Philip Morris International Inc. (NYSE:PM) Second Quarter 2022 Earnings Conference Call July 21, 2022 9:00 a. m. m. ET
Participating companies
James Bushnell – Vice President of Investor Relations and Financial Communications
Emmanuel Babeau – Chief Financial Officer
Conference Call Participants
Pamela Kaufman – Morgan Stanley
Bonnie Herzog-Goldman Sachs
Chris Growe – Stifel
Vivien Azer – Cowen
Gaurav Jain – Barclays
Operator
Hello and welcome to the call of Philip Morris International’s 2022 quarter earnings convention. Today’s call is scheduled to last about an hour, adding commentary from Philip Morris International’s control sessions and the Q&A session. [Operator Instructions] Media representatives will also be invited on the call for consultations at the end of the period of consultations and responses from the investment community.
I would now like to speak with Mr. James Bushnell, Vice President of Investor Relations and Financial Communications. Please continue, sir.
james bushnel
Welcome. Thank you for joining us. Earlier in the day, we issued a press release with detailed data on our results for the current quarter of 2022. GAAP measures and more information about the unit heated tobacco market can be found at the end of today’s webcast slides, which are posted on our website.
Unless otherwise stated, all references to IQOS refer to our IQOS products heated without combustion and all references to smoke-free products refer to our RSOs. Growth rates presented on a biological basis reflect unbiased adjusted effects in foreign currencies, excluding acquisitions and disposals. In line with the last quarter, the figures and comparisons presented on a pro forma basis absolutely exclude PMI activities in Russia and Ukraine.
As mentioned above, starting in the current quarter of 2022, and comparatively, PMI will exclude amortization and impairment of acquired intangible assets from its adjusted effects. Today’s comments include forward-looking statements and projections of long-term effects. Please draw your attention to the disclosure of forward-looking statements and cautionary statements in today’s filing and press release for a review of the points that may cause actual effects to differ materially from forward-looking statements or projections.
Now I must introduce Emmanuel Babeau, Chief Financial Officer. It happened to you, Emmanuel.
emmanuel babeau
Thank you James. Welcome to your new position and welcome everyone. Before we begin, I would like to reiterate the importance we attach to the protection of our workers and their families affected by the war in Ukraine and especially to the protection of our workers. We continue to roll out the promised humanitarian and additional benefits to our Ukrainian workers.
As announced in the past, we intend to exit the Russian market in an orderly manner, as complex exits from ongoing operations in Russia are increasing, such as demanding origin chain situations and restrictions in the monetary and banking sectors. We actively continue to paint on features to do so in the context of an increasingly complex and changing regulatory and operating environment, adding the requirement to download secure government approvals for any transaction.
Let’s go to our business. We demonstrated strong underlying momentum in the current quarter of 2022 with another quarter of positive volume supporting better-than-expected earnings and earnings expansion. IQOS’ most impressive continued functionality and strong expansion in the number of pro forma users in the current quarter of more than 1. 1 million, demonstrating additional sequential acceleration compared to the first quarter as device limitations and COVID restrictions continue to ease. This reflects strong momentum in the EU region, Japan and emerging markets.
Second quarter pro forma PR net profit increased by more than 11% despite the unfavorable impact on shipping schedule due to supply chain constraints highlighted in the last quarter, while HTU IMS volumes increased by more than 20%. IQOS ILUMA achieved impressive new effects in its 3 most sensitive markets: Japan, Switzerland and Spain. The acceleration of category expansion in those various geographies highlights the exciting long-term expansion opportunity around the world, adding Greece’s most recent launch market.
In fuels, the expansion of pro forma volume forged in the current quarter of more than 2. 4% and the expansion of net biological sales of more than 4. 2% were driven by gains in Marlboro shares, stronger costs and a continued market recovery. Maintaining leadership in the cigarette category allows us to maximize the transition from adult smokers to smoke-free and drive our transformation into a predominantly smoke-free business through 2025.
We expect the strong underlying momentum of our business to continue in the first half and are based on a biological expansion outlook for the year. We are now on track for two consecutive years of volume expansion, confirming our prestige as an expansion company in terms of volumes, biological net income and margins. Despite strong currency hurdles in 2022, we expect to generate a diluted adjusted EPS of about $6 for the full year, adding Russia and Ukraine.
The proposed addition of Swedish Match would improve our long-term financial profile. It’s a value-creating offering for any of the shareholder teams with a compelling strategic and cultural fit, providing an additional opportunity to drive our long-term smoke-free.
Let’s move on to the name numbers. Our second quarter volumes increased by more than 3% on a pro forma basis and by more than 1. 1% overall, adding Russia and Ukraine. Pro forma net income grew organically by more than 6. 2% and by more than 5. 3% for the overall PMI, whether it is the continued strong expansion of IQOS and the continued recovery of the fuel business in many markets to a comparison affected by the pandemic.
As we expected and indicated above, the less unfavourable timing of the cigarette shipment also played a role, in particular due to the replenishment of duty-free stocks. Base and through more than 4. 1% overall despite expected retention in HTU shipments to Japan as we handle global supply chain disruption. This includes the fuel value of plus 3. 5% on a pro forma basis or almost 5% outdoors Indonesia.
Our second quarter adjusted operating margin decreased organically by 190 bps on a pro forma basis and 150 bps total. As expected and communicated in our first quarter quarterly results, this reflects 4 main factors: first, investments to further expand and maintain the pace of expansion of our smoke-free product portfolio. This includes the higher up-front charge of ILUMA devices and HTUs and the brief dilutive effect on margin from higher device sales as we implement ILUMA and fill the distribution channel as device restriction eases. mitigated to help the accelerated expansion of IQOS users. Second, they have an effect on the disruption of the chain of origin, mainly due to the war in Ukraine, which adds approximately $80 million in additional air freight expenses. Third, an inflation of around 4% in our goods charge driven by the recovery from the global pandemic and exacerbated by the war, adding some direct prices for materials, wages, energy and transportation. And finally, a tough comparison to last year’s margins, which included really extensive productivity savings on goods sold.
Despite those typical margin challenges, our earnings expansion and continued profitability allow us to record an expansion of more than 5. 6% of adjusted and currency-neutral diluted EPS, ahead of expectations at $1. 32 and an expansion of more than 3. 8% for the overall PMI at $1. 48, adding Russia and Ukraine. If we now take a look at the first part of the year, our volumes increased more than 4% on a pro forma basis and more than 2. 2% for the overall PMI. Pro forma earnings rose more than 8. 1% and by more than 7. 1% overall, also driven by IQOS functionality and the recovery of the cigarette category.
We recorded a biological expansion in net income consistent with unit of over 4% on a pro forma basis and over 4. 7% overall, again, reflecting the positive impact on volume and value expansion. the margin contracted biologically through 110 base emissions on a pro forma basis and 90 base emissions overall, due to the points discussed above. We expect increased margin functionality in the second half, a topic I’ll be talking about shortly. EPS increased by more than 10. 4% to $2. 79 on a pro forma basis and by more than 9. 2% overall to $3. 06, perfect functionality given the circumstances.
Reflecting this strong momentum, we are raising our forecasts for 2022. With a strong expansion in IQOS and physically powerful trends in fuels, we expect our expectation of currency neutral expansion to increase compared to our previous guidance. First, we now plan to increase our overall pro forma shipment volume from over 1. 5% to over 2. 5% by 2022, achieving a year of volume expansion.
For pro forma net sales, we expect a biological expansion of between 6% and 8% compared to what was previously announced plus 4. 5% to plus 6. 5%, despite a larger-than-expected slowdown in hyperinflationary accounting in Turkey. With a strong recovery in device volume, ILUMA’s developing contribution with a higher unit charge first, and continued global inflation, we are cutting our forecast for pro forma adjusted biological margin expansion between 0 and more than 50 basis points.
We are also raising our expansion outlook for unbiased foreign currency adjusted pro forma diluted earnings per share between 10% and 12%. This reflects a diversity of $5. 23 to $5. 34, adding an estimated unfavorable exchange effect of $0. 80 to prevailing rates, especially due to the euro. and the Japanese yen. We will come with a slide in the appendix with more main points about this estimated impact. For the overall PMI, which assumes a full annual contribution from Russia and Ukraine, we expect adjusted diluted EPS of $5. 90 to $6. 05, reflecting the momentum to the pro forma base and adding an estimated unfavorable currency effect of $0. 69.
Please note that our guidance for 2022 does not signify any contribution from the proposed merger with Swedish Match, which is expected to close in the fourth quarter of this year, subject to Swedish Match shareholder acceptance and regulatory approvals. IQOS expansion customers are fair and we now expect to deliver a pro forma HTU shipping volume of 90 to 92 billion games for the full year, which is the top of our previous address range.
With a very strong expansion momentum, the main constraint to not increasing our HTU volume target is our production capacity, especially for ILUMA’s PTUs due to their exceptional initial good fortune and the cancellation of production in Russia following the conversion of the existing production line. for induction consumables. We continue to expect adequate HTU expansion in the coming quarters with a slow improvement in ILUMA HTU capacity in the first part of 2023. We are prioritizing the ILUMA launch market accordingly with a plan for additional launches in the fourth quarter, as in the previously announced.
Another notable update to our outlook is an accumulation in our operating money playroom to approximately $10. 5 billion, from approximately $10 billion previously, despite notable currency difficulties. and Ukraine throughout the year. We recorded a physically powerful operational monetary expansion of more than 14% in the first part of the year. And as the demanding situations of recent years show, the money-making capacity of our business remains exceptional.
Although flattened out in 2021 through a favorable timing and unique impact, our revised full-year guidance shows underlying expansion compared to this exceptional year after also taking into account current capital accumulation and inflation-like currency needs. This underscores our ability to achieve a strong balance sheet, pay off debt and invest in the expansion of our business.
Our net debt of $23 billion as of June 30, 2022 decreased compared to June and December 2021, despite first half capital expenditures of $500 million and continued dividend payments. Our commitment to our progressive dividend policy is unwavering and we look to the future for the additional money that the proposed merger with Swedish Match would bring. We also continue to forecast approximately $1 billion in capital expenditures for the full year.
Let’s now move on to the pro forma perspective for the current part of the year. We will be expecting a strong expansion of earnings, an expansion of the biological margin in the adjusted IO and a further acceleration in the expansion of the net source of profit. For the third quarter, we will be expecting an average single-digit biological expansion driven through IQOS with approximately $22 billion in HTU pro forma shipping volumes. Fuel volume trends are expected to remain resilient across old standards. The expansion of net sales will also continue to be affected in the third and fourth quarters through the shift to hyperinflationary accounting in Turkey.
While the headwinds of forward-looking charges in the current quarter are expected to decrease in the third quarter, we expect this to be more than offset through increased business investment and R.
Let’s go back to our results. Sales volume in the HTU pro forma market increased significantly by more than 20% in the current quarter and in the first part of the year, thanks in particular to the strong functionality in the EU region. As expected, IMS’s pro forma expansion in the quarter at the moment specifically outpaced the shipment volume expansion, reflecting the subsequent shipping schedule I discussed earlier. Our overall pro forma shipping volume was over 3% for the current quarter and over 4% for the first part. As I mentioned earlier, this has put us on the right track to achieve overall volume expansion for a consecutive year, either on a pro forma basis and on a general PMI basis.
Thanks to IQOS’ impressive performance, hot tobacco games accounted for 12. 6% of our pro forma shipment volume in the first part of the year, or 14% overall, despite the expected impact on HTU’s shipping schedule in the current quarter. Our sales composition is also rapidly becoming, as our goal is to become a predominantly smoke-free company by 2025. the first part of the year. .
IQOS devices accounted for about 5% of the $4200 million in proforma H1 RRP net profit. This reflects a higher volume of devices with a lower average value than last year as we expand our portfolio of devices with VEEV and ILUMA and our value range, our portfolio of blade devices in preparation for the launch of the premium position in ILUMA. IQOS’ positive momentum continues and accelerates further in many geographies, offering a strong driving force of earnings and margin growth.
We recorded a biological expansion of more than 8. 1% of pro forma net income in the first part of the year and a shipment expansion of more than 4%. This reflects the two driving forces that drive our utility in addition to volume. The first is fuel-driven pricing. The timing is the developing combination of RSO in our business with a net profit source consistent with the unit, which has continued to generate a truly extensive expansion. It’s a difficult driving force as our transformation accelerates.
Now let’s turn to the drivers of our first-half pro forma adjusted investment margin, which organically through 110 foundation issuances. business and manage transient supply chain disruptions and charge inflation.
This margin against was partially offset by higher pro forma adjusted reserve management and marketing charges, which increased organically through 160 base issues. This is due to the positive operating leverage of RSO’s expansion and the good fortune of the charge power program where we generated approximately $420 million in gross savings, of which approximately $170 million came from COGS productivity and more than $250 million from general and administrative expenses.
With more than $1. 2 billion in medium-term savings, we are on track to achieve $2 billion in savings in charge by 2021, 2023. This allows us to reinvest in expanding earnings and mitigate inflationary pressures while continuing to increase our margins. increase investments in our virtual engine and R trading programs
With a shift from a fuel approach, our portfolio again generated an expansion in pro forma volume and biological net sales in the current quarter. Our pro forma shipping volume increased by more than 2. 4% compared to a comparison affected by the pandemic, driven by Indonesia, Poland and Turkey. In addition, we have noticed a continued recovery in duty-free overseas sales outside of Asia as passenger traffic increases. The pro forma fuel value of over 3. 5% exceeded our expectations. Cautious with the economic outlook, the value environment is gradually improving. We plan to offer a similar value point for the whole year.
Our fuel leadership is helping to maximise the shift to smoke-free products and the positive segment percentage at the time and first part of the year demonstrates the strength of our portfolio. We continue to target a strong category percentage over time despite having an effect on IQOS cannibalization. This year marks the 50th anniversary of Marlboro, which has become the world’s leading cigarette brand. the first part of the year, with a category drawback rate of more than 10 % on a pro forma basis for 12 consecutive months.
Of course, our long-standing good fortune in construction is the strength we are now: a smoke-free product as we move wonderfully forward with IQOS as the undisputed world leader in smoke-free products. The positive mix of a solid fuel percentage and the continued expansion of IQOS position us to achieve some overall percentage expansion of the market over time. We captured more than 40 basic numbers of pro forma percentage gains from the market in the current quarter, adding earnings at duty-free department stores in Italy, Japan and Turkey. In addition, PMI HTU reinforced its position as the largest nicotine logo of the moment in the markets where IQOS operates with a percentage of 7. 5%, Russia and Ukraine.
Now let’s move on to IQOS performance. We estimate that there were approximately 19 million IQOS users as of June 30 on a pro forma basis. This reflects a very strong expansion of more than 1. 1 million users in the current quarter and more than 2. 2 million in the first part, a record in the first part on this basis. The acceleration in IQOS user expansion compared to the first quarter and last year, driven by the revival of the acquisition and loyalty program in many markets as the device source restriction fades, as well as the impressive start of IQOS ILUMA. While the limited source of devices has declined over the past quarter, this is largely due to the good fortune of our own proactive efforts. The global source of semiconductors remains scarce and we continue to monitor and manage the situation strictly.
In the EU region, we are now reaching the milestone of nine million IQOS users, reflecting the intensification of business activities to stimulate acquisition and loyalty, as well as the launch of ILUMA in Switzerland and Spain. Our percentage of HTU at the highest quarter through more than 1. 6 emissions at 7. 1% of the total volume of the cigarette and HTU industry.
As reported in previous years, the sequential percentage compared to the first quarter was affected by the same seasonality of the fuel market with the additional detail of a strong year-over-year fuel recovery this quarter. More importantly, IMS volume continued to show physically powerful sequential expansion, and we expect this to continue into the current part of the year. The robust functionality includes the right expansion of users and volume across the region, with a notable contribution from Italy and Poland.
Now, to give a little more color to our progress in the region. This slide shows a variety of the last key Texas city in the current quarter. Despite the effect of the fuel category denominator I just mentioned, the effects on stocks are still very strong. The most impressive is Venus, the first city in the world to exceed 40% market share, while Athens, Budapest and Rome are in their 20s and 20s. Elsewhere, we are satisfied with the effects in London, Vienna and Zurich.
In Japan, IQOS ILUMA is leading the way and our market share continues to grow in key cities like Tokyo. Most importantly, our IMS volume trends have remained strong with continued sequential growth. As reported in the last quarter, second quarter shipments decreased due to time points and are expected to separate at this time with a weighting towards the fourth quarter. The adjusted percentage of our H2 brands increased by more than 1. 9 issues to a record 22. 9% in the second quarter despite seasonality.
Although we are very happy with those effects, it is possible that the functionality of our action has been further accelerated. The fuel category was resilient in the quarter and our release of full HMUs on the mainframe worth using with ILUMA was a bit slower than the first of all anticipated. However, the early effects have been encouraging and are designed to satisfy the desires of its users switching to ILUMA and more value-conscious legal-age smokers.
We have also noticed an increase in the number of adult users moving from a competing product to a low price. We, the users of competing providers, have a lower average daily intake due to a lower full conversion, which ILUMA deserves. improve over time. The smokeless heat category now accounts for about 0. 33 percent of total tobacco in Japan, with IQOS increasingly driving this year’s growth.
In addition to the progress forged in developed countries, we continue to see a very promising expansion of IQOS in the low- and middle-income market. grew to 2. 9% in the second quarter, reflecting a sustained expansion in IMS volume. Given the gigantic length of this market, the high-level positioning of the existing IQOS portfolio, and the initial level of commercialization, this represents remarkable progress.
A wonderful example of this is Lebanon, where the second quarter sales percentage in Beirut increased through more than 8. 1 editions to 17. 4%, and Egypt, where the percentage of sales in Cairo reached around 5% after its launch less than a year ago. Other notable successes come with the recently introduced market of Morocco and Tunisia, as well as Georgia, Jordan, North Macedonia and the Philippines despite the pandemic restriction in Manila.
Now let’s move on to IQOS ILUMA, which has continued to increase the conversion and retention rate in the initial launch market. a acquisition rate of 14. 6% within nine months of the national launch. Encouragingly, SENTIA’s tax percentage has already surpassed the point of prefectures covering about 45% of the industry’s volume.
The expansion of our portfolio of devices with ILUMA 1 in the first quarter also experienced strong traction among legal smokers. We ended the current quarter with a record percentage of generation and continue to see a long track record of expansion in Japan for ILUMA in the coming quarters. HTU ILUMA and TEREA are also making their super start in Spain and Switzerland.
We presented ILUMA in Spain in March 2022 with very positive first results, especially in key cities such as Barcelona and Madrid. Sequential IMS volumes increased by 27% in the second quarter. TEREA ended the quarter, accounting for over 50% of HTU sales in just 4 months after commercialization and our national HTU percentage increased by over 1. 7%. This is encouraging, as Spain is a market where regulatory restrictions have limited the speed of IQOS expansion.
In Switzerland, the demand for ILUMA remains very strong. IMA volume continued to grow sequentially, expanding by more than 13% in the current quarter. A significant proportion of existing users migrated to ILUMA and TEREA’s launch volume now exceeds 70% of our HTU sales. We continue to expand our global portfolio of smoke products-Free products through our portfolio of innovations. We introduced ILUMA in Greece at the end of June and additional market launches are planned for the fourth quarter.
Regarding our new non-combustion heater suitable for the low- and middle-income market, we continue to plan pilot launches in the fourth quarter, further expanding our portfolio to meet the wishes of other customers and segment the market. On e-steam, IQOS VEEV has continued to provide encouraging effects and, for example, is now the most established logo of closed capsules in Italy, with a pattern percentage that expands sequentially to around 20%. 20% to 30%, as we pursue a successful and differentiated category leadership position over time.
In the current quarter, we expanded to 3 more geographies, adding France, and now offer in 10 markets. The latest addition to our e-steam wallet is the VEEBA disposable device. A responsibly advertised disposable electronic steam product can play a vital role. as convenient and hassle-free access to the smoke-free category for older smokers. VEEBA was recently introduced in Canada with nine varieties. Our geographical expansion of smoke-free products also continued in the current quarter with the launch of IQOS in Bahrain.
Of course, the biggest short-term prospective addition to our smoke-free portfolio is the blend presented with Swedish Match. This would particularly drive our transformation into a smoke-free company. smoke- and cigarette-free in the long run and would create a smoke-free world champion. oral nicotine category with the prospect of accelerating overseas expansion.
Another competitive justification for this deal is a large, horny, developing non-smoking market in the U. S. USA. Swedish Match as the leading nicotine sachet franchise, with ZYN, and a truly extensive operating platform in the U. S. the next few years. This would be a strong strategic and cultural complementarity, providing a significant creation of prices for the shareholder in the medium and long term.
As stated in the offer document released June 28, the waiting period for the transaction under the U. S. antitrust proceedings is not limited to the U. S. antitrust process. The U. S. has expired, which means we have met our U. S. requirement. UU. de complete the transaction. We expect the transaction to close in the fourth quarter of this year, subject to Swedish Match shareholder acceptance and regulatory approvals.
As for sustainability, I would first like to draw your attention to our built-in 2021 report published in May, which points to our new sustainability strategy and ESG functionality as we continue forever. The report includes our new sustainability index consisting of 19 key functionalities signs covering our topics of maximum vital sustainability.
The index is weighted through product transformation and now accounts for 30% of our fair long-term performance-based executive reimbursement. The definitions, method, and scope of those KPIs are included in our recently published ESG KPI protocol, which offers greater transparency on how you describe esg good fortune and key performance.
With regard to the fight against climate change, I am very pleased to announce that the science-based targets initiative, as it stands today, has validated our target 0 for 2040. The initiative also revalidated our short-term goal for 2030 to reduce the greenhouse effect. fuel emissions and our new 2025 target for 15% of our suppliers consistent with spending to have their own science-based target until 2025, a very positive development, given that Scope 3 remains the most challenging facet of any company’s decarbonisation strategy.
To achieve those purposes, we are accelerating progress to decarbonize our chain, and we have made 8 more carbon-free plants this year, more than doubling last year and on track to fulfill our all-plant purpose by 2025.
Finally, the effect on product fitness remains one of our top critical ESG priorities. There is a developing framework of clinical and genuine evidence of the really broad threat relief potential of smoke-free products compared to smoking products. We continue to help a policy and a fiscal framework that recognises the positive effect that tobacco harm relief policy can have on public health.
Recent examples come with another multi-year tax plan with differential compensation for smokeless products in Romania and one from Belgium’s Higher Health Council on the entire e-vapor product that can help keep adult smokers away from cigarettes.
To conclude today’s presentation, we delivered a solid first part despite challenging headwinds, which put us on the path to generating physically powerful volume expansion and accelerated, currency-neutral pro forma monetary functionality in 2022. We remain excited about the promising effects of IQOS ILUMA. Increased customer satisfaction is driving higher retention and conversion, and we expect more market launches later this year.
Our fuels business continues to perform well with pro forma volume and organic net income expansion, maintaining our market share over time despite the influence of IQOS cannibalization allows us to further drive the transition of smokers to greater variety and invest for long-term expansion in the progression of cutting-edge health and wellness products. have an effect. net positive in society.
We continue to enrich our portfolio of smoke-free innovations, such as ILUMA and VEEBA, to grow and expand into new and existing categories and geographies. We are raising our pro forma expansion direction for the full year and expect to generate approximately $6 in total adjusted diluted UPA, adding Russia and Ukraine despite the currency’s headwinds.
Importantly, with adequate functionality in 2021 and our strong outlook for 2022, we now expect to comfortably exceed our 2021-2023 minimum CAGR target on a pro forma basis of more than 5% organic net income expansion and more than 5% in foreign currency. -expansion in unbiased adjusted diluted UPA. Our ambition for a predominantly smoke-free company across net sales through 2025 also remains completely intact. We are confident in the immediate speed of our transformation.
Finally, we remain firmly committed to providing liquidity to shareholders. Our most sensible precedent in terms of capital allocation remains reinvestment in corporate and our policy of progressive dividends, backed by strong money generation.
Thank you and now we are more than satisfied with your questions.
Q&A session
Operator
[Operator Instructions] Our first comes from Pamela Kaufman of Morgan Stanley. Your line is now open.
Pamela Kaufmann
I sought to get an idea of what contributes to the strong dynamics of new IQOS users that it has experienced over the past two quarters. And where do you upload those users geographically?How much does ILUMA play beyond IQOS devices?And then, in relation to this, what do you think the expansion in the number of new users would be if you weren’t limited by production capacity?
emmanuel babeau
We are very happy with the functionality of IQOS, and this is reflected in the strong expansion in the number of users of more than 1. 1 million in the current quarter. It has been said that for the first half, this is a record expansion. The good news is that we are developing in different geographies. So, of course, we have several countries like Italy, Poland, Japan, because their size, of course, contributes more to the quarter.
But the truth is, we’re seeing very smart trends across geographies. And I can only mention countries like Romania, Portugal, Hungary, I mean, they’re all smaller countries but where the expansion is impressive. So I think it’s a Triyete to the fact that IQOS obviously meets the expectations of visitors, to the fact that other people realize all the benefits they can get from switching from combustible cigarettes to the IQOS product.
There is a contribution from ILUMA. But as you know, unfortunately today we are limited in the number of geographies where we offer ILUMA. These are Japan, Switzerland and Spain. We present Greece. That’s right in this country, which is helping with functionality. But to be very clear, the functionality is at all levels, as I said, and adding the countries where we haven’t introduced ILUMA yet.
Certainly, we are improving the way we provide a wonderful visitor experience, adding the virtual visitor, the way we manage to reach smokers, how we get in touch with them, how we initiate dialogue, how we get the benefits of IQOS, and how we get them to move from fuel products to IQOS.
So, without a doubt, we continue to improve our commercial engine, and that helps. Undoubtedly, there is the effect of notoriety, of visibility that is increasing. There are markets where when you start to succeed in a certain market share, IQOS becomes visible, more visible, you go to bars, you go to events, you go to social gatherings, you see more and more other people, and it triggers what’s called biological growth, other people who need to notice IQOS for themselves.
They need to learn, friends, how it works and why they really enjoy IQOS. We are also accelerating innovation. We have proposed new devices. We will be offering new types of references. Therefore, we expanded the selection and this probably makes IQOS even more desirable and attractive. I think that’s actually the hard engine of IQOS’ success.
Now, if I am in ILUMA and what is the prospect with the most capacity of ILUMA, we see it in the 3 markets where we launched. ILUMA solves the remaining problems that existed in the last edition of IQOS. This actually comes with a wonderful experience for the visitor. It is to build condition, fidelity.
We expect it to also increase the average daily intake and, in particular, decrease our [indistinguishable]. We see that the customer’s Net Promoter Score is in the countries. So this clearly gives more momentum to the country where we are launching ILUMA. And I think it has to be noticed as a kind of moment level of the rocket that we’re going to launch in the other countries to sell IQOS even higher, and that we’re expecting in the other countries where we’re going to launch in the coming quarters.
Pamela Kaufmann
That’s very useful. I also sought to get an idea of how it would describe its existing appetite for more short-term acquisitions in light of the Swedish Match transaction. There are other assets for sale in the U. S. market. Do you have other acquisitions?
emmanuel babeau
Today, we concentrate on Swedish Match. La timeline is what we originally expected. We are still waiting for the final of the transaction in the fourth quarter, of course, issue of the acceptance of swedish Match shareholders. Nothing has changed. Am I finally opening the door to other things that would further propel our adventure toward a leading and successful smoke-free company?But clearly, the priority and attention today is on Swedish Match.
Operator
Let’s take our next Bonnie Herzog with Goldman Sachs. Your line is open.
Bonnie Herzog
I have a query about your pro forma adjusted OP margin in the second quarter. It decreased on a biological basis. And he noted that the slowdown in its margins was at least partly due to the overload of ILUMA devices and then HVUs. And then it also lowered its FULL-year OP margin forecast. So I hope you can give us a idea. de how long margins can be negatively affected, I guess, through the implementation of ILUMA. Margins can be a key element in that current component, but I just wanted to check that out. And just thinking about 2023, will the ease of dragging continue as it continues to drive ILUMA?
emmanuel babeau
Yes. Thank you Bonnie for the question. So, I mean, it’s true that in the early part of the year, we saw a series of headwinds on the margin. Needless to say, inflation, of course, is one of them. And we said we see inflation of about 4% on the charge of our inputs. So, I guess it’s probably lower than the inflation we’re seeing in a lot of countries, but it’s important. the war in Ukraine.
We have a dramatic acceleration of air shipping which is, of course, temporary. We’re not going to stop air travel in the long run. But we have to do it for a while, and it’s very expensive at a time when cargo cargo is global, not only for air travel, but also on a global scale. Therefore, we have an obvious effect. So it has an effect here.
And then there’s an ILUMA launch initially, especially in Japan, where we had a very, very strong investment, which was actually vital to make in the device. And now we are offering two devices: 3 devices, in fact, 3 models. in Japan, and the maximum volume of devices has an impact on the margin level.
In addition to this, we have been saying it since birth, we are not launching the launch of ILUMA with optimized load and weight in TEREA and SENTIA. And this comes at birth with a negative effect on the margin, which is also temporary. Therefore, we expect that during 2023 it will gradually improve.
Inflation is not transience. For the rest, I think a lot of the headwinds we’re seeing in the early part of the year are transitory and there will be a recovery in the future. I can’t right now and we’re doing it, of course. because we’re gaining visibility to stagger it over the next quarter, but that’s what we expect.
And then, obviously, for the S2, we expect an improvement in the margin. Admittedly, this would be largely biased compared to the fourth quarter, but the deterioration of gross margin in the third quarter would already be minor, but there will be more. investment because we know we’re just tracking growth, and we’re putting the right investment point in place to cope with growth. In the fourth quarter, we will obviously see a greater improvement with the more productive combination.
Didn’t it also impact us on the margin by the fact that the volume we deserve to have sent, which deserves to have been the P
bonnie herzog
It is ok. This all makes sense. And yes, in fact, many moving parts. So it was helpful. And then my query at the moment is about your proposal to win the Swedish party, I guess, can you give us a little more information about where things are?And then, what do you see as potential dangers of this transaction possibly not happening?I guess I’m asking, thinking about the participation of activists, in other words, I guess, I’d like to know how committed you are to this transaction. And what flexibility does it have in terms of leverage? I don’t think it has a target debt ratio, but it has said in the afterlife that it needs to maintain its quality ratings. So I just looked to maybe get an idea from you of the approximate threshold, I guess, of that leverage. the.
emmanuel babeau
Thank you Bonnie. What I can tell you about Swedish Match is, first of all, to repeat that we have met the needs of the USA. In terms of regulatory approval. So it’s us. Otherwise, the proceedings are still ongoing in several jurisdictions according to the plan. And we see that we are waiting for what we said until we started the final in the fourth quarter, of course, issue of the acceptance of the shareholders of Sueco. Game.
And here I would like to reiterate the fact that we believe this is a very attractive offer for the Swedish Match shareholder. I remind everyone that we will be offering 40% of the premium at the time of the announcement in May. since then, markets have been volatile, most of them down, and that this offer was approved by Match’s board of directors, which showed that they thought it was convincing to their shareholders. So that’s what I have to say about it. Swedish Match. Et I don’t have any additional comments to make.
Operator
We’ll take our next Chris Growe with Stifel. Su line is now open.
chris growe
I just had a question for you first about the shipping schedule in the current semester. You talked about a little over 2 billion sticks that were shipped in the current part of the year. Does this basically happen into the fourth quarter when you reflect on your forecast for third quarter IQOS shipments compared to what is implied for the fourth quarter?
emmanuel babeau
Yes, Chris, if I can check to help you, what we expect in the third quarter is that shipments will be much more in line with the underlying expansion we saw in the IMS in the early part of the year. , which about 20%. So, that’s what we expect in shipments, but we don’t expect the resumption of shipments that were missing in the first part of the year. We will be expecting this recovery in the fourth quarter, where we continue to anticipate a very strong dynamism of IQOS consumables. But then shipping will be in the fourth quarter above IMS to align globally with year, shipping and IMS. This is the phase we are being in being waiting for inging ing ing for the year.
chris growe
It is ok. And just some other query about dating with device sales. They were a bit superior here because I had more availability. Is it still superior even in, say, the first part of 23 as the availability of your devices continues to increase?And is this the right timeline to think about when you have, let’s call it, full device availability in the first part of 23 due to the chip shortage?
emmanuel babeau
I think you have two things, Chris, here. The first, remember, we had some restrictions on device availability that started in the current quarter, some have an effect in the third quarter and last year. So, of course, there is one building at the point of the device this year on the basis of low compositions. So that’s the first element. And I think it’s really important to realize how important it is to make sure that smokers can have access to the IQOS device to convert.
So I think it’s vital that we make an advertising effort here. And I think we’re doing well. And we see that our device compared to some festival devices transparently gets a higher conversion. In addition to this and then the element of the moment, it is transparent that with ILUMA, there is a wave of replacement. Thus, we see in the markets where we present ILUMA, a quick replacement of the existing IQOS blade device through IQOS ILUMA.
And this: this wave of replacement creates a very strong point acceleration at the device level. When other people get supplied when the main customer is available, they will be behind us, but we have to go through that. And this has, again, on a transitory basis, a negative effect on the margin.
Operator
We will take our next Vivien Azer with Cowen. Su line is now open.
vivien azer
My first consultation considers the proposed elimination of menthol variants in the EU for non-burning products. Could you offer some color in your menthol blend in this geography and, secondly, a revision of the timing of this proposal?Thank you. .
emmanuel babeau
Look, I’m not sure we’ve disclosed the menthol component. Of course, it is a minority of our activities. What I can say about this is that we must understand that this is an update of the application of the TPD component. So it’s not a decision. It is an application on the TPD of 2014, which in some cases provided for the implementation of a kind of automatic ban.
Now, this still wants to be approved through parliament and the European Council, which will be before those two bodies later in 2022, and we will see what the final resolution will be. To be very transparent, this has already happened in a fuel industry with almost no or very limited effect. Thus, the customer reorganizes its flavor and resorts to other products, but with a very limited effect. And therefore, it is not clear that this will have a significant effect if this happens in our non-combustion heating activity.
Most sensitively, we have the superiority of our tobacco flavor over the festival, and that is the superiority of our generation with IQOS over the festival generation. This means that if we end up with the tobacco flavor, our product will look wonderful compared to the festival for other people who might make the decision to opt for a new product, if they have to give up the taste. So, of course, we’re waiting to see what the progress is. But as you can hear, I suppose, from my comments, we have limited considerations about it.
vivien azer
And my follow-up is about IQOS in the US. If we can reconsider when this product will be reintroduced to the market, please. Thank you.
emmanuel babeau
We hope to be able to present IQOS in the first part of 2023. No I can be more explicit on this point. We continue to work on the plan to be able to do so. And, of course, we will stay published when we have more clarity and a more precise reintroduction date.
Operator
And we’re going to take our last Gaurav Jain consultation with Barclays. Your line is open.
Gaurav Jain
So some questions from me. So, the way forward now, adding Russia for the whole year and before, had included Russia only for the first quarter. So, you can still export devices to Russia, IQOS devices because you still have IQOS shipments there?And also, can you withdraw cash from Russia to pay the dividends, which you pay in USD?
emmanuel babeau
Thanks Gaurav. So yes, I check that we can still export our device, not covered by the penalty. And as a result, you have a lot of parts of the business that are disrupted in the chain of origin, but this one right now because, of course, you never know how it might evolve, it’s not affected. On the payment of the dividend, I am not in a position to tell you because we have not tried to pay a dividend. Therefore, I am not in a position to respond. What I can tell you is that at the moment we have made the same previous payment between our subsidiary and in terms of source in terms of royalties of all kinds or interlines normally. That’s what I can tell you at this point.
Gaurav Jain
It is ok. And my query at the moment is about the Canadian market. Clearly, it’s not consolidating Canada, but it’s giving the volume figures. Thus, the market is down 16% in H1’22 and 19% in the second quarter. And the retail price, I think, is 6% to 7%, which is not unusual. And then he talked about the cannibalization of the e-cigarette and introduced Viva, the disposable device in Canada. Are e-cigarettes now appearing very temporarily and cannibalizing the market?Could we realize that?
emmanuel babeau
Oui. Je think it’s a market where you can have a basis for comparison and a one-time item, however, the trend is obviously not to take less than 60% as a benchmark for the market. But obviously, the trend is downward in fuel and smoke-free products, adding vaping, but our ambition is also to expand smokeless heat to expand well as a replacement for fuel. It’s a market where things are becomingArray
Operator
Now I would like to pass the program to control any additional or final comments.
emmanuel babeau
Well, thank you so much for participating in this call today. We are excited to share the great progress we are making at IQOS and in setting up a smoke-free company, despite the demanding situations everyone knows. And we look forward to talking to you soon. Thanks a lot.
james bushnel
This concludes our call today. Thank you for joining us. If you have any follow-up questions, please contact the Investor Relations team.
Thank you back and have a day.
Operator
This concludes today’s program. Thank you for your participation. You can disconnect at any time and have a glorious day.