菲利普莫里斯國際 (PM) 2021 Q4 法說會逐字稿

Good day, and welcome to the Philip Morris International Fourth Quarter 2021 Year-End Earnings Conference Call. Today's call is scheduled to last about 1 hour, including remarks by Philip Morris International management and the question-and-answer session. (Operator Instructions)

I will now turn the call over to Mr. Nick Rolli, Vice President of Investor Relations and Financial Communications. Please go ahead, sir.

Welcome, and thank you for joining us. Earlier today, we issued a press release containing detailed information on our 2021 fourth quarter and full year results. You may access the release on www.pmi.com. A glossary of terms, including the definition for reduced-risk products, or RRPs, as well as adjustments, other calculations and reconciliations to the most directly comparable U.S. GAAP measures and additional heated tobacco unit market share data are at the end of today's webcast slides, which are posted on our website.

Unless otherwise stated, all references to IQOS are to our IQOS heat-not-burn products and all references to smoke-free products are to our RRPs.

Growth rates presented on an organic basis reflect currency-neutral underlying results. Following the acquisitions of Fertin Pharma, OtiTopic and Vectura Group, PMI added the Other category in the third quarter of 2021. Business operations for the Other category are evaluated separately from the geographical operating segments.

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.

Please also note the additional forward-looking and cautionary statements related to COVID-19.

It's now my pleasure to introduce Jacek Olczak, our Chief Executive Officer; and Emmanuel Babeau, our Chief Financial Officer. Over to you, Jacek.

Thank you, Nick, and welcome, everyone. I hope you are all safe and well. Our business delivered an excellent performance in 2021, reaching record net revenues, adjusted diluted EPS and cash flow with growth in overall volumes, high single-digit organic net revenue growth and strong double-digit adjusted EPS growth.

This illustrates the sustainable nature of our growth, based on new product and innovation as demonstrated by continued strength of IQOS, which delivered 31% full year organic growth in RRP net revenues. Smoke-free products surpassed 30% of total net revenues in Q4 as we progress towards our ambition of becoming a predominantly smoke-free company by 2025. We are especially pleased by the reacceleration of our business in Q4 to deliver a better-than-expected result. This reacceleration was visible in organic net revenues, IQOS user growth, heated tobacco unit market shares across developed and emerging markets, innovation in devices and consumables and commercial investments and combustible market share.

IQOS user growth recovered in Q4 to reach an estimated 21.2 million total users, despite ongoing tightness in device supplies in the second half of the year.

Full year heated tobacco unit shipment volumes grew 25% to reach 95 billion units with broad-based growth for both our volumes and the category across key geographies, with an especially positive rebound in the EU. The growth outlook for IQOS remains very positive with outstanding initial results from IQOS ILUMA in Japan and Switzerland, the only 2 launches so far, and growing traction for IQOS VEEV in early launch markets. In combustibles, we essentially reached our goal of stable category share in the fourth quarter despite the impact of IQOS cannibalization.

During the year, we laid the foundation for our long-term growth ambitions beyond nicotine in wellness and health care, including the milestone acquisition of Fertin and Vectura, which provide essential capabilities for future product development. And last, bolstered by strong operating cash flow, we continued to prioritize returns to shareholders through a 4.2% increase in the dividend and ongoing share repurchases.

Turning to the headline numbers, our full year adjusted net revenues grew organically by 7.6% or 10.3% in dollar terms, including positive currency. This reflects the continued underlying strength of IQOS and the ongoing recovery of the combustible business in many markets compared to the pandemic-affected prior year. Our net revenue per unit grew 5.3% organically driven by the increasing proportion of IQOS in our sales mix and pricing. Combustible pricing was in line with our expectations at 2.7% or around 4%, excluding Indonesia. Our adjusted operating income margin increased by 200 basis points on an organic basis, in line with our expectations, with continued positive effect from the increasing size and profitability of IQOS, pricing and productivity savings.

Through first half expansion -- although strong and solid expansion was tempered in the second half by the expected initial higher unit cost of IQOS ILUMA, geographic and category expansion investment and the Q4 resumption of consumer programs in a number of markets.

Our resulting adjusted diluted EPS of $6.08 represents 17.6% growth in dollar terms and 15.3% currency-neutral growth, which is well above our prior guidance as IQOS user growth, the launch of ILUMA and total industry volumes exceeded our expectations.

Finally, we generated operating cash flow of $12 billion, reflecting excellent underlying cash conversion in addition to strong Q4 business results and certain timing factors.

Looking at our Q4 performance, net revenues grew by 8.4% organically. This reflects the sequential improvement in IQOS user acquisition, the initial success of ILUMA in Japan and strong overall volumes, including a further recovery in combustibles. We delivered a robust organic net revenue per unit growth of 4.1%, again reflecting our shift in business mix. We achieved this despite softer pricing on combustibles of 1.4% due to the factors flagged previously of continued pandemic-related challenges in certain markets, as well as comparison effects in Germany and Australia.

Our Q4 adjusted operating income margin declined by 10 basis points on an organic basis, primarily due to the same factors mentioned for the second half, as accelerating business performance opened more opportunities for investment in future growth. Despite that, our currency-neutral adjusted diluted EPS again grew strongly by 11.9%, also reflecting a lower interest cost and effective tax rate.

Turning now to 2022 guidance. After the temporary slowdown in IQOS user growth in the second half of 2021, the device supply situation is gradually improving. While the situation remains fluid, we now expect a more limited impact, allowing us to gradually return to prior rates of user progression over the coming quarters. With the remarkable success of ILUMA in its first market, a number of other innovations planned, and promising growth for IQOS in low and middle income markets, our 2022 growth fundamentals are strong, and we look forward to an exciting year.

We note that the slower user growth in the second half of 2021, particularly in the third quarter, will have an estimated carryover effect on our growth this year of around 4 billion to 5 billion heated tobacco units. This is reflected in our 2022 expectations of 113 million to 118 billion HTU shipment volume. Given this continued growth, we expect our full year HTU shipments to again be ahead of IMS volumes.

We expect to deliver between 4% and 6% organic net revenue growth, keeping us well on track to deliver our 2021 to 2023 compound annual growth rate target of more than 5%. This range prudently incorporates the continuing uncertainty on full device availability and the pace of the ongoing pandemic recovery. For duty free, we assume no meaningful pickup in Asian travel, but a continued gradual recovery in other geographies.

We expect our adjusted operating income margin to expand between 50 and 150 basis points as the positive effects of our product transformation continues, despite the expectation of a moderately lower gross margin. This is essentially attributable to temporary ILUMA related factors such as the higher initial weight and cost of TEREA consumables and the cost of devices, which we expect to decrease over the 18 to 24 months post launch as we have experienced in previous -- with previous major innovations.

We also account for higher logistic costs, where the tremendous uptake of ILUMA in Japan has led to increased use of air freight, investments to grow capacity across our smoke-free platforms and inflation in certain supply chain elements.

Operating income margin expansion and continued reinvestment in attractive smoke-free growth opportunities and in wellness and healthcare R&D will again be supported by our ongoing efficiency programs. We remain on track to deliver around $2 billion in gross savings by 2023.

Accordingly, we forecast currency-neutral adjusted diluted EPS growth of 8% to 11%. This translates into an adjusted diluted EPS range of $6.12 to $6.30, including an estimated unfavorable currency impact of around $0.45 at prevailing rates. This is primarily due to translation effects, and this currency impact reflects notably the depreciation of the euro, Japanese yen and Turkish lira versus the dollar.

This guidance includes the impact of $785 million of share repurchases made in 2021, which were somewhat restricted by blackout periods. It does not reflect the impact of repurchases in 2022 as we continue to take an opportunistic approach within our target of between $5 billion to $7 billion over 3 years.

Our guidance also reflects the impact of acquired businesses, which we expect to generate underlying operating income in line with our business plan, but with an operating loss of around $150 million or approximately 1% of adjusted diluted EPS, which we'll come back to explain later.

As outlined in today's release, there are a number of other assumptions underpinning our outlook. We expect the total industry volume of cigarettes and heated tobacco units, excluding the U.S. and China, to decline between minus 1% and minus 2%. Given our leadership in smoke-free product, the structural growth of the category and its growing proportion in our business, we expect to gain share and target broadly stable total PMI shipment volumes within the range of minus 1% to plus 1%. We assume full year combustible pricing of 3% to 4% with a softer first half and a stronger second half of the year, and this is clearly above 2021 levels. The pricing environment is improving but still challenged in certain markets with ongoing pandemic related impacts.

Our balance sheet is strong. We delivered excellent operating cash flow of $12 billion in 2021, reflecting robust underlying cash conversion in addition to favorable timing and one-off impact of around $0.5 billion. With further strong organic profit growth expected in 2022, we expect to generate around $11 billion of operating cash flow, subject to year-end working capital requirements and after accounting for the reversal of timing benefits and using prevailing exchange rates.

As a result, we raise our 2021 to '23 operating cash flow target communicated at the February 2021 Investor Day at then prevailing rates from around $35 billion to the range of $36 billion to $37 billion. We also expect full year capital expenditures of around $1 billion, reflecting increased capacity investment behind our smoke-free platforms, including ILUMA, and enhancing our digital commercial engine in addition to certain projects which were delayed due to the pandemic.

Lastly, looking specifically to the first quarter of 2022, we expect adjusted diluted EPS of $1.50 to $1.55, including $0.15 of unfavorable currency at prevailing rates. We expect robust organic top line growth and operating margins comparisons, which reflect both a very strong prior year quarter, which benefited from a high level of productivity savings and relatively low levels of investment, and the Q1 of 2022 dynamics of increased device sales, commercial investments, ILUMA-related costs and increases in some inputs such as freight.

Let me now hand over to Emmanuel, who will give you more details of our performance in 2021.

Thank you, Jacek. Turning back to our 2021 results, total shipment volumes increased by plus 4.2% in Q4 and by plus 2.2% for the year. This reflects continued strong broad-based growth from HTUs of plus 25% or 18.9 billion units for the full year, comfortably exceeding the decline of 3.6 billion cigarettes. The plus 2.4% increase in our Q4 cigarette volumes reflect the continued sequential recovery of the total industry and of our category share, in addition to a 2.7 billion stick favorable inventory movement, which mainly reflects inventory reduction in the prior year quarter.

Due to the remarkable performance of IQOS, heated tobacco units comprised almost 14% of our total shipment volume in the fourth quarter and 13.2% for the year, as compared to 11% in full year 2020, 8% in 2019 and 5% in 2018. Our sales mix is evolving rapidly, putting us on track to become a majority smoke-free company by 2025. Smoke-free net revenues made up over 30% of our adjusted total revenue in Q4 and 29% for the year as compared to 24% in 2020.

In 10 markets, we have already surpassed 50%. IQOS devices accounted for over 6% of the $9.1 billion of 2021 RRP net revenues with a step up in H2, reflecting the IQOS ILUMA launch, outweighing the effect of supply constraint on other IQOS versions.

We delivered plus 7.6% organic growth in 2021 net revenues on shipment volume growth of plus 2.2%, reflecting the twin engines driving our top line. The first is pricing on combustible and in certain markets on HTUs. Second is the increasing mix of HTUs in our business at higher net revenue per unit, which continues to deliver substantial growth, an increasingly powerful driver as our transformation accelerates.

Let's now turn to the driver of our 2021 margin expansion. Our gross margin increased by 190 basis points on an organic basis due to product mix, pricing and cost savings, while our adjusted marketing, administration and research costs were 10 basis points better as a percentage of adjusted net revenues. We generated over $800 million in gross cost savings in 2021 with around $550 million in manufacturing and supply chain productivity and more than $250 million in SG&A efficiency before inflation. This represents strong progress towards our target of around $2 billion for 2021-2023 and allows us to reinvest in top line growth while continuing to deliver robust margin progression.

While OI margin expansion was lower in H2, this reflects the positive dynamic of our business and the ability to return to normalized investment levels compared to the pandemic affected prior year. ILUMA device and HTU shipments commenced with higher initial unit cost and we reaccelerated investments in our commercial program, digital engine and R&D as well as a number of growth opportunities across categories and geographies. We intend to continue investing in such opportunities in 2022. But with the benefit of scale, operating leverage and accelerated efficiencies, we continue to target organic SG&A increases below the rate of sales growth.

Moving now to market share, our share of the combustible category recovered and was essentially stable in Q4 on a year-over-year basis, as our portfolio initiatives bear fruit and pandemic-linked restrictions receded in many markets. Our leadership in combustible helps to maximize switching to smoke-free products and we continue to target a stable category share over time despite the impact of IQOS cannibalization. As IQOS user growth reaccelerates, we target at first a slight decline in 2022.

For the combustible category overall, the improving total market volume backdrop includes notable Q4 recoveries in Indonesia, Mexico and Turkey, close to stable industry volume in the EU region and a modest recovery in duty free driven by sales outside Asia. Daily consumption remains below pre-COVID levels in certain markets such as the Philippines, where our share of market is influenced by mobility and social consumption.

In Indonesia, our share was again broadly stable on a sequential basis despite the continued growth of the below Tier 1 segment and our volumes grew over 4% for the year. The reduction from 10 to 8 excise tax tiers in 2022 represents a step in the right direction, and the industry weighted average excise increase of around plus 13% is slightly below the prior year. However, the playing field remains unequal between industry players and the pricing environment remains challenging.

In terms of our overall share, ongoing gain for our IQOS portfolio creates positive momentum going into this year, and we expect to resume overall share growth as well as achieving broadly stable total shipment volume. PMI HTUs now have a 7.1% share in the markets where they are present, making them the third largest tobacco brand. This includes the #1 position in 5 markets, and the #2 in a further 6 markets.

Moving now to IQOS performance. We estimate there were approximately 21.2 million IQOS users as of December 31. The improved user growth of plus 0.8 million in Q4 reflects our agile commercial model, which allowed us to rapidly adjust our consumer program and assortment. As demonstrated by the performance of ILUMA in Japan and Switzerland, the underlying momentum of the IQOS brand remains strong. While we don't yet have full visibility over the full year of 2022, as device shortages ease, we expect to gradually return to user growth at or above the prior run rate of around 1 million per quarter. We estimate that 72% of total users or 15.3 million adult smokers have switched to IQOS and stopped smoking with the balance in various stages of conversion.

In the EU region, fourth quarter HTU share reached 6.4% of total cigarette and HTU industry volume, 1.4 points higher than Q4 last year. Underlying IMS growth trends remain excellent. This very good performance included strong growth across the region, with Italy reaching the milestone of 2 million users and positive contribution from Germany and Poland. I also want to highlight Hungary, where our Q4 national HTU share exceeded 20%, following Japan and Lithuania in reaching this important threshold.

To give some further color on our progress in the EU region, this slide shows a selection of the latest key city offtake shares. While Vilnius continued to lead the way with 37.5% share, the 20% level was also reached in Budapest, Rome and Athens. With strong progress across the region, we are especially pleased by Vienna, almost doubling to 4%, the strong traction in London at almost 6% share, and an acceleration in Zurich with the introduction of IQOS ILUMA. We show further HTU share data in the appendix to these slides.

Share growth continued in Russia with our Q4 HTU share up by plus 0.8 points to reach 8%. For both Russia and the overall region, sequential growth in adjusted IMS slowed in the last 2 quarters, partly reflecting the more acute device shortage and lead on commercial program. In addition, the region was affected by the halting of sales in Belarus, which impacted sequential IMS growth in Q4.

In this context, as mentioned in last quarter, we have seen some increased consumer trial in Russia of discounted competitor offerings and disposable e-vapor products. We continue to see high interest in the category and with a pipeline of exciting innovations planned, including the launch of ILUMA, we aim to resume strong growth this year.

In Japan now, the adjusted total tobacco share for our HTU brands increased by plus 1.7 points to a record 21.8% in Q4. And an offtake exit share approaching 23%, with Q4 adjusted IMS sequential trends incorporating the pull forward of consumer offtake into Q3 before the price increase. This performance reflects the strength of our portfolio and the launch of IQOS ILUMA, which I will come back to shortly.

The overall heated tobacco category continues to grow, making up over 31% of the adjusted total Japanese tobacco market in Q4, with IQOS maintaining a high share of segment and capturing the majority of the category's 2021 growth. In addition to strong progress in developed countries, we see very promising IQOS growth in low and middle income market. A prime example of this is Egypt, where offtake share in Cairo is approaching 4% within 6 months of launch, with other notable successes including Lebanon, Jordan, the Dominican Republic and the Philippines despite pandemic restrictions in Manila. This low and middle-income market key city performance is especially encouraging as we achieved it despite the premium position of the current IQOS portfolio.

We do intend to bring a new complementary range of heat-not-burn products tailored to emerging markets towards the end of this year, which I will come back to.

With this potential in mind, we continue to drive the geographic expansion of our smoke-free products as we aim to be in 100 markets by 2025. During the quarter, we launched IQOS in both Morocco and Tunisia. This takes the total number of markets where PMI smoke-free products are available for sale to 71, of which 30 are in low and middle-income markets. We plan to add more market this year as we also meaningfully broaden our product offer and price segmentation within existing geographies. This includes the expansion of LIL and Fiit, which are now available in over 20 markets across multiple regions, and our expansion of e-vapor and nicotine pouches.

Following the implementation of the ITC's importation ban, IQOS is not currently available in the U.S. We continue to work on contingency plans, including domestic manufacturing, and hope to be able to resume U.S. supply in the first half of 2023. It is important to remember that the ITC decision on this patent is an outlier. We were encouraged by the U.S. patent office recent invalidation of 1 of the 2 patents included in the ITC ruling, and we expect a decision on the second patent by April 2, though this decision is subject to an appeal process. BAT has been universally unsuccessful in asserting these same 2 patent family against IQOS in Europe.

Separately, in December, a German court ruled that the BAT GLO HYPER dual-coil heat-not-burn device infringes our patent and that we are entitled, among other things, to an injunction against BAT sales of the device.

Moving now to IQOS ILUMA, we are delighted to report the outstanding success since its launch in Japan and Switzerland with sales performance and consumer reaction exceeding our expectation. In Japan, the uptake of ILUMA devices and consumables among both existing IQOS users and legal age smoker has been rapid with more than 20% of the large user base switching since the August launch and over 20% of sales to legal age smokers due to IQOS.

Moreover, the enhanced and consistently high-quality user experience, better reliability and no need for cleaning has led to significant observed increases in conversion rate, retention rate and Net Promoter Score. This bodes well for volume growth and indeed, premium-priced TEREA consumables have been the fastest-growing launch in the smoke-free category, reaching an offtake share in the 3 main convenience store chains of 8% within 3 months of national launch and driving the growth of the heat-not-burn category following the October tax-driven price increase.

Early results in Switzerland have been even more remarkable with over 1/3 of sales to new user and TEREA making up over 1/3 of HTU sales after only 2 months of commercialization. Our HTU share growth has accelerated accordingly, from 6% in September to 7.9% in December. These results are very encouraging for the wider rollout of ILUMA in the EU region and around the world, and we plan to roll out gradually to more markets this year, mostly in H2.

While we continue to manage device supply constraints, the unprecedented growth in Japan also means we have had to accelerate both the supply of TEREA consumable using airfreight and the conversion of our production line to support new market launches. With ILUMA, IQOS 3 DUO and LIL, we now have 3 heat-not-burn technology under the IQOS umbrella to serve different consumer needs and segment the market. We have an exciting pipeline of innovation on devices and consumables across our technology at different price tiers.

As I mentioned, we also plan to enhance our portfolio for future growth with the introduction of a new complementary technology towards the end of this year. This will be targeted at smokers in low and middle income market, catering to the consumer need of simple, high-quality, affordable devices and consumable and specific local taste preferences.

In terms of HTUs, after launching over 15 new ILUMA SKUs in Q4, we plan to continue expanding our portfolio across platforms, geography and price points this year. We continue to commercialize IQOS VEEV with very promising results in the first group of markets where we started in our own channel with a limited range of test variants and nicotine levels. IQOS VEEV is a premium product, providing a superior experience and the commercial infrastructure of IQOS allows us to deploy efficiently and at scale through a bespoke route-to-market approach.

As we start to expand distribution and the consumable offering, we observed signs of increased uptake and clear positive consumer feedback relative to competitive product. We see encouraging success in Italy and the Czech Republic, reaching double-digit offtake shares of close to 10 points with rapid progress also visible in Croatia within 3 months of launch. After launching in Canada and Ukraine in the fourth quarter, we plan to add more markets in 2022 with timing subject to device availability. We also continued preparation to apply for a PMTA from the U.S. FDA and now prudently assume readiness for filing in early 2023, given further clarity on the required preparatory steps.

An additional exciting midterm growth opportunity is in the nicotine pouch category, where we aim to become a leading player with the Shiro brand. Nicotine pouches provide a convenient smoke-free alternative for adult smokers. And while still early in many markets, we see Shiro playing an important role in our smoke-free portfolio over the coming years.

Following the acquisition of AG Snus and Fertin Pharma, we have established a base of product development and manufacturing expertise. Although we are still learning about the promising category, our IQOS commercial infrastructure allows for a fast rollout and we plan a number of launches over the coming quarters.

The first major activity is the full relaunch of the revitalized Shiro portfolio in the Nordic this month from its more limited prior presence with full commercial activity and a broad portfolio of flavors and strength variants. Separately, following feedback from the 2021 consumer test of our Platform 2 carbon tip product, the design of our current technology has been discontinued. We are assessing alternative design for this consumer segment.

Turning now to our nascent business beyond nicotine, the 2021 acquisition of Fertin, Vectura and OtiTopic provides a base for building critical respiratory and oral product development capabilities in tandem with our existing expertise. This opened up opportunity to deliver the positive effect of existing wellness and health care molecules in a fast and effective manner.

For the time being, our reported number in the Other segment showed the existing acquired business, which delivered $101 million in net revenue in the fourth quarter and a marginal operating loss of $1 million. The underlying performance is in line with our expectation with reported operating expenses reflecting the amortization of intangible, deal-related items and our planned investments. Around 39% of Q4 revenue were derived from 13 smoking cessation products and nicotine pouch operations.

While we intend to continue the CDMO activities of the acquired companies, the most significant value to PMI is in this ability to develop and commercialize new products in the wellness and healthcare segment over time. We plan important R&D investment over the course of the coming years to support the aim of delivering meaningful incremental revenue starting 2 to 3 years from now as we pursue our ambition of at least $1 billion of net revenue from wellness and healthcare products by 2025.

As I mentioned earlier, we expect an operating loss of around $150 million in 2022, with revenue of around $250 million, including smoking cessation products. We recognized investor interest in our future product line in these new areas and plan to provide more color at our CAGNY conference presentation on February 23.

Moving to sustainability and our ESG priorities, I'm happy to share that we recently completed a new sustainability materiality assessment to update and recalibrate our priorities in accordance with our biggest impact on society, double materiality and extensive stakeholder inputs. While addressing the health impact of our product remains by far the biggest focus, we also identified a number of topics, which are emerging in importance or required an evolved approach. We will publish the results next week. It is increasingly important to align management incentives with sustainability, materiality, performance and impact. We will strengthen this link in 2022 with the new sustainability index and plan to provide more details in the near future.

Our progress on sustainability continues to be recognized by leading external stakeholders with repeated inclusion in both the Dow Jones Sustainability Index North America and the Bloomberg Gender-Equality Index, and receiving CDP's Triple-A score for the second year running.

We also published an agricultural labor practices report, making 10-year -- marking 10 years of the program. Since its introduction, we have successfully eradicated systemic issue related to child labor, while improving living condition of farmers and farm workers. It also outlined our ambition targets, such as 100% farmers supplying tobacco to PMI making a living income by 2025.

On our most critical priority of product impact, the growing penetration of smoke-free products around the world is accelerating the end of cigarettes as legal age smokers switch to better alternative. I am also pleased to report further recent positive regulatory development. For example, as part of its Beating Cancer Plan, the European Parliament special committee recognized and featured harm reduction in its last report, for which the plenary vote will take place next week.

In New Zealand, the government published its smoke-free action plan, expressly excluding smoke-free product from the proposed measures. In addition, a number of countries, including Poland and Russia, have announced new multiyear excise tax plans with taxation of smoke-free products clearly differentiated from cigarettes, making 15 markets globally with such plans.

There is a growing body of scientific and real-world evidence of the substantial risk reduction potential of smoke-free product compared with smoking. While challenges in some markets are to be expected, we continue to support regulatory and fiscal framework that recognize this critical harm reduction opportunity.

I will now turn it back to Jacek for some concluding remarks.

Thank you, Emmanuel. Overall, we are very pleased to have delivered excellent growth in last year in 2021 with a strong underlying momentum for IQOS as well as a record adjusted EPS, net revenues and cash generation. The consistent quality and sustainability of our organic top and bottom line delivery has been clearly demonstrated over the last 2 years, which I believe we all acknowledge were pretty turbulent years. With an improving outlook for device supply, although still there's an element of fragility, the exceptional initial success of ILUMA and the number of innovations and growth initiatives, we look forward to 2022 with a tremendous excitement. At the same time, we're building -- we will be building our development capabilities in wellness and healthcare through targeted investment in order to support the next driver of our long-term growth.

Our balance sheet is strong, and we have increased cash returns to shareholders through a higher dividend and our share repurchase program, in line with our objective to deliver sustainable value and returns to investors as we continue our smoke-free transformation. In short, we continue to see a bright future for our business. Following a very strong 2021, we remain confident in our '21 to '23 growth targets and in our ambition to be majority smoke-free by net revenues in 2025.

Thank you all for your attention. Emmanuel and myself will be happy to answer your questions.

(Operator Instructions) Our first question will come from Bonnie Herzog with Goldman Sachs.

Jacek and Emmanuel, I hope you're both doing well. I have a question on your EPS guidance this year. It's quite a wide range at 8% to 11% on a currency-neutral basis. So I was hoping you could highlight some of the key assumptions or drivers that put you maybe at the low end of that range versus what needs to happen for you to get to the 11% growth. For instance, 11% is it possible even if the chip shortage situation doesn't get resolved for the next few months?

I think Emmanuel.

I'm going to take this one, Bonnie. So obviously, and we've been saying it in our preliminary remarks, we are still facing a number of uncertainties. The COVID has not disappeared. Even if things seem to be improving, we don't have full visibility on the IT shortage and on the supply chain globally. And that is obviously what is behind with some certainly cautiousness on the guidance that we are giving on the top line.

And then from there, we, of course, are driving a business that is seeing good momentum. We are the traditional driver of price increase. We're going to be very efficient on cost savings. You can see what we've been delivering in 2021, already more than $800 million of efficiency on our cost. We're going to continue in 2022. And I know that is going to drive the difference between the revenue growth and the adjusted EPS organic growth. One of the headwinds that we're going to face this year, which I think we should see as very positive because it's coming from the growth, and we are managing a very nice potential of growth, is that we are investing for exciting outlook.

It starts, of course, with ILUMA in Japan, but globally, the launch of ILUMA. But certainly with a big impact in Japan, where we know that when we launch a new product, this is having some impact on the cost of goods because we are not at the same level in terms of efficiency on the supply chain. The productivity is not at its maximum, and we've been explaining that in our remarks. And that is going to have some impact at the launch.

We talked about air freight as well. And that is going to have an impact, we said it will probably -- what we see today is a moderate decrease of the gross margin rate. Without that, it would have been from -- what we see today, another year of growth of the gross margin rate. But that's really what is driving the guidance. So we have some uncertainty, but we are very excited by the potential of growth that we see with all this innovation that is coming up. We are the traditional driver of efficiency that are going to help. We have some headwinds, which was absolutely planned because we are coming with innovation, and we need to invest to launch this innovation.

And I should add in terms of innovation, but it's certainly the fact that we are also expanding in terms of geography. What we see in Egypt bode extremely well for the potential in emerging countries, but we need to invest, of course, to build the capacity. We need to develop our commercial tools. We need to invest on the new 2 platforms, vaping and nicotine pouches.

So what I think is great in this guidance and in our ambition for 2022 is that it's a year with a lot of investment for an exciting growth, but we are still able to deliver a good dynamic top line. We are able to deliver nice margin improvement, good organic growth at a good level. And as you have seen, we are hugely cash generative, and we do that at the same time, again, while investing for the future.

Okay. That's super helpful and honestly makes a lot of sense. So clearly, a lot of puts and takes, but you've got a lot of levers to pull. For my second question, I maybe wanted to switch gears a bit and just kind of ask a little bit about the situation in the U.S. and just maybe an update. It sounds like you expect to get back in the market next year with IQOS. So maybe love to hear a little more color on this. And will the build out of the production in the U.S., will that be your financial responsibility?

And then Altria mentioned some issues between you 2 in terms of the agreement you have in their fourth quarter press release. So just was hoping to better understand what that could mean. For instance, I guess, if Altria fails to meet the terms of the agreement, would you then pursue distribution of IQOS in the U.S. yourselves and/or, I guess, find another distribution partner? Can you kind of walk through that for us? And then I'm thinking in the context of a potential solution for VEEV in the U.S., assuming it gets ITC approval.

Yes. So Bonnie, yes, we are working on the -- bringing the manufacturing capacity for IQOS on the U.S. territory. And that's our main mitigation plan or reaction plan to where we are today post the ITC event. As we said, we think that, somewhere at the beginning of the next year, we should be in a position to resume the shipments in the U.S.

As to we and Altria is very clear disclosed, we have some disagreement with regards whether Altria has fulfilled the certain milestones in the current contract, and we're currently in negotiations or discussions with Altria how to resolve it. And so I believe in a good faith, we should be finding some solutions. I wouldn't go now beyond speculating what other options and how we would approach the IQOS going forward in the U.S. I mean, our partner results, and I think, we should seek some amicable solution between both partners.

Now I have said it on a number of occasions in the U.S. market is as a few other markets in which we have a very negligible presence, are of strategic importance. So obviously, you've heard us in the past, I believe, that the pre-ITC ruling IQOS performance in U.S. and you know how we performed -- with IQOS across all essential geographies. I mean it's really well below what I would expect at this stage or characterize as the potential of IQOS. And if I take into this the fact that this is the only inhalable FDA authorized product. You don't really have a competition, and the size of the market, et cetera, I think it's fair to say that the expectations were much beyond where we are today. But I will stop here and I believe we will find a good resolution, which will, on the one hand, enable American smokers, cigarette smokers to have access to the technology, and also something which will be accretive to us or the partners' results there.

We'll take our next question from Chris Growe with Stifel.

I just wanted to ask, first of all, on IQOS, and you had a nice acceleration in the number of IQOS users in the fourth quarter. I just want to get -- and I know you talked about an acceleration of getting back to that roughly 1 million users sequentially. Can that not happen until the second half of '22? Or will supply be sufficient to where you could start to see that level of user growth in the first half of '22? I'm just trying to get a sense of that availability of devices to understand the growth in '22.

Yes. Look, the Q4, reacceleration or coming back to the previous user growth is highly encouraging. It just confirmed that IQOS has that ability of a continued growth. Obviously, it very much hinges on the fact that where we have unrestricted access or availability of the devices. And remember IQOS today is -- our heat-not-burn propositions, which we have today consist of the few versions of IQOS blade product.

I should mention LIL product is coming through through our partnership with KT&G and IQOS ILUMA. And all of that altogether create certain portfolio of proposition for the various targets in the various consumers growth. So we regain a little bit of a flexibility of recomposing the full portfolio in Q4. And hence, in Europe -- we have all seen the spectacular regain in user acquisition.

It is somehow reflected in our 4% to 6% growth target and the heated tobacco unit target for this year, that for how many months or for how many weeks in a year, we think we can have unrestricted access to the full product portfolio of the devices very much. I believe that actually IQOS can fly higher if we're in the unrestricted mode, but somehow in the forecast for the next year, we should have clear, bigger scenario, which is maybe more on the moderate side, et cetera.

If this was the -- if we wouldn't have all these constraints coming from a device as a couple of other things in the supply chain, I believe we would be looking at a different number. But at this stage, it's difficult to start baking this into something which we think we can deliver.

So I think I'm saying that IQOS has a higher potential of that growth rate. But we really have to be in the moment when we can go unconstrained. Needless to say that part of our growth is coming from Asia region. And although European Union, western part of the world if you like, seems like it's leaving COVID behind, we're still not at this stage in Japan and a few other locations. So we also have to start factoring this in. But I'm very optimistic that we can deliver 2022 and, frankly speaking, knowing how much headwind we need to take on our chest in 2022, I start looking actually excited about the '23.

Just to complement on your question on, can we reach 1 million. I think we are simply -- we see rather a ramp up today. It doesn't mean that we cannot reach 1 million in 1 of the quarter in H1. But it's true that we see a ramp-up and an acceleration as we go through the year.

Okay. And I did just have a quick question on the U.S. to follow on Bonnie's question. Is there a scenario where you prevail on the patent office review that would allow you to start importing the product again before the first half of '23? So you're getting your supply chain ready in the U.S., but is there a chance that you could win on the patents and not -- and then be able to import the product again?

Well, there is, but the whole process is -- I think it deserves a separate conversations about the patent laws and the processes around this whole thing and unfortunately, we have to work with -- cope with this. I mean even if we prevail on the invalidation of some patents, obviously, the other party, in this case, they have a right to appeal. So the whole process is really extended in time. And by -- you need another couple of years, frankly speaking, until you have -- one of the parties actually can claim the full victory. Then you have to go to the ITC and establish the restrictions, if you like, which are now imposed on us.

I think the fastest -- absent any other resolutions, right, the fastest route back to the U.S. is through activating there our domestic capacity and resupplying the market from that. And then it might be that later on, we are unconstrained, which means that the U.S. market could be supplied from the both international and from the domestic. But I think the near-term opportunity for us is to go the route which we discussed.

We'll take our next question from Pamela Kaufman with Morgan Stanley.

I have a question about your outlook for combustibles pricing in 2022. Pricing in 2021 was below your historical rate of growth, given headwinds in Indonesia. But can you talk about your expectations for pricing environment in 2022? And how you're prioritizing price realization versus market share in combustibles?

Yes. So we're looking for, as we said, we're looking at the 3% to 4% pricing variance this year, which is better, stronger than the last year. I think some Asian geographies, due to the variety of factors are still presumably driving us lower on what we think we could have normally realized a bit, comparing at least to the historical trends we had there. Indonesia, you're absolutely rightly pointed out, is on the negative.

Although the tax increases, which the industry has to pass on, I mean, gives some hope that we can end up with the -- that maybe Indonesia can return to the pricing that is an important component of the growth there. But we also have to take it from the considerations of impact of COVID, the volumes and presumably talking more about the Philippines. We will see how much of this thing we can unwind in 2022. And having -- reaching the benefits in '22 and how much we can build at a good pace for '23. It's going in the right direction, but a bit of a more is needed.

The last of the pricing environment, okay, is always difficult to predict. But as we characterize it's improving on all other geographies. And we have a pretty good visibility at this stage, obviously, about the taxes that is in the major volume or profit market. Emmanuel in his part of the remarks, was talking about this, more and more countries are taking to the multiyear approach, which always gives us better visibility and planning around.

As you know, in some countries, the tax increases cannot be passed into consumers in 1 step. You need to have some preparatory, take some pricing before some pricing after -- so it is going into the right direction, especially if we take it in a context that every country, every market is having a huge pressure on the public finances due to the COVID situation, et cetera. So I think we -- I mean, have so far navigated pretty well there.

Right. My second question is on ILUMA uptake. And if you can provide some more color on how much of the new user growth in Japan has been driven by ILUMA for IQOS? And what observations you have around the user base and the interaction with prior versions of IQOS?

Yes. So -- but you might have -- might remember that from the very beginning of ILUMA, I was personally very excited about that innovation. And I am so happy that it delivers all my expectations, actually, if not even beating by expectations. So I will continue, if you allow me, to do enthusiastic voice. ILUMA does generate, obviously, the IQOS user, Blade product users, they appreciate the benefit of ILUMA, the first moment, you have it in your hands and you have your fist experience. And the response from the consumers in Japan is phenomenal.

Obviously, first ILUMA goes to the existing users, but we also already having a benefit of existing IQOS users switching to ILUMA because they have uninterrupted consumption during every moment of day when they wish or they're willing to use the product. And this also has an impact on the volumes. In other sense, if I give you the device, which is much more intuitive to use, reliable, much, much, much more reliable, you will have a tendency to increase the consumption versus what you have on a Blade, which on other occasions failed to allow for having that experience. So that's a very good thing.

Second thing is ILUMA, after all of these initial months, we observed a very solid higher level of conversions. And if you know, it is a very important component in the business model. I have many devices, will fully convert smokers -- combustible smokers. How many of them will stay because it releases the pressure going forward also on the margins, et cetera.

And the third one is at this stage, if I remember the number correctly, about 20% of the user of the ILUMA cells is coming from the people who are never in the category, not in IQOS. And also what I started serving recent or we started serving recently, ILUMA also start taking back users who have temporarily migrated from IQOS to competitive products. So in whatever aspect of performance of ILUMA look like, it really delivers on every axis.

So the question is again, and I know that for some might be boring, do we have availability of the devices? And can we continue supplying the market and the rest? I believe so far, so far is really going in the right direction.

We'll take your next question from Vivien Azer with Cowen.

My first question is on pricing. Certainly encouraging to hear that your outlook for 2022 contemplates an improvement in pricing relative to last year. I was wondering, however, if you could just comment on how you're thinking about price gap management between your combustible cigarettes and your heated tobacco units, please?

Well, we essentially, in most or in all markets, we maintain the same sort of a positioning of IQOS today versus the combustible reference point. As you know, most of the tax expense actually have that conversion mechanism baked in. So if there is a tax increase on a combustible somehow proportionally this triggers the increase on the heated tobacco units, which translates that the consumer price gap is essentially untouched.

We obviously complement, depending on the market situation, our portfolio, for example, KT&G, the real proposition. And I think it works very nicely, especially in the geographies when IQOS reaches the levels which are above, for example, premium -- equivalent of the premium price segment in the combustible market.

So we need to take affordability to the equation as well. So instead of doing something about the pricing of IQOS and the heat. We're actually expanding the portfolio to the below, but also to the above in some geographies when we think there is a best premium versus IQOS versus heat, is the opportunity. We did it very successfully in Russia and in a few European markets.

So I think the whole thing is that the broader we have a portfolio of horizontally from a price perspective and vertically from taste, flavor, et cetera, perspective, we're increasingly creating more attractiveness for the cigarette smokers to switch to heat-not-burn.

Perfect. And my follow-up question is on your decision to discontinue Platform 2 heat. Certainly, that product has been under evaluation for a number of years. And I was just curious to hear kind of the key takeaway from the consumer test. Is the problem that consumers are using a live heat source, and that's just creating a lot of confusion in terms of the reduced risk proposition? Was it product performance? Just any other color would be helpful.

Now actually, I think that, if you like it, allow me the tech language, it was more on the user interface rather than anything else. I don't think the past -- the number of the market test, the proposition, the eligibility of the propositions in terms of the -- is the better alternative to smoking and everything goes there. The issue actually pertains to the heat source. As you remember, the design at the very end of the cigarette-like looking product, you have the heat source, which requires lighting, okay?

And this was -- to face open this from the paper cup lighten this. And that is the question, how you extinguish the product, right, because you need to pay attention how you extinguish the product. And this was actually in our opinion, what the consumers' opinion actually, not leading to that adoption levels, which we would wish to have, and especially comparing our experience from other platforms and the mainly P1 platform.

So I think we reached the moment of the design of that product and this part of the technology around the heat source and operating, asking the consumers, how the interact and operate around this whole thing led us to the conclusion that we are -- think that design component we shut down. And I think still the proposition makes sense, is understood by the consumer, has the potential, but we cannot offer the product to the consumers, which they will not find convenient to use. And the convenience is the middle name of what the consumers want these days, and I think, we need to deliver on this one, especially that our ambitions would be to also leverage the equity, which we build around the IQOS, and IQOS cannot afford calling the product, which has this one.

So I think we will come back 1 day to the P2. From the very beginning, you may recall, our annual Investors Day when we start talking about the vision of growing smoke-free and how many platforms will be needed to compare the 1 billion smokers worldwide. This is a proposition which is more for the -- more conservative audience. The people who really don't want to completely walk away from the ritual and experience which the combustible cigarettes are delivering. So I think in terms of our growth prospects for the near item I don't think it's that much of an issue. That we will be working on that by using a different approach to the design and the technology going forward. So I hope it answers your question, Vivien.

We'll take our next question from Gaurav Jain with Barclays.

So I have a couple of questions. So first one is on your guidance. So your volume growth is minus 1 to 1. You are saying cigarette pricing will be 3 to 4. And then category price mix in that slide that you have, it is plus 3, assuming it is a 3. So it should come to plus 5% to plus 8% on revenue growth for FY '22, but you are saying 4% to 6%. So that will imply that the category mix uplift will be less in FY '22 than was the case in FY '21. So can you just help us understand why that will be the case.

I'm happy to try to add to, Gaurav, certainly what we are expecting in 2022 is to have another very nice difference between the volume growth and the revenue growth. And indeed, for the volume, we've been guiding to -- from minus 1% to plus 1%. So then the question is how much are we going to generate in terms of extra growth, there is this price where we have in 2% to 4%. Remember, we've done 2.7% in 2021. So the low end of the bracket is not massively above what we did in 2021. But it's true that it could be better, and it's certainly something that we are factoring in the high end.

And then there is impact of the growth of the IQOS business and the heat-not-burn category where we have this positive mix impact that is playing. But here, the mix and with the launch in many new economies and new geographies, emerging country that is potentially having an impact on the differential. So we do expect a very strong differential again, but not necessarily at the same level as the difference that we generated in 2021.

Last but not least, we referred to the fact that we have, at the beginning, and it's temporary higher weight on the consumables for IQOS ILUMA and TEREA. And this is having an impact because the excise duty in the country where the excise duty are based on weight is higher, and therefore, because we are coming with the same price for the consumable than heat. That can generate when we have a switch but temporary. Again, I insist on the fact that it's temporary, decrease -- a slight decrease on the per stick. So that can have an impact as well.

So that is really what you're going to have plus leaving potentially some impact on the price of the device, which will depend on the volume of the device that we sell. Also on the mix of the device that we sell and also on the commercial aggressiveness that we want to have on the price of the device. So you have to take a number of things into account.

Now at the end of the day, as you can see between the minus 1% to plus-1% and the 4% to 6%, we are definitely targeting to have another year with a very nice differential between volume and organic revenue growth, which is exactly how we end up.

Okay. That's very helpful. And my second question is on the beyond nicotine segment. where you will have $150 million of operating losses this year and you made also the comment that you will invest in it in future years so that you can hit the $1 billion revenue target. So does it mean that the losses we should expect to be higher in FY '23 than what they will be in FY '22? Or when could we expect that segment to break even?

Well, I think there will be an investment for the next few years, not a couple but a few years, which we are willing to do. I think if you stay with us and wait until the CAGNY when we will give you more insight of what we have, what is our thinking about is beyond nicotine wellness and healthcare business because then we will be in a position to show which products, concrete products or programs we're willing to go after what is the size of an opportunity and what sort of investment is in terms. But I think the number which we gave for this year, for 2022 in the guidance, about the ballpark sort of the investment, which we will be calling for the couple of years.

It's not a one-off. It could go a bit higher, but I don't expect an explosion here. I think you have a good calibration of the kind of amount that we're going to invest over a few years.

We'll take our next question from Jared Dinges with JPMorgan.

First, I want to touch a bit more on the nicotine pouches. How should we be thinking about the scale of that initial launch in the Nordics? And how should we think about the future market launches that you guys touched on a bit? Are you considering launching nicotine pouches in markets maybe that don't have a nicotine pouch presence today, like some of your emerging markets? And also, just looking at the potential in the U.S., would you consider a PMT application there as well?

Yes. I would leave the U.S. aside for a second. I think nicotine pouches can play a very important role in if you like the smoking smokers, okay? They demonstrated their variability that has that proposition in many markets. Initially, we're essentially taking share as we acquire this. And after remaking of the product and the packaging, et cetera, we'll go in the market when there was some sales of Shiro. Obviously, not very high, but we start where we already were present. And we build on this. As always, in our innovations we will look at the consumers' feedback. See what else we have to improve, and we also have some product pipelines behind the initial offering of Shiro, which we now could accelerate to the large extent, thanks to the acquisition of Fertin.

Now Fertin gives us much broader opportunities than just the pouches. Because Fertin sits on the very interesting delivery systems in -- for the oral delivery. And we know that Fertin is the manufacturer of the nicotine replacement therapies like the gums, nicotine gums, but they also have interesting other technologies.

So we will be thinking. We start with the pouches, but I think over a period of time, not 2022, I think, the oral way of delivering nicotine as a substitute to smoking is actually a very attractive opportunity, which we are very excited to start working on. So we will go into the geographies, obviously, when pouches are not present today. I mean, as you know, we have a geographical footprint in addition to this 70-plus markets where they have acquired quite a meaningful IQOS infrastructure.

You're talking the shops, you're talking digital, you're having all the CRM, commerce -- consumer engagement. I believe we can start adding to that our portfolio of the propositions to smokers to the oral category -- broader oral category than just the pouches. So we focus this year on the pouches. We will be extending the presence. But I think that is more than just the pouches and therefore, very pleased that we concluded the acquisition of Fertin because it gives us -- it accelerates our development by a quite good few years, which otherwise we would have to take organically.

Got it. So just to follow up on that. So you would consider the U.S. PMC application?

I think I answered that question to Bonnie. U.S. is a very attractive market, and I believe it is of the strategic importance to us. And I do believe that in the market of the size of the U.S., we need to have all platforms, frankly speaking, because of the 1 platform which can which can guarantee the full success or full seizing of an opportunity. So ultimately, yes. But our focus today is somewhere else.

Got it. And the second one, going back towards cigarettes and IQOS. Are you guys worried at all about potential impacts of price elasticities with -- especially with lower income consumers given the inflationary environment and where you guys are positioned in most markets, and we're usually more at the premium end. So maybe you can give a comment on that?

Yes. So the price elasticity is always the concern, and as we know very well, sometimes this price elasticity on the tobacco nicotine product is elevated due to the pressures or income pressures on the consumers. So we're now having that situation in a few markets that consumers have a pressure on the income. I mean I believe some of these pressures will unwind as the COVID will be becoming a sort of the past and I don't think it's anything systemic.

It's very interesting, you're asking this question because if we look in the market where were taking pricing on cigarettes and on the HeatSticks and the market has a pretty robust set of data from the price increases. I think today, products like IQOS or alternatives to smoking tends to have a better elasticity -- price elasticity than the conventional cigarette. And as you know, I guess, very well, the price elasticity on cigarettes underscored by other factors was pretty attractive, and this was a part of the building as a business model. And actually, at this stage, looks an alternative even for the -- not high but better elasticity than a combustible cigarette.

Separately, not from the elasticity perspective, but from the pure affordability perspective, we were already pretty successful with IQOS in the so-called low middle income countries. But we also know that in order to make the more significant inroads. We need to come with the proposition, which directly addresses the need or below-need price, low price segment. And we will not leave the smokers behind or alone. And before the end of this year, we are having the plans to test another technology which would allow for the both devices and consumables to be more accessible from an affordability perspective, while there is harm-reduction potential as IQOS, as we know it today. So we're taking those things into the very serious consideration. So thank you for your question.

And there are no further questions at this time. I will turn the call back over to the management team for any closing remarks.

Well, this was a call longer than expected, but we also delivered the results last year better than we expected. So I think somehow we match it. Thank you very much for your attention. We invite you to our CAGNY presentation, which will be in a position to give the more light, more details on the few aspects like what we discussed today, wellness, healthcare, but also how we look in a much broader terms, the development of these categories. And I think you could feel in our -- my voice and Emmanuel's voice how excited we are that '21, we delivered in that shape and form. And despite the number of headwinds, which I believe we articulate pretty well, we're still looking into the very successful and rewarding for both of us 2022. So thank you very much for your attention, and hope to see most of you, if not all, during our CAGNY presentation. Thank you, all.

Thank you all. Talk to you soon.

If you have any follow-up questions, please contact the Investor Relations team. And just a reminder that the slides and scripts are available on the PMI website. Thank you very much. Have a great day.

Thank you, and this does conclude today's Philip Morris International Fourth Quarter 2021 Year-End Earnings Conference Call. At this time, you may disconnect, and have a wonderful day.