Philip Morris International Inc
NYSE:PM
Earnings Call Analysis
Q3-2023 Analysis
Philip Morris International Inc
Philip Morris International (PMI) has reported a commendable third-quarter performance, highlighted by a remarkable 20% growth in adjusted diluted EPS, achieving a record high of $1.67. The company has sustained growth in total volumes, ascending over 2%, which marks PMI's path towards its third consecutive year of volume growth.
The standout performers driving PMI's success were its IQOS and ZYN brands, with ZYN's U.S. volumes soaring by 66% in Q3 and over 50% year-to-date, alongside a substantial rise in market share. The IQOS business also delivered robust results, with heated tobacco unit (HTU) shipments up by 18%, mirroring the year-to-day trend and contributing to over 36% of the company’s total net revenue. This aligns with PMI’s ambitions to shift predominantly to smoke-free products by 2030.
Despite a shifting landscape with many adult smokers transitioning to smoke-free options, PMI's traditional combustible products still witnessed a vigorous 6% increase in organic net revenues, along with a climb in operating income growth and margin expansion compared to the previous quarter.
PMI's financial milestones are notable, with net revenues surpassing $9 billion for the first time, supported by a strong 9.3% organic net revenue growth and an 11.3% rise in organic operating income. Consequently, the company saw organic margin expansion of 70 basis points. Furthermore, the company achieved a significant 20.3% increase in adjusted diluted EPS growth, despite currency headwinds, and year-to-date currency neutral adjusted diluted EPS growth stood at 10.7%, amounting to $4.65.
Strengthened by solid year-to-date performance, PMI raised its forecast for volume growth, organic sales growth, and adjusted bottom line growth. The volume outlook increased to a range of 1% to 1.5% growth, and organic net revenue growth expectations narrowed to around 8%. PMI anticipates double-digit growth for the third consecutive year, forecasting a full-year EPS range of $6.05 to $6.08 and operating cash flow anticipated to be around $10 billion.
For the second half of the year, PMI foresees organic operating income margin expansion and strong organic income growth of approximately 10%. Although annual organic margin is projected to trend towards the lower end of the -50 to -150 basis point range, PMI forecasts strong operating income growth and broadly stable year-on-year organic margin provision for Q4. Notably, the company plans to ramp up ILUMA device sales, with the product reaching around 50 markets by year-end.
PMI's total shipment volumes heightened by 2.2% in Q3, with year-to-date growth at 1.5%, underscoring a continued upward trajectory. HTU shipments specifically saw an 18% increase in Q3, predominantly led by performance in Europe and Japan. This could be further disaggregated to a 16% growth in Europe and a normalized 12% growth rate in Japan, even amidst competitive pressures.
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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. [Operator Instructions] 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 U.S. 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 plus 20% in currency-neutral terms to reach a record quarterly high of $1.67 despite a significant adverse currency impact in the period.
Once again, our total volumes were positive with the Q3 progression of [ other ] plus 2%, positioning us to deliver our third straight year of growth. While not yet in our organic metrics, ZYN continued its exceptional growth with U.S. volumes up by plus 66% in Q3 and over plus 50% year-to-date with a substantial increase in category share.
Importantly, our IQOS business delivered another strong quarter with HTU shipment growing plus 18%, in line with the year-to-date trend. As covered at our recent Investor Day, HTU volumes have excellent unit economics related to cigarettes. And the plus 16.5% organic net revenue growth from smoke-free product 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 towards our new ambition of over 2/3 by 2030, making us substantially smoke-free.
In combustibles, we delivered very robust performance with plus 6% growth in organic net revenues, strong pricing and higher category share despite the impact of the [ smoker ] moving to smoke-free product.
Our interesting 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 Combustible in the period and lower-than-expected commercial cost. 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, a strong positive volume and continued excellent IQOS momentum supported organic net revenue growth of plus 9.3%. This organic growth does not include the impressive plus 22% adjusted ex currency top line growth of Swedish Match led by ZYN.
Our organic net revenue per unit grew by plus 7%, driven by the increasing proportion of IQOS HTUs in our sales mix and very firm combustible pricing of plus 9%. This positive top line and mix performance drove very strong organic operating income growth of plus 11.3% and organic margin expansion of plus 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 plus 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 plus 1.5% and organic net revenue growth of plus 7.7%, again, reflecting continued dynamic IQOS performance and Combustible pricing.
In addition, Swedish Match currency-neutral net revenues increased by plus 18%, excluding accounting reclassifications. Year-to-date, operating income grew by plus 2.4% organically despite accentuated margin headwinds and the notable OI decline in the first quarter due to the headwinds covered previously, which are now starting to subside.
Combined with outstanding ZYN performance, this resulted in year-to-date currency-neutral adjusted diluted EPS growth of plus 10.7% to $4.65, this is an excellent performance.
Turning now to the full year outlook. I am pleased to share that following this very strong year-to-date delivery, we are raising our volume, organic sales growth and currency neutral adjusted bottom line growth forecast. First to volumes where we increased our outlook to plus 1% to plus 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 reflects a further delay to the expected market launch in Taiwan, limited underlying growth in Russia and Ukraine as well as some uncertainty related to inventory level in EU as trade partners adjust to the upcoming HTU flavor ban.
For Combustible, 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 U.S. 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 plus 8%, the midpoint of our previous range.
As I will come back to shortly, we expect excellent organic OI growth over the second half of the year. Combining this strong profit performance with the continuation of ZYN's phenomenal growth and diligent cost management allows us to raise our currency-neutral adjusted diluted EPS growth forecast to plus 10% to plus 10.5%. This means we now expect double-digit growth for the third year running and translate into a full year range of $6.05 to $6.08, including an estimated unfavorable currency impact of $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 2x 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 2 halves with a number of accent treated headwinds in H1, as explained in prior quarters, including steep cost inflation. H2 is a different story, and we believe it is more reflective of the underlying trajectory of our business.
First, we expect an accelerated H2 top line with organic growth of around plus 9%. Second, we expect a significant re-acceleration in profit growth. We continue to expect organic operating income margin expansion in H2, and we are well on track after delivering another quarter of sequential adjusted OI margin improvement in Q3, with margins also expanding organically year-on-year.
In H2, we expect strong organic operating income growth of around 10%. For the full year, our expectation remains that organic margin evolution will be towards the lower end of our minus 50 to minus [ 150 ] basis point range, including the expected technical margin impact of around 40 basis points from third-party arrangement in Indonesia and Ukraine.
For Q4, we expect strong operating income growth with broadly stable year-on-year organic margin proration. 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 translate into an acceleration in currency-neutral adjusted diluted EPS growth bolstered by a Swedish Match.
Now turning back to our results. Our total shipment volume increased by plus 2.2% for Q3 and plus 1.5% year-to-date, putting us comfortably on track to deliver our third sequential year of growth. HTU shipment volumes grew by plus 18% in Q3 to reach 32.5 billion units driven by continued strong performance in Europe and Japan. Adjusting for inventory movements, including the transition back to sea freight, Q3 adjusted IMS grew by plus 14.4%. This includes Europe at plus 16% despite heightened competitive activity, notably in Poland and a more normalized growth rate in Japan of plus 12%. Excluding Russia and Ukraine, where growth remains limited, our adjusted IMS advanced by a very robust plus 16%. This growth rate excludes the excellent development of oral nicotine, for which shipment volume grew by plus 19% in Q3 and plus 14% year-to-date on a pro forma basis, including the U.S. growth of ZYN of plus 66% and plus 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 plus 19.5% and our total volume by plus 2.5%. Cigarette volume declined by a modest 0.5% in Q3 with strong performance in Turkey and Egypt and by 1.3% year-to-date, reflecting solid category share performance in a resilient category despite robust pricing.
I will now walk through the mechanics of our Q3 net revenues. In addition to plus 2.2% volume growth, pricing contributed plus 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 plus 8% to plus 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 top line performance drove a better-than-expected organic margin expansion of plus 70 basis points in the quarter. This was also the first quarter 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 '21-'23. We aim to continue this run rate as reflected in our '24-'26 target of an incremental $2 billion in gross savings.
The Q3 margin currency variance include a 0.6 point impact from the Argentina balance sheet-related item I mentioned earlier. By its nature, this does not carry forward to future periods.
Now moving to Swedish Match, which is meaningfully accelerating our smoke-free growth trajectory as we progress towards becoming substantially smoke-free by 2030. Swedish Match business delivered excellent adjusted currency-neutral net revenue growth of plus 22% in Q3 and plus 18% year-to-date. This means that our adjusted pro forma year-to-date top line growth was 60 basis points higher at plus 8.3%. Swedish Match strong profitability also enhanced our year-to-date adjusted operating income margin by plus 70 basis points.
As we covered at Investor Day, Swedish Match smoke-free portfolio has excellent economic and is already at significant size compared to total PMI with its product contribution or operating profit before G&A to be clear, approaching 1/4 of our total smoke-free business year-to-date.
ZYN remains the key performance driver as it delivered another remarkable U.S. performance with plus 66% volume growth, reflecting positive momentum across the country. Elsewhere in smoke-free, recent trends of share gain in U.S. [ 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 U.S. performance in more detail. Exceptional progress continued in Q3 with an increase in 12 months rolling shipment volume growth of plus 52% compared to Q3 2022 and plus 14% sequentially. Impressively, ZYN Q3 category volume share grew to 70.8%, which is plus 4.7 points higher year-on-year and plus 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 progressive increase in distribution and a further broad step-up. Nationwide store velocity as the category gained strong traction with adult nicotine users for its convenience and pleasurable experience.
Now focusing on IQOS starting with user growth. We estimate they were 27.4 million IQOS users as of September 30. This represents an increase of 3.7 million user versus 1 year ago and 0.2 million compared to Q2 2023. As shown on the right-hand side of this 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 device sales to legal aged 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 plus 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 user in the region. In addition to Q3 launches in Denmark and the U.K., 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 continued to exhibit robust sequential growth and reached a record high on a 4-quarter moving average. This reflects strong year-on-year growth of plus 16% in Q3 despite limited growth in Ukraine. We expect strong IMS volume growth to continue in Q4 with a corresponding increase in market share.
In the EU, the majority of number states have transposed a delegated directive withdrawing the [ heated ] tobacco product exemption from the characterizing flavor ban international law. The ban in those markets will be effective as of October 23 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, [ icosema ] celebrated its second anniversary of the national launch in September and continues to exhibit strong growth due to excellent conversion, consumer satisfaction and retention rates. Adjusted total tobacco share for our HTU brands increased by plus 3 points in Q3 year-over-year to 26.6%. Importantly, adjusted in-market sales volume again grew sequentially on a 4-quarter moving average, reaching over 10 billion units for the first time in Q3 '23 as IQOS outgrew the [indiscernible] category.
In addition to this excellent consumer trend, our Q3 shipment to Japan also benefited from further switching back to [ SIF ] rate during the quarter. This shift is now substantially progressed, and we expect a more normalized rate of HTU shipments in Q4.
Our premium price [ carrier ] HTUs and mainstream price [ Cynthia ] HTU continued to grow individually and in aggregate, reaching Q3 of take shares of around 18% and 8%, respectively, despite the impact of seasonality. Our Japan [ city ] shares also continued 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 market. This slide highlight the selection of Q3 key city of take share across markets in Eastern Europe, Africa, Asia and Latin America. We see notable ongoing success in Egypt with [indiscernible] offtake share up plus 3.5 points to almost 9%. And in Santo Domingo as 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 plus 6.2% in Q3 and plus 5.6% year-to-date. This reflects another strong quarter of pricing with notable contribution from Germany and Indonesia. With better-than-expected pricing in Q3 of plus 9% and plus 8.6% year-to-date, we now forecast a full year increase of plus 8% to plus 8.5%.
Our cigarette category share grew by plus 0.6 points in Q3 and plus 0.3 points year-to-date. This reflects notable contribution from Egypt, Poland and Turkey resulting in only modest volume declines. Our leadership in Combustibles helps to maximize switching to smoke-free products and we have fully achieved our ongoing objective of stable category share over the last 2 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 plus 0.9 points of international cigarette and HTU share in Q3 and plus 0.7 points year-to-date. As covered at Investor Day, our superior share of smoke-free product give us a formidable platform for sustainable market share gains with superior unit economics.
Now let me update you briefly on our exciting innovation and expansion activities which will be critical as we aim to reach over to 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 4 markets in Q3, reaching 27 markets in total, which represents 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 6 market launch already this month, we expect ILUMA to be present in around 50 markets by year-end and to essentially complete the rollout next year.
I've 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 hand of the consumer preference spectrum, we will be offering 0 tobacco consumable for nontobacco flavored discovery under the [ Livia ] brand. Just as nicotine pouches are an evolution from [ smokes ] to make the overall category relevant to more adult smokers, [ Livia ] is a similar nontobacco evolution for IQOS as we broaden our offering to increase switching away from combustibles.
The U.S. represents the most significant opportunity to drive accelerated smoke-free growth at both the top and bottom line. We are continuing to invest behind 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 remain 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 product 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, recognition achieved by very few companies. We pledged to reduce this absolute Scope 3 emission by 33% by 2030 which is significant given that Scope 3 remain the most challenging aspect of any company's decarbonization strategy.
In September, almost 20,000 employees in over 60 countries participated in World Clean Update, 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 strong governance framework. As part of our ongoing work, we provided responses to consultation requests from the International Sustainability Standard Board to help shape the development of their work plan and update to the SASB standards. PMI continued to be recognized by organizations such as the World Business Council for sustainable development as a leader in nonfinancial reporting.
We have much more to share on our sustainability efforts and transformation. Jacek will be presenting at the CECP CEO Investor Forum in New York on November 14, 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 give 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 U.S., the largest [ smoker ] market and internationally. We are confident in our 2024-2026 CAGR target of plus 6% to plus 8% organic top line growth, plus 8% to plus 10% organic operating income growth and plus 9% to plus 11% currency-neutral adjusted EPS growth.
We also have a clear guiding objective with our new ambition to be substantially smoke-free by net revenue in 2030 as another key milestone on our journey towards 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. As this demonstrates, our commitment to shareholder return through a progressive dividend remain steadfast. Thank you very much, and we are now extremely happy to answer your questions.
[Operator Instructions] Our first question will come from Vivien Azer with TD Cowen.
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. And I'd love to hear your perspective on the durability of the current margin level for ZYN, please.
Thank you, Vivien. So on ZYN and of course, every quarter will bring its new, I would say, load of news. And I think we have been seeing in Q3 another great quarter of acceleration in the velocity that means that where the brand is already even nicely present, we see the consumer offtake accelerating. It just show that this product are becoming more relevant for a growing number of adult user and that's great news.
There is also the geographical dimension on which we elaborated at the time of our Investor Day and which is showing that while the brand has a certain level of presence on the western part of the U.S., it doesn't mean that it isn't going to grow it further, but it's, of course, bigger than the rest of the country. There seems to be a trajectory that is saying that the rest of the country is going to adopt it progressively, and that is indeed giving also a nice, I would say, trajectory on further growth in the coming quarters and years, of course. We talk here about probably years of very nice growth.
So it's great that we have [indiscernible] and ZYN, 2 engine, which is really where the brand is already with the biggest presence. We don't see any decrease in the consumer adoption, and we see increase, what we call the velocity. And we see progressively, I think, as well quarter-after-quarter, this geographical momentum building up as expected.
Now on the margin, yes, it's true that this growth of ZYN is extremely positive when it comes to margin. Of course, we are going to continue to invest behind this growth potential in the U.S., and we will put the necessary commercial resources to make sure that we maximize the growth potential. But I said it, ZYN is really best-in-class in terms of gross margin for our product in -- at the group level. I'm talking about ZYN in the U.S., but globally in [indiscernible] nice margin, but dealing the U.S. is best in class. And that means, of course, that growing ZYN is an excellent news for top line, but also for bottom line.
And I think that in the growth of the adjusted earnings per share over the quarter, this is absolutely visible.
Your next question will come from Bonnie Herzog with Goldman Sachs.
I had a question on your HTU shipment volume for the year. You mentioned you're now expecting to come in within the lower half of your guidance. And then you highlighted a few reasons for this, including the uncertainty related to inventory levels in Europe given the upcoming flavor ban. So could you give us a sense of maybe where inventory levels are at right now? And then maybe how many quarters do you expect some of this unwind to happen? And then just thinking about the trade, is this being offset in any way with -- I'm just thinking about combustible cig inventories? Or really, how is the trade responding to this ban?
Yes, Bonnie. So I think it's, of course, something on which we will be able to elaborate once we have been landing the year after the ban put in place on where the country are implementing it at the end of October [indiscernible] all countries.
One of the questions we have is with some reduction with some SKUs, does it mean that they are globally going to reduce the level of inventory and can this impact the level of shipment toward the year-end. So I think we're flying that because, of course, we continue to be with a view that this ban should not ultimately bring major disruption, and we've been elaborating on many occasions on why we think that this ban is not going to ultimately change the dynamic in the category. But it's so that we have some question mark on the lending for the reason I've just been describing on the level of inventory. That's why we are -- I mentioned we need to make sure that we are as clear as possible on the possible, I would say, temporary effect that this could generate.
Now when I look at our shipments for the year. So we are clarifying the lending area. When I look at the '23 performance versus '22 performance, that will mean even in the low end of the bracket, an acceleration in terms of growth versus the growth that we experienced in '22 in terms of incremental billion of [ cig ] being sold. And of course, shipments are, as we know, what we are selling, what is probably more important is the consumer offtake. And here, frankly, we see the momentum continuing with no change. And I think the Q3 number where we have seasonality. But when we look at Q3, what we expect for Q4, we are very much with the same strong 15% to 16% IMS growth. And we are in line with what we have experienced last year.
So that shows -- and by the way, it's a percentage on a higher base. So in fact, in volume, that means that the volume growth is higher. So we don't see any change in the momentum. We see a lot of strength in the growth, and that's visible in the volume and the market share that we are reporting today.
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?
Sure, Bonnie. So actually, last year, we were flat in terms of user acquisition. So we're doing better this year than last year in terms of user evolution. And I think we are in line with what we experienced in '21, if I remember well, I think we've been sharing the numbers.
So that's a typical pattern for Q3 which is due to the mythology on how we calculate the user growth. And I think we have today the -- as I said, the element of the momentum that we are seeing on people buying the device and people registering that is pointing to the fact that we see the same momentum, that there is no change. And last year, we finished the year with a strong user growth, and we target to do the same this year. So I have to say it's remarkably stable in the strength, if I can use this exploration. And as I said, we could be at the end of the day, in fact, growing in shipments and in IMS volume more than last year.
So the percentage is about the same. Again, the basis being higher, it means that we're going to increase in terms of volume differential year-on-year.
Our next question comes from Gaurav Jain with Barclays.
So I have a question on the U.S. cigar side of things. So clearly, the FDA and this 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 had been below a certain threshold for a [ gait ] 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 are the plans. What is it going to be, how long it would take, what is decided, and again, nobody definitely 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. And then my second question is on FY '24 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 '24. So we should add back to FY '23 EPS? And then could you also just comment on Russia exposure and this year's EPS?
Yes. So this is a technical comment on Argentina. Gaurav, you're absolutely right. This is a ForEx impact that is a kind of one-off, if you want, because that is impacting this year but next year, we're not starting with the base on our profit that is decreased by that. It's just something that you need to book on your balance sheet exposure. But what is taken is taken. I mean, of course, depending on the evolution of the Argentinian peso in the future. But I don't have anything to say at this stage. I think I just wanted to clarify this technical impact.
On Russia, frankly, versus when we made 3 weeks ago, there is nothing new to report on the Russian situation. This is a market where, of course, we are being very significantly impacted on the profit reported in dollars because of the very strong weakening of the Russian ruble versus the dollar. And that is one of the, if not the biggest impact this year on ForEx. That is, of course, I would say, mechanically reducing our exposure to Russia in our profit. That's mechanical. And we are -- as we already said, we are seeing very limited growth in Russia, that is a market where as we've been saying, we've been reducing our commercial activity and a auto-market where we're investing and that is translating, of course, on the performance of this market.
Our next question comes from Pamela Kaufman with Morgan Stanley.
I have a question on the Combustible business. It's been exceeding expectations, and you've taken up your guidance for volumes on the Combustible strength. Can you talk about what's driving the performance in this category, despite the acceleration in pricing growth?
Sure, happy to do that. So yes, Combustible is being resilient. We have a decline, but it's a modest decline in Q3. Let's be clear, this is driven by a few market where we see a nice share gain. One is Turkey. The other one is Egypt. As you can imagine, they are not market with great profitability per stick. So let's be very clear.
We have a nice performance on Combustible on volume, to some extent on revenue. All the great work that we are doing now on increasing OI and growing margin is first and foremost, driven by our smoke-free product, IQOS first, ZYN second and [indiscernible]. So yes, great performance when it comes to volumes, greater [ hormone ] versus the decline that we may have seen in the past few years. Good impact on revenue. We've been doing good on price increase as well. But remember, that's a category in which we've seen a lot of inflation on our cost and part of the growth is generated by market with low profitability.
Okay. 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.
Look, we discussed that 3 weeks ago and there is nothing new on the PMTA. We don't know what's going to be the time line. It's at the discretion of the FDA, and we see that a lot of things are taking significant time to the decision to be taken. Let me make a couple of comments on this PMTA process, nevertheless. The first one is that we have with our [ smoke ] product, [indiscernible] an MRTPA of Level 1. So the FDA has been recognized that this product are representing a reduced risk versus combustible cigarettes and we're very clear as benefit claim.
We believe that by nature, this product should be considered as equally good, if not better. And we believe that they have the potential to really convince million of smokers to move away from combustible cigarettes to have a better way of consuming nicotine. So we are really [indiscernible], hopeful that the FDA will really take that as a very important element and that it's important to make this product available for nicotine users in the U.S.
Now on the flavor because I think that was probably one of your questions. For the same reason, we believe it is important that the consumer has the choice of flavor, if it is a reason for them to move away from combustible cigarettes to this better product. Having said that, we have the example of a ban on flavor in California. And the reality is that there was an adjustment during a couple of months, and then the growth resumed without flavor in California and we are today very, very significantly, I think we are close to 30% above the pre-ban level in California. So it shows that these products are extremely attractive and resonate with a nicotine user, with the smokers and with other nicotine users beyond the flavor, which is very good news.
Our next question comes from Matt Smith with Stifel.
If we take the full year organic profit margin guidance, the down 150 basis points or so and the year-to-date performance, along with your commentary around kind of a flattish year-over-year performance in the fourth quarter, can you talk about some of the factors in the fourth quarter. I understand there's a lot of crosswinds here, but you get the benefit of Swedish Match rolling into the organic base. And then you mentioned you've completed the shift to -- back to sea freight for HTU consumables in Japan. So can you talk about some of the headwinds to margin in the fourth quarter? Maybe some detail around your expectations around the incremental ILUMA launches or any other factors would be helpful.
Sure. So indeed, there are going to be some mix impact 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, and that is having an impact on the margin. And then you can have some mix coming from geographies and other mix element. But that is what is today behind this 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.
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 [indiscernible]. That should probably mean quarter-on-quarter, I would say, sequential increase and still a significant growth versus last year.
Our next question comes from Owen Bennett with Jefferies.
I just wanted to ask also -- been very, very strong in the U.S., but I wanted to ask about pouches ex U.S. So volumes only flat versus 2Q for [ Scandic ] and ex [ Scandic ]. 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 at U.S. near term?
Yes. So we have this situation in Scandinavia on nicotine [indiscernible] the product is already present, mainly in Sweden, where it's a nicely growing market. That's not where we enjoyed the biggest market share. So we are globally year-to-date, growing on nicotine pouch in Sweden, but they are not -- we're not talking about big volumes here as we have our strong leadership in Sweden on [indiscernible].
Outside Scandinavia, we are just at the beginning. So yes, we are launching. So we explained that we've been launching in Switzerland, Finland as well, even in the Nordics. There will be more market to come. Now it's going to be hopefully nice, but it's going to be small versus what we see in the U.S. You see what I mean. So it's going to be difficult to see given the strength that we are seeing in the U.S. to see volume outside the U.S. showing their strengths.
Now yes, it's going to add very nicely additional numbers. But again, it's not going to be huge compared to the U.S. We'll see with TPD if there is any decision taken around nicotine pouch. Of course, if there is anything decided that will in that respect, which we don't know today that may influence the way we invest on this category in the [ EU ]. But frankly, at that stage, it's too early to say because we don't know what's going to be discussed, if anything on that one. And therefore, we'll see.
Our last question will come from Andrei Condrea with UBS.
Just one from me, please. And I know it's a bit of a topic to [indiscernible], 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?
Frankly, I mean, I've been hearing things about that. I mean I know what the assumption is everybody 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 and that is going to say that.
So first of all, I don't know how broad the usage of this medicine as drug is going to be. Second, I don't know what's going to be the potential impact. So I'm not sure that today we can say anything relevant and that makes sense on that topic.
And there are no further questions at this time. I'll turn the call back to Emmanuel for closing remarks.
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.