Philip Morris International Inc (PM) — Q4 2023 Transcript

Welcome. Thank you for joining us. Earlier today, we issued a press release containing detailed information on our 2023 fourth quarter and full year results. The press release is available on our website at www.pmi.com. A glossary of terms, including the definition for smoke-free products as well as adjustments, other calculations and reconciliations to the most directly comparable U.S. GAAP measures for non-GAAP financial measures cited in this presentation and additional net revenue data are available in Exhibit 99.2 to the company's Form 8-K dated February 8, 2024, and on our Investor Relations website. Today’s remarks contain forward-looking statements and projections of future results. I direct your attention to the forward-looking and cautionary statements disclosure in today’s presentation and press release for a review of the various factors that could cause actual results to differ materially from projections or forward-looking statements. I’m joined today by Jacek Olczak, Chief Executive Officer, and Emmanuel Babeau, Chief Financial Officer. Over to you, Jacek.

Thank you, James, and welcome, everyone. PMI delivered another strong operating performance in 2023. We achieved our third consecutive year of positive volumes and high single-digit organic top line growth, driven by smoke-free products. Smoke-free products delivered accelerated accretion to profitability in the fourth quarter, as our IQOS business delivered meaningful 2023 operating leverage, mitigating a significant drag from combustibles. I am also very pleased to report the continued outstanding growth of ZYN, which was not included in organic metrics until mid-November. Importantly, smoke-free products reached nearly 40% of total PMI net revenues in the fourth quarter and over 40% of gross profit. For the year, smoke-free gross profit increased by 19% organically, and we expect smoke-free organic growth to accelerate for both net revenues and gross profit in 2024. ZYN delivered exceptional growth in its first year within PMI, with U.S. pro forma volumes up by over 60% for the year and over 75% in quarter four. Oral smoke-free is accretive to both our smoke-free business and the overall group, with Swedish Match contributing 50 basis points organic uplift to Q4 OI margins from only 50 days of the period. Our IQOS business continues to deliver excellent results with 15% adjusted in-market sales growth for heated tobacco units, reflecting broad-based momentum in Europe, Japan, and emerging markets. The rollout of IQOS ILUMA is substantially complete, now present in 51 markets representing over 95% of IQOS geographies by volume excluding Russia and Ukraine. The superior experience and design of ILUMA combined with the strong premium brand equity of IQOS and our unrivaled commercial infrastructure enabled IQOS to outgrow the heat-not-burn category, despite holding a category share of over 75%. Importantly, as we have seen in Japan, the launch of ILUMA is a multiyear growth driver consistent with past IQOS innovations. Our 2023 combustible performance was margin dilutive despite strong commercial results, with very good pricing and higher category share. This reflects the significant cost pressures in the category, geographic mix from volume growth in lower-margin markets without smoke-free products, and the impact of IQOS cannibalization. This was also compounded by the technical impact of third-party manufacturing in Indonesia and Ukraine. While cost and currency headwinds impacted our earnings in 2023, the strengthening growth and margin profile of smoke-free products set us up well to deliver sustainable growth and returns including currency in 2024 and beyond. We reached a number of key transformation milestones in Q4. First, IQOS net revenues surpassed Marlboro to become the number one international nicotine brand on this measure. This demonstrates the power of innovative smoke-free alternatives to switch adult smokers away from cigarettes and to address the societal issue of combustible tobacco. It is also a testament to our organization’s ability to build strong and sustainable brand equity. This also applies to ZYN, the fastest growing U.S. smoke-free brand with another outstanding performance in Q4, marked by an increase in category volume share, retail value share, and overall volumes. We are also proud to have reached 25 markets where smoke-free products exceed 50% of our top line for both Q4 and the full year. We aim to reach 60 markets by 2030, driving our ambition to exceed two-thirds of group net revenues. Last, as I already mentioned, over 40% of our total gross profit was generated by smoke-free products, with the adjusted gross margin rate on smoke-free surpassing combustibles for both the quarter and year. We are encouraged by the increasing number of governments adopting tobacco harm reduction policies to encourage reduced-risk nicotine consumption instead of smoking, which is ultimately more sustainable for society. Nevertheless, a considerable amount of work remains. Sustainable growth requires a sustainable business, and we continue to garner increasing recognition for our sustainability performance across the key product and operational topics for our company. PMI was included in the Dow Jones Sustainability World Index for the first time and for the fourth year in a row DJSI North America. In addition, PMI was awarded a carbon disposal projects Triple A rating for the fourth consecutive year. I will now hand it over to Emmanuel to discuss our results and outlook in more detail.

Thank you, Jacek. Let’s start with the headline numbers. We finished the year strongly with Q4 organic net revenue growth of 8.3%. This includes 14% growth from smoke-free products despite slower HTU shipment growth due to comparison effects, and also 5% growth from combustibles. Pricing was a strong driver for both categories, with smoke-free pricing including the impact of retail price increases on HTUs. While Swedish Match was only included in organic metrics as of November 12, it contributed 0.8 percentage points to Q4 organic top line growth and grew by an excellent 26% on a pro forma basis. Operating income grew organically by a very good 8%, including a Swedish Match contribution of 2.2 points. As expected, Q4 margins were broadly stable organically, and grew excluding the technical effects mentioned by Jacek. This enabled our business to deliver another quarter of double-digit currency neutral adjusted diluted EPS growth at 12.2%. This exceeded our prior expectations with ZYN’s remarkable growth a notable contributor. Despite this strong currency-neutral result, Q4 adjusted diluted EPS of $1.36 was adversely affected by a greater than expected currency impact of $0.20. This includes a $0.09 balance sheet related impact under hyperinflationary accounting in Argentina, following the devaluation of the peso in mid-December. As with the previously mentioned impact in Q3, this reflects the depreciation of monetary net assets denominated in pesos, which are subject to capital controls. By its nature, this does not carry forward to future periods. Turning to the full year. Net revenues grew by plus 7.8% organically, representing the third straight year of high single-digit growth. Similar to Q4, this reflects continued excellent IQOS momentum and strong combustible pricing. In 2023, Swedish Match, led by ZYN, grew pro forma ex-currency net revenues by 20%. Operating income grew by plus 3.7% organically, reflecting a challenging first half followed by strong growth in H2. We delivered expansion in both adjusted gross margins and operating income margins in H2, driven by the strong progress of smoke-free products. With the impact of accelerated device sales from the ILUMA rollout in the base and a return to sea freight to Japan, the effects of growing HTU volumes and ongoing cost optimization are clearly visible. As expected, OI margins organically contracted 150 basis points for the full year, primarily due to acute cost and supply chain headwinds in H1. As flagged in prior quarters, full year margins include a 40 basis point headwind from the accounting treatment of third-party manufacturing in Indonesia and Ukraine, primarily reflecting the Indonesia excise tax gross up of around $250 million growth in both net revenues and cost of sales. While headwinds in combustibles have not fully abated, our smoke-free business is delivering excellent profit growth, and our organic results will include the strong contributions from Swedish Match going forward. We successfully mitigated inflationary pressures and supported investments with efficiencies. Across our total operating cost base, we delivered an incremental $100 million in gross cost efficiencies in Q4, and $2.2 billion for 2021/2023 overall, surpassing our $2 billion target. We target an additional $2 billion over the next three years. These positive factors allowed us to deliver very strong currency neutral adjusted diluted EPS growth of plus 11%, ahead of our prior expectations. Adjusted diluted EPS of $6.01 includes unfavorable currency of $0.63, primarily reflecting the Japanese yen, Russian ruble, and specific Argentine peso dynamics I just explained. We include a slide in the appendix to this presentation with more detail. Focusing now on volumes. We comfortably achieved a third consecutive year of shipment growth driven by a 15% increase for IQOS HTUs, in addition to a resilient combustible performance. Our smoke-free volumes made up over 20% of total PMI in Q4, and with continued mid-teens or better growth expected here, we are very well-positioned to continue growing volumes over the mid and long-term. 2023 HTU shipment volumes of 125.3 billion units were at the lower end of our targeted range due to delayed launches in Saudi Arabia and Taiwan, combined with lower-than-expected underlying growth in Russia and Ukraine. For IQOS HTUs, we believe the best indicator of underlying growth is adjusted IMS, as the closest metric to consumer offtake. For the full year, adjusted in-market volumes and shipment growth were in line at plus 15%. In the fourth quarter, HTU shipment growth of 6% reflects trade inventory build-up in the prior year quarter and the plus 14% adjusted IMS growth is therefore a more reliable measure of continued strong growth momentum. Excluding Russia and Ukraine, adjusted in-market sales grew by more than plus 17% for the year. For context, across the two years before the war began in 2022 these markets made up 23% of HTU shipment volumes and exceeded the company’s growth rate by a notable margin. These smoke-free volume growth rates exclude the excellent development of our oral nicotine portfolio driven by ZYN, with shipment volumes up by plus 23% in Q4 and plus 17% in 2023 on a pro forma basis. Cigarette shipments declined by a modest 1.4% in 2023, outperforming the international category decline of 2.4%. Turning to profits. Organic operating income growth stepped up in H2 to plus 10% following the exceptional headwinds of H1. We believe this is more representative of the underlying momentum of our business and in line with our 2024/2026 CAGR target range of plus 8% to 10%. Focusing now on some key drivers of our full year operating income, smoke-free gross profit grew organically by an excellent plus 19%, expanding gross margins by 340 basis points. This reflects part of the operating leverage of IQOS I already mentioned, with a notable contribution from Swedish Match oral nicotine in the last 50 days of Q4 with organic operating profit growth of over 50%. With smoke-free commercial costs also increasing by less than net revenues, this clearly bodes well for 2024 as we continue to benefit from scale effects and manufacturing optimization. Despite very strong pricing, there was only marginal organic growth in combustible gross profits. This partly reflects the negative geographic mix I already mentioned, with greater volume declines in higher margin markets like Japan as adult smokers switch to smoke-free products, and better volume trends in lower margin geographies where smoke-free products are small or not available, such as Turkey. There were also significant inflationary pressures on leaf, direct materials, and other manufacturing costs. Cost increases on leaf, where inventories cover multiple crop years, and wages are likely to carry over into 2024 and should ease thereafter. Moving now to Swedish Match, which delivered outstanding performance in its first full year as part of PMI, with adjusted pro forma currency neutral top line growth of 26% in Q4 and 20% in 2023. When we announced our offer for Swedish Match in 2022, we targeted a return on investment in excess of our cost of capital within five years. With the growth of ZYN surpassing our expectations, we now expect to achieve this well ahead of time. ZYN delivered another remarkable U.S. performance with plus 78% volume growth in Q4 and 62% in 2023. Internationally, we have launched or relaunched ZYN in 10 markets as planned, as we continue to focus on building a truly global brand. U.S. cigars posted robust 2023 results, growing net revenues and profits. This was driven by strong pricing following an increase in April, partially offset by volume declines which reflect lagged competitor pricing and comparison effects. ZYN’s excellent U.S. progress continued in Q4 with 15% sequential growth in 12-month rolling shipments. Impressively, category volume share grew for the third consecutive quarter to 72.8%, an increase of plus 5.4 points year-on-year and plus 2 points sequentially. Retail value share also grew during the quarter to 77.4%, highlighting ZYN’s premium positioning and superior brand equity. This accelerated growth again reflects a broad step-up in nationwide store velocities and gradual distribution expansion as the category gains strong traction with adult nicotine users for its convenience and pleasurable experience. Now focusing on IQOS, starting with user growth. We estimate there were 28.6 million IQOS users as of December 31st, representing growth of 1.2 million users in the quarter and 3.7 million for the full year, a nice acceleration compared to 2022. This includes notable progress in Japan and Europe, in addition to a broad range of other geographies. ILUMA is now available in essentially all major markets outside Russia and Ukraine, with over 17 million estimated adult users as of December 31, 2023. This reflects the switching of existing IQOS users and the acquisition of adult smokers. We expect ILUMA to drive continued strong IQOS user growth in 2024 and beyond. Considering the seasonal fluctuations and volatility in quarterly user estimation, we plan to report this metric on a semi-annual basis going forward. With the addition of ZYN to our portfolio and a smaller but growing VEEV e-vapor business, we also intend to provide a more holistic view of our total smoke-free user base to investors. Moving now to IQOS in the Europe region, where smoke-free products made up more than 45% of Q4 net revenues. Our Q4 adjusted HTU share increased by plus 1.2 points to 9.6% of total cigarette and HTU industry volume. A key driver is the growing uptake of ILUMA, which is available to around 90% of IQOS users in the region after eight further launches during the quarter. In the EU, 11 markets making up nearly 30% of regional IQOS volumes adopted the delegated directive to implement a characterizing flavor ban on heated tobacco products and implemented clean-shelf policies in October. While still early days, we estimate only a small impact on offtake as consumers adjust, as well as on trade inventory levels. Indeed, adjusted IMS volumes continue to exhibit very good sequential growth and reached a record high of 12.4 billion units on a four-quarter moving average. This reflects double-digit year-on-year progression of plus 13% in Q4, despite the lack of growth in Ukraine. We expect the remaining EU markets to adopt the characterizing flavor ban in 2024 and estimate a full year consumer adjustment impact of around 2 billion units on both shipment and IMS, representing less than 5% of regional volumes and less than 2% of total PMI. This is consistent with other past flavor restrictions, such as the EU ban applied to combustibles in 2020. Based on the initial data from markets that have enacted the ban, our fundamental view remains the same. We do not expect a meaningful change in the structural trajectory of the category and indeed expect Europe adjusted IMS progression to be broadly in line with the group growth rate in 2024. Europe is also an important geography for innovation. LEVIA zero-tobacco HTUs were launched in the Czech Republic in mid-October through limited channels with an encouraging initial response. We plan a broader Czech rollout later this month and further market launches this year. In Japan, the heat-not-burn category now represents close to 40% of the total industry, with IQOS driving its growth and reaching over 8.5 million adult users. In Q4, the adjusted total tobacco share for our HTU brands increased by 3.1 points to 27.6%, with off-take share surpassing 34% in Tokyo. Adjusted IMS volumes increased by 14.5% year-over-year for 2023 and 13.4% in Q4 alone, reaching a record high of almost 10 billion units on a four-quarter moving average. Such impressive growth in a market with already high category penetration is a clear testament to the sustainable potential of IQOS around the world. HTU shipment volumes returned to a more normalized state in the fourth quarter as compared to a tough prior year inventory comparison, following the substantial completion of the transition back to sea freight in Q3. In addition to strong IQOS share gains in developed countries, we continue to see very promising growth in low and middle income markets. This slide highlights a selection of Q4 key city off-take shares across markets in Eastern Europe, Africa, Asia, and Latin America. Egypt continues to impress with Cairo off-take share up plus 3 points to 9.4%, also noting encouraging results elsewhere in the region such as Morocco and Lebanon. Indonesia also saw notable progress in its capital city, especially given limited commercialization. We continue to see dynamic off-take volume growth across these important future markets, with the city shares towards the right of this chart indicating exciting potential. While we have already covered the margin dynamics on combustibles, our 2023 commercial performance was very robust with organic top line growth of plus 5.5%. This reflects both strong pricing, with notable contributions from Germany and Indonesia, and positive share performance within a resilient international category. Our cigarette category share grew by plus 0.1 points in Q4 and plus 0.2 points in 2023, with notable contributions from Egypt, Poland, and Turkey. Although flattered by competitor supply constraints in Egypt, which may normalize in 2024, we again achieved our ongoing objective of stable category share excluding this effect, despite the impact of IQOS cannibalization. This remains key as our leadership in combustibles helps to maximize switching to smoke-free products. This combustible share performance combined with the structural growth of IQOS led to an increase of plus 0.6 points of international cigarette and HTU share for the full year. As mentioned previously, our superior share of smoke-free products gives us a formidable platform for sustainable share gains, with superior unit economics. Before we turn to the 2024 outlook, let me briefly reflect on our strong delivery over the past three years, in spite of a number of substantial headwinds. The performance was clearly positive compared to our currency neutral 2021/2023 targets of more than 5% organic top line and more than 9% bottom line growth, supported by overall growing volumes. For the next three years, we target a similar strong volume delivery, a plus 6% to 8% organic net revenue CAGR, and a step-up in organic operating income growth to plus 8% to 10%. We target an adjusted EPS CAGR of plus 9% to 11% ex-currency growth at constant 2023 corporate tax rates, including an increase in net financing costs which skews towards the first year of the period in 2024. Okay. This brings me to the outlook for 2024, where we expect a strong acceleration in smoke-free performance across IQOS volumes, smoke-free net revenues, and gross profit. We forecast the highest-ever absolute increase in HTU adjusted IMS volumes to deliver plus 14% to plus 16% growth in percentage terms, despite the inclusion of an estimated impact of around 2 billion units from consumer adjustment to the EU characterizing flavor ban I mentioned earlier and essentially no off-take growth in Russia. For shipment volumes, we target more than 140 billion units, subject to the usual inherent volatility of shipment timing, new market launches, and potential supply chain disruptions, such as the ongoing situation in the Red Sea. While shipment growth rates naturally follow adjusted IMS over time, there is a possibility of some lower inventory levels compared to 2023 given the substantial completion of ILUMA launches and opportunities for working capital optimization. We expect continued excellent U.S. ZYN volume growth to around 520 million cans. We have also accelerated our capacity expansion plans to support this further significant step-up in volumes and to manage inventory levels which are naturally affected by the recent level of growth. Such a strong outlook for IQOS and ZYN means we expect to deliver an acceleration in organic smoke-free top line growth compared to 2023, reaching close to $15 billion in net revenues at prevailing exchange rates. This supports a total PMI forecast of plus 6.5% to plus 8% organic net revenue progression, including a fourth consecutive year of total volume growth and mid-single digit combustible pricing. We also forecast an acceleration in smoke-free gross profit growth from the organic plus 19% delivered in 2023 as IQOS profitability expands and ZYN’s excellent economics continue. We expect smoke-free to again drive the lion’s share of our forecast organic OI growth of plus 8% to plus 9.5%, notably given the enduring cost pressures and negative geographic mix in combustibles I just mentioned. This naturally implies organic margin expansion, even factoring in the ongoing technical dilution impact of third-party manufacturing in Indonesia. We expect a meaningful organic improvement in overall gross margins excluding technical impacts, and a very limited currency impact on adjusted OI margins. This forecast includes notable capability investments in the U.S., but as mentioned at Investor Day, we still expect to deliver strong double-digit operating income growth in this market. As flagged at last year’s Investor Day, we anticipate an increased net financing expense this year as debt is renewed at higher rates. We forecast a range of $1.3 billion to $1.4 billion, as compared to $1.1 billion in 2023. We also assume a higher effective corporate tax rate due to Russia’s suspension of certain double tax treaties and earnings mix. These tax and interest factors combined impact our currency neutral adjusted diluted EPS growth projection by around 2 percentage points. Accordingly, we forecast currency neutral adjusted diluted EPS growth of plus 7% to plus 9%. This translates into an adjusted diluted EPS range of $6.32 to $6.44, including an unfavorable currency impact of $0.11 at prevailing rates. This notably includes a net favorable impact of $0.13 related to the revaluation of monetary balances in hyperinflationary economies in 2023, skewed to the second half comparison. Moving to the shape of expected 2024 performance on a quarterly basis, we anticipate good double-digit growth in adjusted IMS HTU growth every quarter supporting the full year forecast of plus 14% to plus 16%. We forecast a strong Q1 overall with HTU shipment volumes of 31 billion to 32 billion and continued strong volume growth from ZYN. We expect organic top line and operating income growth to be broadly consistent with the full year outlook, which implies organic margin expansion as with the full year. We project strong Q1 currency neutral adjusted diluted EPS growth of plus 7% to plus 10%. This translates to a range of $1.37 to $1.42, including a negative currency variance of $0.10 at prevailing rates, with currency comparisons improving in the second half as we lap the Argentina impacts of 2023. Our business remains highly cash generative. However, the $9.2 billion in 2023 operating cash flow was lower than expected. This was due to currency effects on net earnings including the Argentine peso devaluation, other year-end currency impacts, and higher-than-expected working capital needs. In 2024, we target between $10 billion and $11 billion in operating cash flow at prevailing exchange rates and subject to working capital requirements. We continue to prioritize investing in innovation and the growth of our smoke-free portfolio. In 2024, we expect capital expenditures of around $1.2 billion, including the ZYN capacity expansion I just mentioned. Deleveraging remains a key priority for us, and as expected, our 2023 net debt to adjusted EBITDA ratio was around three times given the 2023 purchase of the remaining Swedish Match minorities and the final U.S. IQOS payment to Altria. We target much better progress of 0.3 to 0.5 times deleverage in 2024, driven by continued EBITDA growth and strong cash flow generation. We continue to target a ratio of around two times by the end of 2026, with buybacks to be considered once confirmed we are on track. Finally, our commitment to our progressive dividend policy is unwavering and in line with our long-term commitment to return cash to shareholders. I'll now turn it back to Jacek for concluding remarks.

Thank you, Emmanuel. Let me now take a moment to cover our key strategic priorities for 2024. First is supporting the sustained growth momentum of IQOS through continuous innovation. This includes leveraging the rollout of ILUMA to maximize user growth while innovating further on both devices and consumables. Second is to continue the strong U.S. growth of ZYN, supported by targeted commercial investment, long-term capacity expansion, and organizational infrastructure, which will also support IQOS. Outside the U.S., we intend to continue developing our integrated multi-category offering to adult nicotine users with further launches of ZYN and, where relevant, our VEEV e-vapor portfolio. Of course, 2024 will be a landmark year for IQOS in the U.S. While the ultimate launch of IQOS ILUMA is the main priority, we continue to prepare for the first city tests of the IQOS 3 blade product starting in Q2 this year. These small-scale pilot launches will allow us to experiment with different aspects of commercialization and support our drive for at-scale commercial success once ILUMA is authorized. While we have no update on the expected PMTA timeline, the patent settlement agreement announced last week allows for commercialization of both blade and induction products, while mitigating risks of patent-related disruptions and enables us to leverage the scale, optimized cost, and flexibility of our global supply chain. In combustibles, we continue to target a stable category share over time, despite the impact of IQOS cannibalization, while taking judicious pricing actions to drive a positive profit contribution. Our capital allocation priorities are crystal clear. We will continue to invest in the growth of smoke-free products, and our commitment to the dividend remains steadfast. Following the acquisition of Swedish Match, deleveraging remains our key balance sheet objective. We aim to continue our excellent progress on sustainability initiatives, including those related to product impact such as youth access prevention and post-consumer waste. Finally, and importantly, we remain committed to transforming the tobacco harm reduction landscape by providing superior alternatives to adult smokers who would otherwise continue smoking and advocating for science-based regulations. We will be expanding further on many of these topics at the CAGNY conference in two weeks’ time. Let me now conclude today’s presentation. Overall, our business delivered a strong 2023 performance in the face of notable cost headwinds, driven by structural smoke-free momentum. The continued excellent performance of IQOS and remarkable growth of ZYN strengthened their positions as leading brands with excellent equity. Combined with our unrivaled commercial and innovative capabilities, we have a powerful platform to expedite our smoke-free future as we broaden our portfolio and reach to adult smokers. We expect 2024 to be a year of accelerated growth for smoke-free products and remain confident in our 2024-2026 growth targets. We have exciting opportunities in the U.S. and internationally, which we are fully dedicated to capture as we progress towards our ambition of being sustainably smoke-free by 2030. Finally and importantly, our strong growth outlook and highly cash-generative business underpin our ability to deleverage while returning cash to shareholders. Thank you, and Emmanuel and I are now happy to answer your questions.

Hi, everyone. I actually wanted to ask a high-level question on the year. You originally guided FX-neutral EPS growth in '23 of 7% to 9%. Yet, you really did finish out the year a lot stronger, reporting 11% currency-neutral EPS growth. So as you look back, what were some of the key areas of outperformance versus your initial expectations? And then as you think about this year, you're initially guiding to 7% to 9% FX-neutral EPS growth again. So just trying to understand how conservative this may be, especially considering your 9% to 11% midterm growth target?

So Bonnie, with regards to 2023, I think the momentum we have in the category is in Japan, is really worth singling out. And despite the fact that as you know IQOS occupies a very sizable part of the segment, I mean where we capture well above our segments, I think we captured about 80% of the entire segment growth in Japan. So this is very strong. Japan is on the forefront of a smoke-free transformation. We're approaching the year 10 anniversary of IQOS in Japan. And if I just look over the last few weeks how the category is continuously expanding in Japan, I think in the Tokyo area, the smoke-free products now exceed the size of the cigarette category. So if IQOS continues after 10 years participating in this phenomenal growth, this is really worth singling out. Clearly, ZYN, and as we indicated very much, we've been very keen and very pleased that we could conclude the acquisition of Swedish Match, that adds the important element of our portfolio of alternative smoking, the pouches, which obviously creates a very good opening for us in entering the U.S. market and that ZYN is clearly growing above their expectations. What is very important is we hear from time-to-time, quite rightly, conversations about some unintended consequences about the use of the product. I am so pleased with both IQOS and with ZYN actually are delivering as they were designed for, i.e. going after adult smokers in the U.S. above 21 years. We're all familiar with the CDC data, less than 80% youth usage, the same is for IQOS and international. So we have a good, my view is we have a very good sustainable growing two fabulous propositions in a smoke-free product, and we're also trying here to be very focused from a financial perspective with regards to the e-vape. So right now, if we roll this forward to 2024, I think that Japan is on good momentum. ZYN in the U.S. continues this momentum. Europe is going very strongly and very well. Yes, we have this distortion, maybe potential headwinds we're getting there. We very clearly indicated the $2 billion potential impact from the flavor ban in the EU. But other than that, these key geographies and these key geographies also are very important from the margin perspective expansion, they really are on the positive side.

Okay. Thank you. That was helpful. And then I did want to ask a little bit more on margins. Just hoping for a little more color on your margins in Q4, especially in Americas, where they were actually negative. I'm assuming, I think you called this out, a key driver of this is your investments ahead of the IQOS relaunch in the U.S. in May. So in the context of this, how should we think about operating income growth in Americas this year? Will it continue to be negative? And then for the full year of '24 year, just total company, your guidance is for FX-neutral revenue growth, and operating income growth does imply operating margin expansion. So could you maybe touch on your expectations for gross margin and OpEx in the context of that?

Yes, Bonnie. Emmanuel can chip in a little more details. I think in the Americas segment, where it's more the impact of the devaluation in Argentina which drove the margins down rather than the U.S. market. Specifically about the U.S. market, yes, there is the increased investment also to continue supporting ZYN growth, and ZYN expansion, but also in preparing Swedish Match organization or Philip Morris International in the U.S. organization for being able to handle IQOS soon and obviously have the organizations, which is after the opportunities and the challenges of the U.S. market. So there are some investments that are already flowing through the P&L even ahead of the IQOS process start of the commercialization.

Yes, to answer your question, Bonnie, and to add to what Jacek mentioned about the reasons behind the better-than-expected performance for 2023, we have observed a very strong increase in commercial volume. Additionally, we are also pleased with the improvement in our margin related to our smoke-free product. And we are today seeing the margin both on IQOS and on ZYN being above the average margin on CC. We are making progress on the profitability of the IQOS product, and we have some price increases in Q4 overall. So that was the planned dynamic, but it is happening maybe even a bit better than what we're expecting, and we expect that to continue in Q4. And in that perspective, I mean, clearly, the U.S. is a fantastic market. We've described the fact that the margin of ZYN in the U.S. is best-in-class among our portfolio of products. And therefore, make no mistake, even if indeed, we're going to continue to invest in the U.S., the U.S. is going to be super nicely accretive in all parameters of our P&L at the level of the, of course, revenue growth but also at the level of the margin evolution and at the level of the operating income.

Okay. Emmanuel, if I may just clarify something then. For this year, you are expecting gross margin and possibly op margin expansion? Based on your guidance, it implies op margin.

Yes, we do absolutely, Bonnie. Yes.

Okay. All right. Thank you.

Hi, good morning. Two questions from me. One is just to clarify the Argentinian peso impact. So you have a $0.19 impact this year, which is linked to balance sheet revaluation. And on the slide, you are using the Argentinian peso rate, which is equal to the spot rate. So there shouldn't be any further balance sheet revaluation down, which means that there is an automatic $0.19 benefit to EPS. Isn't that the way the math works?

We cannot speculate on any further devaluation of the peso. The reality is that the dollar amount has been significantly reduced by the last devaluation. Therefore, any further devaluation would affect a lower amount. We cannot predict if more devaluation could occur. It's important to note that the basis has been adjusted following the devaluation in December. Thus, any additional devaluation would apply to a lower base in Argentinian pesos.

Sure. Maybe I can ask it separately. And my second question is around ZYN. We are hearing a lot of statements. We had a statement by Chuck Schumer. A lot of investors are concerned, they think that regulation is coming on, then flavors will get banned. So how do you plan to get ahead of this entire potential controversy that could emerge around ZYN?

Yes. So we observed over the last few weeks, I heard a lot of conversations around Brazil in social media and generally Internet and media. I think, look, ZYN is in the U.S. market for 10 years, okay? And if you look at the numbers, CDC latest data on the underage usage, et cetera, it stays very below. I think it's 50%, which is the lowest from any product nicotine and also other products where there's some major restrictions applied. I believe we understand the marketing practices of Swedish Match, and we took this very seriously during the acquisition. We have indicated that our alignment with Swedish Match is due not only to their focus on a smoke-free future but also to their responsible and disciplined marketing approach, similar to our strategies with IQOS and heat-not-burn products internationally. We have reached out to several vocal participants in discussions with general consumers, as well as with the FDA. The facts surrounding this issue differ from how they are sometimes portrayed in the media. Our product is effectively assisting adult smokers while maintaining strict age verifications. When discussing adult interactions on social media, it's clear that we're entering territories beyond our control. ZYN is not employing any paid ambassadors on social media. We believe our approach focuses on delivering a scientifically grounded product that offers potential harm reduction, positioning it as the best nicotine alternative compared to other products, particularly cigarettes. We have a pending PMTA with the FDA, and we are confident in the strength and conclusiveness of the science behind it.

Good morning. I have a question about ZYN as well. It's seen phenomenal growth in the U.S. Can you talk about what's driving the acceleration in growth in ZYN in the U.S.? And are there any particular regions where you're seeing stronger growth? And just on the ZYN guidance, it implies about 35% growth in U.S. shipments, but that seems conservative given the strength that we've seen. So is there anything that would temper ZYN's growth outlook relative to what we're observing?

Yes. So the ZYN, as you might remember from our Investor Day, the profile of ZYN, when it comes toward the smoke or where the adults are coming from, there is any sourcing very nicely from combustible cigarettes, obviously, and serves from the overall categories, including the tobacco-containing pouches, Swedish snus or similar products, but also resourcing from the vape category. The growing number of adults in Brazil is recognizing the convenience of usage. Another way to view ZYN is as a natural innovation or extension of the Swedish snus product, which consists of tobacco-containing pouches. Some individuals are uncomfortable with having tobacco in their pouches due to various factors, such as hygiene concerns. ZYN offers a cleaner alternative, as it is white and does not contain tobacco, which may create resistance among some consumers. Overall, I believe the product has strong potential. The U.S. market is significant, featuring a developed e-vape category, alongside a sizable combustible cigarette segment and various other forms of oral tobacco. This creates a solid market opportunity for ZYN, which appeals to these consumers. With regards to your comments about the number of accounts forecasted, naturally related to our guidance for next year. We are very well familiar with that slightly trend in the U.S. Can ZYN surprise us positively? Yes. But guidance is built on the number of assumptions, right? I mean, it's a global business, multi-category and there are some headwinds, which we are aware of today. I'm not sure whether there's a lot of materialized, but I think it's a matter of prudence to single them amount and be prudent, but there are also some upsides and the tailwinds, which we are well aware of. The year-end faults will come to the Q1. I mean as a player, we build the confidence as you go through the year.

Okay. Thank you. That makes sense. And a question on the patent settlement with BAT. Can you elaborate on the implications of that? I know you've been investing in manufacturing capabilities in the U.S. for IQOS. How does the settlement influence your ability to import into the U.S.? And does it change your manufacturing strategy?

Well, it actually allows us now to also connect IQOS in the U.S. to the supply chain, which is on the international supply chain from day one, which is operating with all the benefits of economies of scale, et cetera. So obviously, as the mitigating type of strategy, we have been implementing in parallel the alternative manufacturing in the U.S., but that obviously is the first factory, first volumes. We would obviously result in increased or elevated cost both on the devices and the HeatSticks and it will take a while until U.S. on a standalone basis would close at the same level of the benefits of the cost, if you like, as we had on international. For us, this agreement paves the way for IQOS, top blend, and ILUMA, eliminating much of the uncertainty we faced today and moving forward. Since IQOS is now part of the U.S. market, it adds to the existing geographical presence of IQOS from the start and provides access to our product pipeline and economic advantages typical of international markets. This agreement offers us clarity and acceleration. The patent litigation landscape has been uncertain, and as we manage a substantial business, we anticipate even more growth with the inclusion of the U.S. market. This clarity and forward visibility are crucial for us and important for our investors as well.

Hi, guys. Good afternoon. Thank you for the questions. I have a couple as well, please. Firstly, you're guiding for another impressive year of mid-teens heated tobacco in-market sales growth. You've highlighted Europe will be within that range. Historically, Europe has done slightly better. What markets make up the sort of difference to help you to still get to the mid-teens growth? If you could allude to the larger markets. And within that, are you assuming any contribution from Taiwan, Saudi Arabia, you mentioned? And what should we expect for the U.S. as well, please?

I will begin with the U.S. We are planning to conduct a test market for the IQOS 3.0 blade product, which is considered a high-cost item for us. We are eager to gain more clarity from the FDA regarding the PMTA and MRTPA for IQOS, as this would enable us to speed up a broader national rollout. For 2024, we anticipate that the volume contribution of IQOS from the U.S. will be quite minimal. We are focusing on developing a consumer-oriented solution rather than just testing the engine or the current version of the product extensively. We have made some assumptions about entering markets where IQOS is currently prohibited, with Taiwan being one such example. These assumptions could be accurate or not, but they are the basis of our strategy. The pace of certain regulatory decisions and new laws heavily influences this. Regarding Europe, while I believe and history has shown that various flavor regulations across different regions typically do not significantly affect revenue over time. But we're going in a period that some markets or markets will be implementing these regulations. I think they need to be cautious that there might be some distortions. I mean that they put in a guideline, and these will be transparent and still give you potential headwind, which we take in, in the volume outlook for IQOS, but we'll have to see where this materializes or not. I think it's a matter of who then we should talk about this. Other than that, the underlying IQOS growth, if I look at the value of share evolution, essentially, our European market is pretty strong despite the fact that very much in Central Europe, there is maybe more of the pricing competition from other heat-not-burn participants. We are facing very strong price competition in Japan for both devices and consumables. Despite this aggressive pricing environment, IQOS has been navigating it well over time. In Germany, we are seeing nice growth, while Italy maintains strong growth momentum, with Spain being the primary driver. We're starting to make significant progress. That's all from me.

Thank you. And then just one other question, please. So you're expecting a smoke-free acceleration in 2024, but that's not translating into group net revenue growth acceleration in 2024. Are you expecting a softer performance in combustibles in '24? Is that the discrepancy?

Yes. Currently, the blended outlook for group revenue at the start of the year includes combustibles, oral products, and heat-not-burn products, along with a few smaller items. Last year, we achieved a significant pricing variance. However, it’s reasonable to assume that the factors driving that pricing variance may not be replicable this year. There is clearly potential for pricing, which we have accounted for in our guidance. We need more visibility on certain aspects to boost our confidence. When I compare what Philip Morris is currently achieving, I see that in previous years we maintained revenue growth above 7%. I recall the times when we began our transformations with growth around 3% to 5%. However, what truly matters to us now is the quality of that revenue growth, as we aim to lead sustainably in our revenue growth efforts.

Just to add to what Jacek has just been saying. I mean indeed, it's taking into account that 2023 was exceptional when it comes to price increase with close to 9% on the combustible portfolio and we don't intend to repeat that. We are guiding to a mid-single-digit price increase for 2024. So of course, that will have an impact and make a difference on the growth of our revenue on the combustible business.

Hi, good morning. Thank you for the questions, guys. I just wanted to start with disposable vaping products. We've obviously seen these products have huge success in the U.S. in 2023 and the U.K. also driving a steeper volume decline for commutable cigarettes in those markets. Obviously, your combustible cigarette business in those two markets is not huge, if nonexistent, obviously, in the U.S. So not a huge impact on your business so far. But my question is, why do you think we haven't seen equivalent success for these products in the markets that are big markets for your business and the EU in particular? And do you think this could be a threat to your business in 2024?

You mean the threat to our business coming from the e-vape products? Look, there are a number of factors, right? So one is that I think that the category of the e-vape product is being disposable; it's not disposable. It's very much focused in terms of the offering and innovation, frankly speaking, into the flavors, right? Then we very often forget that the core of the smokers' market-by-market with literally few exceptions are very much and if I would characterize it is a traditional tobacco type of experience flavor, etc. So this creates sort of a more dual consumption or occasional consumption. But I think for some smokers, and we know it from our experience of IQOS, it actually triggers curiosity to try, but at the same time, triggers the bottleneck in terms of a full-time type of switching adoption. So that's one of the factors, okay? And then obviously, other factors at play.

I understand that, but why hasn't that been a barrier to the success of these products in the U.S. and the U.K. over the past 12 to 18 months?

The focus is on results, particularly since the U.K. and the U.S. have historically been at the forefront of this category, largely due to the appealing margins in the CC category. People are choosing alternatives that provide an opportunity for those margins while also allowing for discussions about these products. In Europe and some international markets, however, these products are not as well received. Let's set aside the hybrid action principles for now and acknowledge that there are various opinions and perspectives to consider. We recognize that we are entering the e-vape category, but we are working to remain disciplined and focused. It's quite easy to enter this space without a clear path to sustainable profitability, and we want to ensure that we are not diverting our attention from other opportunities that we believe are more sustainable and can provide a solid foundation for our margins and overall profitability. As we launch this product in Italy, the Czech Republic, and a few other markets, despite the fact that we are relatively late to the category, we have captured double-digit market shares in under a year.

I have a follow-up question that is related but perhaps a bit more philosophical. In several markets, particularly in the U.S., we are observing the emergence of a dual-tiered market regarding disposable vaping products. On one hand, there are large legacy companies like yours that have to adhere to regulations and maintain certain standards, marketing only to existing nicotine users. Many of us likely saw your recent video about ZYN. On the other hand, there are smaller new businesses that appear to operate with much more freedom, often pushing the limits of legality, yet they are thriving and attracting many consumers in the marketplace.

And so I guess my question is, do you think that this dual-tiered structure that seems to be forming in a number of markets structurally impairs the attractiveness of your business and your brands when it seems like you're just being forced to play on a playing field that is not level? Companies like ours are committed to adhering to regulations and societal expectations. Our ability to compete is very different from some other operators in the market, particularly those who lack a long-term perspective. They tend to engage in more opportunistic or short-term operations. I think we understand what is currently happening in the U.S. There seems to be some discipline entering the market, which is long overdue. The market has been troubled due to the slow response from regulators, law enforcement, and designated agencies. This situation resembles what we have seen for many years, with some areas resembling a black market, leading to illicit participation. This issue extends beyond marketing practices to product standards, resulting in significant distortions that harm legitimate manufacturers and distract from discussions on how we can make progress in achieving reductions in a more straightforward manner.

Okay, thanks, Jacek.

Thank you.

I think you asked second, Emmanuel, wanted to ask a follow-up question about investment levels embedded in the 2024 outlook. If we consider the expectation for gross and operating profit margin expansion on an organic basis, can you talk about the areas where you're seeing a step up meaningfully in incremental investment? Last year, you called out $150 million of explicit investments, including $75 million or so in the U.S. It would seem like the growth in ZYN would allow you to step that investment level up while still being able to achieve your double-digit profit expectations in the market.

Yes. A lot depends on our goal of achieving adjusted live growth that exceeds revenue growth. We anticipate some improvement in margins, and we believe we have sufficient resources to support that revenue growth. If we were to stop investing entirely, the growth in margins would be significantly greater, but that's not aligned with our strategy. Once we scale our operations and establish a strong consumer base in the U.S., the revenue potential is quite significant by market standards. We generate income from a small crew while also focusing on international combustibles, which gives us room for investments to support both current and future growth, alongside improving our margins. We have acknowledged some inflationary pressures, particularly related to combustibles. We anticipate that 2024 will be the last year experiencing high inflationary pressure, and from 2025 onwards, we expect to see relief from cost of goods sold pressures, which will aid in delivering materials. And I think every incremental IQOS and every incremental ZYN obviously requires proportionally less of the investment with the first IQOS and the first ZYN. So I mean, the scale offers going forward, there's opportunity for supporting the margin.

Thank you, Jacek. I can leave it there and pass it on.

Thank you, Matt.

Sorry. Before closing our call, I'd like to remind you that we will be presenting at the CAGNY conference on February 21, and we hope you'll be able to join either in person virtually. Thank you again for joining us today. If you have any follow-up questions, please contact the Investor Relations team, and hope you have a great day.

Thank you, all. Speak to you soon.

Thank you.