Philip Morris International Inc. (NYSE:PM) Q4 2022 Earnings Call Transcript February 9, 2023

Operator: Good day, and welcome to the Philip Morris International Fourth Quarter 2022 and Full Year 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. I will now turn the call over to Mr. James Bushnell, Vice President of Investor Relations and Financial Communications. Please go ahead, sir.

James Bushnell: Welcome. Thank you for joining us. Earlier today, we issued a press release containing detailed information on our 2022 fourth quarter and full year results. You may access the release on pmi.com. A glossary of terms including the definition for the smoke-free products 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. Growth rates presented on an organic basis reflect currency-neutral adjusted results excluding acquisitions and disposals. As such figures and comparisons presented on an organic basis exclude Swedish Match up until November 11, 2023.

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. Over to you, Jacek.

Jacek Olczak: Thank you, James and welcome everyone. We had a remarkable year for our smoke-free transformation in 2022. Despite the exceptional challenges of the war in Ukraine, severe supply-chain disruptions and global inflation, we delivered very strong financial performance and took two major strategic strides towards a smoke-free future. I would like to express my deepest thanks to all my colleagues who spared no effort to drive excellent business results during these unprecedented times. Our thoughts also continue to be with those affected by the war in Ukraine and the recent tragedy in Turkey and Syria. In 2022, PMI delivered its second consecutive year of total volume growth, reflecting continued IQOS progress and broadly stable cigarette volumes.

Full-year smoke-free net revenues reached almost one third of total PMI and over 50% in 17 markets. This is impressive progress towards our ambition of becoming a predominantly smoke-free company by net revenues in 2025. IQOS outstanding results continued with over 21% full-year growth in both shipment volumes and in market sales excluding Russia and Ukraine. This reflects broad-based momentum in the European Union Region, Japan and emerging markets. IQOS ILUMA continues to generate excellent growth in its launch markets with upgrades from existing users and new user acquisition outperforming our initial expectations. The success is supported by the increasing deployment of a two-tier heated tobacco units portfolio providing adult smokers with an expanding range of innovative and high quality alternatives to cigarettes.

In combustibles, we delivered a robust performance with a 3.7% growth in organic net revenues and 0.3 percentage points higher share of segment excluding Russia and Ukraine despite the impact of adult smokers moving to smoke-free products. We also achieved two critical strategic milestones this year, reaching an agreement to take full control of IQOS in the U.S. in 2024 and successfully completing the acquisition of Swedish Match. These achievements will accelerate our smoke-free journey and further position us to lead the transformation of the wider industry. Clearly currency headwinds were extremely strong and weighed on our U.S.s dollar performance but although volatility remains, I am pleased that they seem to significantly abate in 2023.

Overall, 2022 was a pivotal year and we look forward with confidence to 2023 and beyond. Let me now take a moment to cover our key strategic priorities for the coming year. With the acquisition of Swedish Match and securing the rights to IQOS in the U.S., we are now a global smoke-free champion. The addition of the world's biggest market and the leading nicotine pouch brand ZYN alongside IQOS provides us with significant untapped opportunities to further accelerate the growth of smoke-free products. As the strength of our IQOS business continues to grow rapidly, the full global rollout of IQOS ILUMA is a major priority and we expect to make substantial progress on this in 2023. The success of ILUMA in launch market so far demonstrates the importance of groundbreaking consumer-centric innovation and we continue to broaden our portfolio with new science backed offerings.

This includes BONDS by IQOS, our latest heat-not-burn device aimed at low and middle-income adult smokers. Pilot city launches in Colombia and the Philippines in the last quarter of last year show encouraging early results and we intend to take the learnings from these markets before deploying on a wider scale. Following a successful first three years of partnership with KT&G, we also recently extended our long-term s their innovative smoke-free portfolio outside South Korea. I am very pleased to welcome Swedish Match to the PMI family. In particular, the fast-growing potential of ZYN is an incredibly exciting addition to our company. We are focused on supporting the Swedish Match team to continue and accelerate ZYN's outstanding success in the U.S. while also leveraging PMI commercial capabilities to prepare for the international expansion of nicotine pouches.

IQOS and ZYN are premium brands, leading the global categories. In the U.S., ZYN is helping the American smokers leave cigarettes behind and offers great growth prospects. For IQOS, the world's biggest smoke-free market is a fully untapped opportunity and our plans are well underway in anticipation of our commercialization in the second-quarter of 2024. We will be leveraging the sales and distribution capabilities of Swedish Match and deploying our commercial model digital engine organization and infrastructure for a successful rollout. We continue to expect to file an FDA application for ILUMA in the second half of 2023. Logically, the international expansion of pouches, U.S. IQOS preparation and the replacement of IQOS 3 with ILUMA entail additional investments this year, which combined with inflationary pressures will weigh temporarily on our margins.

Indeed, many of the ILUMA related costs are one-off in nature as Emmanuel will explain shortly. In combustibles, we continue to target a stable category share over time, despite the impact of IQOS cannibalization, while taking judicious pricing actions. As we have explained previously, maintaining our leadership in combustibles helps us maximize switching to smoke-free products through the connection to adult smokers and the retail trade. In terms of our financials, the strength of our business provides a robust operating cash flow, which we intend to maximize to provide reinvestment in our smoke-free business, deleveraging and growing the dividend. Finally and importantly, shaping tobacco harm reduction by providing better alternative to smokers and advocating for science-based regulation is critical to accelerate the end of smoking.

Harm reduction is also at the core of our transformation, as we lead on sustainability to achieve a positive impact. We will be expanding on some of these topics at the CAGNY conference on February 22nd and we also plan to host an Investor Day in September this year, where we will go into greater detail on our strategies and future vision particularly with regard to --with regards to the U.S. Now, I will hand it over to Emmanuel, to discuss our results in 2023 and outlook in more detail.

Emmanuel Babeau: Thank you, Jacek. Our business driven by the strength of our innovative and expanding smoke-free portfolio generated excellent top and bottom-line 2022 growth despite a very difficult operating environment, and currency headwinds. Our full-year net revenues grew organically by plus 7.7% excluding Russia and Ukraine and by plus 7.1% for total PMI, despite the impact of hyper-inflationary accounting in Turkey. This reflect the continued strength of IQOS, accelerating pricing and the recovery of combustibles in many markets against a pandemic affected comparison, notably in H1. IQOS devices accounted for approximately 5% of our full-year smoke-free net revenue, both including and excluding Russia and Ukraine. Our net revenue per unit grew plus 4.4% organically, excluding Russia and Ukraine and by plus 5.5% in total.

This was driven by combustible pricing of plus 4%, excluding Russia and Ukraine and plus 5% overall and the positive mix impact of an increasing proportion of HTUs heated tobacco unit in our overall volumes at higher net revenue per unit. Our 2022 operating income margin contracted organically by 60 basis-points, excluding Russia and Ukraine, and by 70 basis-points in total due to a number of headwinds, which I will come back to. These headwinds were partially mitigated by the growth of IQOS, pricing and ongoing cost-saving. In 2022, we delivered gross saving of $800 million, with over $1.6 billion in the first two years of our cost-efficiency program. This puts us well on track to exceed our target of $2 billion over 2021, 2023 and mitigate recent inflationary pressures.

Despite margin pressures, our excellent top-line growth and diligent cost management enabled us to deliver currency-neutral adjusted diluted EPS growth of plus 11.9% to $5.34, excluding Russia and Ukraine. This includes unfavorable currency of $0.85 and a small contribution from Swedish Match net of financing cost for the 50 days of consolidated results. For total PMI, we delivered adjusted diluted EPS of $5.98. We also had a strong finish to the year. We delivered excellent Q4 organic net revenue growth of plus 7.9%, excluding Russia and Ukraine. Again, reflecting continued strong IQOS performance and robust combustible pricing. Our Q4 operating income margin expanded organically by 80 basis-points, excluding Russia and Ukraine mainly due to a favorable comparison.

On the total PMI basis, organic margin were flat including the impact of a challenging comparison in Ukraine and shipment timing in Russia. Fourth quarter currency-neutral adjusted diluted EPS grew by plus 20.8% to $1.23, excluding Russia and Ukraine and plus 15.3% in total to $1.39, an excellent performance. Before discussing our 2023 guidance, I would like to provide an update on our Ukraine and Russia businesses. We continue to support our employees in Ukraine. I would like to personally thank them for their tremendous efforts to secure our business continuity during these extremely difficult times. In Russia, the environment for divestment has become increasingly challenging and complex, especially given recent December 2022 regulatory developments.

To provide more clarity to investors on the full extent of our business, we will now include both Ukraine and Russia in our 2023 outlook and reporting. Now turning to the 2023 outlook, we expect to deliver very strong organic net revenue growth of plus 7% to plus 8.5%, supported by a step-up in combustible pricing and another year of rapid progress from IQOS. This would represent the third consecutive year of organic top-line growth above plus 7% and excludes the impact of Swedish Match for the large majority of the year. Including Swedish Match, we expect our reported currency-neutral net revenues to grow into the teens as its business continue to deliver strong performance. We expect excellent IQOS momentum to increase our HTU volume growth on the total PMI basis supported by the growing presence of ILUMA across our key markets.

We forecast between 125 billion and 130 billion HTU shipment volumes, representing plus 15% to plus 19% growth. This reflects an acceleration compared to the total PMI growth rate in 2022 despite an expectation of no significant progress in Russia given our decision to restrict investment and innovation. As mentioned previously, the pace of ILUMA launches has also been constrained by supply-chain disruption and the outstanding take up in initial launch markets. We expect these constraint to gradually improve through the first half as we progressively roll-out to more geographies. We expect organic smoke-free net revenue growth to have an aligned progression with the rate of HTU volume growth this year with less distortion from device revenues.

Including Swedish Match and at constant-currency, we expect to deliver around $13.5 billion in smoke-free net revenue compared to $10 billion in 2022 and to approach 40% of total PMI net revenues this year. While our topline outlook is very strong, like many other global companies, we are facing significant margin pressure from the intensifying inflationary environment in addition to a number of specific transitory factors and investment, which I will come back to shortly. As a result, we expect our adjusted operating income margin to contract between 50 to 150 basis-points organically. Accordingly, we forecast currency-neutral adjusted diluted EPS growth of plus 7% to plus 9%. This includes a full year's positive contribution from Swedish Match net of the related interest expense.

However, this benefit is offset by the increased interest cost on our non-Swedish Match debt and planned investments. This translate into an adjusted diluted EPS range of $6.25 to $6.37, including $0.15 of unfavorable currency at prevailing rates. This forecast notably, does not factor any potential favorable court ruling in Germany regarding the legality of the surcharge on the existing excise tax on heated tobacco product effective in Germany. as of 2022. We continue to account for the excise surcharge in our results and outlook. However, the obligation to pay the surcharge is currently suspended. If favorable the difference to our forecasted 2023 excise payment would increase our net revenue by around 1% and adjusted diluted EPS growth by around three point, thereby increasing our forecast currency-neutral growth range to plus 10% to plus 12%.

In this scenario, we would expect our operating cash flow would move towards the upper half of our forecast range. We expect a judgment towards the end of the year. There are a number of other assumptions underpinning our outlook, we expect total international industry volumes of cigarettes and heated tobacco units excluding China and the U.S. to decline by minus 1% to minus 2%. Given our leadership in smoke-free product and the growth of the category, we expect to gain share and target total PMI shipment volume to be flat to plus 1%, which would represent the third consecutive year of growth. While we seek to maintain our share of the combustible category, given the current inflationary environment, we assume combustible pricing will accelerate to around plus 6% on an organic basis compared to the plus 5% realized in 2022.

Photo by Irina Iriser on Unsplash

We also expect full-year capital expenditure of around $1.3 billion as compared to $1.1 billion in 2022, reflecting increased investment behind our smoke-free platform including ILUMA and Swedish Match portfolio. Let me now come back to the various factors impacting our margins. In 2022, total PMI gross margin contracted by 220 basis points organically. While growing inflationary pressures were a drag, the largest impact came from the combination of the rapid growth of ILUMA and transitory factors such as supply-chain disruption and the need to use air-freight. ILUMA drove accelerated device replacement from existing user in Japan and other launch market. Such devices sales are positive for acquisition, retention and full conversion. However, devices are margin-dilutive and this dynamic is likely to continue on a temporary basis, as we roll out to more markets this year and consumers upgrade from IQOS blade.

The initially higher weight and cost of ILUMA consumable also played a role and this meant that the overall impact of our heat-not-burn business including devices was margin-dilutive in 2022. Importantly, average gross margin on HTUs remain around 10 percentage points higher than for cigarettes on the higher net revenue per unit. This is a fundamental long-term positive margin driver through the growing HTU volume mix in our business and this had a plus 110 basis-point favorable impact in 2022. Our two other key long-term margin drivers of pricing and productivities also continued to contribute favorably. Gross margin headwinds were mitigated at the operating income margin level by SG&A cost which declined by 150 basis-points of net revenues, due primarily to cost-efficiency, operating leverage and comparison effect.

The picture for 2023 is quite different while our gross margin will face increased inflationary pressure, this is now primarily due to COGS for the cigarette business as leaf, acetate tow, salaries and energy cost increase. An acceleration in combustible pricing and lower air freight cost will serve to mitigate this exceptional inflation. However, a time lag is built into our projections. Importantly, while cost inflation is also headwind for IQOS, the 2023 margin impact of our heat-not-burn business is expected to be favorable due to the positive impact of increased HTU volume at higher net revenue per unit, planned ILUMA efficiencies and a more measured increase in device volumes. Overall, this underlying strength from IQOS combined with pricing will not be sufficient to offset combustible cost inflation in 2023, however, we expect a lower organic gross margin decline compared to last year and for our heat-not-burn business, to have an increasingly visible positive impact as we approach 2024.

2023 SG&A cost would include incremental investments to drive future growth, including in the commercialization of ILUMA. Also included is around $150 million with a broadly even split between the U.S., where we are preparing our organization capability for the launch of IQOS and wellness and healthcare investment in product development and clinical trials. In addition to inflation, this mean an SG&A cost increase more in line with net revenue growth is likely with limited margin impacts. A few words now on 2023 phasing. We expect margin pressures to be weighted to the first half, particularly given the challenging Q1 2022 comparison and a progressive decrease in airfreight cost throughout the year. In addition, investment are expected to be front loaded and we know that the rollout to ILUMA can lead to a short period of slower user acquisition as consumer wait for the launch.

Combined with the timing of shipment and cost saving, we expect our 2023 top and bottom line delivery to be heavily H2 weighted. Indeed, we expect the first quarter to be the most challenging with low-single digit organic topline growth and soft margin. Shipment timing and ILUMA launch impact are expected to be pronounced and we accordingly expect HTU shipment volume of around 26 billion to 28 billion HTUs. We also face a comparison with a significantly lower impact from war related disruption. We forecast adjusted diluted EPS of $1.28 to $1.33, including $0.10 of unfavorable currency at prevailing rates. Importantly, we expect margin to improve as we approach 2024 as headwinds relent and the fundamental margin-accretive driver of our smoke-free transformation continue in the form of heated tobacco unit growth, pricing and cost optimization on ILUMA.

Our cash flow generation remains strong. We delivered $10.8 billion in 2022 operating cash flows representing plus 3% growth on a currency-neutral basis. This include a favorable timing of certain financing item of around $0.3 billion. Given nonrecurring item and working capital movement benefited 2021 by around $1 billion, this was an excellent result. In 2023, we forecast $10 billion to $11 billion in operating cash-flow despite the notable expected impact from higher working capital requirements due to growth, global inflation and the reversal of one-off timing benefits. This put us on track to deliver our '21, '23 target of around $35 billion given in February 2021 at then prevailing rates. While our net debt is 2.9 times adjusted EBITDA on a 12 months trailing basis, this reflects only 50 days of Swedish Match results, including a full-year contribution for Swedish Match would clearly result in a lower ratio.

We target robust EBITDA growth, which combined with strong cash flow allows us to focus on deleveraging, while continuing to invest in innovation and the growth of our business. In addition, our commitment to our progressive dividend policy is unwavering and in line with our long term commitment to return cash to shareholders. Turning back to our 2022 results, both our HTU and in-market sales volume increased by around 21.5% supporting total volume growth of plus 3.2%, excluding Russia and Ukraine. Q4 HTU shipment volume grew by plus 37.5%, partly reflecting the replenishment of inventory for ILUMA in Japan, following lower shipment earlier in the year and favorable shipment timing in the EU, notably in advance of new ILUMA launches. Supported by very solid cigarette performance, we delivered total volume growth for the second consecutive year, both including and excluding Russia and Ukraine.

Focusing now on combustibles. Our portfolio delivered robust organic net revenue growth of plus 3.7% for the full-year excluding Russia and Ukraine. Combustible pricing increased in H2 as we continue to adjust to the inflationary environment. This resulted in Q4 organic pricing of plus 4.8%, excluding Russia and Ukraine and yielded full-year pricing in line with our expectation with notable contribution from Germany, the Philippines and Turkey, despite the impact of hyperinflationary accounting. In 2022, our share of the cigarette category increased by plus 0.3 percentage points excluding Russia and Ukraine following category share declines in 2020 and 2021, exacerbated by the pandemic. This includes sequential growth in every quarter of 2022.

Marlboro remains extremely resilient despite pressure on disposable income and the impact of IQOS cannibalization with plus 0.2 percentage point share of segment growth. In addition, while we have not yet seen any meaningful acceleration in down trading, our share in the low price segment increased by plus 0.6 percentage points excluding Russia and Ukraine. As Jacek mentioned earlier, maintaining our leadership in the cigarette category is a key enabler in accelerating smokers switching to better alternative. Our robust cigarette share combined with the growth of IQOS delivered an overall market-share gain of plus 0.6 point in 2022, excluding Russia and Ukraine, with notable contribution from Egypt, Italy, Japan and Poland. PMI heated tobacco unit continue to strengthen the position towards becoming the largest nicotine brand in markets where IQOS is present and reached the number two position in 2022 with a record-high share of 8.5% in Q4.

Now focusing on IQOS user growth, there were an estimated 20.3 million IQOS user as of December 31st, excluding Russia and Ukraine. This reflect growth of around plus 3.5 million for the full year. For total PMI, we estimate there were almost 25 million IQOS users as of year-end. Consistent with comments in our recent disclosures, user growth in October and November was slower due to higher-than-expected impact from commercial activity and lower acquisition for IQOS brand product in anticipation of the launch of ILUMA in certain key markets. However, we saw a strong rebound in December as ILUMA launches continued delivering robust user growth of plus $0.8 million for the quarter. This actually was close to our initial expectation and we look forward with confidence to 2023 as ILUMA continues to be deployed.

ILUMA is driving volume and share growth across its market supporting our strong position in heat-not-burn category. We launched in eight new markets in Q4, including the Czech Republic, Italy, Portugal, and South Korea, bringing the total to 16 markets with ILUMA launched now represent more than half of our total HTU volume. ILUMA delivers a superior consumer experience as evidenced by net promoter scores which on average increased by more than 10 points across its different market archetypes and higher conversion rate compared to IQOS. While the rate of acceleration differ by market in both Switzerland and the more recently launched United Arab Emirates offtake share has almost doubled since launch. Importantly, as I mentioned earlier, the benefit of scale and optimization should allow us to bring down the cost of ILUMA overtime starting in the second half of 2023.

Focusing now on the European Union where smoke-free net revenue exceeded 40% of the region for the full year. Our fourth quarter HTU share increased by plus 2.4 points to reach 8.8% of total cigarette and HTU industry volume with a modest flattering effect from timing factor. IMS volumes continue to grow sequentially and reached a record high of 9.3 billion units on the four-quarter moving average. This reflects success across many markets and key cities including Vilnius with over 43% share, as well as Athens and Rome with over 25%. In Japan the heat-not-burn category now represents close to 35% of total tobacco with IQOS increasingly driving its growth In Q4, the adjusted total tobacco share for our HTU brands increased by plus 2.6 points to 24.5% with offtake share in Tokyo surpassing 30%.

Our two-tier consumable portfolio continued to deliver strong results. IMS again grew sequentially to reach a record-high of 8.8 billion units on a four-quarter moving average as the number of Japanese IQOS users crossed a remarkable 7.5 million adult consumers. In addition to strong IQOS gain in developed countries, we continue to see very promising growth in low and middle-income market. In 2022, our HTU shipments grew by almost 50% excluding Russia and Ukraine. This robust performance reflects success across many markets, including Egypt where Urban Cairo exit offtake share surpassed 7% Bulgaria and Malaysia where Q4 offtake share reached 14% in both capital cities. Let's now move on to Swedish Match which finished the year strongly further confirming our belief that this combination will be accretive to our growth and margin profile over the coming years.

Please note for housekeeping purposes, that my comments on Swedish Match Financial Results are based on publicly available information through September 30th and from November 11th when it was consolidated in PMI's financial statements. Swedish Match delivered excellent performance following the acquisition, with strong net revenue and adjusted operating income. Most impressive was the phenomenal U.S. growth of ZYN which I will come back to on the next slide. In other U.S. smoke-free products, moist snuff also performed well gaining almost one percentage point share of segment and growing 2022 volumes within a declining category. In Scandinavia, the overall smoke-free market and Swedish Match continued to grow, albeit helped by year end trade inventory movements ahead of a January excise tax increase in Sweden.

The cigar business delivered robust performance to end a challenging year with growth in volume and category share. We are very pleased with the strong 2022 results from Swedish Match, which also included positive pricing across all smoke-free category. We look forward to reporting our combined results going forward. Now let's discuss ZYN's recent U.S. performance in more detail. Excellent progress continues with shipment volume growth of plus 37% in 2022 and plus 35% in Q4, reaching a record quarterly high. ZYN category volume share grew sequentially by one percentage point compared to the third quarter and by 2.2 percentage points compared to the prior year, further strengthening its position as the clear number one nicotine pouch brand despite continued heavy competitive discounting from less premium offerings.

Importantly retail value share for ZYN remains strong at 75.7%, highlighting its premium positioning and high brand equity. 2023 promises to be a very exciting year. We are thrilled to have welcomed Swedish Match employee and leading oral nicotine portfolio into the PMI, family to create a global smoke-free champion. And we will look we will work together to create value as we accelerate towards our shared vision of the smoke-free future. In particular, bringing in ZYN and IQOS together in both the U.S. and international markets present a significant opportunity to drive accelerated growth and switching of adult smoker to better alternative. As a well-run and successful business we expect continued strong performance from Swedish Match existing operation.

A key focus this year will be supporting and further driving strong in growth in the U.S. In addition, we are now preparing for the international expansion of nicotine pouches leveraging Swedish Match rich product portfolio and PMI's extensive smoke-free commercial infrastructure. In parallel, we will be actively Swedish Match U.S. distribution and commercial capabilities for the launch of IQOS in 2024. Moving to sustainability. As we transform our company our business and sustainability strategies are advancing hand-to-hand with increasing momentum. PMI and Swedish Match have a shared vision and values. The combination helps us further accelerate towards achieving our purpose, transforming for good to make cigarettes obsolete and maximize the benefit of smoke-free products.

Our goal for best in class ESG performance is aligned as we seek to address the environmental impact of our product, eradicate child labor, reduce our carbon footprint and provide a more inclusive and empowered working environment for all our employees. In December, we published a standalone report detailing our new biodiversity and water ambitions. For biodiversity we aim to achieve no low net loss on ecosystem connected to our value chain by 2033 and contribute towards to a net positive impact on nature by 2050. For Water Stewardship we aim to scale solutions towards a positive impact on water resources by 2033 and contribute towards a positive impact on water resources by 2050. I am also proud to share that for the third consecutive year we have been awarded CDP's Triple A.

CDP scored nearly 15,000 companies on their climate change forest and water security disclosures, of which only 12 received this strategic prestigious score. In addition I am excited to share that we are included in the 2023 Bloomberg GenderEquality Index for the third year running. I'll now turn back to Jacek for concluding remarks.

Jacek Olczak: Thank you, Emmanuel. Overall, our business delivered both a strong fourth quarter and full-year performance despite many challenging headwinds. We achieved excellent top and bottomline growth with double-digit currency-neutral adjusted diluted EPS growth and almost $6 of adjusted EPS for total PMI. The consistent quality and sustainability of our organic top and bottomline delivery has been clearly demonstrated over the last three years. Most impressive was the continued outstanding performance of IQOS, which is now complemented by the remarkable growth of ZYN. Combined with Swedish Match we will have a comprehensive global smoke-free portfolio with leadership positions in heat-not-burn and the fastest-growing category of oral nicotine.

We expect 2023 to be a landmark year for our smoke-free transformation with smoke-free net revenues of around $13.5 billion at constant currency, approaching 40% of our company. We have exciting opportunities for growing nicotine pouches in the U.S. and internationally, along with the U.S. commercialization of IQOS next year. We expect margin headwinds will persist in 2023 before improving in 2024. However, our underlying growth fundamentals remain strong and we look forward with - and we look forward with confidence. With an excellent performance over the past two years and our strong 2023 outlook, we expect to comfortably exceed our three year minimum CAGR targets of more than 5% organic net revenue growth, more than 9% in currency-neutral adjusted diluted EPS growth and broadly stable shipment volumes.

Finally, our strong growth outlook and highly cash-generative business enables us to deleverage while maintaining our steadfast commitment to our progressive dividend policy. Thank you for your attention, Emmanuel, and I will be happy now to answer your questions.

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