Good day and welcome to the Philip Morris International Third Quarter 2023 Earnings Conference Call. Today's call is scheduled to last about 1 hour, including remarks by Philip Morris International Management and the question-and-answer session. 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. A glossary of terms, including the definition for smoke-free products, as well as adjustments, other calculations, and reconciliations to the most directly comparable US GAAP measures for non-GAAP financial measures cited in this presentation, and additional net revenue data are available in Exhibit 99.2 to the company's form 8-K 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 Babeau, 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 IQOS and ZYN. Adjusted Diluted EPS grew by an excellent 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 2% positioning us to deliver our third straight year of growth. While not yet in our organic metrics, ZYN continued its exceptional growth with US volumes up 66% in Q3 and over 50% year-to-date with a substantial increase in category share. Importantly, our IQOS business delivered another strong quarter with HTU shipment growing 18%, in line with the year-to-date trend. As covered at our recent Investor Day, HTU volumes have excellent unique economics relative to cigarettes, and the 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 6% growth in organic net revenues, strong pricing and higher category share despite the impact of adult smokers 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 IQOS business, which surpassed combustibles 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 IQOS momentum supported organic net revenue growth of 9.3%. This organic growth does not include the impressive 22% adjusted ex-currency top line growth of Swedish Match led by ZYN. Our organic net revenue per unit grew by 7%, driven by the increasing proportion of IQOS HTUs in our sales mix and very firm combustible pricing of 9%. This positive top line and mixed performance drove very strong organic operating income growth of 11.3% and organic margin expansion of 70 basis points. Again, this excludes the exceptional performance of Swedish Match, which is included in our adjusted diluted EPS. We delivered adjusted diluted earnings per share growth of 20.3% excluding an unfavorable currency impact of $0.17 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 1.5% and organic net revenue growth of 7.7%, again, reflecting continued dynamic IQOS performance and combustible pricing. In addition, Swedish Match currency neutral net revenues increased by 18%, excluding accounting reclassifications. Year-to-date, operating income grew by 2.4% organically, despite accentuated margin headwinds and notable OI decline in the first quarter due to the headwinds covered previously, which are now starting to subside. Combined with outstanding ZYN performance, this resulted in year-to-date currency neutral adjusted diluted EPS growth of 10.7% to $4.65, which 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 to volumes, where we increase our outlook to 1% to 1.5% total shipment growth for cigarettes 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 billion to 130 billion range. While IQOS 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 levels in the EU as trade partners adjust to the upcoming HTU flavor ban. For combustibles, the resilience of our portfolio is reflected in an updated forecast of a 1% to 2% cigarette volume decline. ZYN 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 full year nicotine pouch forecast range to 390 million 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 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 ZYN’s phenomenal growth and diligent cost management allows us to raise our currency neutral adjusted diluted EPS growth forecast to 10% to 10.5%. This means we now expect double-digit growth for the third year running and translates into a full-year range of $6.05 to $6.08, including an estimated unfavorable currency impact of $0.53 at prevailing rates. Last, despite increased currency headwinds, we continue to expect operating cash flow of around $10 billion for the year. This sets us up nicely as we focus on deleveraging towards our target of around 2 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 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 -50 basis point to -150 basis point range, including the expected technical margin impact of around 40 basis points from third-party arrangements in Indonesia and Ukraine. For Q4, we expect strong operating income growth with broadly stable year-on-year organic margin provision. This includes the expectation of higher device sales as we accelerate our ILUMA rollout to reach around 50 markets by year end, complemented by further ILUMA device innovation. This very positive organic OI trajectory in H2 naturally translates into an acceleration in currency-neutral adjusted diluted EPS growth posted by Swedish Match. Now turning back to our results, our total shipment volume increased by 2.2% for Q3 and 1.5% year-to-date, putting us comfortably on track to deliver our third sequential year of growth. HTU shipment volumes grew by 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 sea freight, Q3 adjusted IMS grew by 14.4%. This includes Europe at 16% despite heightened competitive activity, notably in Poland. And a more normalized growth rate in Japan of 12%. Excluding Russia and Ukraine where growth remains limited, our adjusted IMS advanced by a very robust 16%. These growth rates exclude the excellent development of oral nicotine for which shipment volume grew by 19% in Q3 and 14% year-to-date on a pro-forma basis, including the US growth of ZYN of 66% and 56%, respectively. If we were to add the growth of nicotine pouches on a unit basis, our Q3 pro forma smoke-free volume grew by 19.5% and our total volumes by 2.5%. Cigarette volumes 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. I will now walk through the mechanics of our Q3 net revenues. In addition to 2.2% volume growth, pricing contributed 6.2 points of growth as combustibles remain 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 mix impact of HTUs overall volume growth and pricing are powerful drivers of our transformation and growth. We expect ZYN 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 ILUMA related factors continue to moderate. And the underlying dynamics of our transformation bear fruit. The Q3 progression is slightly above our 2024-2026 CAGR target of 8% to 10% organic operating income growth. And as I covered earlier, we expect our overall H2 OI growth to be around the top of this range. This strong operating income growth in excess of an already healthy topline performance drove a better-than-expected organic margin expansion of 70 basis points in the quarter. This was also the first quarter this year where gross margin expanded organically, notably due to lower shipping costs, ILUMA 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 quarter. 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 variance includes a 0.6 points 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 22% in Q3 and 18% year-to-date. This means that our adjusted pro forma year-to-date topline growth was 60 basis points higher at 8.3%. Swedish Match strong profitability also enhanced our year-to-date adjusted operating income margin by 70 basis points. As we covered at Investor Day, Swedish Match smoke-free portfolio has excellent economics and is already at significant size compared to total PMI with its product contribution or operating profit before G&A to be clear, approaching one quarter of our total smoke-free business year-to-date. ZYN remains the key performance driver as it delivered another remarkable US performance with 66% volume growth, reflecting positive momentum across the country. Elsewhere in smoke-free recent trends of share gain in US moist snuff, 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. Now, let's examine ZYN's recent US performance in more detail. Exceptional progress continued in Q3 with an increase in 12 months rolling shipment volume growth of 62% compared to Q3 2022 and 14% sequentially. Impressively, ZYN Q3 category volume share grew to 70.8%, which is 4.7 points higher year-on-year and 2.5 points sequentially. Retail value share remained strong at around 76%, highlighting ZYN's premium positioning and superior brand equity. This accelerated growth reflects a progressive increase in distribution and a further broad step up in nationwide store velocity as the category gains strong traction with adult nicotine users for its convenience and pleasurable experience. Now focusing on IQOS starting with user groups. We estimate there were 27.4 million IQOS users as of September 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 age 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 IQOS in the Europe region, where our third quarter HTU share increased by 1.3 points to 8.6% of total cigarette and HTU industry volume. Continued share gains include the growing take-up of ILUMA, which is available to over 80% of IQOS users in the region. In addition to Q3 launches in Denmark and the UK, ILUMA 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 reached a record high on the four-quarter moving average. This reflects strong year-on-year growth of 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 this market will be effective as of October 23rd and the remaining markets are expected to adopt in 2024. As previously mentioned, we are adjusting our HTU 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, IQOS ILUMA 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 3 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 2023, as IQOS outgrew the heat-not-burn 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-priced TEREA HTUs and mainstream priced SENTIA HTUs continued to grow individually and in aggregate, reaching Q3 offtake 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 IQOS gains in developed countries, we continue to see very promising growth in low- and middle-income markets. This slide highlights a selection of Q3 key cities offtake share across markets in Eastern Europe, Africa, Asia, and Latin America. We see notable ongoing success in Egypt with Cairo offtake share of plus 3.5 points to almost 9%. And in Santo Domingo our leading Latin America city, with offtake share around 8%. Most promising is a 3.1% offtake share in Urban Jakarta, where IQOS is only available via the IQOS Club Members program. We continue to see robust offtake volume growth across this important future market, despite seasonal effect on sequential share metrics. I'd like to spend a moment now on combustibles, where our portfolio delivered strong organic net revenue growth of 6.2% in Q3 and 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 9% and 8.6% year-to-date, we now forecast a full-year increase of 8% to 8.5%. Our cigarette category share grew by 0.6 points in Q3 and 0.3 points year-to-date. This reflects notable contribution from Egypt, Poland, and Turkey, resulting in only modest volume decline. 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 IQOS cannibalization. This combustible share performance combined with the structural growth of IQOS supports robust overall market-share gains. We captured 0.9 points of international cigarette and HTU share in Q3, and 0.7 points year-to-date. As covered at Investor Day, our superior share of smoke-free products gives us a formidable platform for sustainable market-share gains with superior unique economics. Now let me update you briefly on our exciting innovation and expansion activities, which will be critical as we aim to reach over two-third smoke-free net revenue by 2030, including 60 markets over 50% and 40 markets of over 75%. As we covered at Investor Day, the global rollout of IQOS ILUMA continues. We launched ILUMA in four markets in Q3 reaching 27 markets in total, which represent around 75% of our IQOS business by volume. ILUMA continues to generate excellent growth with upgrades from existing users and new user acquisition. With a further six market launches already this month, we expect ILUMA to be present in around 50 markets by year-end and to essentially complete the rollout next year. As also mentioned during Investor Day, 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 flavored discovery under the LEVIA brand. Just as nicotine pouches are an evolution from snus to make the oral category relevant to more adult smokers, LEVIA is a similar non-tobacco evolution for IQOS, as we broaden our offering to increase switching away from combustibles. The US represents the most significant opportunity to drive accelerated smoke-free growth at both the top and bottom line. We are continuing to invest behind ZYN and readying our organizational and commercial capabilities for the launch of IQOS in Q2 2024 and a scaled-up rollout with ILUMA once authorized. We remain on track to file for IQOS ILUMA's PMTA and MRTPA this month. The international expansion of nicotine pouches remains a key mid to long-term focus, notably for ZYN 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 this absolute Scope 3 emission by 33% by 2030, which is significant given that Scope 3 remains the most challenging aspect of any company decarbonization 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 under a strong governance framework. As part of our ongoing work, we provided responses to consultation requests from the International Sustainability Standard Board to have shared the development of their work plan, an update to the SASB standards. PMI continues to be recognized by various 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 effort and transformation. We 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 IQOS and ZYN continues, further enhancing our position as the global smoke-free champion. We have exciting plans to accelerate our smoke-free future in both the US, the largest smoke-free market and internationally. We are confident in our 2024-2026 CAGR target of 6% to 8% organic topline growth, 8% to 10% organic operating income growth, and 9% to 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 the 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 cycle. This translates to a cumulative 183% increase and CAGR of 77.2% since 2008 with an annualized dividend of $5.20. This demonstrates our commitment to shareholder return through a progressive dividend remains steadfast. Thank you very much. And we are now extremely happy to answer your questions.

Thank you. We will now conduct the question-and-answer portion of the conference. Our first question will come from Vivien Azer with TD Cowen. Please go ahead.

Hi, good morning.

Good morning, Vivien.

So I'd like to start with ZYN, 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 how much more runway do you see from a distribution standpoint? 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've called out very strong cost management. That's clearly apparent. I'd love to hear your perspective on the durability of the current margin level for ZYN, please. Thank you.

Thank you, Vivien. In relation to ZYN, each quarter brings new updates. In Q3, we experienced another significant increase in momentum, indicating that the brand is well established and that consumer uptake is accelerating. This illustrates that the product is becoming increasingly relevant for a larger number of adult users, which is promising. We previously discussed the geographical aspects during our Investor Day, revealing that while the brand is already well represented in the western part of the U.S., there is still potential for further growth across the rest of the country. The trend suggests that the rest of the country will gradually embrace it, indicating a strong growth trajectory in the coming quarters and years. We are looking at several years of robust growth ahead. It’s also important to note that we have two key growth engines beyond ZYN where the brand has established a strong presence. We are not witnessing a decline in consumer adoption; rather, there is an increase in what we refer to as velocity. We are also observing geographical momentum building steadily quarter after quarter as anticipated. Regarding margins, the growth of ZYN has a significantly positive impact on margins. We are committed to investing in this growth potential in the U.S. and will allocate the necessary commercial resources to maximize this potential. ZYN stands out as best-in-class in terms of gross margin at the group level. While it also has good margins globally, ZYN in the U.S. is the best. This growth in ZYN positively affects both our top and bottom lines, which is clearly reflected in the increase of adjusted earnings per share this quarter.

Thank you.

Thank you.

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

Thank you. Good morning.

Good morning, Bonnie.

I have a question about your HTU shipment volume for the year. You mentioned you're now expecting to come in within the lower half of your guidance. You pointed out a few reasons for this, including the uncertainty surrounding inventory levels in Europe due to the upcoming flavor ban. Can you provide some insight into where inventory levels currently stand? Additionally, how many quarters do you anticipate it will take for some of this to unwind? Lastly, regarding the trade, is there any offset related to combustible cigarette inventories? How is the trade responding to this ban?

Yes, Bonnie. I believe we will be able to provide more details once the year concludes and the ban is implemented at the end of October. One of our questions is whether the reduction in some SKUs will lead to a global decrease in inventory levels and how this might affect shipments towards the end of the year. We are monitoring this closely because we maintain that the ban should not cause significant disruption, and we've discussed multiple reasons why we believe the dynamics in the category will remain unchanged. However, we do have questions regarding inventory levels, which is why I mentioned the need to clarify any potential temporary effects this might create. Looking at our shipments for the year, we're assessing the lending area. Comparing 2023 to 2022, even the lower end of our projections indicates an acceleration in growth, reflected in additional billions of units sold. Shipments represent what we're selling, but more importantly, we see consistent consumer engagement. In Q3, we expect momentum to carry through to Q4, maintaining strong growth rates of 15% to 16% in IMS, consistent with last year's performance. This percentage is based on a higher volume, leading to greater actual growth. We observe no change in momentum and significant strength in growth, which is evident in the volume and market share we report for Q3.

Okay. That's helpful. And then just in terms of another question, I just wanted to ask on your new IQOS users in the quarter. It did come in a bit light. You highlighted that this is normal quarterly seasonal trend. So maybe could you talk through that a bit further for us? And then maybe what other drivers might be impacting this? And essentially, how much visibility do you have in terms of Q4? You mentioned you expect a substantial acceleration in user growth this quarter. So I just kind of wanted to verify what you're seeing so far in October gives you that confidence. And is it realistic to assume a typical $1 million average quarterly run rate moving forward? Thanks.

Sure, Bonnie. Last year, we had flat user acquisition, but we're performing better this year in terms of user growth. We're seeing patterns similar to what we had in 2021, and as we've previously shared, that's typical for Q3 based on our methodology for calculating user growth. Currently, we're observing strong momentum with device purchases and registrations, indicating consistent performance. We concluded last year with significant user growth, and we aim to achieve the same this year. The strength of our performance remains remarkably stable. It's possible that by the end of this year, we'll see an increase in shipments and IMS volume compared to last year, with a similar percentage growth. Given that the base is higher now, we expect to see a year-on-year increase in volume differential.

All right. Thank you.

Thank you.

Thank you. Our next question comes from Gaurav Jain with Barclays. Please go ahead.

Hi, good morning.

Good morning, Gaurav.

So I have a question on the U.S. cigar side of things. So clearly, the FDA stands as rule-making 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 increasing price. I mean the cigar has been below a certain threshold for a period of time and we decided to move above this ratio, which was $1.14. 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 in the long term where we continue to have very good brands and with a lot of consumer support. Frankly, on the flavor, will you allow me not to speculate. I mean, I don't know exactly what the plans are. What it's going to mean, how long it would take, what is decided, and again, nobody actually knows what could be decided, how long it's going to 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 going to be relevant on anything that could be seen at that stage.

Sure. Thank you. And then my second question is on FY 2024 EPS and what's the base we should use to project that? Because I heard a comment that the Argentinian balance sheet revaluation impact, which is about $0.06 that will not recur in FY 2024. So we should add back to FY 2023 EPS? And then could you also just comment on Russia exposure and the CLCPS?

Yes. This is a technical point regarding Argentina. Gaurav, you are correct. The Forex impact we are experiencing is a one-time occurrence that affects this year, but it won't affect our profit base for next year. It is something that needs to be reflected in our balance sheet exposure. What has happened has happened, and it will depend on how the Argentinian peso evolves moving forward, but I don't have any updates on that for now. I wanted to clarify this technical aspect. As for Russia, there haven't been any updates since three weeks ago regarding the situation there. The market is facing significant impacts on reported profits in dollars due to the substantial decline of the Russian ruble against the dollar. This is one of the largest effects from Forex this year. Consequently, it is mechanically reducing our profit exposure to Russia. We have previously mentioned that we are seeing very limited growth in this market; we are scaling back our commercial activities and market investments, which is reflected in the performance of this market.

Thank you so much.

Thank you, Gaurav.

Thank you. Our next question comes from Pamela Kaufman with Morgan Stanley. Please go ahead.

Hi, good morning.

Hi, Pam. Good morning.

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?

Sure, Pam. Happy to do that. So yes, combustibles have been resilient. We have a decline, but it's a modest decline in Q3. Let's be clear, this is driven 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 combustibles on volume, to some extent on revenue. All the great work that we are doing now on increasing OI and growing margin is first and foremost driven by our smoke-free products, IQOS first, ZYN second, and other products. So yes, great performance when it comes to volumes, greater performance versus the decline that we have seen in the past few years. Good impact on revenue. We've been doing well on price increases 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 markets with low profitability.

Okay. Thank you. And then on ZYN, when do you expect to hear a decision from the FDA on ZYN's PMTA applications? And how are you thinking about the prospects for ZYN flavor approvals, considering the FDA has recently issued unfavorable decisions around flavored e-cig products?

We talked about this three weeks ago, and there's no new information on the PMTA. The timeline is uncertain as it depends on the FDA, and many decisions are taking considerable time. However, I want to highlight a couple of points about the PMTA process. First, our snuff product has another MRTPA of Level 1. The FDA has acknowledged that this product poses a reduced risk compared to combustible cigarettes, and we have clearly defined benefit claims. We believe that this product should be viewed as equally beneficial, if not more so, and it has the potential to persuade millions of smokers to transition from combustible cigarettes to a better way of consuming nicotine. We are hopeful that the FDA will recognize this as a significant factor and that it is important to make this product accessible to nicotine users in the U.S. Regarding flavors, we also believe consumers should have flavor options, as it could motivate them to switch from combustible cigarettes to this improved product. We can look at the example of California, where there was a flavor ban. Initially, there was an adjustment period, but after a few months, sales resumed without flavors, and we are now seeing sales that are significantly higher, almost 30% above pre-ban levels. This indicates that these products are very appealing to nicotine users, including smokers, even without flavors, which is encouraging news.

Great. Thank you.

Thank you, Pam.

Thank you. Our next question comes from Matt Smith with Stifel. Please go ahead.

Hi, good morning, Emmanuel.

Good morning, Matt.

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 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 the margin in the fourth quarter? Maybe some detail around your expectations around the incremental ILUMA launches or any other factors would be helpful.

Sure. So indeed, there are going to be some mix impacts in Q4 and notably on the devices as we are rolling out ILUMA in a significant number of new markets. We are also launching some new innovation in some markets on the ILUMA 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 margin. So that's going to be clearly one element. Then on top of that, there will be certainly some investment during the fourth quarter, which will impact the margin. And then you can have some mix coming from geographies and other mix elements. That is what is today behind the guidance of around flat. I mean it doesn't mean that it's going to be a bit positive. But today, we are seeing this around stability situation for our OI margin year-on-year organically for Q4.

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.

Yes, I think you should expect certainly a continuation of a significant level of investment as we are accompanying the growth of our star product, IQOS and ZYN. That should probably mean quarter-on-quarter, I would say, sequential increase and still a significant growth versus last year.

Thank you for that.

Thank you.

Thank you. Our next question comes from Owen Bennett with Jefferies. Please go ahead.

Good morning, Emmanuel. Hope you are well.

Good morning, Owen.

I just wanted to ask also ZYN very, very strong in the U.S., but I wanted to ask about pouches ex U.S. So volumes only flat versus 2Q for Scandi and ex-Scandi. 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 at U.S.? Do you expect any meaningful acceleration over the next several quarters? And then the 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 ex-U.S. near term? Thank you.

Thank you. In Scandinavia, we have nicotine pouches available, primarily in Sweden, where the market is experiencing growth. However, we do not hold the largest market share there. While we are seeing growth in nicotine pouches in Sweden this year, the volumes are still quite small as we focus on our strong position in snus. Outside of Scandinavia, we are just starting to enter the market. We have launched products in Switzerland, Finland, and other Nordic countries, with plans for more markets in the future. While we hope for positive outcomes, the volumes are likely to be small compared to what we observe in the U.S. The strength of the U.S. market makes it challenging for us to expect similar volumes elsewhere. These additional markets will contribute to our numbers, but they won’t be significant compared to the U.S. We'll have to wait for any decisions from the TPD regarding nicotine pouches, as those could affect our investment strategy in the EU. However, at this point, it's too early to determine the impact since we don’t know what discussions will take place.

Okay. Thank you. Appreciate it.

Thank you. Our last question will come from Andrei Condrea with UBS.

Hi. Good morning, Emmanuel. Just one from me, please. And I know it's a bit of a topic to Joe, 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.

Frankly, I mean, I've been hearing things about that. I mean I know what the assumption is everybody is going to be under GLP-1, and therefore, they're going to drive massive change in consumer behavior. And 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 GLP-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 a 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.

No. That makes sense. Thank you very much.

Thank you.

Thank you. And there are no further questions at this time. I'll turn the call back to Emmanuel for closing remarks.

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.

Thank you, talk to you soon. Bye-bye.

This does conclude today's call. We thank you for your participation. You may disconnect at any time.