Good day, and welcome to the Philip Morris International Third Quarter 2022 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. [Operator Instructions] I will now turn the call over to Mr. James Bushnell, Vice President of Investor Relations and Financial Communications. Please go ahead.

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 efficient 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 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 allow us to capture the full potential of the combination. Now that we are close to the end of the offer period, the…

Thank you. [Operator Instructions] 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 element, of course, 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 I’ve been with us since almost the beginning of the year, and that drove the operating margin down. I think that it will take a little bit of time for us to be removed. But we also have seen, for the first line, something that is going to obviously stay with us, which is the 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 this mid-single-digit numbers. As we’ve been saying, we are entering into the renewal of a number of contracts that protected us to some extent on the way 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 9 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 break down 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 type of a pressure, we still don’t see really an acceleration of the tracks, right? So obviously, we see the Indonesia, Philippines under pressure. But it’s not much really changed versus what we have seen before. Now, one could argue that in some geographies that the inflation has a bit of a lagging sort of evolution but nothing today. And you could see also from the shows of Marlboro, right, that we will look pretty strong on the premium propositions. Okay? Despite the fact that we’re taking the pricing and there will be pricing -- more pricing to come.

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?

So -- I mean what stands behind the success of IQOS is really the front-end consumer interface, right? That’s the commercialization aspect, which makes -- is one of the key elements of IQOS success, which we measure as the highest in the industry rates of conversion and adoption of IQOS and therefore, switching from cigarettes. Swedish Match doesn’t have it, right? Swedish Match is the component of the sales force, which is essentially in store execution, but IQOS success hinges on that business-to-consumer component. So, in above scenario, obviously, that’s the investment, which is front of us, but vis-à-vis a great -- the market size and the profitability pool -- and the profitability pool. So, Swedish Match adds the component of the sales force, which is the in-store execution. Obviously, it would be nice to have them, but this is not something which is unique in a sense that -- you cannot make it or attain it organically, for example, right, or other options can be at the table as well. The uniqueness of an IQOS is again is the commercial engine, commercial activations. If you follow us closer, we have spent enormous effort in behind the consumer journey and automating, digitalizing all touch points with the consumers. And that’s the value which we will be bringing. We’ll have to invest, but the know-how is on our side.

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 the both, group of the shareholders, PMI shareholders, 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.

A couple of questions from me. So, first is on the entire plan around IQOS commercialization in the U.S., and let’s assume you are doing it standalone. So, you will have to hire, and I’m looking at some of your competitors, which have a 10% share in the U.S. like Imperial. So, they have a few thousand employees. So, if you have to hire a few thousand employees and then you incur marketing investments, so should we model in like a few-hundred-million-dollar of losses in the first few years before you scale up IQOS to a big enough volume where it starts generating incremental EBIT? Much like you had when you commercialize IQOS around the world, I remember like between ‘15 and ‘17, you had like a few -- like $700 million or $1 billion kind of loss that you had identified at that time. So, is that something similar we should do as you commercialize U.S.?

Yes. I mean, look, the directional -- you’re right. I mean, obviously, building the infrastructure looking from a scratch requires several hundred thousands of employees now in the scheme of the 80,000 employees, which PMI has, it’s not the first time that we’re building an organization from scratch. And you’re absolutely right that the initial years, couple of years will be on the laws as frankly speaking, we had with IQOS in every country in which we enter. And you’re following us closely, you know that we have achieved on markets, the faster path to the breakeven that we had in the year one or two of our smoke-free journey versus what we’re achieving today. So, it’s a ton of learnings, it’s tremendous learning and capability in our organization, as I call the internal know-how and the systems, et cetera, which we don’t have to reinvent again. So, we know pretty well the blueprint. A lot of things have been attested, et cetera. So, U.S. market will enjoy or leverage that sort of the things. So, summer next year will come with the more visibility on how we see the spending and the path. I think in the release, we have said that the most logical -- based on our experience and the success on international, most logical milestone near term, so let’s say, 2030’s 10 [ph] share point of the market, which if we see where we are in other places and what we achieved six years after to date versus now I add the six years plus/minus to the current 2030, 10%, I think we will execute accordingly. We have -- and Emmanuel, in his remarks made it very clear. We’ll fully stand behind, including monetary and the human resources to deliver the success -- is well overdue success of IQOS in the U.S.

And a follow-up question on the BAT litigation at ITC, which they won, the patent dispute. So, -- look, so that prevents you from importing IQOS devices, which is why you are now setting up the domestic manufacturing facilities. But, can’t BAT use those patent wins, because clearly, they have established, they have some strength in their patent, and go to a domestic U.S. court and also get injunctions against your selling of IQOS devices in the domestic market? So, I’m trying to understand how do you frame this entire patent litigation even around your domestic IQOS manufacturing and commercialization sort of strategy.

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 case which we have with -- the ITC case with -- started by BAT is with regards to the IQOS 3.0. ILUMA is in a completely different path.

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, 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.

Okay. Thanks for that. And then just my second question, I -- sorry, I have a follow-up question about the agreement you reached with Altria, maybe asked a little differently. I guess I’m trying to get a sense of how you got comfortable with $2.7 billion payment to Altria, which is quite a large lump sum of money. This is to get your exclusive rights to IQOS back in the U.S. So, how confident are you that you’re going to be able to reach this 10 share in the U.S. market by 2030, especially since it does feel like the ramp will now likely be slower, if you have to go it alone or even with Swedish Match? And then, finally, as it relates to this, how do you think about not being able to use the Marlboro brand name in the U.S. now?

Yes. So, with regards to the confidence, Bonnie, is that -- look, this confidence beyond -- or behind IQOS is growing every year, every quarter. I mean, you see the results on the international markets and we have the markets when we -- slower markets, when we faster. But the potential for IQOS, the heat-not-burn is there, okay? So, if we look at the U.S., I don’t think -- I cannot find the reasons why in the U.S. we cannot replicate to come close to the success of international. And the 10%, if you like, the first double-digit number, which we are obtaining after six years in any other geographies and taking into considerations that U.S. starting with IQOS 3 that we will be also working to bring faster the IQOS ILUMA to the U.S. and our international success has been built on IQOS 2.4, 2.4-plus. So, the U.S. is starting the journey with IQOS, the much better moment from a product perspective of our capability perspective, understanding this entire category that we’ve been in our international markets. So, this is what the confidence is coming from. And the second question with regards to the Marlboro, IQOS TEREA in Japan is now by X factor bigger than the HeatSticks Marlboro. And this was the last market, which we still have been using a Marlboro trademark of our heat-not-burn consumables. And as you know, at the very beginning, six or so years ago in a few markets, I recall it was Switzerland and Italy, we started with Marlboro and very early in the journey, we have almost overnight, we branded that thing and we dropped the Marlboro from the brand, from the proposition. And I actually believe that we have a Marlboro in international, and this is a great brand, but on cigarettes. And I have no doubt today that we are on the path that we can make IQOS as iconic brand on a global basis as in the past we have made Marlboro. So, I don’t see this as an impediment or bottleneck in our strategy in the U.S.

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 dollar. That’s it. So, I’m not sure to understand your question.

It was just whether -- so when you announced the transaction, the dollar amount would have been $16 billion. And you’re still sort of close to that just given the FX move, but was there any incremental hedging that was put in place?

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 sort of 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 time line are you assuming around that getting to market and getting nationalized?

Well, I mean, we’re planning to file for PMTA with ILUMA to FDA next year. So, as we’ve seen recently, the factoring in the timing of outcome of dealing with FDA is a little bit of a challenge. But there will be -- ILUMA, obviously, in this 10%. I won’t give you the number now how much of the 10% is hinging on ILUMA, but let’s take it again differently. We have a few markets very successful, but still very few markets when ILUMA plays the role today in our portfolio. And if you look, for example, for the European Union, almost entirely, the success of six years in commercialization of IQOS is built on the IQOS 2.4, 2.4-plus and at 3, 3.1. So, these are the products which we have a relatively clear path to grow in the U.S. So, there will be ILUMA, but it’s too early now to say how much of the 10% will be there. Obviously, for us, it’s -- ILUMA offers benefits even further than the blade technology. But on the blade technology, this is where we are today, 6 years in PMI. So, I think we’ll -- we don’t have to solve that equation today.

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.

Look, on the inflationary pressure, of course, very difficult to give a kind of definitive answer because this is a very fluid situation and with significant evolution. Today, if we assume that at a certain point in time, the inflation we are facing will be in line with the inflation that is seen in many countries. Yes, that would probably mean that the mid-single digit could go to high-single digit. It can be a bit more complex than that because, of course, it depends on which kind of element of inflation we are exposed to. But that could be in some areas an evolution for next year. Frankly, too early to say. And also too early to say when is going to be the climax of that. Is it going to be at the end of this year in terms of cost increasing, are we going to see more inflation through 2023? I think it’s too early to say. Of course, for the -- I mean, we’ll monitor the situation, but I would say energy price is energy price, but I mean there is not much we can do. We still need to buy energy. The answer for us is, of course, to react with price increase. And I think you have seen in our Q3, an acceleration of our price increase. We are getting at almost 5%, which is showing the capacity depending on what’s going to be the environment and whatever it is, to mitigate the impact of what we’re going to see on inflationary pressure with price increase.

Thank you. This does conclude today’s Q&A portion. I would now like to turn the program back over to management for any additional or closing remarks.

So, thank you very much for your attention. We’re very happy that we spent our review, especially in this very important moment for us that our key strategy focus -- strategic focus over the last good few months, if not longer, is how to find a much more clear and predictable path to the U.S. has been achieved towards the -- achieving the deal with Altria gaining the full control of IQOS. So, we’re very happy that you spent this hour with 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.