is already present, many in Sweden where it's a nicely growing market. That's not where we enjoy the biggest market share. So we are globally here today growing on nicotine pouch in Sweden, but we're not talking about big volumes here. As we have our strong leadership in Sweden on on smooth 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 known in the Nordics there will be more market to come now is going to be a and hopefully nice, but it's going to be small versus what we see in the U.S. You see what I mean? So it's going to be difficult to see, given the strengths that we are seeing in the U.S., to see volume outside the U.S. showing, you know, their strengths. Now, yes, it's going to add very nicely additional numbers, but again, it's not going to be huge compared to the U.S. We'll see with TPD if there is any decision taken around nicotine pouch. Of course, if there is anything decided on that respect, which we don't know today, that will 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.
Moderator
Question and Answer Session Moderator
Okay, thank you, sir. Appreciate it. Thank you. Our last question will come from Andre Candria with UBS.
Andre Candria
Analyst at UBS
Hi. Good morning, Emmanuel. Just one from me, please. And I know it's a bit of a topic to show, but the GLP-1 drug, obviously there's been talk about it having anti-addictive properties. Do you think this could be an issue for PMI in the long term, rather? Thank you.
Emmanuel Babot
Chief Financial Officer
Frankly, I mean, I've been hearing things about that. I mean, I know what the assumption is. Everybody going to be under GLP-01, and therefore, you know, they're going to drive massive change in consumer behavior. And, you know, I'm not even... able to tell you what would be the impact for somebody who is a nicotine user and is going to take GLT-1. I'm not sure we have any serious study on human behavior on that that is going to say that. So first of all, I don't know how broad the usage of this medicine as drug is going to be. Second, I don't know what's going to be the potential impact, so I'm not sure that today we can say anything relevant and that makes sense on that topic, frankly.
Andre Candria
Analyst at UBS
No, that makes sense.
Moderator
Question and Answer Session Moderator
Thank you very much. Thank you. Thank you, and there are no further questions at this time.
Operator
Conference Call Operator
I'll turn the call back to Emmanuel for closing remarks.
James Bushnell
Vice President of Investor Relations and Financial Communications
Hi, this is James Bushnell, Vice President of Investor Relations. That concludes our call today. Thank you again for joining us. If you have any follow-up questions, please contact the Investor Relations team. Thank you again, and have a great day.
Emmanuel Babot
Chief Financial Officer
Thank you. Talk to you soon. Bye-bye.
Operator
Conference Call Operator
This does conclude today's call. We thank you for your participation. You may disconnect at any time.
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