Philip Morris International Inc. (PM) Q4 2023 Earnings Report, Transcript and Summary

Good day, everyone and welcome to the Philip Morris International Fourth Quarter 2024 and Full Year Earnings Conference Call. Today's call is scheduled to last about one hour, including remarks by Philip Morris International Management and the question-and-answer session. [Operator Instructions] As a reminder today's call is being recorded. I will now turn the call over to James Bushnell, Vice President of Investor Relations and Financial Communications. Please go ahead, sir.

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 the 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 unrivalled 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 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 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 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 an indication of the 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 disruption 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 unrivalled 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 underpins our ability to deleverage while returning cash to shareholders. Thank you. And Emmanuel and I are now happy to answer your questions.

[Operator Instructions] Our first question will come from Bonnie Herzog with Goldman Sachs.

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 which we have in the category is in Japan, is really well 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 category is continuously expansions in Japan, I think in the Tokyo area, the smoke-free products now about exceeded 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 and obviously, creates a very good opening for us in entering the U.S. market and that ZYN is clearly is 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 of 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 the good momentum. ZYN in the U.S. continues this momentum. Europe is going very strongly 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. And I don't want to sound negative on the rest of the world. However, one thing you should note that, on occasions, there might be some conversations around the growth trajectory of IQOS and so on. And you remember during Investors Day, I've been very clear. We're running IQOS 10 consecutive years of fabulous growth despite the fact that we essentially lost any growth, access to any growth in Russia and Ukraine. And historically, I mean, Russia alone was delivering, and depends how you now -- which period you pick up, but easily above the 4 billion maybe even 5 billion per annum growth of the category. So I think we need to look at this trajectory from this perspective, which makes me even more confident about our 3-year outlook.

Okay. Thank you. That was helpful. And then I did want to ask a little bit more on margins. Just hoping for a little bit 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 which are already flowing through the P&L even ahead of the IQOS process start of the commercialization. Emmanuel, do you want to?

Yes, just to complement -- to answer your question, Bonnie, and complement what Jacek was saying on what is behind the higher-than-expected performance for '23. Clearly, as I described, a very strong dynamic on the volume on the commercial dimension, if you want. But we've been very pleased as well with the development of our margin on 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 increase 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. And we reflect the fact that we talk about double-digit growth and very strong double-digit growth. U.S. is a very powerful contributor to our financial performance.

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.

We'll go next to Gaurav Jain with Barclays.

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?

Look, of course, we cannot speculate on any further devaluation of the peso. The reality is that the amount in dollar terms has been significantly reduced by the last devaluation. So a further devaluation would impact to a much lower amount. Now I don't know whether more devaluation could come. Frankly, we're not able to anticipate this kind of thing. What you have to take into account is that the basis has been -- in fact, as basically with the devaluation in December. So any further devaluation would apply to a lower base in Argentinian peso.

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 think we know what about the Swedish Match marketing practices, and we were taking this very seriously during the acquisition of the (inaudible). We have said that the alignment with Service Match was not only that they were pursuing the smoke-free trajectory, but also that they have a very responsible and a disciplined approach to the marketing as we are on -- with IQOS, with heat-not-burn and the international. We have reached out to the few people who have been the most vocal too in these conversations with general consumer, but also to FDA and I think the facts are different than sometimes it is being -- trying to be the positions in the media. So the product is helping adult smokers with very strict with the age verifications. Obviously, when it comes to the conversations among the adults in the social media, that's going a little -- well, going anticipating, frankly speaking, in the territories we wouldn't have a control. ZYN is not using any paid ambassadors or whatever this is being called in the social media. So we think what we're doing is put the right product from the potential of the reduction of the harm where the product is based on science position and the risk reduction continuum, frankly speaking, it is the best nicotine alternative to any another nicotine product, very much obviously versus the cigarette. We have a pending PMTA with FDA and feel the science is very strong and very conclusive on the site. So I feel very confident. From the very beginning of our transformation, solid Swedish Match, we put the marketing team and very much the protection of the youth very, very high on our agenda. So I think it gives me the confidence that, as I said earlier to Bonnie's question, we have a progress, phenomenal growth on the products, which are delivered in a very sustainable manner to adult smoker.

We'll go now to Pamela Kaufman with Morgan Stanley.

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 Investors Day, the profile of the ZYN, when it comes toward the smoke or where the adults are coming from, there is any sourcing very nicely from a combustible cigarette, obviously, serves from the overall categories, including the tobacco-containing pouches, Swedish snus or similar products, but also resourcing from the vape category. So it is being recognized by the growing number of adults, the convenience of usage of Brazil. It is -- another way of looking at ZYN, it is a natural innovation or extension of the Swedish snus product, the tobacco-containing pouches. Obviously, as we know them, some people were not maybe comfortable of having a tobacco in the pouch. There are some optical hygienic type where they may be constraints, et cetera, and ZYN is something which is -- looks cleaner and is white, it doesn't contain tobacco, which might have been for a -- might be for some consumer create some resistance. So this is what I can say. I think the product has a good trajectory. The market is a large market in the U.S. with a well-developed e-vape category, obviously, still a very sizable combustible cigarette category and also many other oral tobacco forms, so it's a nice sourcing for ZYN, which is appealing to these audiences. 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 to the positive? Yes. Can -- but guidance is built on the number of the assumptions, right? I mean it's a global business, multi-category and there are some headwinds, which we are aware today. I'm not sure whether there's a lot of materialized, but I think it's a matter of prudence is that this part of the year at the beginning of the year 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.

Yes. And Pam, to clarify the guidance here, we are coming with a growth year-on-year that would be similar than the one we've been experiencing in terms of total volume growth and not in a big percentage year versus '23 and '22. So these are similar volume growth. It's related to a reduction in the growth rate. We'll see whether your -- we have still going even higher than what we are forecasting for the time being.

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 1, which is operating with all the benefits of economies of scale, et cetera. So obviously, as the mitigating type of a 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 the increased or elevated cost both on the devices and the HeatSticks and it will take a while until U.S., on a stand-alone basis, would close at the same level of the benefits of the cost, if you like, as we had on international. So for us, it clears the path for IQOS, top blend and ILUMA. So we're bringing a lot of -- or removing that, I should say, uncertainty from today and going forward. And IQOS because it is U.S., it's just another market which we added to the geographical family of IQOS presence from a day one, will have an access as I said to the pipeline of the products and its economic cost benefits as an international market. So for us, actually, is clarity and acceleration which we gain through this agreement. And obviously, as we all know, the patent litigation territory has a high degree of uncertainty. And we're running a very sizable business and we plan to have even more sizable business with the addition now of U.S. and that clarity and the visibility going forward is very important which I believe is also important for investors too.

We'll go next to Faham Baig with UBS.

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?

So maybe I start with the U.S. I mean the U.S., we will do the test market on IQOS three point -- what we called IQOS 3.0 blade product, which is literally for us the high cost and we keep looking forward to get more visibility from FDA with regards to the PMTA MRTPA for IQOS which would allow us to accelerate the broader, more national type of a commercialization. So what we have assumed in 2024 in terms of the volume contribution of IQOS from U.S., it's very minimal. We are not treating this as testing the engine, commercial, the consumer phasing type of a solution rather than a lowered the current version of the product at the full scope. We have assumed -- we made some assumptions with regards of opening the markets in which IQOS today is not allowed. The trade not on the list is obviously Taiwan. Okay, that's each other assumptions and we might be right or wrong, but these are the assumptions which we made. It obviously hinges on the speed of some regulatory decisions and the laws being passed and et cetera. And with regards to Europe, look, I mean although I believe and the history have shown with the flavor type of regulations in the different categories, in the different places, that over a period of time, they don't have much of an impact to the dollar. 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 guidelines and these will be transparent and still give you potential with headwind, which we take in, in the volume outlook for IQOS, but we'll have to see where this materializes. Not materialize, 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 a 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. But we also have a very strong price competition, extremely strong price competition, I should say, both on the devices and the consumables, consumables in Japan. And over the period of time, IQOS navigates for this highly sometimes aggressive competitive pricing environment very well. So that's essentially where we are. Germany grows very nicely. Italy continues with a very strong growth momentum. Again, the major driver is Spain. We make the -- we start making a significant progress. So that's it for 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. I mean look, this is the blended -- at this moment in time, at the beginning of the year, the blended outlook for the group revenue is combustibles, oral and, obviously, heat-not-burn. There's few other in smaller things. But we have managed last year to deliver a very strong pricing variance. I think again, it's fair to assume that the driver of a pricing variance may not be repeatable this year. But there is obviously a pricing potential, which we baked in, in the -- or included in the guidance. Look, for some of these things, we need a little bit more visibility to start increasing our confidence. I still believe that if I compare what Philip Morris is delivering now, number of the years when we leave the revenue top line above 7%. And remember very well the times when we started transformations when they were the 3% to 5%, now I think a quality what counts for us, and this is what we pay a lot of attention, that we not only want to lead in a sustainable matter the revenue growth, but obviously important is the quality of that revenue growth. So having a 3-year total group volumes to start with above was no decline, not even flat, but growing, when you start overlaying this by pricing and managing to -- focusing to avoid the risk of some down-trading, et cetera, I think that the 7% is there, well, above 7% revenue growth is the pretty -- from a qualitative perspective, not just from the nominal growth perspective, I would think that is all that EBITDA.

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.

We'll go next to Callum Elliott with Bernstein.

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 us 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 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 is a traditional tobacco type of experience flavor, et cetera. 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 a switching adoption. So that's one of the factors, okay? And then obviously, other factors at play.

I guess I understand that, yes. But why hasn't that -- it seems like in the U.S. and the U.K., that hasn't been an impediment to these products' success over the past 12, 18 months.

Results, so the focus, right? Because U.K. was on the forefront as was U.S., if I remember historically, of the forefront of this category partially, I guess, also attracted by the underlying margins in the CC category. So obviously, people are going with alternatives to the places which create some sort of that underlying margin opportunity with the relative freedoms also to talk about these products. As you know, Europe very much, but also in international, some countries, these products are not very -- let me put it that way, warmly welcomed. So let's leave aside the hybrid action principles. But some other opinions and views at play. Look, we know that we enter a e-vape category, but we're trying to be very disciplined or focused I should say and it's very easy to enter into this category without too much of the path to sustainable profitability. And we don't want to focus the company from some other opportunities which we're pursuing, which, in our view, are more sustainable and offer the good start for the margins and the underlying profitability But when we enter with this product, Italy, Czech, a few other markets, I mean our products despite the fact that we're relatively late into the -- from a category history perspective, and then we have gained double-digit shares in this market in the speed of -- span of less than 12 months or so. So it also tells you there is a lot of lack of loyalties in place. There's a lot of yes, I know that we see the volumes, but there's a lot of trial. I should not ban category and the pouches judge by performance in the U.S. And then by definition, the consumer is more loyal, more focused, more discipline in how they navigate it also.

Okay. And I have a follow-up that is related but maybe a slightly more philosophical question. In a number of markets and especially the U.S. related to some of these disposable vaping products, we've been seeing this formation of -- I would describe it as like a dual-tiered market that's been forming with big legacy players such as yourselves who are forced to play by the rules and hold themselves to a certain set of standards, marketing only to existing nicotine users and all of us will have seen your video on ZYN last week, I would imagine. But at the same time, we also have a secondary set of smaller new businesses who seem to be doing basically whatever they want and often illegally, but having great success within the marketplace and attracting lots of consumers. 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 which is not level?

Well, look, obviously, companies like ours is not even thinking about doing something which would be against or crossing the line of regulations or even, I would say, societal expectations. So obviously, I mean, our ability to come to you, these are -- it isn't what you're asking, grossly different than some other operators or participants in the market, especially people who don't have a view of 10 years or 15 years outlook, but it's essentially hit and run almost type of operation. And I think we know what has happened or what is happening in the U.S. There is, I understand, some discipline in the market is now underway. But frankly speaking, it's a long overdue because there is a lot of -- pardon my language, but a mess created in the market by the fact that regulators, law enforcements and other design for this designated for these agencies were a bit slow. And I think it's, frankly speaking, a replica, which we have for many years, and still in some places, kind of on a cigarette market, and it forms of an illicit type of a participation in the market. It's not only marketing practices, but also products, product standards, all of these things creates completely around distortions in the market at the expense of the legitimate category manufacturers and also diverts the conversation from how further we can progress and have reductions and divert them into the things which relatively easily should be fixed.

Okay, thanks, Jacek.

Thank you.

Our final question will come from Matt Smith with Stifel.

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. So a lot depends, obviously, we target adjusted the live growth above on the revenue growth. So obviously, we are assuming some improvement in the margins. But on the other hand, I think we will have enough of the resources to support that revenue growth. So it is -- if we were to completely stop investing, obviously, the expansions on a wide growth would be much more significant, margin expansions will be much more significant, but we are -- it is not what we see in our strategy. So I think once we operate it at scale and we build, like the consumer has there, so the scale in the U.S., the revenue is very substantial over there, at least by the market standard. And the revenue, which we generate from a small crew, but also combustibles on international with that sort of a revenue growth rate, I think we have a room to provide for the investments to support today's and tomorrow's growth while also allowing for driving the margin expansion. We also have provided here some inflationary pressure. And I think, especially on the combustible, I -- we assume that the 2024 is sort of the last year of this extra ordinary life of inflation under pressure. And as of 2025, in other words, we should start seeing easing when the COGS pressures, and this is about delivering some other materials. And I think every incremental IQOS and every incremental ZYN is obviously requires proportionally less of the investment with the first IQOS and the first ZYN. So, I mean, the scale offer is going forward, there's opportunity for supporting the margin.

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

Thank you, Matt.

That concludes today's question... End of Q&A:

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.

That concludes today's call. Thank you for your participation. You may disconnect at this time.