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. In order to ask a question, please press the star key followed by the number 1 on your touch-tone phone at any time. Media representatives on the call will also be invited to ask questions at the conclusion of the questions from the investment community. I will now turn the call over to Mr. James Bushnell, Vice President of Investor Relations & 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 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 removed the potential of a protracted legal process to regain the U.S. rights to IQOS, which Altria previously held, subject to performance milestone until 2029. We have ambitious plans for the full-scale launch and rapid extension of IQOS in the U.S. market. As soon as we take over, we will use the transition period efficiently 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 synergy 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 economic 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 retained 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 increased offer is primarily intended to fairly reflect the higher net value to us of the portion of Swedish Match cash flow, which are in U.S. dollars, given currency movements since our initial offer was announced in May. Equity markets, the global economy, and interest rates have also moved unfavorably since then. As such, we believe the updated price, with a premium of 52.5% to the undisturbed share price prior to the initial offer, strengthen the attractiveness yet further for Swedish Match shareholder, while maintaining strong value creation for PMI shareholders. This is our best and final price, and we hope to complete the transaction next month to achieve full ownership.
Turning now to our Q3 earnings. We delivered another very strong performance this quarter, with HTU volumes ahead of our forecast and robust growth in total volumes, market share, and combustible net revenues. With adjusted operating income margin in line with expectation, this resulted in total Q3 adjusted diluted EPS of $1.53. Close to our all-time high quarterly high, despite notable currency headwinds. IQOS excellent performance continued with +22% growth in pro forma HTU shipment volume, a testament to the continued strengthening of our heat-not-burn portfolio and broad-based growth across key regions. IQOS ILUMA continued to drive growth in its launch markets. In combustibles, we delivered robust performance with Q3 organic pro forma net revenue growth exceeding +4%, driven by accelerated pricing of almost +5%.
Cigarette shipment volumes were essentially stable , and category share grew, supported by Marlboro, showcasing the resilience of the brand despite current economic conditions. Turning now to the headline numbers. Our Q3 volumes grew by +2.3% on a pro forma basis and by +4.6% in total including Russia and Ukraine. Pro forma net revenues grew organically by +6.9% and by +6.7% for total PMI. Our total organic net revenue per unit grew by +4.5% on a pro forma basis and by +6.1% in total, despite lower device revenues. This reflects the increasing weight of IQOS in our sales mix and a step up in combustible pricing.
Our Q3 adjusted operating income margin declined organically by 100 basis points on a pro forma basis and by 90 basis points in total, consistent with our expectations. As previously communicated, this reflects the recovery in device volume, the investment in launching ILUMA, including initially higher unit costs, the impact of supply chain disruption, notably due to the war in Ukraine, and increasing global inflationary pressures. Despite these headwinds, our strong top-line growth and ongoing cost efficiency enabled us to outperform our previous currency neutral guidance to deliver adjusted diluted pro forma EPS of $1.33, including unfavorable currency of $0.23, representing +8.3% currency neutral growth. Including Russia and Ukraine, we deliver adjusted diluted EPS of $1.53. Our strong third quarter, combined with a robust H1, supported an excellent delivery for the year to date.
I would highlight our strong pro forma volume growth of +3.4% and organic net revenue growth of +7.7%. Again, reflecting continued strong IQOS performance, pricing, and the recovery of the combustible business in many markets against a pandemic-affected comparison. Smoke-free net revenue made up around 30% of our year-to-date pro forma total, putting us on track to reach our ambition of over 50% by 2025. Our year-to-date operating income margin contracted organically by 110 basis points on a pro forma basis, driven by the factors mentioned previously. We remain on track to deliver cost saving of $2 billion over 2021-2023. $1.5 billion of gross savings have already been delivered, including over $200 million in Q3.
This allows us to invest in the business and mitigate increasing inflationary pressures. Year to date, currency neutral adjusted diluted EPS grew by +9.7% to $4.11 on a pro forma basis, and by +8.8% in total to $4.59, an excellent performance. Now, let's turn to the pro forma full year outlook. Given the continued growth of IQOS and robust trends in combustible, we are revising our top line forecast upwards to +2% to +3% growth in total shipment volume and +6.5% to +8% growth in organic net revenues. While our top line outlook remains very strong, like many other global companies, we are facing significant inflationary forces in the world economy, and this is reflected in our updated adjusted OI margin forecast.
Inflation in our cost of goods remain mid-single digit in the third quarter. However, inflationary pressures are growing as we renew pricing arrangements, notably for certain direct materials, wages, energy, and transportation costs. In addition, the very strong growth of ILUMA in Japan and other launch markets has an initial negative margin impact given the higher weight of the consumable and increased cost of both the device and consumable in the first 12 to 18 months of activation. As mentioned previously, the combination of strong demand, global supply chain disruption, and the impact of ceasing induction HTU production in Russia means our supply chain is not fully optimized.
This has resulted in reduced productivity and a number of additional costs, including an approximate $300 million impact from a significant increase in the use of air freight. As a result, while we continue to expect a rebound in our Q4 adjusted OI margin, partly reflecting higher commercial investment in the prior year, we are now forecasting less expansion than previously expected, with pro forma adjusted organic operating income margin flat to slightly negative for the full year. Despite this change to margin expectations, our top-line momentum is strong, and we continue to forecast pro forma adjusted diluted EPS growth of +10% to +12% for 2022. This translates into a pro forma adjusted diluted EPS forecast of $5.22-$5.33, including an estimated unfavorable currency impact of $0.87 at prevailing rates, notably due to the euro and Japanese yen.
There is a slide in the appendix with further detail on the estimated exchange rate impact. For total PMI, which assumes a full year contribution from Russia and Ukraine, we expect adjusted diluted EPS of almost $6, including an estimated $0.80 unfavorable currency impact. Lastly, given the continued success of ILUMA and the continuation of TEREA production in Russia, I just referenced, we are working to further accelerate our production of induction consumable. As we convert and transition capacity from blade to induction, we incur certain inefficiencies and limits on the availability of ILUMA HTUs. We are optimizing our inventory level where possible to minimize any impact on consumer availability. However, these factors are a constraint on our shipment, and we are updating our HTU shipment volume forecast to 89-91 billion units for the year. Importantly, this is a short-term supply dynamic.
Combustibles and tech trends remain strong and HTU in-market sales volume are expected to further accelerate their growth to over +25% in Q4, while also growing sequentially compared to Q3. The cash generation capacity for our business remains exceptional, as shown through the challenges of recent years. Our balance sheet and cash flow remain strong. We delivered operating cash flow of $7.7 billion year to date, representing growth of +6.5% on a currency-neutral basis. Today, we reconfirm our forecast of around $10.5 billion in operating cash flow for the full year, despite an estimated currency headwind of around $1.3 billion. This means we expect to deliver an excellent $22.5 billion over 2021 and 2022.
Cash flow was flattered somewhat in 2021 by $0.5 billion from one-off impact and the timing factors of certain cash flow which benefited 2021 at the expense of 2022, and by a further $0.5 billion of working capital improvement. However, our 2022 forecast demonstrates underlying growth against this exceptional year. I would also like to highlight that U.S. dollar strength has a positive impact on our net debt, given that more than 60% of our financing is in euro, including derivative overlays. This serves to offset the impact on our earnings, and combined with strong cash generation, contributed to $1.5 billion reduction in our net debt since December 2021, which is now below 1.6 times adjusted EBITDA on a 12 months rolling basis.
This delivery highlights our ability to maintain a strong balance sheet, pay down debt, and invest in the growth of our business. In addition, we recently increased our annualized dividend for the 15th consecutive year, in line with our long-term commitment to return cash to shareholders. Turning back to our results, our total pro forma shipment volume increased by +2.3% for Q3 and +3.4% year to date, putting us comfortably on track to deliver total volume growth for the second consecutive year on both a pro forma and total PMI basis. Pro forma HTU shipment volumes grew by +21.9% for the third quarter and +15.8% year to date.
While our shipments have been more volatile this year, reflecting the current supply chain dynamic, HTU IMS growth has been consistently strong, with +18.2% growth in Q3 and +19.2% year to date, with robust performance in the EU region, Japan, and low and middle income market. As I mentioned, we expect a further acceleration of IMS growth in Q4. Focusing now on combustibles. Our portfolio delivered robust pro forma organic net revenue growth of +4.1% in Q3, and essentially stable pro forma shipment volume. Our pro forma pricing accelerated to +4.9% in Q3 as we progressively adjust to the inflationary environment.
This reflects notable contribution from Australia, Germany, and the Philippines, and a positive quarterly variance from Indonesia for the first time since Q4 2019. We now expect full year pricing to be around 4%. Our pro forma share of the cigarette category increased by +0.2 points year to date. This was supported by Marlboro, where volumes grew by almost +4% for total PMI. With a premium position in a challenging consumer environment, this represents an impressive performance from the world's leading cigarette brand. Our leadership in combustibles helps to maximize switching to smoke-free products, and we continue to target a stable category share over time despite the impact of IQOS cannibalization. The positive combination of stable share in combustibles and the continued growth of IQOS positions us to deliver total market share growth over time.
We capture +0.5 points of pro forma share gains in Q3 and +0.6 points year to date, with notable contribution from Italy, Indonesia, Japan, and Poland. Despite increasing competition in many markets, our leading share of the growing heat-not-burn category has remained stable since the start of the year at around 75% and grew sequentially in the third quarter. This remarkable achievement is supported by the increasing deployment of a two-tier HT portfolio, providing adult smokers with an expanding range of innovative and high-quality alternatives to cigarettes. PMI HTUs again strengthen their position as the second-largest nicotine brand in markets where IQOS is present, with a sequential share gain in Q3 of +0.2 points to a record 7.7% share, excluding Russia and Ukraine. Focusing now on IQOS performance.
We estimate there were approximately 19.5 million IQOS users as of September 30, excluding Russia and Ukraine. This reflects growth of around +0.5 million users in Q3 and +2.7 million year to date. As shown on the right-hand side of the slide, the third quarter of each year typically experiences slower pro forma user growth due to seasonal factors. The growth of +0.5 million this quarter was very robust in a historical context, noting that the high growth in Q3 2020 benefited from a catch-up effect following the relaxation of COVID restrictions on retail locations and mobility. Importantly, we expect a strong acceleration in user growth in the fourth quarter of 2022. In the EU region, smoke-free net revenue comprised almost 40% of regional net revenue year to date, with a number of markets well above 50%.
This performance clearly shows the way towards our ambition to be predominantly smoke-free by 2025. Our EU third quarter HTU share increased by +2 points compared to Q3 last year to reach 7.3% of total cigarette and HTU industry volume. I would also highlight the +0.2 points sequential increase, which is a notably strong performance given the usual seasonality of the combustible market. Most importantly, adjusted IMS volume continued to grow sequentially and reached a record high of 8.7 billion units on the fourth quarter moving average. We expect IMS volume growth to continue in Q4 with a corresponding increase in market share. Please refer to the appendix for additional key cities and market share data.
With regard to regulation in the EU, we are encouraged by the increasing number of countries adopting multi-year fiscal framework with clear differentiation of smoke-free product, such as the recent legislation in Romania. We expect the proposal on the EU Tobacco Excise Directive to be published by year-end and hope for a similar approach. As a reminder, the Tobacco Excise Directive will require unanimous support for approval by all 27 EU member states. Now, let's focus on the performance of Iluma in the EU region. Iluma continued to drive user acquisition, the switching of existing user, and accelerated category growth in both Spain and Switzerland. In Q3, both markets experienced another quarter of strong sequential IMS volume growth, with offtake exit volume of TEREA, now the clear majority of HTU sales in both markets.
We also launched IQOS ILUMA in Greece at the end of June, with promising initial results, and introduced the product to Portugal earlier this month. In Japan, the adjusted total tobacco share for our HTU brand increased by +2.8 points versus the prior year quarter to 23.6%. As in the EU, Q3 last year saw an actual sequential share decline due to combustible seasonality, making the +0.7-point sequential increase this quarter a notable achievement. IMS again grew sequentially to reach a record high of 8.3 billion units on the fourth quarter moving average. This was driven by the impressive performance of IQOS ILUMA and the continued growth in key cities such as Tokyo. The heat-not-burn category now represents over one third of total tobacco in Japan, with IQOS increasingly driving the unit growth.
IQOS ILUMA celebrated its first anniversary of the Japan national launch in September and continues to exhibit strong growth due to excellent conversion, consumer satisfaction, and retention rates. Our premium price series HTUs continued to grow strongly in Q3 and strengthen their position as both the second-largest nicotine brand and largest RRP brand in Japan, reaching an exit HTU share of 14.9%. Encouragingly, SENTIA HTUs have also grown rapidly since the initial launch in April and national expansion in mid-July, driving consumer acquisition in the mainstream price segment. We've exited Q3 with over 25% HTU offtake share, a record high, and continue to see a long runway of growth in Japan over the coming quarters.
In addition to strong IQOS gain in developed countries, we continue to see very promising growth in low and middle-income markets, which drove around 30% of the company's pro forma HTU growth in Q3. Given the large size of this market, the premium positioning of the existing IQOS portfolio and the relatively early stage of commercialization, this represents outstanding progress. Strong growth in IMS volume continued and the pro forma share of our HTU brand group plus 0.9 points versus the prior year quarter to 2.8% in Q3, a robust performance considering the impact of seasonality. This reflects success across many markets with notable progress in Lebanon, where Q3 offtake share in Beirut increased by +7 points to 18%, and Egypt, where offtake share in Cairo is approaching 6%. Further TCS data can be found in the appendix.
We are also encouraged by recent positive regulatory development in the Philippines, where the government passed a new law clearly differentiating combustible and non-combustible tobacco product. Smoke-free products will be regulated separately with different health warnings, permitted product technique or testing or guided trials, and rules to be established for product communication and point-of-sale activity that will support the switching of other smokers to better alternatives. In addition, the latest development from our smoke-free innovation pipeline is a new heat-not-burn device that is especially relevant for low and middle-income markets. It is a simple, convenient, and affordable proposition, which can cater to local taste preferences without compromising on the reduced risk profile of the product. We are planning pilot city launches in Colombia and the Philippines during the fourth quarter as we further extend our portfolio of smoke-free products to serve different consumer needs.
As we continue to innovate, it's critical to integrate sustainability through eco-design principles, circularity, and efforts to minimize and manage post-consumer waste. Addressing the environmental impact of our product is a key pillar of our sustainability strategy, which is reflected in our sustainability index and form part of our executive compensation scheme. Our approach to reduce waste related to cigarettes, RRP consumable, device, and packaging is covered in a report, case studies, and campaign published last month and available via a dedicated microsite on pmi.com. For example, we are progressing well towards our 2025 aspiration of having at least 80% of our shipment volumes covered by markets with anti-littering program in place for cigarettes and for over 1 million cumulative smoke-free devices to be refreshed or repaired. Moreover, during September, more than 10,000 stakeholders from more than 60 markets joined cleanup initiative around the world.
I am proud of our ESG performance, which continue to be recognized worldwide. Our 2021 low carbon transition plan and our business transformation strategy were recently nominated for sustainability prizes, and our Chief Sustainability Officer, Jennifer Motles, was nominated for CSO of the year at the World Sustainability Awards. Moving now to perhaps most impactful news of today, we are delighted to announce that we will soon have full control of IQOS, the world's leading smoke-free product in the United States, the world's largest smoke-free market. As previously communicated, following the ITC decision last year prohibiting the import of IQOS into the U.S., we have been in discussion with Altria to find the best path forward. PMI's priority has always been to find a solution that best positions IQOS to realize its full potential in the U.S. as quickly as possible.
I am excited to report that we have now reached an outcome that achieves this goal. Let me start by briefly summarizing the key terms of the agreement. From April the thirtieth, 2024, PMI will have full control over the commercialization of IQOS in the U.S., allowing us to distribute and sell the product and critically engage directly with adult tobacco users. As part of the agreement, we will pay a total cash consideration of around $2.7 billion to Altria. We believe this agreement represents excellent value to our shareholders, as with the previous agreement, potentially stretching to 2029. This solution provides certainty by avoiding what could have been a protracted and uncertain legal process that could have severely held back the development of IQOS.
It provides a clear near-term path to commercializing at scale in the U.S. with the unencumbered backing of PMI's full strategic and financial commitment to the product success. IQOS is the world's leading smoke-free product, with remarkable and rapid growth achieved across a wide range of international markets. From a standing start in 2015, IQOS is already a $9 billion annual net revenue business, having created the attractive heat-not-burn category and driving its growth. The U.S. is the world's biggest accessible nicotine market by retail value. The estimated retail value of its growing smoke-free market is already around 60% of all international markets combined, excluding China. We have spoken before about our plan to bring a leading portfolio to the U.S., and we expect IQOS to be at the very core of our U.S. smoke-free future, just as it already is elsewhere.
The U.S. opportunity for IQOS is particularly encouraging, given the clear demand from American adult smokers for credible smoke-free alternatives to cigarettes. Moreover, current smoke-free products have had limited success in fully switching adult smokers away from cigarettes. In the U.S., there are ample opportunities to build adult smoker awareness and understanding of smoke-free product offers, something that is particularly true for IQOS given our MRTP authorization. We are ready to invest behind IQOS to bring it to market at scale across the U.S., starting with full-scale launches in key cities and regions, with a plan to progress rapidly to national penetration. IQOS remains the only inhalable smoke-free nicotine product to have received a modified risk tobacco product authorization from the U.S. Food and Drug Administration.
We know from our experience in over 65 markets worldwide that IQOS appeal to adult smokers who have tried the product is strong, as demonstrated by high full switching rate. We have a strong commitment to build awareness and invest behind the category to drive product trial among American smokers. The true potential for IQOS in the U.S. is substantial, as illustrated by the double-digit national shares achieved in just a few years across a number of Asian, European, and other markets, all with varying demographic profiles and adult smoker taste preferences. We believe a volume share of 10% of cigarettes and HTUs by 2030 is very achievable, with potential to go much further. Importantly, the return on investment for IQOS in the highly profitable U.S. tobacco market is compelling.
We estimate the total U.S. industry profit pool at over $20 billion and with average unit margin on U.S. cigarettes more than three times greater than for the PMI average. The payback over the next few years on the consideration paid to Altria looks very attractive. As we do not have a legacy cigarette business in the U.S., the opportunity is purely incremental. This also reflects a current excise tax system with no differentiation for heated tobacco products versus cigarettes at the federal level and differential on a limited basis in only a handful of states, thus presenting a clear additional opportunity over time. We are already advanced in our plan for IQOS in the U.S. as we prepare for domestic manufacturing and for important regulatory submissions, including for IQOS ILUMA, where we plan to file a PMTA in H2 2023.
As mentioned previously, we target the first half of next year for the resumption of IQOS domestic supply, which will be available to Altria under our current arrangement up until PMI assumes full commercial responsibility in April 2024. Our proposed combination with Swedish Match would provide certain U.S. sales and distribution capability. However, in the case of failure, we have a clear path forward for IQOS and the rest of our smoke-free portfolio. Indeed, the most critical part of the IQOS commercial model centers on converting adult smokers rather than distribution. In addition, the U.S. has an established distribution and retail landscape with a clear route to market.
We therefore also have concrete plan to proceed autonomously in building, fully control and manage U.S. sales and distribution capabilities over the next 18 months leading up to April 2024 in order to ensure a successful IQOS rollout and the introduction of other smoke-free products. Should our Swedish Match offer fail. Indeed, we believe today's agreement is fundamental to unlock the U.S. smoke-free market. As we have shared previously, we expect the heated tobacco category to remain the largest and fastest-growing in dollar terms internationally. While the e-vapor and to a lesser extent nicotine pouch category has paved the way for smoke-free product in the U.S., we know that heated tobacco comes closest to replicating the experience that smokers enjoy with higher conversion and very low unintended use. Conclude today's presentation.
Our business delivered strong third quarter and year-to-date performance despite some challenging headwind, and we expect to deliver another excellent year of double-digit adjusted diluted EPS growth on a pro forma currency-neutral basis. Most impressive was the continued excellent IQOS performance with strong shipment volume, IMS growth, reflecting broad-based momentum in the region, Japan, and emerging markets. We remain excited by the promising result of IQOS ILUMA, our rich pipeline of smoke-free innovation and plans for further launches of both ILUMA and VEEV, in the fourth quarter and in 2023. We continue to accelerate investment in our commercial program, digital engine and R&D for long-term growth, as well as behind a number of growth opportunities across category and geography. The return from such investments remain compelling, as demonstrated by the exceptional top and bottom-line growth delivered over recent years.
In addition to growth in smoke-free product, our combustible business continued to perform well with organic net revenue growth and essentially stable pro forma shipment volume. Despite accelerated pricing in the current inflationary environment, temporary margin pressure from inflation and supply chain inefficiency is likely to continue in the coming quarters. Importantly, our underlying growth fundamentals remain strong and we look forward with confidence. We have secured our near-term access to the substantial U.S. opportunity for IQOS, also forming the backbone for introducing our broader smoke-free portfolio. We are now advancing on our plan to launch at scale, with or without Swedish Match. Finally, we have increased the dividend every year as a public company through the ups and downs of economic and currency cycles. We continue to be steadfastly committed to returning cash to shareholders as we advance toward our ambition to become predominantly smoke-free by 2025.
Thank you. Before we start the question and answer session, please note that we are not able to comment on our offer for Swedish Match beyond what has been announced. All materials related to the offer can be found on the website smokefree-offer.com. Jacek and I, we are now more than happy to answer your questions.
Thank you. We will now conduct the question-and-answer portion of the conference. Again, in order to ask a question or make a comment, please press the star key followed by one on your touch tone phone. In the interest of fairness and time, we ask that participants keep to a minimum of two questions each. If time allows, follow-up questions may be taken. You may rejoin the queue by again pressing star one on your touch tone phone. Thank you. Our first question will come from Chris Growe with Stifel. Your line is now open.
Hi. Good morning.
Hi, Chris. Good morning.
Hi. I wanted to ask first if I could, in relation to the operating margin. 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. I just wanna 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? 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 cost 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. You have a number of temporary elements that have been with us since almost the beginning of the year and that drove the operating margin down.
I think that it will take a little bit of time for those to be removed. We also have seen for the first nine months 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 digits. It could strengthen further because when we look at the level 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, you know, we are buying energy and a number of components. That means that this part of inflation is gonna stay.
In Q4, actually with a more positive mix and some maybe one-off having a lower impact, we are expecting rather a better sort of situation on margin evolution versus the first nine months. That's the opposite. We expect a Q4 that should be, in terms of margin evolution, better than the first nine months.
Okay. Thank you. 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, you know, trade-down activity, you know, the concerns of consumers being able, you know, behaving discretionary spending, and particularly in Europe and particularly as we move forward, as energy costs continue to remain so high. Are you seeing any signs of that, any trade-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, you know, down-trading type of a pressure, we still don't see really an acceleration of the trends, right? So obviously we see the Indonesia, Philippines under pressure, but it's not much really changed versus what we have seen before. One could argue that in some geographies that inflation has a bit of a lagging, you know, sort of evolution, but nothing today. You could see also from the shares of Marlboro, right, that we look pretty strong on the premium propositions, okay? Despite the fact that we taking a pricing and there will be, you know, a pricing, more pricing to come.
Thank you for that. I appreciate it.
Thank you.
Thank you. Our next question will come from Pamela Kaufman with Morgan Stanley. Your line is now open.
Good morning.
Hi, Pam.
Hi, 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?
Yeah. Hi, Pamela. I mean, what stands behind the success of IQOS is really the front end consumer interface, right? That's the commercialization aspect which is one of the key element of IQOS success, which we measure as the highest in the industry rates of conversion and adoption of IQOS and a full switching from cigarettes. Swedish Match doesn't have it, right? Swedish Match has the component of the sales force, which is essentially in-store execution, but IQOS success hinges on that business-to-consumer component. In a bolt-on scenario, obviously that's the investment which is in front of us but, you know, vis-à-vis a great, you know, a market size and the profitability pool. Swedish Match adds the component of a sales force, which is the in-store execution.
Obviously it would be, you know, nice to have them, but this is not something which is unique in a sense that that, you know, you cannot to make it or attain it organically, for example, okay? Other options can be at the table as well. The uniqueness of an IQOS is, again, the commercial engine, commercial activations. If you follow us closer, we have spent enormous effort in behind the consumer journey and, you know, automating, digitalizing all touchpoints 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.
Thank you. 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? What would be the challenges in operating the asset with a lower ownership stake?
Well, we have asked for, you know, some understanding and not getting the question from the Swedish Match deal. Like, the fact of life is it is SEK 116 and the 90% acceptance level, okay? 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 thing. I think it is a fair market price, fair valuation of the company from 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.
Understood. Thank you.
Thank you, Pam.
Thank you.
Thank you. Our next question will come from Gaurav Jain with Barclays. Your line is now open.
Hi, good morning.
Good morning, Gaurav.
Hi. Hi. A couple of questions from me. First is on, you know, the entire plan around IQOS commercialization in the U.S., and let's assume you are doing it standalone. 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. 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 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 commercialized IQOS around the world.
I remember, like, between 2015 and 2017, you had, like, a few, like, $700 million or $1 billion kind of loss that you had identified at that time. Is that something similar we should do as you commercialize U.S.?
Yeah, I mean, look, directionally, you're right. I mean, obviously, you know, building the infrastructure, everything from scratch requires several hundred or thousands of employees. Now, in the scheme of the 30,000 employees which PMI has, you know, it's not the first time that we're building an organization from scratch. You know, you're absolutely right. In the initial years, couple of years will be at a loss as frankly speaking, we had with IQOS in every country into which we enter. You know, if you're following us closely, you know that we have achieved on markets the faster path to the break-even that we had in a year one or two of our smoke-free journey versus what we're achieving today. You know, it's a ton of learnings.
It's a tremendous learning and capability in organization. They call the, you know, internal know-how and the systems, et cetera, which we don't have to reinvent again. We know it pretty well, the blueprint, a lot of things have been tested, et cetera. U.S. market will enjoy or leverage that sort of the things. We'll come, you know, somewhere next year, we'll 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, our most logical milestone near term.
Let's say 2030 is 10, 10 share points of the market, which if we see where we are in other places and what we achieve 6 years after, i.e., to date, versus now I add the 6 years plus minus to the current 2030, 10%, I think we will execute accordingly. We have and Emmanuel Babeau in his remarks make it very clear we'll fully stand behind, including monetary and the human resources to deliver the success, this well-overdue success of IQOS in the U.S.
Sure. You know, a follow-up question now on the BAT litigation at ITC, which they won, the patent dispute. Look, so that prevents you from importing IQOS devices, which is why you are now setting up the domestic manufacturing facilities. Can't BAT use those patent wins because clearly they have established they have some strength in their patents and go to a domestic U.S. court and also get injunctions against your selling of IQOS devices in the domestic market? 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, you know, there is a decision from ITC. But otherwise, on the federal circuit, I would say for the time being, there is rather success on our side. You know, one of the family of patents that have been claimed by BAT on their case with the ITC was actually recognized as not valid in front of a U.S. court. 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.
We believe that the domestic manufacturing is giving us a clear path and the capacity to reenter the U.S. market.
Okay. If I could just ask one 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 started by BAT is with regards to the IQOS 3.0.
Sure. Thank you so much.
Okay. ILUMA is in a completely different path.
Sure. Thank you.
Thank you.
Thank you. Our next question will come from Bonnie Herzog with Goldman Sachs. Your line is now open.
All right. Thank you. Hi, everyone. I
Hi, Bonnie.
Hi. My first question is on your guidance. Your Q3 came in better than expected, and you know, you took up your full year currency neutral revenue guidance. 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. Could you walk through this for us, especially on device sales expectations in the second half, possibly ramping? You know, if there's a risk of retail inventory building that could potentially impact results next year?
Yes, Bonnie. No, there is nothing to do with the device in the guidance. You're right. We have slightly been moving the bracket for the HTUs volume. Not massively. We were 90-92, and we are now 89-91. You know, there 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.
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 +2%-+3%. We have been raising the guidance for revenue as well, with the low end of the bracket that has been raised to +6.5%. 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. That is giving us the same bracket for adjusted EPS. In a nutshell, that is how the guidance is evolving.
Okay, thanks for that. Just my second question. I sort of 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, you know, how you got comfortable with the $2.7 billion payment to Altria, which is quite a large sum, lump sum of money. You know, this is to get your exclusive rights to IQOS back in the U.S. How confident are you that you're going to be able to reach this 10% share in the U.S. market by 2030, you know, especially since it does feel like the ramp will now likely be slower, you know, if you have to go it alone or even with Swedish Match.
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?
With regards to the confidence, Bonnie, look, with this confidence behind IQOS is growing every year, every quarter. I mean, you see the results on the international markets and, you know, we have the markets when we're slower, we have markets when we're faster. The potential for IQOS, the heat-not-burn, is there, okay? You know, if we look at the U.S., I don't think, you know, I cannot find the reasons why in the U.S. we cannot replicate and come close to the success internationally. You know, the 10%, if you like, the first double-digit number, which we are attaining after six years in any other geographies, and taking into consideration that U.S. is starting with IQOS 3, that we will be also working to bring faster the IQOS ILUMA to U.S.
You know, our international success has been built on IQOS 2.4, 2.4 Plus. The US is starting history, the journey with IQOS at a much better moment from a product perspective, of our capability perspective, understanding this entire category that we've been in our international markets. This is where the confidence is coming from. The second question with regards to the Marlboro, IQOS TEREA in Japan is now by X factor bigger than the HeatSticks Marlboro. This was the last, market which we still have been using the Marlboro trademark on our heat-not-burn consumables. As you know, at the very beginning, six or so years ago, in a few markets, if I recall, was Switzerland and Italy, we started with Marlboro.
Very early in the journey we have almost overnight rebranded the thing and we dropped the Marlboro from the brand, from the trade, from the proposition. I actually believe that, you know, we have a Marlboro in international, and this is a great brand, but on cigarettes. 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. I don't see this as any impediment or bottleneck of our, you know, in our strategy in the U.S.
Okay, thank you.
Thank you.
Thank you.
Thank you. Our next question will come from Priya Ohri-Gupta with Barclays. Your line is now open.
Hey, thank you so much for taking the question. 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 any adjustment for any hedging that might have previously been put in place? 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 reporting is the fact that the price increase that we are offering today correspond 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. I'm not sure to understand your question.
It was just whether, you know, 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. Was there any incremental hedging?
We can.
That was put in place?
We can make your calculation. We can provide you with the number of shares of Swedish Match and you can make the calculation. In dollar terms, I think the amount is slightly lower. Please take into account the fact that Swedish Match is not 100% generating cash flow in dollars, okay? You cannot just take the dollar amount at 100%, to be very clear.
That's helpful. 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 the PMTA or submit the PMTA in the latter half of next year, what sort of a timeline are you assuming around that getting to market and getting authorized?
Well, I mean, we're planning to file for PMTA with ILUMA to FDA next year. So, you know, as we've seen recently, the factoring in the timing of outcome of dealing with FDA is a little bit of, you know, 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 where ILUMA plays the role today in our portfolio. If you look, for example, for the European Union, almost entirely, the success of nearly six years in a commercialization of IQOS is built on the IQOS 2.4, 2.4 Plus and a 3.1.
These are the products which we have a relatively clear path to go in the U.S. There will be ILUMA, but, you know, it's too early now to say how much of the 10% will be there. Obviously, you know, for us, ILUMA offers benefits even further than the blade technology. But on a blade technology, this is where we are today, six years in PMI. I think we don't have to solve that equation today.
Okay, that's very helpful. 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? In terms of cadence, is it fair to assume sort of the greatest effect of that being on the first half of calendar 2023, 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. Yeah, that would probably mean that the mid-single digit could go to high single digits. It can be a bit more complex than that because of course, it depends on which kind of element of inflation we're exposed to. That could be in some areas an evolution for next year.
Frankly, too early to say, and also too early to say when gonna be the climax of that. Is it going to be at the end of this year, you know, in terms of cost increasing? Are we going to see more inflation through 2023? I think it's too early to say. Of course, I mean, we'll monitor the situation, but I would say energy price is the energy price. You see what I mean? There is not much we can do. We still need to buy energy. The answer for it is of course to react with price increase. 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 gonna be the environment and whatever it is, to mitigate the impact of what we're gonna see on inflationary pressure with price increase.
Great. Thank you so much.
Thank you.
Thank you. This does conclude today's Q&A portion. I would now like to turn the program back over to management for any additional or closing remarks.
Thank you very much for your attention. We're very happy that we spent this hour with you, especially in this very important moment for us, that our key 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 with achieving the deal with Altria and regaining the full control of IQOS. 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.