Philip Morris International Inc

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.

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.

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.