Good day, and welcome to the Philip Morris International Third Quarter 2022 Earnings Conference Call. Today's call is expected to last around one hour, which will include comments from Philip Morris International management and a question-and-answer session. I will now turn the call over to Mr. James Bushnell, Vice President of Investor Relations and Financial Communications. Please proceed.

Welcome. Thank you for joining us. Earlier today, we issued a press release containing detailed information on our 2022 third quarter results. You may access the release on www.pmi.com. A glossary of terms, including the definition for reduced-risk products, or 'RRPs,' 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 are 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 are to our RRPs. Growth rates presented on an organic basis reflect currency-neutral adjusted results excluding acquisitions and disposals. Figures and comparisons presented on a pro forma basis entirely exclude PMI’s operations in Russia and Ukraine. As mentioned previously, starting in the second quarter of 2022, and on a comparative basis, PMI excludes amortization and impairment of acquired intangibles from its adjusted results. 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. I’m joined today by Jacek Olczak, Chief Executive Officer; and Emmanuel Babeau, Chief Financial Officer. Jacek 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 world’s largest smoke-free market from April 30, 2024. Indeed, today’s agreement with Altria removes the potential of a protracted legal process to regain the U.S. rights to IQOS which Altria previously held, subject to performance milestones, 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 efficiently use the time during the transition period to put our commercial model and related organization and infrastructure in place using our wealth of experience from international markets. We see IQOS as the primary vector for establishing a leadership position in the U.S. smoke-free industry and it will be followed by the other products in our smoke-free portfolio. In this context, Swedish Match offers an immediate position in the oral segment, and mutually beneficial synergies at the sales force level. However, should the offer fail, we can certainly build a robust sales force as part of our commercial deployment engine during the 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 a 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 SEK 116. Our updated offer retains a 90% acceptance condition, which is critical to allowing us to capture the full potential of the combination. Now that we are close to the end of the offer period, the increased offer is primarily intended to fairly reflect the higher net value to us of the portion of Swedish Match’s cash flows 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 such, we believe the updated price, with a premium of 52.5% to the undisturbed share price prior to the initial offer, strengthens the attractiveness further for Swedish Match shareholders while maintaining strong value creation for PMI shareholders. This is 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 HTU volumes ahead of our forecast, and robust growth in total volumes, market share and combustible net revenues. With adjusted operating income margins in line with expectations, this resulted in total Q3 adjusted diluted EPS of $1.53, close to our all-time quarterly high despite notable currency headwinds. IQOS’ excellent performance continued, with a 22% growth in pro forma HTU shipment volumes, a testament to the continued strengthening of our heat-not-burn portfolio and broad-based growth across key regions. IQOS ILUMA continues to drive growth in its launch markets. In combustibles, we delivered robust performance with Q3 organic pro forma net revenue growth exceeding 4%, driven by accelerated pricing of almost 5%. Cigarette shipment volumes were 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 2.3% on a pro forma basis, and by 0.6% in total, including Russia and Ukraine. Pro forma net revenues grew organically by 6.9% and by 6.7% for total PMI. Our total organic net revenue per unit grew by 4.5% on a pro forma basis and by 6.1% in total despite lower device revenues. This reflects the increasing weight of IQOS in our sales mix and a step up in combustible 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 reflects the recovery in device volumes, the investments in launching ILUMA including initially higher 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 top-line growth and ongoing cost efficiencies enabled us to outperform our previous currency-neutral guidance to deliver adjusted diluted pro forma EPS of $1.33, including unfavorable currency of $0.23, representing 8.3% currency-neutral growth. Including Russia and Ukraine, we delivered adjusted diluted EPS of $1.53. Our strong third quarter, combined with a robust H1, supported an excellent delivery for the year-to-date. I would highlight our strong pro forma volume growth of 3.4% and organic net revenue growth of 7.7%, again reflecting continued strong IQOS performance, pricing, and the recovery of the combustible business in many markets against a pandemic-affected comparison. Smoke-free net revenues made up around 30% of our year-to-date pro forma total, putting us on track to reach our ambition of over 50% by 2025. Our year-to-date operating income margin contracted 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. $1.5 billion of gross savings have 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 9.7% to $4.11 on a pro forma basis and by 8.8% in total to $4.59; an excellent performance. Now, let’s turn to the pro forma full year outlook. Given the continued growth of IQOS and robust trends in combustibles, we are revising our top-line forecasts upwards to 2% to 3% growth in total shipment volumes, and 6.5% to 8% growth in organic net revenues. While our top-line outlook remains 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 operating income margin forecast. Inflation in our cost of goods remained mid-single-digit 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 ILUMA in Japan and other launch markets has an initial negative margin impact, given the higher weight of the consumables and increased cost of both the device and consumables, in the first 12 to 18 months of activation. As mentioned previously, the combination of strong demand, global supply chain disruption and the impact of cancelling induction HTU production in Russia means our supply chain is not fully optimized. This has resulted in reduced productivity and a number of additional costs, including 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 operating income margin, partly reflecting higher commercial investments 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 of 10% to 12% for 2022. This translates into a pro forma adjusted diluted EPS forecast of $5.22 to $5.33, including an estimated unfavorable currency impact of $0.87 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 $0.80 unfavorable currency impact. Lastly, given the continued success of ILUMA and the cancellation of TEREA production in Russia that I just referenced, we are working to further accelerate our production of induction consumables. As we convert and transition capacity from blade to induction, we incur certain inefficiencies and limits on the availability of ILUMA HTUs. We are optimizing our inventory levels where possible to minimize any impact on consumer availability. However, these factors are a constraint on our shipments and we are updating our HTU shipment volume forecast to 89 billion to 91 billion units for the year. Importantly, this is a short-term supply dynamic. Consumer offtake trends remain strong and HTU in-market sales volumes are expected to further accelerate their growth to over 25% in Q4, while also growing sequentially compared to Q3. The cash generation capacity of our business remains exceptional, as shown through the challenges of recent years. Our balance sheet and cash flow remain strong. We delivered operating cash flow of $7.7 billion year-to-date, representing growth of 6.5% on a currency-neutral basis. Today we reconfirm our forecast of around $10.5 billion in operating cash flow for the full year, despite an estimated currency headwind of around $1.3 billion. This means we expect to deliver an excellent $22.5 billion over 2021 and 2022. Cash flow was flattered somewhat in 2021 by $0.5 billion from one-off impacts and the timing factors of certain cash flows which benefitted 2021 at the expense of 2022; and by a further $0.5 billion of working capital improvements. However, our 2022 forecast demonstrates underlying growth against this exceptional year. I would also like to highlight that U.S. dollar strength has a positive impact on our net debt, given that more than 60% of our financing is in euros, including derivative overlays. This serves to offset the impact on our earnings and, combined with strong cash generation, contributed to a $1.5 billion reduction in our net debt since December 2021, which is now below 1.6 times adjusted EBITDA on a 12-month rolling basis. This delivery highlights our ability to maintain a strong balance sheet, pay down debt, and invest in the growth of our business. Additionally, 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 volumes increased by 2.3% for Q3 and 3.4% year-to-date, putting us comfortably on track to deliver total volume growth for the second consecutive year on both a pro forma and total PMI basis. Pro forma HTU shipment volumes grew by 21.9% for the third quarter and 15.8% year-to-date. While our shipments have been more volatile this year reflecting the current supply chain dynamics, HTU IMS growth has been consistently strong with 18.2% growth in Q3 and 19.2% year-to-date, with robust performance in the EU Region, Japan, and Low and Middle-Income markets. As I mentioned, we expect a further acceleration of IMS growth in Q4. Focusing now on combustibles, our portfolio delivered robust pro forma organic net revenue growth of 4.1% in Q3 and essentially stable pro forma shipment volume. Our pro forma pricing accelerated to 4.9% in Q3 as we progressively adjust to the inflationary environment. This reflects notable contributions from Australia, Germany, and the Philippines, and a positive quarterly variance from Indonesia for the first time since Q4 2019. We now expect full year pricing to be around 4%. Our pro forma share of the cigarette category increased by 0.2 points year-to-date. This was supported by Marlboro, where volumes grew by almost 4% for total PMI. With a premium position in a challenging consumer environment, this represents an impressive performance from the world’s leading cigarette brand. Our leadership in combustibles helps to maximize switching to smoke-free products and we continue to target a stable category share over time, despite the impact of IQOS cannibalization. The positive combination of stable share in combustibles and the continued growth of IQOS positions us to deliver total market share growth over time. We captured 0.5 points of pro forma share gains in Q3 and 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 heat-not-burn category has remained 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 a 2-tier HTU portfolio, providing adult smokers with an expanding range of innovative and high-quality alternatives to cigarettes. PMI HTUs again strengthened their position as the second largest nicotine brand in markets where IQOS is present, with a sequential share gain in Q3 of 0.2 points to a record 7.7% share, excluding Russia and Ukraine. Focusing now on IQOS performance, we estimate there were approximately 19.5 million IQOS users as of September 30th, excluding Russia and Ukraine. This reflects growth of around 0.5 million users in Q3 and 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 0.5 million this quarter was very robust in a historical context, noting that the high growth in Q3 2020 benefited from a catch-up effect following the relaxation of COVID restrictions on retail locations and mobility. Importantly, we expect a strong acceleration in user growth in the fourth quarter of 2022. In the EU Region, smoke-free net revenues comprised almost 40% of regional net revenues year-to-date, with 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 HTU share increased by 2.0 points compared to Q3 last year to reach 7.3% of total cigarette and HTU industry volume. I would also highlight the 0.2-point sequential increase, which is a notably strong performance given the usual seasonality of the combustible market. Most importantly, adjusted IMS volumes continued to grow sequentially and reached a record high of 8.7 billion units on a four-quarter moving average. We expect IMS volume growth to continue in Q4, with a corresponding increase in market share. Please refer to the appendix for additional key city and market share data. With regard to regulation in the EU, we are encouraged by the increasing number of countries adopting multi-year fiscal frameworks with clear differentiation of smoke-free products, such as the recent legislation in Romania. We expect the proposal on the EU Tobacco Excise Directive to be published by year-end and hope for a similar approach. As a reminder, the Tobacco Excise Directive will require unanimous support for approval by all 27 EU member states. Now, let’s focus on the performance of ILUMA in the EU region. ILUMA continues to drive user acquisition, the switching of existing users and accelerated category growth in both Spain and Switzerland. In Q3 both markets experienced another quarter of strong sequential IMS volume growth, with offtake exit volume of TEREA now the clear majority of HTU sales in both markets. We also launched ILUMA in Greece at the end of June with promising initial results and introduced the product to Portugal earlier this month. In Japan, the adjusted total tobacco share for our HTU brands increased by 2.8 points versus the prior year quarter to 23.6%. As in the EU, Q3 last year saw an optical sequential share decline due to combustible seasonality, making the 0.7-point sequential increase this quarter a notable achievement. IMS again grew sequentially to reach a record high of 8.3 billion units on a four-quarter moving average. This was driven by the impressive performance of IQOS ILUMA and the continued growth in key cities such as Tokyo. The heat-not-burn category now represents over one-third of total tobacco in Japan, with IQOS increasingly driving this year’s growth. IQOS ILUMA 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 TEREA HTUs continued to grow strongly in Q3 and strengthened their position as both the second largest nicotine brand and largest RRP brand in Japan, reaching an exit offtake share of 14.9%. Encouragingly, SENTIA HTUs have also grown rapidly since the initial launch in April and national expansion in mid-July, driving consumer acquisition in the mainstream price segment. We exited Q3 with over 25% HTU offtake share, a record high, and continue to see a long runway of growth in Japan over the coming quarters. In addition to strong IQOS gains in developed countries, we continue to see very promising growth in Low and Middle-Income markets which drove around 30% of the Company’s pro forma HTU growth in Q3. Given the large size of these markets, the premium positioning of the existing IQOS portfolio and the relatively early stage of commercialization, this represents outstanding progress. Strong growth in IMS volumes continued, and the pro forma share of our HTU brands grew 0.9 points versus the prior year quarter to 2.8% in Q3, a robust performance, considering the impact of seasonality. This reflects success across many markets, with notable progress in Lebanon, where Q3 offtake share in Beirut increased by 7 points to 18%, and Egypt, where offtake share in Cairo is approaching 6%. Further key city data can be found in the appendix. We are also encouraged by recent positive regulatory developments in the Philippines where the government passed a new law clearly differentiating combustible and noncombustible tobacco products. Smoke-free products will be regulated separately, with different health warnings, permitted product testing or guided trials, and rules to be established for product communication and point of sale activities that will support the switching of adult smokers to better alternatives. In addition, the latest development from our smoke-free innovation pipeline is a new heat-not-burn device that is especially relevant for low- and middle-income markets. It is a simple, convenient, and affordable proposition, which can cater to local taste preferences without compromising on the reduced risk profile of the product. We are planning pilot city launches in Colombia and the Philippines during the fourth quarter, as we further expand our portfolio of smoke-free products to serve different consumer needs. As we continue to innovate, it’s critical to integrate sustainability through eco-design principles, circularity, and efforts to minimize and manage post-consumer waste. Addressing the environmental impact of our products is a key pillar of our sustainability strategy, which is reflected in our sustainability index and forms part of our executive compensation scheme. Our approach to reduce waste related to cigarettes, RRP consumables, devices and packaging is covered in a report, case studies and campaign published last month and available via a dedicated microsite on pmi.com. For example, we are progressing well towards our 2025 aspirations of having at least 80% of our shipment volumes covered by markets with anti-littering programs in place for cigarettes and for over 1 million cumulative smoke-free devices to be refreshed or repaired. Moreover, during September more than 10,000 stakeholders from more than 60 markets joined cleanup initiatives 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 were recently nominated for sustainability prizes, and our Chief Sustainability Officer, Jennifer Motles, was nominated for CSO of the year at the World Sustainability Awards. Moving now to perhaps the most impactful news of today, we are delighted to announce that we will soon have full control of IQOS, the world’s leading smoke-free product, in the United States, the world’s largest smoke-free market. As previously communicated, following the ITC decision last year prohibiting the import of IQOS into the U.S., we have been in discussions with Altria to find the best path forward. PMI’s priority has always been to find a solution that best positions 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 achieves this goal. Let me start by briefly summarizing the key terms of the agreement. From April 30, 2024, 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 a 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 stretching to 2029, this solution provides certainty by avoiding what could have been a protracted and uncertain legal process that would have severely held back the development of IQOS. It provides a clear near-term path to commercializing at scale in the U.S., with the unencumbered backing of PMI’s full strategic and financial commitment to the product’s success. IQOS is the world’s leading smoke-free 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 net revenue business, having created the attractive heat-not-burn category and driving its growth. The U.S. is the world’s biggest accessible nicotine market by retail value. The estimated retail value of its growing smoke-free market is already around 60% of all international markets combined, excluding China. We have spoken before about our plans 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 smokers for credible smoke-free alternatives to cigarettes. Moreover, current smoke-free products have had limited success in fully switching adult smokers away from cigarettes. In the U.S., there are ample opportunities to build adult smoker awareness and understanding of smoke-free product offers, something that is particularly true for IQOS given our MRTP authorizations. We are ready to invest behind IQOS to bring it to market at scale across the U.S., starting with full-scale launches in key cities and regions, with a plan to progress rapidly to national penetration. IQOS remains the only inhalable smoke-free 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 markets worldwide that IQOS’s appeal to adult smokers who have tried the product is strong, as demonstrated by high full switching rates. We have a strong commitment to build awareness and invest behind the category to drive product trial among American smokers. 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 across a number of Asian, European, and other markets, all with varying demographic profiles and adult smoker taste preferences. We believe a volume share of 10% of cigarettes and HTUs 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 is compelling. We estimate the total U.S. industry profit pool at over $20 billion, and with average unit margins on U.S. cigarettes 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 cigarette business in the U.S., the opportunity is purely incremental. This also reflects a current excise tax system with no differentiation for heated tobacco products versus cigarettes at the federal level, and differentials on a limited basis in only a handful of states, thus presenting a clear additional opportunity over time. We are already advanced in our plans for IQOS in the U.S., as we prepare for domestic manufacturing and for important regulatory submissions, including for IQOS ILUMA where we plan to file a PMTA in H2 2023. As mentioned previously, we target the first half of next year for the resumption of IQOS domestic supply, which will be available to Altria under our current arrangement up until PMI assumes full commercial responsibility in April 2024. Our proposed combination with Swedish Match would provide certain U.S. sales and distribution capabilities. However, in the case of failure, we have a clear path forward for IQOS and the rest of our smoke-free portfolio. Indeed, the most critical parts of the IQOS commercial model center on converting adult smokers, rather than distribution. In addition, the U.S. has an established distribution and retail landscape, with a clear route to market. We therefore also have concrete plans to proceed autonomously in building fully controlled and managed 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 other smoke-free products should our Swedish Match offer fail. Indeed, we believe today’s agreement is fundamental to unlock the U.S. smoke-free market. As we have shared previously, we expect the heated tobacco category to remain the largest and fastest-growing in dollar terms internationally. While the e-vapor and, to a lesser extent, nicotine pouch categories have paved the way for smoke-free products in the U.S., we know that heated tobacco comes closest to replicating the experience that smokers enjoy, with higher conversion and very low unintended use. To conclude today’s 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 and IMS growth reflecting broad-based momentum in the EU region, Japan, and emerging markets. We remain excited by the promising results of IQOS ILUMA, our rich pipeline of smoke-free innovation, and plans for further launches of both ILUMA and VEEBA in the fourth quarter and in 2023. We continue to accelerate investment in our commercial programs, digital engine, and R&D for long-term growth, as well as behind a number of growth opportunities across categories and geographies. The return from such investments remains compelling, as demonstrated by the exceptional top- and bottom-line growth delivered over recent years. In addition to growth in smoke-free products, our combustible business continues to perform well, with organic net revenue growth and essentially stable pro forma shipment volumes. Despite accelerated pricing in the current inflationary environment, temporary margin pressure from inflation and supply chain inefficiencies 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 broader smoke-free portfolio. We are now advancing on our plans to launch at scale with or without Swedish Match. And finally, we have increased the dividend every year as a public company, through 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 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, smokefreeoffer.com. And Jacek and I, we are now more than happy to answer your questions.

Thank you. Our first question will come from Chris Growe with Stifel.

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 want 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 operating 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 of impacts that we described due to the situation, of course, of strong disruption on the supply chain coming from the war in Ukraine and the situation in Russia. We have, of course, some elements attached to the development of IQOS ILUMA, 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 elements that have 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 us to be removed. But we also have seen, for the first line, something that is going to obviously stay with us, which is inflation. We are seeing an inflation level for the time being around mid-single-digit. It could strengthen further because when we look at the number of inflation in many countries, it is above these 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 we are buying energy and the number of components. So, that means that this part of inflation is going to stay. But in Q4, actually, with a more positive mix and some maybe one-off having a lower impact, we are expecting rather a better situation on margin evolution versus the first nine months. So, that’s the opposite. We expect the 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 up for the year, which is very encouraging. You had a very strong performance year-to-date. There’s been a lot of concerns about trade down activity, the concerns of consumers 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 breakdown activity, or anything you could share that would help us get a better feeling for the performance of some of your premium brands? Thank you.

Hi Chris, it’s Jacek. Not really. If you look at the down trading pressure, we still don’t see a significant acceleration in the trends. We observe that Indonesia and the Philippines are under pressure, but not much has really changed compared to what we've seen before. One could argue that in some regions, inflation has a somewhat delayed effect, but nothing has emerged today. You can also see from the performance of Marlboro that we look quite strong in the premium offerings. Despite the pricing adjustments we’re making, there will be more pricing increases coming.

Thank you. Our next question will come from Pamela Kaufman with Morgan Stanley.

So, the U.S. is clearly a large growth and profit opportunity for IQOS, and it helps that you don’t have an existing combustibles business here. How would your commercialization strategy in the U.S. change if you came into the U.S. through Swedish Match or independently? And how should investors think about the required level of investment to commercialize IQOS in the U.S. and the impact to your growth algorithm?

The success of IQOS is primarily driven by the consumer interface, which is a crucial aspect of commercialization. This component is key to our high industry rates of conversion and adoption of IQOS, leading to a switch from cigarettes. Unlike Swedish Match, which focuses on in-store execution through its sales force, the success of IQOS relies heavily on our direct business-to-consumer approach. While there is a need for investment in this area, we see it as a valuable opportunity given the market size and profitability potential. Although Swedish Match adds a sales force element, it's not uniquely necessary, as we can achieve this organically or explore other options. The true uniqueness of IQOS lies in our commercial engine and activations. We have dedicated significant resources to enhance the consumer journey, automating and digitalizing all consumer touchpoints, which will add value. While we will need to invest, we possess the necessary expertise to do so effectively.

And then, I have a question about the 90% threshold for the Swedish Match deal, which appears difficult to achieve in most circumstances. Would you consider lowering the threshold in the event that fewer shareholders tender? And what would be the challenges in operating the asset with a lower ownership stake?

Well, we have asked for some understanding, not getting the questions on the Swedish Match deal, like the fact of life is, it is SEK 116 and the 90% acceptance level, okay? And this is where we see the value of Swedish Match, the maximum of the value to Swedish Match today and I will not comment beyond this whole fact. I think it is a fair market price, fair valuation of the company for both, the group of the shareholders, PMI shareholders, and Swedish Match shareholders, both long term and short term, and we will not comment beyond this one.

Our next question will come from Gaurav Jain with Barclays.

I have a couple of questions. First, I would like to discuss the plan for IQOS commercialization in the U.S. Assuming you are doing this independently, you will need to hire staff. Looking at some of your competitors, like Imperial, which has a 10% market share in the U.S. and a few thousand employees, it raises the question. If you need to hire thousands of employees and invest in marketing, should we anticipate losses in the hundreds of millions during the initial years before IQOS reaches a volume that generates positive EBIT? I recall that when you commercialized IQOS globally between 2015 and 2017, there was a loss in the range of $700 million to $1 billion at that time. Should we expect something similar as you launch in the U.S.?

Yes, you're correct. Building the infrastructure from scratch requires a significant number of employees. With PMI's current workforce of 80,000, this isn't our first experience creating an organization from the ground up. You're also right that the initial couple of years will likely involve losses, similar to what we experienced with IQOS in every country where we launched. If you follow our progress, you've seen that we've achieved a quicker path to breakeven in our markets during the initial stages of our smoke-free journey compared to what we are aiming for now. We've gained extensive knowledge and developed capabilities within our organization, which means we don't have to start from zero again. We have a clear blueprint based on past successes. The U.S. market will benefit from this experience. As we progress, we will provide more clarity regarding our spending and plans. We mentioned that, based on our international experience, a near-term goal could be capturing 10% market share by 2030. Looking at our performance over the past six years gives us confidence in meeting this target. Emmanuel clearly stated that we will fully support this initiative, both financially and with human resources, to ensure the success of IQOS in the U.S., which is long overdue.

I have a follow-up question about the BAT litigation at the ITC, where they achieved a victory in the patent dispute. This outcome prevents you from importing IQOS devices, which is why you are now establishing domestic manufacturing facilities. However, can BAT leverage their patent victories, given their established strength, to approach a U.S. court and obtain injunctions against the sale of IQOS devices in the domestic market? I'm trying to understand how this entire patent litigation fits into your strategy for domestic IQOS manufacturing and commercialization.

Well, Gaurav, on that one, we have to clarify. One thing is the ITC process where indeed there was a decision from ITC. But otherwise, on the federal circuit, I would say, for the time being, there is rather success on our side. One of the family of patents that has been claimed by BAT on their case with IT was actually recognized as not valid in front of a U.S. court. So, I don’t think that you can draw a parallel between what happened in the ITC and what is happening on the federal level in the U.S. And we believe that the domestic manufacturing is giving us a clear path and the capacity to reenter the U.S. market.

Okay. And if I could just ask 1 follow-up on what you just said, the IQOS ILUMA device, does it bypass all these patents, which are under dispute?

The ITC case initiated by BAT pertains to the IQOS 3.0, while ILUMA is on a completely different trajectory.

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

My first question is on your guidance. Your Q3 came in better than expected, and 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 combustible business and possibly greater device sales. So, could you walk through this for us, especially on device sales expectations in the second half, possibly ramping? And if there’s a risk of retail inventory building that could potentially impact results next year?

Yes, Bonnie. So no, there is nothing to do with the device in the guidance. You’re right. We have slightly been moving the bracket for the HTUs volume, not massively, we were 90% to 92%, and we are now 89% to 91%. So they are still part of the bracket that is the same. Clearly, we see some compensation at the level of a very robust combustible business. I think, I’ve been flagging that in detail in the presentation. And that is giving us this visibility on higher growth in volume than what we were anticipating so far, and we are raising the guidance to plus 2% to 3%. We have been raising the guidance for revenue as well with the low end of the bracket that has been raised to plus 6.5%. And then, we have the same adjusted EPS, notably because we see costs that are probably potentially a bit higher than what we anticipated a few weeks ago. So, that is giving us the same bracket for adjusted EPS. But in a nutshell, that is how the guidance is evolving.

Thank you for that information. I have a follow-up question regarding the agreement with Altria. I'm curious about how you became comfortable with the $2.7 billion payment to Altria, which is a significant amount. This payment secures your exclusive rights to IQOS in the U.S. How confident are you in achieving a 10% market share in the U.S. by 2030, particularly given that the growth may now be slower as you navigate independently or even alongside Swedish Match? Lastly, how do you view the implications of not being able to use the Marlboro brand name in the U.S. anymore?

Our confidence regarding IQOS continues to grow every year and every quarter. The results in international markets demonstrate this, and while some markets are progressing more slowly than others, the potential for IQOS and heat-not-burn products is evident. In the U.S., I see no reason why we can't achieve a level of success similar to what we see internationally. Achieving a 10% share is a significant milestone for us after six years, and as we launch IQOS 3 and work to introduce IQOS ILUMA, we're building on the success that was achieved with earlier models like IQOS 2.4. The U.S. is now starting on this journey with a much stronger product and better understanding of the category, which gives us confidence. Regarding Marlboro, IQOS TEREA in Japan has now surpassed Marlboro HeatSticks by a considerable margin. In the past, we used the Marlboro brand for heat-not-burn products, but we rebranded early in our journey. While Marlboro remains a strong brand for cigarettes, I believe we can establish IQOS as an equally iconic brand on a global scale, just like Marlboro was in the past. I don’t view this as a limitation or obstacle in our U.S. strategy.

Our next question will come from Priya Ohri-Gupta with Barclays.

First, I just had a quick administrative question. What is the U.S. dollar equivalent for the revised Swedish Match offer? Should we just use the current exchange rate, or would there be an adjustment for any hedging that might have previously been put in place? And then I have another follow-up.

I’m not sure to understand your question, Priya. I mean, the offer is in Swedish krona, so we’ll pay it in Swedish krona. Now, what we’ve been importing is the fact that the price increase that we are offering today corresponds to the impact of the currency fluctuation since the day of the announcement in May between the dollar and the Swedish krona, noting that a significant portion of the cash flow generated by Swedish Match is in dollars. That’s it. So, I’m not sure to understand your question.

When you announced the transaction, the dollar amount was $16 billion. You’re still close to that considering the exchange rate change, but was there any additional hedging implemented?

We can make our calculation. We can provide you with a number of shares of Swedish Match and you can make the calculation. So, in dollar terms, I think the amount is slightly lower. But again, please take into account the fact that Swedish Match is not 100% generating cash flow in dollars. Okay? So, you cannot just take the dollar amount at 100%, to be very clear.

That’s helpful. And then, as we think about the 10% share that you’ve discussed getting to by 2030 in the U.S. market, how much of that includes contribution from ILUMA? I guess, as you put PMTA or submit the PMTA in the latter half of next year, what sort of timeline are you assuming around that getting to market and getting nationalized?

We are planning to file for PMTA with ILUMA to the FDA next year. Recently, we have faced challenges with the timing of the FDA’s outcomes. ILUMA will be included in the 10% market share target, but I'm not ready to disclose how much of that share depends on ILUMA. Looking at our current markets, ILUMA has only played a small role in our portfolio. For instance, in the European Union, the success over the past six years in commercializing IQOS has relied heavily on the IQOS 2.4, 2.4-plus, and 3, 3.1 products. These items have a clearer path for growth in the U.S. Regarding ILUMA, it is still premature to determine how much it will contribute to that 10%. Nevertheless, ILUMA provides advantages beyond the blade technology, where we stand today after six years in PMI. We do not need to resolve this right now.

Okay. That’s very helpful. And then, just final question for me. I think, as you discussed the inflationary pressure ramping from some of the contract renewals that you’re going through right now on the input side, how should we think about that headwind? Is it fair to think of that sort of mid-single-digit rising to the 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 ‘23 and then sort of moderating into the back half as you start to lap some of that? Thank you.

It is challenging to provide a definitive answer regarding inflationary pressures because the situation is quite dynamic and changing. If we assume that inflation aligns with what many countries are experiencing, it could shift from mid-single-digit to high-single-digit. However, this is complex as it varies based on the specific elements of inflation we encounter. It’s too early to determine the peak of this inflation, whether it will occur by the end of this year or continue into 2023. We will monitor this closely. Regarding energy prices, they are somewhat fixed since we must purchase energy, and our response will be to implement price increases. You will notice in our Q3 results an acceleration in our price increases, approaching nearly 5%, indicating our ability to manage inflationary impacts through these price adjustments.

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.

Thank you very much for your attention. We are pleased that we spent this time together, especially during this significant moment for us. Our main strategic focus over the past several months has been finding a clearer and more predictable path to the U.S. and successfully completing the deal with Altria to gain full control of IQOS. We appreciate that you joined us today. Thank you.

Thank you. Talk to you soon.

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 nice day.

Thank you. Ladies and gentlemen, this concludes today’s event. You may now disconnect.